The Universal Laws of Capital
I recently read an article that ranked U.S. states in the order of the total tax burden they impose on their citizens. The article could serve as a practical guide for those seeking the most tax-friendly places to live in order to conserve their retirement dollars.
This article reinforces two things: The fact that each state reflects the diverse attitudes and beliefs of its citizens, and the importance that this is the case. It also reminds me of a tremendous commonsense quote from a good friend of mine, economist Barry Asmus: “Capital is like electricity. It gets up into the atmosphere—it goes where it is needed—and stays where it is well treated.”
For the purposes of this analogy, capital isn’t just economic wherewithal. “Capital” includes human talent. It takes the form of private property. It is reflected in our right to work freedoms. It also applies to environmental resources. It can be said of education and a multitude of other commodities.
The founding of the United States was predicated upon simple notions that competition and diversification are not only a basic human condition; they are also essential to a healthy economy and the financial mobility of people. The framers of the Constitution designed a system of government in which individual states can choose the way they want to live, so long as they do not infringe on the core constitutional and civil rights we all agree to uphold as Americans. This has allowed 50 simultaneous experiments in societal organization to occur, preserved together into one union. I would argue in favor of strengthening this condition of individualism and diversity—rather than seeking to homogenize it.
Our Constitution was designed to allow power to ebb and flow, to expand and contract. Notably, it follows the natural order of evolution. That is, the strongest and best ideas win out, not through codified political arrangement, but through diverse and practical implementation.
The concepts of diversity and evolution also apply to portfolio construction. Organizing return streams across geographies, capital channels, strategic styles, degrees of leverage, ownership—whether public or private—liquidity and so on. The process of asset allocation is akin to Mr. Asmus’ analogy of attracting capital like a flow of electricity as it flies through the atmosphere looking for the place where it is “best treated.”
We want to encourage and profit from the flow of capital and implement as many lightning rods in our portfolios as we can in order to increase our participation in that electrical attraction of capital by following the laws of the financial universe.