Rethinking investment return

Rethinking investment return

July 31, 2020 0 By Anton

The notion of investment return, quantifiable and financial, is in dire need for reform. It has become too rigid in a world that is ever changing. This notion should also include non-quantifiable (qualitative) and non-financial “gains”.

This change in how we think about investment return (and therefore in how we allocate financial capital and consequently, how real resources are used) cannot come just from asset managers – both investors and managers have to change the meaning behind return.

Profit, or financial return, is the by-product of real economic activity; real economic activity (trade between people, businesses and government entities) happens within a broader environment supported by different values and knowledge about the use of resources in the chain of production, distribution and consumption of goods and services.

If this environment in which trade takes place is not nourished, financial returns become artificial – this means that capital is not being built as a result of profit making, but consumed or destroyed. In other words, when financial return is artificial, capital deteriorates.

The world’s capital can be split into four categories: human capital, political capital, economic capital and financial capital.

It is with this human capital that we are concerned here. Most profound developments that improved human life are the result of innovation and artistic creation – these have no input cost and no price, no matter what models are telling us. All other forms of capital are useless if human capital is not developed.

There are already some strives in the right direction. But much more needs to be done – a reformation of the concept of investment return and a new fund structure to implement the broader notion.

Part 1 – Investment return and the role of finance

There are a number of ways of looking at investment return – from a total return perspective, on an annualised basis, or perhaps the yield angle is the one you prefer, or maybe the various risk-adjusted basis figures are more comforting?

However you look at it, these returns come from two sources: cash flows (dividends or interest) and price movements (I didn’t say capital appreciation because you can make a return when there is a fall in price).

In reality however, only one question seems to matter when you draw the bottom line: Do I have more or less money in my account?

Given where we are in the current socio-economic cycle1, on its own, this is an incomplete perspective: fiat money are increasingly worthless.

“In my opinion, don’t own bonds, and don’t own cash because they’re producing a lot of debt and producing a lot of money to fund it, and so that’s changing the nature of capital flows,” added the investor, who claimed back in January that “cash is trash.”

Profit viewed purely from a financial perspective is an incomplete notion because it neglects the bigger picture:

  • Firstly, the financial industry is there to support economic development (not just growth – see here what’s the difference)
  • Secondly, the financial industry, as the heart of the capitalist system, is the one that takes risks which should be more than just financial in nature
  • Thirdly, what is usually amalgamated as “resources” in textbooks matters: without human capital, there is no other form of capital, only rocks, rivers and fields.

Since the end of WWII, there have been a number of structural developments (demographics boom, expansion of international trade, Eurodollar markets’ growth, larger labour pools etc.) that have eventually bloated the financial industry2.

We can look at this development from various angles, but probably the one which stands out the most is the growth of AUMs of asset managers relative to GDP3.

At the end of 2019, BlackRock managed about $7.4trn, while Vanguard ran close to $6.2trn. This is how many countries (and continents) you can fit in the balance sheet of just these two asset managers: the UK, Germany, Mexico, Italy and Australia – the point is to highlight size and concentration of financial assets.

Other perspectives from which you can reach a similar conclusion include measures of: global liquidity relative to GDP, the growth of banks’ claims nationally and internationally, the expansion of bank branches, the growth of institutional cash pools (cash and cash-like instruments of non-financial corporations), the expansion of different money supply relative to GDP (although even broad money neglects billions and billions of dollars of institutional money, such as repos) and so on – the point is, there is undeniable growth of the financial sector relative to the broader economy4.

Capital Wars: The Rise of Global Liquidity by Michael J. Howell

The concern is that the financial sector has grown too big and, therefore it has become increasingly inefficient in meeting its role in the economy: to finance economic development, which goes beyond growth.

Focusing solely on financial return generation is no longer sustainable because it will lead to an ever bigger financial sector. Investment return must therefore change its rigid and narrow focus.

In particular, the notion of return ought to allow for the qualitative development of the underlying resources used to extract financial gains, in particular of human capital.

