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Leverage: Difference between revisions
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Quite how such an ugly {{tag|metaphor}} shape-shifted into an all-purpose business {{tag|verb}} is anyone’s guess, but it is time it was sent back where it came from. With leverage. | Quite how such an ugly {{tag|metaphor}} shape-shifted into an all-purpose business {{tag|verb}} is anyone’s guess, but it is time it was sent back where it came from. With leverage. | ||
===One times leverage?=== | ===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 | 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 | 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. | 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. | ||
{{ | {{sa}} | ||
*[[Leveraged alpha]] | |||
*[[Long-Term Capital Management]] | |||