Equity vs debt
|
Office anthropology™
|
Human capital
/ˈhjuːmən ˈkæpɪtᵊl (n.)
The meatware. The stuff of which Morlocks are made. Subject matter expertise. We who shed salt tears at our meagre role in life’s rich pantomime. Working stiffs.
Ispend a lot of time in these pages discussing the role of various financial instruments in the capital structure of our collective undertakings and the role and function in our professional lives of equity and debt:
- Capital structure: The hierarchy of a company’s funding.
- Liquidity and fungibility of financial instruments: The differing qualities of debt and equity instruments.
- Means of production: The damage globalisation has done to the working stiff.
- Derivatives showdown: A vibe comparison between credit and equity derivatives.
In financial reckoning, debt is recorded as an asset to the lender and a liability to the borrower. A “liability” is an obligation to transfer economic benefits; an asset is the corresponding right to be transferred those benefits. There is, thus, an intrinsic opposition here: a relationship of debt and credit. A debtor wants to minimise it, a creditor wants to maximise it.
There is no such tension in common equity: a share represents a residual ownership in the company’s net assets. A company is aligned with its shareholders, not opposed to them. It does not “owe” anything: the shareholder already owns whatever it has left after it has settled its debts. Both the company and its shareholders want its common equity to be as high as possible.
So this division between equity and debt is the great cleft in the capital markets.
Now, financial markets and the instruments that flit about them are formal tokens for something deeper: in the broadest sense, they are “derivatives” of the grand drama that plays out on life’s stage. They are pale metaphors for the boons and vicissitudes of life’s cruel pageant.
Are we debt or equity?
Let us invert this metaphor and apply it back to ourselves. Where do we sit in the great cosmic capital structure? Are we “debt” or “equity”? What does it mean to be “debt” or “equity”? If we don’t like our current place in the capital structure, what can we do to change it?
Are we recorded in the shareholder’s equity section of our own balance sheet, or as a liability on someone else’s?
Are we owner or owned?
Are we master or slave?
The thesis here: we should aspire, always, to equity. Our interests should align with those of our enterprise. Whenever they do not, our returns are naturally limited: by contract, by convention and by the profit motive of the very enterprise for whom we toil.
Profit as a moment of joy
About profit: it is the excess of an undertaking’s “revenue” over its “cost of income”. It is shared among owners. To declare a profit is to experience a moment of joy: this is the undertaking’s sacred raison d’etre. There is no shame, no profligacy, no call for austerity in declaring a well-tempered, sustainable but colossal, dividend: this is the greatest celebration there can be in all of capitalism. This is its highest end.
We do not say the same thing about the cost of income. The capital stewards’ sacred quest is, all other things being equal, to optimise it. In general terms, that means minimise. Not eliminate, exactly — it is axiomatic that one must spend to earn; there is no risk without reward — but still one should not pay a penny more than is needed for the cost of income.
In a services industry, the greatest production cost, by far, is labour: expertise; analysis; knowledge work.
We should expect the professional managerial class constantly to be on safari hunting out alternatives and cheaper sources of labour. Undertakings will commoditise, productionise, outsource and automate. All in the name of reducing the fixed costs of labour.
It should not need being said, but let us say it: all the benefits of labour optimising accrue to shareholders. They come at the expense of labour providers. An employee gets compensation — what is not fixed is at the pleasure of the management class — and for that sum, is in fundamental opposition to management’s will to omptimise. Workers are short an option.
Lesson: if you can, own capital, do not sell it. If you can’t, manage capital, rather than providing it.
This feels like it should not be being said.
Now, not everyone can own the means of production. Those of us who work are encouraged to climb the greasy pole, transcending our subject matter expertise to work in management (lawyers do not like doing this: we entered the profession for the pleasure that comes from wielding arcane expertise: we give that up reluctantly). But many of us are constrained for our working lives to remain mere fixed-cost inputs into someone else’s capital undertaking, being paid in full and final settlement of the price for our labour.
That price is payment, reluctantly parted with; a contractual obligation. We are vulnerable to the machinations of management.
Life advice for young punters
This is not investment advice. If you would rely on JC’s advice you should see a doctor, not a financial specialist. The key to escaping this prison is to convert as much of your fixed payments as you can into something that has an ownership payoff: it need not be — probably should not be — equity in the same organisation that you work for — there is a conflict in taking a wage and owning equity in the same undertaking, since one stake wishes the other ill — but whatever you can save from your wage slavery, invest in equity. Acquire capital. For this is to transcend your slavery. Pay as little as you can by way of fees for doing this: fees are the monopolist’s rent.
Now, I would not presume to suggest any particular investments, but make it something that will earn an indeterminate — in your assessment, good — return. It might be in learning a language, acquiring a skill, paying off a mortgage, or investing in the stock market (minimise fees!!) but if all your income is going on consumables that can’t give you an outsize return — rent, media subscriptions, booze, fags, clothes — you are painting yourself into your own cell of wage slavery.