Part 2 – The interactions between forms of capital

Traditionally, the concept of capital refers to either economic resources (raw materials, land, property and so on) or financial resources (purchasing power – cash and credit). The chart below illustrates this perspective quite clearly.

However, there is also political capital (much more elusive than the first two types of capital, which can be thought of as the trust in the the socio-economic ecosystem – e.g. liberal democracy) and human capital (even more vague than the previous one, which is made of each individual).

If investment return is entirely viewed as a financial by-product of economic capital put to work, then we risk missing the bigger picture: for financial capital to exist, economic capital needs to be built so products and services are exchanged; for economic capital to exist we need political capital that sets the rules of the economic exchanges (i.e. the rules of the game); and for political capital to exist, human capital needs to be firstly developed – the individual is ultimately the building block of civilisation.

This view of capital is not a pyramid. Is not a completely structured “something”. It is a complex and vague ecosystem, with parts that are more structured than others. From the individual every other form of capital forms.

Without imagination, reason and emotional drive, economic capital does not exist – raw materials as rocks, wood, sand, water etc. aren’t useful on their own. Only by transforming raw materials into various tools and technologies we have what we call progress.

As soon as technologies that liberated men and women from the suffocating grip of existence itself, without developing (through education) the individual, the political systems which have encouraged innovation the most over the past 200 years or so (variations of a liberal form of governance) cannot exist. Again, it starts with each individual – the institutions we build reflect us!

As the economy develops, financial capital (types of purchasing power) also starts to be built up (savings) and to be further improved (financial engineering). The latter enables transactions of more complex products and services.

Not only that these forms of capital interact between them, as resources of different kinds, but they also help build and then interact with various media which become practical and metaphysical pillars of a civilisation – financial capital becomes a symbol of status and power and helps accumulate wealth (or claims on wealth), economic capital becomes infrastructure, machinery, real estate and wealth, political capital fuels and backs political activities (which are outsourced representations of interests) and human capital transforms into sources of innovation, scientific progress and philosophical inquiries that then produce values, norms, laws, traditions and revolutions.

Therefore, if this is true, the practical conclusion is that if one form of capital grows at the expense of others, and this can happen when capital growth is not justified – here the concept of justification goes beyond the solely economic notion of productivity – then, in the absence of actual, tangent action to remedy the imbalance, other forms of capital decay until the entire fabric of the socio-economic ecosystem disintegrates.

Composition VIII, W. Kandinsky

What’s more, these imbalances are easier to be observed in the financial and economic forms capital because they are more measurable than, say trust in the political system.

However, polls into what people think can offer an insight but a rather weak one – true insight, one which seldom lies is offered by the artist: the men and women who operate with the metaphysics of life.

What we create reflects how we feel and what we think. So, if you want to take the pulse of a society, look at what its artists create. All is connected. Alchemy is an uncomfortable process only for those who do not understand and/or accept its nonliteral nature.

Part 3 – Focus on developing human capital

Human capital is a strange misnomer. On one hand, the word capital is usually used to mean resources, which are on a spectrum of precision, if you want: they are more or less quantifiable.

Financial capital is quantifiable. Economic resources are also quantifiable, although to a lesser extent than financial capital, I would say. For example, you can know that a company has made $100m profit this year from its audited statements, but you can’t know with the same precision how much oil is left in a well in Texas. Nevertheless, with the help of advanced models, financial and economic capital is fairly quantifiable.

A more vague form of capital – political capital – can also be quantified (to a much lesser extent than the previous two) by assessing the public appetite for a party’s agenda: who are people voting for and what are they voting for, are the people protesting against certain policies or going on a strike, for what are they signing petitions and so on.

The most elusive form of capital is human capital – the word human implies something more than a quantity. Sure, you can know how many employees a firm has and needs, the size and composition of the labour market, the market costs of educating and training these workers, their wages (in absolute and relative to other labour markets) and so on. All these are quantifiable features of human capital.

