Ah capital. It’s such an amazing concept. A person can give his money away, to a manager without any difficulties, and reap the gains. Our society values these capital givers so much we devised a special term for them: Investors. Being an investor is a wonderful thing. Instead of working achingly long hours for menial returns, that work is done by others. Instead of seeing the product of your labor end up in someone else’s pocket book, it goes straight to your’s. Instead of breaking your back with labor, you simply wait and watch as the market delivers.
Wow, this system sounds fantastic for the people with capital, but there are many caveats. When investing in any venture, save your own, you place faith that the managers will be good stewards of your money. You also place faith in that sector of the economy and the employees behind the company. In any investment capital is as critical as faith is. It’s difficult to internalize that so much of our economic system is faith based.
Capital allocation is as dependent on understanding people as it is about understanding businesses. Balance Sheets are important only in the context of the people that manage it. It is key to remember these axioms in this time of turbulence.