Assets and Capital

The Falling Capital by ~Latuff2
The Falling Capital by ~Latuff2

My friend sent me a funny link about CNBC that brought forward a few thoughts about assets. What I am about to write you can and should safely ignore as it is likely to have little to no impact on your life. If you know me, you already know I don’t know anything and carry my cross like everyone else in the world. If you don’t even know me, how can you take what I say as anything of value, anything to use as basis for even a simple decision. Please apply this test to all the noise that comes at you at hundred miles per hour from all the sources of your information. It is actually fun to find the hidden assumptions, the flaws in arguments, the hard-to-notice issues with the opinions given out so freely by everyone. Find issues with what I say, and I’ll thank you.

I only watch CNBC, keep an eye on the papers, and the Internet to gather clues about public feelings. Don Chu’s eloquent points about the fractal nature of humanity come to mind here because just as we have good days and bad days, so does the society. Our aggregate public feelings appear in media. As an example, jokes are only funny because we can relate to them. These feelings in today’s complex and constantly changing world cannot be internalized without one keeping both eyes and ears open and watching and listening on all frequencies. Often the clues are subtle, insignificant and sometimes I cannot even verbalize what I’m “hearing” but I don’t stop listening. My only limitation is time. CNBC plays its vital role in filling in the picture of public sentiment. All of the networks cater to their audiences so well, that we can easily approximate the mood of the audience by simply keeping an eye on the media catering to that audience.

Why did I think about assets? Actually, I don’t like that word at all. The reason is debt. Assets can be acquired with debt. It is not difficult to have significant assets balanced by significant debt. I like the word capital much better. Much of the media, your neighbors, everything you see screams “assets.” Assets are visible and quantifiable. Debt is a hidden, private matter. Of the various definitions of capital, I like this one “any form of wealth employed or capable of being employed in the production of more wealth.” This concept is too basic, I agree. However, often the very basic and simple ones contain more energy than complexities (who would have thought tiny atoms could produce so much energy).

The first challenge is the preservation of capital which encompasses everything we do to make sure that whatever capital we have does not turn into nothing as a result of everything that happens around us. Public sentiment is critical for this because after all the vehicles for storage of capital only work if someone out there is willing to accept them in exchange for something we need. I lived through a period when currency turned into nothing after the collapse of the Soviet Union. Every day I would take the money I earned with my friend and buy something, anything I could buy (cheese, butter, dollars, etc.) because the next day that money would buy less. To contrast that, I was speechless when I visited the Vatican and realized how the Roman Catholic Church had preserved its wealth throughout centuries, changing regimes, wars, and changes in public sentiment. It is a superb lesson in wealth preservation which even includes sovereignty. Contrast that with someone trying to hold on to their property during the gold rush. Keeping in touch with the world and public sentiments is critical for taking the necessary measures ahead of time to protect one’s capital.

The second challenge is employing the capital to produce more wealth. I actually consider this an easier challenge than the preservation of capital but there is nothing easy about this. CNBC and millions of “advisers” are ready to give us that one perfect method that will surely increase our capital. They (referring to the money machine) even convinced a lot of people to borrow someone else’s capital (mortgage or margin put into stock market). They “help us” with enormous amounts of data (real-time quotes, hundreds of statistics, derived metrics, research reports, derivative instruments, etc.), with “education” contrasting investors with speculators (no real difference here), with language (buy and hold, dead cat bounce, MBS, ABS, CDS, etc.), and everything else one would ever “need” to turn capital. The US government wants constant turnover of capital because at every turn increases can be taxed. If capital is not turned (artwork passed from one generation to another), no worries as there are laws to tax the transfer. I still cannot understand how the capital gains are taxed fully but capital losses are only used to offset gains (+$3,000 break). People unfortunately do not often understand what capital is because we sometimes start out with negative capital (student loans, mortgages, etc.). By the time we create enough value to pay off these loans by helping someone else turn their capital, time (our most valuable resource) becomes depleted. CNBC, the mutual fund companies, the government, our friends, this blog, and nothing else in the world can tell you how to preserve and increase your capital. Once this became clear to me, CNBC and all forms of media and information took their proper place in my mind.


  1. Claude Shannon argued that the return you can obtain in the stock market is a function of the information you have. The more non publicly available information you have, the higher your return.

