Your Most Valuable Investment Asset
by Ben M. Bartlett
So what is your most valuable investment asset? The asset that will give you the best investment return? Real estate? Shares? Cash?
It’s actually none of the above, as today’s lesson explains. So read on to find out exactly what your most valuable investment is.
When it comes to investing it’s important to get good advice on the best way to grow your portfolio. And the best advice will most often come from a qualified financial advisor or planner.
Yes, your hairdresser, best friend, favourite aunty or influential YouTuber may have “inside information” on the latest investment “sure thing.” But, unless they are qualified and have stellar reputations, it’s best not to listen to such people.
Me personally? I pay far more attention to 93 year old Warren Buffett, as opposed to some 20 something acne-faced kid on social media hyping up crypto currencies.
A good financial advisor will help you plan your investment portfolio around the traditional asset classes. These are the tried and true investments that have varying degrees of risk and return, and which allow you to build a diversified portfolio.
The traditional asset classes? Principally, they are:
- Interest-bearing deposits (Highly liquid accounts that are easily accessible)
- Real estate (Residential, commercial and industrial property)
- Managed funds (Investment funds managed by others. Also includes retirement accounts and index funds)
- Businesses (Your own business and/or direct share investment in other businesses)
Now, there is one other asset class I will add to this list. Yes, it is a traditional asset, but very few financial advisors talk about it with clients.
Fact is though, this asset is your most valuable investment. Indeed, the ROI you get from this investment will out-perform every other investment you have now, or will have in the future.
Let me tell you something else. If a financial advisor mentions this investment to you, and advises you that this is your most important investment asset, then pay close attention. It means that they are a next-level advisor.
So what is this sure-fire, gilt-edged investment? It is called human capital.
Yes, human capital is your most valuable investment. Which is why it is the key component in The Strategy Grid:
Given the importance of human capital, you need to know what it is. So let me explain what human capital is all about.
Human Capital Defined
According to Wikipedia:
Human capital is a concept used by economists and social scientists to designate personal attributes considered useful in the production process. It encompasses employee knowledge, skills, know-how, good health, and education, to name a few.
Companies can invest in human capital, for example, through education and training, enabling improved levels of quality and production.
https://en.wikipedia.org/wiki/Human_capital
The Wikipedia article on human capital also highlights that human capital is an intangible asset. Therefore human capital is a non-tangible asset that has intrinsic value, and which can generate future value.
In its definition, the financial website Investopedia touches on human capital’s economic value, as well as the importance of values, traits and physical health.
The term human capital refers to the economic value of a worker’s experience and skills. Human capital includes assets like education, training, intelligence, skills, health, and other things employers value such as loyalty and punctuality.
https://www.investopedia.com/terms/h/humancapital.asp
The concept of human capital is not new.
In 1778 Scottish economist Adam Smith highlighted, “the acquired and useful abilities of all the inhabitants or members of the society” as one of the four types of fixed capital. So, as part of Smith’s framework, abilities were categorised alongside machines, buildings and land as fixed capital. (From: An Inquiry into the Nature And Causes of the Wealth of Nations Book 2 )
Then, moving forward to 1928, the specific term human capital was first used by English economist, Arthur Cecil Pigou. In his book A Study in Public Finance, Pigou stated, “There is such a thing as investment in human capital as well as investment in material capital.”
Although the term human capital was first used in 1928, it is actually the planet’s oldest investment. And that’s because society and progress has been built upon the development and application of human capital.
My definition of human capital
My definition of human capital brings together its key components and highlights its investment value:
Human capital is an intangible asset that comprises traits, philosophy, skill set and track record.
As an investment asset, human capital has intrinsic value, as well as the ability to generate future financial and non-financial value. Human capital is the world’s most valuable investment asset.
Let me unpack my definition by expanding on human capital’s components.
Traits (Physical and Personality)
Traits are the physical and personality characteristics of a person. Both physical and personality traits have a strong genetic factor. However, environment also plays a big part in their formation and development.
Physical traits are a person’s physical characteristics, and include such attributes as gender, height, eye colour, complexion, length of limbs and hand-eye coordination.
When it comes to performance, your physical traits place a limit on what you can and cannot do. And even in determining what you’ll be good at.
