China … an interesting perspective

Why Nations Fail. Rather than use my own inadequate words I think Thomas Friedman’s  Why Nations Fail opinion article (login required) expresses the book’s observations the best. Friedman writes:

Quote: “Why Nations Fail” argues that the key differentiator between countries is “institutions.” Nations thrive when they develop “inclusive” political and economic institutions, and they fail when those institutions become “extractive” and concentrate power and opportunity in the hands of only a few.

“Inclusive economic institutions that enforce property rights, create a level playing field, and encourage investments in new technologies and skills are more conducive to economic growth than extractive economic institutions that are structured to extract resources from the many by the few,” (the authors) write. End quote (bold emphasis is mine to highlight the key conceptual difference).

Now, you may be asking yourself why blog about nations succeeding and picking out China specifically?

– About nations: only history will be able to tell us who winners and losers are among nations today. We won’t know until the future has become the past. However, the thesis in the book about “inclusive” national institutions versus “extractive” national institutions is plausible when one thinks about it.

– About China: There has been a lot of focus on investing in China. The risks are higher there since there has been little time to see whether State-owned companies can be efficient and compete globally with privately owned companies. Essentially, we are witnessing a different approach to growing and sharing wealth and it remains to be seen how a different model may work compared to results of over 100 years experience of Western models.

How to apply this to wealth management investing? Diversify and stay diversified through a prudent and academically thought through approach.

You see … investing is not speculating about regions, business sectors, or specific companies. When you do that you are actually increasing your risk. Investing prudently is through a much broader approach with an understanding that all things are connected and the goal is to participate on a macro scale in the global economy to grow and protect your financial capital.

You are already participating in the economy on a micro scale through your labor (human capital) and most people do not realize that they are at risk of losing that too. Human capital has greater risk in my opinion because it is concentrated in you only (thus insurance to transfer this risk is available through Disability Insurance).

Financial capital generally refers to saved-up financial wealth. This (build up your wealth or financial capital) is what you are trying to do during your working years with your human capital (you are paid for your competencies, knowledge and labor).

Related book: Wealth and Poverty of Nations.

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