    This means you need to know more than the public does. For instance, you could know when the public is irrational or when it is not pricing a company at its fair value. Or you could trade a pattern that the public is not aware of. In other words, you need to have an ‘edge’.

    My guess is your edge could be anything. Whether it is in spotting macro trends or in having inside information, or maybe in evaluating financial statements, it doesn’t really matter. It’s only a matter of doing your homework.

  2. Hi ld,

    I made the following comment recently regarding assets/capital and debt. Agree that the financial mainstream-media’s raison d’etre is far from ensuring the financial well-being of their audience.

    And yet, even for the well-informed who scrupulously piece together a ‘real’ picture of the world, it is by no means certain that they will be able to position themselves/their portfolios towards benefitting from their foresight.

    “I guess what I’m trying to say is that valuations will always be more art than science and the only accurate valuation is the one that looks backwards.
    And even analysts/writers who figured out that the debt-fuelled asset inflation was unsustainable, couldnt have anticipated how long and far it went, and just when the reflexive turning point was.

    And ruefully for myself, leaving aside whether following the above advice will prove to be the right decision (jury still out on that), it has certainly been an experience to endure puzzled looks at best and more often, sniggers from the people around me.”


    [Good observation on the unseverable, yet often obscured link between assets and debt.

    A prudent way to approach any financial widget, no matter how complex, is to decompose it into its cashflows, to realistically match up its asset and liability cashflows and even more importantly, their durations.

  3. MDan – I cannot really say much about the proverbial edge because honestly I haven’t spent enough time thinking about it. Perhaps this is more important for institutions who need to show an advantage over competition. I have noticed that some people like to “display” their nice tools suggesting an edge (to gain credibility?) and there’s a contingent who tries to follow those that appear to have an edge.

    Don – I agree with your points and especially with “it is by no means certain” sentence. Your point about matching up cash flow streams is definitely a valuable analysis as long as it is not the only lens through which one looks at the widget because the measure for leverage (and risk) is not sufficiently bound. For example, sub-prime borrowers could manage their cash flow until things changed.

  4. Indeed, rightly said. Your highlighting of leverage (as being of a different dimension from assets/liabilities) is reminiscent of Soros talking about leverage adding a third dimension (and always potentially catastrophic – a veritable double-edged knife cutting both ways) to his original fund/portfolio structure:

    “The best way to understand the role of leverage is to think of an ordinary investment portfolio as something flat and loose, as its name implies. Leverage adds a third dimension: credit. What was a loosely held together, flat portfolio becomes a tightly knit three-dimensional structure in which the equity base has to support the credit used.”

    (What’s interesting is that Soros may have had access to a 4th-dimensional tool in his trading/management arsenal – his very prescient backaches…)

    But of the various legs – asset/liability cashflows, leverage, time/duration, I’m hazarding time to be the most important and also most misunderstood factor linking the others.


    [What a market day! A day that is well-worthy of the laying on of superlatives. And yet, it is just one of so many we have experienced in the last 18 months, with no signs of abating yet.

    Talk about perception and distortions. The events of the past two years must surely be having a tremendous impact on this current generation (myself included). You can imagine how the on-going impressions are being burnt into their synapses even right now, and in turn shall influence their actions/motivations in the decades ahead.
    I just wonder, years from now, what term will academics and newsmen come up with to describe this period/generation…

  5. Time took me a long time to understand and I’m still learning. Let me write a few thoughts in a separate post. These are the two definitions of the word leverage that I like: “the action of a lever” and “the mechanical advantage or power gained by using a lever.” Life need not require the others. Edwin Lefevre says it very nicely “People who look for easy money invariably pay for the privilege of proving conclusively that it cannot be found on this sordid earth.” When thinking of the finance definition of leverage, it cannot hurt to remember another comment in Reminiscences of a Stock Operator “Dog has no foolish prejudices against eating dog in Wall Street.” Don, years from now they’ll say what they have already said (Ecclesiastes 1:9).

  6. ld, am delighted by your reference to Ecclesiastes (a book close to my heart).

    As for understanding and learning, perhaps both of us should take the second-last admonishment by the Preacher in this book to heart:
    “And further, my son, be admonished by these. Of making many books there is no end, and much study is wearisome to the flesh.”

    Dust and vanities, ever and always indeed…
    Time to rest the flesh.

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