Although physical traits are largely genetic, environment plays a key role in their optimisation. Access to the right nutrition is one such environment factor. As an example, two people may have similar physical traits. But if one of those two people does not get the right nutrition, then some of their physical traits – such as height – will not be optimised.
Personality traits is the second aspect of traits and refers to one’s personality type.
The scientific study of personality began more than 2,000 years ago with the work of the Greek physician Hippocrates. Since then a number of differing personality theories, models and tests have been developed. Some of the more popular ones? They include the Myers-Briggs Type Indicator (MBTI), Enneagram, HBDI, Kolbe and DISC.
The personality model with the most scientific support and backing? It’s called The Five Factor model.
The Five Factor Model
The Big 5 or Five Factor model is the personality model and theory which has strongest backing in the scientific community. And it is also popular commercially.
The Big Five model classifies personality into five traits, namely:
- Openness to experience
- Conscientiousness
- Extroversion
- Agreeableness
- Neuroticism
For ease of remembrance the acronyms OCEAN and CANOE are used.
In reality, there are ten traits that the model measures, with our personality falling within a five dimension ten trait scale, specifically:
- Openness to experience vs Conventional/sequential thinking
- Conscientiousness vs Unproductiveness
- Extroversion vs Introversion
- Agreeableness vs Disagreeableness
- Neuroticism vs Emotional stability
Like physical traits, personality traits have a genetic foundation. So getting back to extroversion and introversion for instance, genetics determines how naturally extroverted or introverted we are.
However, personality traits are also strongly affected by environment. And environment plays a big role in the development of personality.
Philosophy
Philosophy is the 2nd component of human capital and it is hugely important. It can magnify personality traits in both a positive or negative way and certainly plays a key role in human performance.
Let’s take a closer look at Philosophy.
The late Jim Rohn, one of the world’s leaders in personal development, often wrote and spoke about the importance of philosophy. In fact, in Rohn’s view a philosophy is, “the greatest determining factor in how your life works out.”
Yes, it may not be apparent to you, but everything you do on a daily basis is guided by your philosophy.
So what is a philosophy? As defined by the Oxford dictionary, a philosophy is “a theory or attitude that acts as a guiding principle for behaviour.”
And, in the Cambridge dictionary we learn that a philosophy is “the way that someone thinks about life and deals with it” and is a “particular system of beliefs, values and principles.”
Putting these definitions together, I define a philosophy as a system of values, attitudes and principles that reflect how we think about life.
Once again, a philosophy is the greatest determining factor in how your life will turn out. One key reason? A philosophy gives you a sense of purpose. It highlights your “why”.
You see, it is quite easy to “want” something. But if that “want” is not matched with an equally important “why”, you will not do what it takes to get what you want.
Our philosophy is shaped by our genetics and the environments in which we live and work. And as well as being an expression of our innermost values and attitudes, a philosophy also points to our vision for the future.
Most importantly, a philosophy is reflected in our behavior.
How to tell a person’s philosophy? You observe their behaviour over time. That’s because a philosophy acts like a magnet towards behaviours and skills that are really us.
Every individual on the planet has a philosophy, which begins to develop when we are young, and is well ingrained by the time we are adults.
Given the importance of philosophy, few people take the time and effort to think deeply about their own personal philosophy – or even to put it into a system. This is why so many people have messed up philosophies, such as:
The loser philosophy
The take advantage of others philosophy
The material possessions are everything philosophy
The angry at the world philosophy
If left unchecked, messed up philosophies can do serious damage. They hurt the people who live them, they can destroy relationships and reputations. And those who live messed up philosophies fail to live to their potential.
Skill Set
The 3rd component of human capital is skill set.
What is skill set? It is a set of knowledge and skills that we use to perform tasks and achieve goals.
Skill set is divided into four parts, which I call the skill set box. The four parts are:
- Technical skills (also called hard skills)
- Life skills (also called soft skills)
- Know what (theoretical knowledge)
- Know how (practical knowledge/experience)
The better your skill set, the better you will perform and achieve your goals. But, skill set is about the whole box and not just one quadrant. Let me explain by going through each of the quadrants.
TECHNICAL SKILLS
When it comes to skill set, there are two types of skills we need to be successful in life – but one type is far more important than the other.
The first type of skills are technical skills – also known as hard skills – and they’re specific technical skills related to performing tasks.