However, this is precisely the kind of thinking which is faulty: what people bring to the socio-economic ecosystem all came from a quasi-qualitative place – the mind. Reason, imagination and emotion mix together to bring ideas to life, creating items, products, processes and services.

This is not a romanticised view of us, people. The history of scientific discoveries and technological progress, with its transformations from “random” fact gathering to paradigm adoption and then revolutionary change, provides many examples of our qualitative capacities that have pushed civilisation forward5. The history of art also tells a similar story6, showing that inspiration (whatever this is) can change the order of things.  

Imagining how the world works, then testing what we imagined through observations and experiments, theorising, generalising, thinking in more or less concrete terms, explaining the relationship between objects, processes and systems, pondering over questions without exact answers, creating new worlds, items, skills – all of these are not quantifiable products of our cognitive complexity.

Some may claim that whatever we do will show up in productivity. I disagree. Say, someone works all their life on “something” – a new technology or a piece of art. That person spends most of their adult life on this endeavour, earning close to nothing from minimal activities, giving up the notion of a career and all that is deemed normal by current economic and social standards.

At the end of their life, this person finishes their project: a new technology which turns out to be a form of free energy that enables exploration across the solar system or a piece of art which serves as Earth’s source of inspiration, hope and awe for many hundreds of years, pushing generations to expand the borders of knowledge, to build new technologies and to cohabitate in peace. By current measures of productivity, this person is a parasite, when in reality he advanced humanity more than anyone who was most productive under this notion. Extreme example – but what if.

The inseparable mix of imagination, reason and feelings drive us to explore and create. Sometimes the result is nonsense, bad products, abominable ideologies, violent wars, but sometimes the result is new technology, better insights about us and the world around us, cures for devastating diseases, brilliant literature and so on. These are the by-products of “human” in human capital.

These aspects cannot be precisely quantified because they are dominated (to different extents) by chaos. Indeed, the process of scientific discovery is non-linear, chaotic, ambiguous, riddled with accidents and defined by a strange change-resistance dynamic that can take years7.

Similarly, the process of artistic exploration is non-linear and patchy, mistakes become new ways of doing things, accidents happen, colours mix as they shouldn’t have, materials never used before are now used as improvisations and so on. All of this is non-quantitative – it cannot be captured by the current definition of investment return, which is entirely financial.

Saturn Devouring His Son - Wikipedia
Saturn Devouring His Son, F. Goya

Novelties and discoveries come from various dimensions and manifestations of chaos, from exploring the unknown, by going against the current, and ultimately from being an individual.

The development of human capital should be focused on the development of the individual. “…it is necessary to become different or else cease to be”8.

To ensure that everyone, no matter where they are born, has the freedom, guidance and bare minimum of financial and economic resources to continue to be an individual is therefore paramount for human capital to exist and to remain useful within the socio-economic ecosystem.

If human capital deteriorates, then other forms of capital also decay – all is linked.

There are a number of ways of looking to see whether human capital is deteriorating, within the context of the current prevalent (and, I assume, preferred) system – that of liberal democracy. These include:

  • Lack of resources to meet basic needs, such as shelter, food and water
  • Lack of access to education
  • Where education is provided, deteriorations in its quality and focus
  • Where education is provided, its politisation and commercialisation
  • The subjugation of academic activity to political and commercial interests
  • The subjugation of scientific endeavours to political and commercia interests
  • The dedication of philosophical work to political ideologies
  • The use of art as propaganda for ideological movements
  • An increase in regulations which limit the freedom to simply be
  • A rise in feelings of unfulfillment, unhappiness and nihilism
  • A rise in feelings of disconnect from nature, ourselves and others
  • An increase in divisive attitudes
  • A lost sense of community and belonging
  • Useless and demeaning jobs sustained by misallocated capital, further supported by easy money
  • The decrease of compensation for one’s labour relative to the increase of living costs
  • The disproportionate claim over one’s labour by their employer
  • A stagnation of new ideas and a decrease in innovation
  • The creation of empty art, which is the emulation of something without essence

We can find evidence of all of these forms of decay: for example, there are also 153 million orphaned children, worldwide, according to UNICEF and and nearly twice as many living in extreme poverty:

“of the world’s 2.3 billion children (those less than 18 years of age), 301 million live on less than $1.90/day in 2011 PPP. This means that 13 percent of the world’s children are very poor…”.

