How Leverage Types Work
“Give me a stick long enough and a pivot and I shall move the world,” the crafty Greek physicist Archimedes observed. Although Archimedes did not discover the lever, he did refine and explain the principles behind leverage.
The leverage type is smart and analytical. They do not waste too many movements. Like Archimedes, leverage types say, “Give me a place to stand on, and I will move the Earth.”
The leverage type takes in all available information and then makes one or two really smart, efficient moves that lead to great results. Careful and deliberative is how to describe a leverage type – with the emphasis on careful.
Warren Buffett is the archetype of the leverage type. His investment strategy embodies the leverage type of thinking. In a speech on investing years ago, he said that most investors should only be allowed to make 20 trades over the course of their investing life.
Buffett theorized that most people trade in and out of the stock market far too often. (There’s even an investing strategy called momentum investing.) This causes the vast majority of investors to “buy high and sell low.” If you could only make 20 trades in the course of you life, you’d be careful to only make the right trades, wouldn’t you?
He told students at the University of Georgia (fast forward to 31:05 in the video, although the entire video is worth watching):
You would be better off if when you got out of school, you got a punch card with 20 punches. Every financial decision you made, you used up a punch. You’d get very rich because you’d think through each one very hard.
The pitfall of being a leverage type is that they are often too risk average. “Big opportunities in life have to be seized.” Make big moves.
In the same speech to students at the University of Georgia, Buffett himself noted that he missed out on some big opportunities. “I’ve cost Berkshire at least $5 billion by sucking my thumb,” he told the audience.
How Momentum Types Work
Momentum types move with swiftness, boldness, and audacity. This allows them to achieve great things because they go where angels fear to tread.
General George S. Patton an outstanding example of a momentum type. As Patton remarked, “Audacity, audacity, always audacity!” Patton ran through Germany and caused havoc and we wouldn’t have been in the Cold War with the Soviet Union if Patton had been allowed to keep moving.
The problem with momentum types is that they assume too much risk and often speak and act too freely. Patton lost a command after he smacked a soldier who claimed to suffer form “battle fatigue” (what we now know to be PTSD).
He also spoke too openly about the Russians, observing:
The Russians are mongols. They are Slavs and a lot of them used to be ruled by ancient Byzantium. From Genghis Kahn to Stalin. they have not changed. They never will and we will never learn, at least , not until it is too late.
Even though political correctness wasn’t the dominant force, Patton lost his position for speaking out openly against what was then an “ally” of the United States.
No approach is right.
A leverage and momentum type can each accomplish great things. Neither approach is right or wrong. However, each type must have some self-awareness and realize where his strength and weaknesses lie. “First, know thyself.”
If you’re a leverage type, are you sitting behind a desk waiting for that perfect type to quit your job to start your own business?
If you’re a momentum type, are you too frantically moving when you should instead pause, reflect, and strategize before making a major decision?