Your assets are much more than financial, says Andre Martin Narciso.
Consider your assets. You might think of money in savings accounts, property, pensions and so on. Now, look at your assets more broadly and in more than financial terms. Think of your human capital as an important asset that is invested in a career. One obvious repercussion of this is that the younger you are the more important this asset is compared to your savings.
The value of your human capital can be estimated as the expected value of all the income you will generate until your retirement discounted to the present value. This can be considered as part of your total assets. So, when defining your investment strategy, you should always have in mind how your human capital is invested and avoid investments with a high correlation in order to diversify your portfolio.
One of the most famous cases that illustrate the importance of this concept is Enron’s bankruptcy at the end of 2001. At that point most of the employees retirement savings were invested in Enron stock. When the bankruptcy was announced, Enron’s market value fell by 98.8 per cent and the employees realised that they had not only lost their jobs but also their retirement savings. Enron employees learned in the hardest possible way of the dangers of having a high correlation between your savings and investments, and your career.
Ideally, one should always avoid investing all your savings in investments correlated to the industry and/or region where you’re working, in order to diversify your portfolio. This is even more important for employees who receive part of their compensation in the form of stock options; in these cases it would appear wise to sell these stocks as soon as possible.
Once you accept that your human resources are part of your assets, then your job becomes an investment strategy for your human capital. This means that with the same human capital you can have different expected returns, and different risk levels. As a result, when choosing a job it is important to try to maximise the expected return, while trying to match your risk appetite with the risk of the job.
It is possible to increase the “beta” of your human capital. You can aim for a very high beta and launch a new startup, or can aim for a very low beta working as a government employee or for a very large company, and, of course, there are a lot of opportunities in between.
When finishing my MBA I had the option of going back to my old employer, one of the major management consulting companies, or to try a totally different career as an entrepreneur, joining my friends at their two year-old start-up. This was a very difficult decision, on one hand I had the possibility of going back to a very solid company, and continuing my career with relatively security and a good salary; but on the other hand, I had the opportunity of joining a very promising company at the early stage, where everything is a lot more uncertain, but the upside might be huge.
I decided to look at my two options as investment opportunities, applying a typical approach used for analysing investments with high uncertainty. I created probability trees for the next 10 years of my career for both options and figured out what would be the expected value of my future incomes as well as plotting the cumulative probability for both options.
By doing so, I could clearly see how much riskier the start-up option was than remaining with my consulting career. It also gave me an idea of the probability of the start-up option paying-off and, finally, it helped me to understand the minimum amount of equity necessary to make the expected value of both options equivalent. Having this information was essential when negotiating my share with the founder of the start-up.
After negotiating with the founder, I found myself in a position where the expected value of the riskier option was slightly higher than the alternative. The crucial difference was how much risk I was willing to take.
In order to make my decision, I decided to go one step further and look not only at my human capital in isolation, but at mine and my wife’s together, as a portfolio. At this point I realised that my wife’s human capital was invested in a low-beta career. Thus it made sense to take a higher risk on my human capital and chose a career with a higher beta.
This process made it clear to me that there are lots of analytical tools, usually only used to decide in which project you should invest, that can be used to help you decide which job you should take.
Andre Martin Narciso has an MBA from London Business School and recently joined a startup in the education sector as CFO. He previously worked for Bain & Company Brazil.
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