Also, “an estimated 617 million children and adolescents around the world are unable to reach minimum proficiency levels in reading and mathematics – even though two thirds of them are in school” due to lack of resources to support education services9.

There is a lot of work being done on some of these matters, of course10. I am not denying that. But that’s not the point – the point is this: in a world that has a so-called wealth of $360trn11 these issues should not exist.

As long as investment return is viewed as a financial concept, I believe that these deteriorations will persists – we need to enlarge the concept to account of returns of non-financial, non-quantitative in nature.

What I propose to solve this are a new type of investment fund that does not seek to produce financial return. This is not socialism – it’s the most capitalist thing to do: to ensure ongoing competition, well into the future, to ensure that capital (in all its senses) is efficiently utilised and to increase prosperity for more people.

Here is how this would work:

  • The underlying thesis of this fund structure: financial growth and concentration are now happening at the expense of other forms of capital, especially human capital.
  • The underlying aim of this fund structure: to defuse financial concentration and ensure development of the individual for a better economy and further technological progress.
  • The fund will receive funding on an evergreen basis from saving accounts of various types (like ISAs in the UK) and from pension allocations, as a percentage of periodical contributions as well as a percentage on profits from investments in financial assets by large institutional investors if certain triggers are breached (say, stock market concentration levels, market capitalisation to GDP, profit margins’ growth above a certain level relative to wage growth and so on).
  • This is different than a charity as its funds do not depend on donations – they are mandatory based on the above triggers.
  • The fund will invest the money in infrastructure, education, scientific programmes and art projects which prove to be neglected under the current system. The reason for neglect doesn’t matter  as much as the degree for neglect.
  • The deployment of funds will be done so by a non-partisan board / counsel of people with a desire to view investment return as a non-financial gain and experience on evaluating the progress of the various projects, which may range from developing infrastructure to supporting young artists.
  • The return, being non-quantifiable, will be seen in an overall rise in prosperity, in a flourishing of novel ideas, increase in innovation, new technologies and, overall, more profits over the long term.

Without “human” there is no “capital”. So invest in the “human”. The results won’t be financial and won’t be quantitative. They will be treated as costs under current accounting standards – totally wrong. The results are qualitative and spill over in all fields of knowledge, industries and societal structures. They are the trust that makes us shake each other’s hand without holding a knife behind our backs, ready just in case. They are what glues and supports this whole thing we call society, the system, civilisation.

No sophisticated model, great-looking chart or regression analysis will be able to tell you the signs of deterioration or improvement of human capital, only traces of it. This form of capital is, in part, beyond materia. Human capital interacts with the part of this world which no structure can conquer or explain entirely – chaos: it is the ancient past, the current moment and the eternal future all in one.


Ωδε η Σοφια εστιν’

Ο εχων νουν ψηφισατω τον αριθμο του θηριου’

Αριθμος γαρ ανθρωπου εστι’

Και ο αριθμος αυτου Χ ξ ς’

Athanasios Tolis, Χ Ξ Σ, 2014

  1. See here for example.
  2. See here, here and here
  3. For different perspectives see here, here, here, here and here.
  4. See also Capital Wars (2020) for a detailed analysis
  5. Thomas S. Kuhn, The Structure of Scientific Revolutions
  6. John Fleming and Hugh Honour, A World History of Art
  7. Thomas S. Kuhn, The Structure of Scientific Revolutions
  8. George Bataille, The Sacred Conspiracy (1936)
  9. See here, here and here
  10. Plenty of charities and the growth of ESG investing for example, which in principle could be a great vehicle to improve human capital but in practice it is still tied to financial-only investment return.
  11. See here.