Unified Theory Of Capital Management

Often times I find that very simple, unsophisticated stuff is right on. For example, hokey as many may seem, I think self help books get a bad rap because there are a lot of exploitative crummy ones but some make prefect sense. Same with cliches that are often overlooked or dismissed as simple minded, For example I believe that "act in haste, repent in leisure", "familiarity breeds contempt" and "absence makes the heart grow fonder" speak volumes about impulsive behavior and relationships.

With that introduction, below is an article that is simple yet I think gets to the heart of some of the psychological underpinnings of the ways that people think about money, investing, saving, careers, retirement and financial risk.

But the thing I also like about this article is that that it implies something important - that people view the continuum of control that they actually have over their lives in different ways. That is as much a "spiritual" issue (for lack of a better word) as a financial one and therefore touches on everything including our 401(k)'s.

The Surprising Money Habits of Successful Entrepreneurs
By CARL RICHARDS

(Carl Richards is a certified financial planner in Park City, Utah. His web site is BehaviorGap.com.)

After many years of talking with entrepreneurs, a calling that seems to appeal to the creative side of people, I’ve come up with what I define as the Unified Theory of Capital Management.

It goes something like this: We all have at least two types of capital that we should be managing: our personal human capital and our financial capital. In simple terms, human capital is the ability we have to earn money. Financial capital is our savings or investments.

So why should this matter to you?

Based on my experience and talks with entrepreneurs, I believe everyone, not just entrepreneurs, needs to manage these two types of capital differently than they do now. So I came up with some strategies to help you manage these two distinct, but connected, resources.

For personal human capital, you want to do three things:

Concentrate
Educate
Compound

For financial capital, you want to do two things:

Diversify
Protect

The majority of entrepreneurs express a strong desire to focus on things they can control, or have at least some control of. For example, I’ve noticed that it’s hard for entrepreneurs to invest in the stock market because they have no control over the outcome.

I remember meeting with a friend of mine whose family had owned a fairly prominent real estate development company that was successful over multiple generations. Behind my friend’s desk, the same desk that his grandfather and father sat at, there was a framed stock certificate.

When I asked him about the stock certificate and why it had such a prominent place, he replied that it was the first and last publicly traded stock that the family ever bought. When the stock started to go down, it proved too frustrating for the family because they couldn’t do anything to fix it. They couldn’t paint the fence, change the zoning, remodel or come up with a new marketing plan. Things seemed completely out of control. So they made a decision to focus on those things that they were good at, in this case real estate development, and then protect the money they made.

Again and again, I’ve heard successful entrepreneurs say that their success came from similar focus on personal human capital and those opportunities where their creative skills, relationships and experiences can mitigate potential risk. But once they make their money, they protect their financial assets by investing far more conservatively than you might think given their propensity for making risky business decisions.

One thing that I’ve heard over and over is that the way to become wealthy is through focus and concentration, while the way to stay wealthy is through diversification and protection. To that end, you do not have to be a creative entrepreneur to benefit from the Unified Theory of Capital Management.

Everyone can focus on improving personal human capital — compounding it — by looking for ways to take on a side job, increasing salary and improving skills and education. Then, look for ways to protect the money through diversification using conservative investments.