What is the difference between “asset” and “capital” ? When you look at the Empowered Wealth banner, you notice that we refer to the items listed in each category as assets. We describe Human Assets, Intellectual Assets, Financial Assets and Social Assets.

Why don’t we refer the these categories as human capital or financial capital, etc.?

Several years ago I read a book entitled, The Mystery of Capital by Hernando De Soto. Hernando de Soto is President of the Institute for Liberty and Democracy (ILD), headquartered in Lima, Peru. The ILD is a prestigious think tank that focuses on why western civilization has so successfully instituted capitalism and the rest of the world has been unable to follow.

In his book, de Soto claims that to unravel the mystery of capital, we have to go back to the seminal meaning of the word. In medieval Latin, “capital” appears to have denoted head of cattle or other livestock, which have always been important sources of wealth beyond the basic meat, milk, hides, wool, and fuel they provide. Livestock can also reproduce themselves. Thus, the term “capital” begins to do two jobs simultaneously, capturing the physical dimension of assets (livestock) as well as their potential to generate surplus value. From the barnyard, it was only a short step to the desks of the inventors of economics, who generally defined “capital” as the part of a country’s assets that initiates surplus production and increases productivity.

What is it that fixes the potential of an asset so that it can put additional production into motion? What detaches value from a simple house, lets say and fixes it in a way that allows us to realise it as capital?

We can begin to find an answer by using an energy analogy. Consider a mountain lake. We can think about this lake in its immediate physical context and see some primary uses for it, such as canoeing and fishing. But when we think about the same lake, as an engineer, focusing on its capacity to generate electrical energy by means of a hydroelectric plant, it has an additional value beyond the lake’s natural state as a body of water. We suddenly see the potential created by the lake’s elevated position. The challenge for the engineer is to find out how he can create a process that allows him to convert and fix this potential into a form that can be used to do additional work.

We refer to this process, of taking an asset which is generally singular in purpose and devising systems that will actually create parallel lives for the asset, as “Parallel Asset Life Maximization” or simply PALM. Bringing assets to life requires us to go beyond looking at our assets as they are, to actively thinking of them as they could be. Two key concepts to the capitalization of all our assets, not just our Financial Assets, are the Concept of Capture and the Concept of Transfer.

The Concept of Capture means that we must first capture the asset before we can do anything with it. Recently, I was chatting with a client and I asked if he grew up rich or poor? His response was that he grew up poor, but did not realize it until he was about 9 years old. I asked him how he discovered he was poor, he told me that he was quietly playing under the porch when his Mum and Dad came out and began discussing their disastrous financial situation.

His mother sobbed as she talked about how they were going to have to skip meals just so their children could have regular meals. With great emotion he recounted how he resolved at that moment that this would never happen to him. He started the very next day doing whatever he could to make money, no matter how small the amount. This experience became the inspiration that propelled him ultimately to be an extremely successful owner of a chain of supermarkets. I asked him if he had shared this experience with his family. With tears in his eyes, he said he hadn’t. This experience was an “Intellectual Asset” that was meaningful to him and him alone. It motivated and inspired him to build financial security so that his family would not have to suffer as he and or his parents suffered.

However, as just an asset….it would die with him. In order to give it life or to capitalize it, he must capture it….recall it and document it by writing it down or video taping the experience for his children and future generations.

The Concept of Transfer means that in order for something to have a life of its own we must give it away. It must be transferred. Once transferred, the asset will have a life that will outlive the life of the person who created it or took possession of it. Once his children and grandchildren had knowledge and understanding about their father/grandfather, they had a better appreciation of his motivation—for better or worse—and consequently they could learn from that experience and build on it. Thus, we have created a parallel life for the asset.

It is not difficult to find examples of PALM in all four asset categories. The most obvious is, of course, in the financial assets. A simple lien on a piece of real estate can create the cash for a parallel asset. I recently read that a number of asset categories within the financial markets had multiplied from roughly 2,500 to 25,000 during the years 1990-2000. This truly is an amazing number.

We have learned how to have money create additional money because some people want risky assets and others don’t. We have been successful in taking rather conservative investment portfolios and providing secure credit enhancements that allow that portfolio to have another life and consequently an additional return over and above the portfolio return on investment.

There is not enough room in this article to even begin sharing the many examples in each asset category. However, I challenge you to evaluate your most precious assets in each category and contemplate how by using the Concepts of Capture and Transfer you can create parallel asset lives that will continue to grow and influence generations long after you are gone.

“Bringing assets to life requires us to go beyond looking at our assets as they are to actively thinking about them as they could be”

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