|The Jolly Contrarian’s Glossary |
The snippy guide to financial services lingo.™
“Please leverage this template to facilitate our discussion”.
Not only does leverage not mean “use”; it isn’t even a verb. It’s a noun: it describes the effect of using a lever on a fulcrum. “Lever” is also a noun, though you could at least use that as a verb. But you would sound stupid:
- “Please lever this template to facilitate our discussion”.
“Leverage” – or “gearing” – came into the lexicon courtesy of the bankers. It properly describes the effect of borrowing money to invest: If you have ten pounds and you invest it, you get ten pounds’ worth of return. If you borrow ninety, add it to your ten and invest the lot you get one hundred pounds’ worth of return. (Buzzword) bingo: you’ve created ten times “leverage” (note: still a noun) on your original investment. When the market goes up, leverage makes you look like a hero. When it goes down, it takes your shirt with it.
One times leverage?
Leverage means the “amplification of an original force”. It doesn’t mean “borrowing” (any more than it means “use” or “fill out”), although people frequently misuse it that way. As a result, it is a metaphor that doesn’t bear close examination. A lever that produces “no leverage” would stop at the fulcrum. It wouldn’t lift anything. It would be worse than not using a lever at all.
To — er — leverage the metaphor, let’s say picking up a brick, without using a lever, takes one unit of force. Now, apply a lever which generates “one times” leverage: for every unit of force you push down on the lever, you get one unit of force up on the other side of the fulcrum. The force you apply is still just your own investment. You haven’t borrowed anything. You’ve just used a lever to do what you could have done without one. Get your kicks —
But if you lengthen (by borrowing) your side of the lever so that the single unit of force you contribute generates ten units of force on the other side of the fulcrum - now you’re “ten times levered”. To achieve this you need, as well as your original £10 investment, another £90.