Capital Preservation

The world financial system is in turmoil. Something like twenty trillion dollars of equity has vanished. The American automobile industry is on the verge of bankruptcy. Rescues and bailouts seem to be as effective as a lifeboat in a tsunami.

If it has not affected you, it has certainly affected people you know. Those who still have jobs are surrounded by empty workstations. Along with sympathy for their former colleagues, they also feel anxious and demoralized.

Winning and losing seem no longer to be in question, since there are not going to be any big winners any time soon. Even Warren Buffett's fund is getting crushed.

The real issue is survival, having enough resources to fight again. More prosaically, the question is how to preserve capital. How can you hold on to what is left of a job, a career, a brokerage account, a real estate investment, or a retirement fund?

Capital is a financial resource that can be invested in production. You use capital to buy the plant and equipment that will manufacture the products whose sale will give you a return on your investment.

Thanks to economists, sociologists, and psychologists we now know that there are other kinds of capital, all of which are essential to our socio-economic well-being. These too need to be invested, grown, and preserved. They are: human capital, social capital, and psychological capital.

They have been usefully distinguished as follows: human capital is what you know; social capital is whom you know; psychological capital is who you are.

In other words, human capital is your knowledge and experience; social capital is your connections; psychological capital is your character.

In time of trouble we should develop strategies for preserving, and even increasing, each of them.

In most cases, when you lose your job, your human capital remains intact. You may not be using it productively, and you may suffer for its inanition, but it is still yours, and it is portable. Think of the mortgage banker who goes to work for the government on a mortgage program.

The exception occurs when the skill set you have developed is rendered obsolete by changing circumstances. The world's leading expert in producing buggy whips lost his human capital when the automobile was mass-produced.

Most people spend considerable time and effort growing their human capital. They take extra courses, study on their own, and enter retraining programs.

When your investments have suffered severe losses, it is a good opportunity to increase your human investment capital, thus to learn more about markets and to work harder managing your money. Similarly, many laid-off investment professionals are now returning to graduate school.

Social capital is a different story. When you lose your job or a large part of your wealth, it will quickly impact your social activities.

Jobs provide us all with social networks, routines, and rituals. Even if you have not lost your job, when many of your colleagues lose theirs, you will have lost social capital. Your everyday social interactions will be negatively affected.

If you suffer a loss of income or wealth you will not be able to afford certain social activities: charity events, country clubs, dinner out with friends, and vacation trips.

Even if you substitute picnics in the park and and golf on the public course, you will feel diminished for not having the same old gang around.

Social capital can be preserved and even rebuilt, but it takes effort, especially when so many people are not feeling very sociable, and when those who are cannot afford the activities they used to enjoy in the past.

Of course, most people will simply adapt to the new circumstances by finding different ways to socialize. Given the loss of financial capital, extravagant spending is no longer the admissions ticket to social life.

When you cannot use your human capital effectively and when you have lost a significant part of your social capital, you are going to feel demoralized. You will have lost psychological capital: the confidence, optimism, and resiliency that would help you to overcome your current problems.

Psychological capital is necessary to rebuild your wealth. It takes courage and character to start over again, to address current problems constructively, and to readjust expectations, habits, and routines.

In my 1996 book "Saving Face" I wrote that psychological capital corresponds to what the Chinese call "face." This term refers to self, but it is more about how others see us than about how we see ourselves.

Clearly, the two are not contradictory. If you are good to your word, people will look forward to their appointments with you. If your good character causes others to have confidence in you, you are more likely to have confidence in yourself. If your good character makes you a trustworthy and reliable member of a community, you will be more likely to respect yourself.

Practice the virtues that constitute character-building and you will build up the psychological capital you need to garner future success.