If we’re referring to sport as an example, a technical skill is the ability to kick a ball in soccer or make a tackle in rugby.
In accounting a technical skill is the ability to create a profit and loss statement or a cashflow forecast. In architecture it is the ability to design a building.
If you have a toothache who do you go and see – a dentist or a plumber?
And if your house needs rewiring do you call an electrician or a heart surgeon?
You get the picture? Technical skills relate specific technical tasks that someone knows how to perform.
Now, within technical domains you also have specialties. So in medicine for example you have generalists like general practitioners and nurses…then you have a whole array of specialists such as pediatricians, heart surgeons and optometrists.
LIFE SKILLS
The second type of skills are life skills. What are they?
According to UNESCO, “Life skills are a group of cognitive, personal and interpersonal abilities that help people make informed decisions, solve problems, think critically and creatively, communicate effectively, build healthy relationships, empathize with others, and cope with and manage their lives in a healthy and productive manner.” (Source: UNESCO website).
There is a more modern day term for life skills, called soft skills which, according to Wikipedia, “Soft skills are a combination of people skills, social skills, communication skills, character or personality traits, attitudes, career attributes, social intelligence and emotional intelligence quotients, among others, that enable people to navigate their environment, work well with others, perform well, and achieve their goals.”
I prefer to use the term life skills instead of soft skills, but they are interchangeable. In short though, life skills – or soft skills – help us to develop goals and plans, get on with others and work towards achieving goals.
THE TWO TYPES OF KNOWLEDGE
The second part of the Skill Set Box refers to knowledge, which is divided into two categories:
- Know what
- Know how
Know what is theoretical knowledge that comes from reading books, attending lectures and workshops, watching YouTube videos and so on. Know what is often free and is very easy to acquire.
Unfortunately, know what is not very practical. It’s only theory after all. So you can watch hours and hours of free videos on a subject like building a fence, but that doesn’t make you very good at building fences.
To add value to theoretical knowledge you need to convert it into know how, or practical knowledge.
Know how is your ability to apply the theory. Know how is far more valuable than know what because it represents your practical experience.
TRACK RECORD
Many years ago I heard a story first given by motivational speaker, Zig Ziglar, variations of which have subsequently been used by other speakers.
In the story a person is being interviewed for a position, with his cv highlighting that he has 12 years of experience in the role he was applying for. On the surface, the 12 years experience is impressive.
However, after reviewing his cv the recruiter says, “You don’t have 12 years experience in this role. You only have one year’s experience multiplied 12 times.”
The recruiter firstly highlighted that the candidate had not progressed in his career after gaining that initial experience. He had flatlined.
Secondly, the recruiter highlighted that the candidate had not built a strong enough TRACK RECORD.
When it comes to performance evaluation, the term experience can be very misleading. And just because we have so many years experience at performing a particular role or task, it may not mean that much. What is more important than experience is track record.
What is track record? It is what you have achieved with your traits, philosophy and skill set. It represents the value of your human capital.
Track record will show a growth path of performance over time. However, experience alone will flat-line over time.
Together Paul McCartney and John Lennon wrote and produced 180 songs, most of which were recorded by The Beatles and included in their catalog of intellectual property. This catalog is valued at more than $US1 billion.
JK Rowling, author of the Harry Potter series, has parlayed her human capital into movies, games and merchandise that have generated more than US$ 2 billion.
Michael Jordan, the first global sporting superstar, built a billion dollar brand upon his obscene basketball skills.
Let’s look at some more down-to-earth situations.
For a sales person, human capital is valued on one’s sales skills and the production of sales.
For a product developer, that person’s human capital is valued on their ability to create commercially viable products and services.
Track record measures growth of human capital value over a time period. Experience only measures experience gained over a time period.
Of the following two people, who has the better track record? A self-made millionaire who started with zero dollars and built a net worth of $3 million? Or, someone with a net worth of $5 million dollars, but who was given a financial head start of $2 million from parents, as well as immediate business connections?
Of course, the first person has the greater human capital value. The first person has grown more financially, and most likely personally.
Summary
So there you go. You’ve just been given an overview of human capital – your most valuable investment asset.
Bottom line? Human capital gives you the best ROI of any investment asset. As such then you need to commit to developing and growing your human capital on a daily basis.