Beautiful article in WSJ : The Secrets of Intangible Wealth by Ronald Bailey

A Mexican migrant is five times more productive in the US than he is back home. Why is that ?
According to some remarkable but largely ignored research - by the World Bank, of all places - it is because the average American has access to $418,000 of intangible wealth, while the stay-at-home Mexican's intangible wealth is just $34,000. But what is intangible wealth and how is it measured ? Two years ago, World Bank set out to assess the contributions of various kinds of capital to economic development. Its study "Where is the Wealth of Nations ? Measuring capital for the 21st century", began by defining natural capital as the sum of nonrenewable resources and produced or built capital as sum of machinery, infrastructure etc. But once the value of all these are added, the economists found something big was missing : The vast majority of the world's wealth!

The rest of the result of the "intangible factors"-such as the trust among people in a society, an efficient judicial system, clear property rights and effective government. All this intangible capital also boosts productivity and results in higher total wealth. 80% of wealth in rich countries and 60% in poor countries is of this intangible type. What the World bank economists have done brilliantly is to quantify the intangible value of education and social institutions. The bottom line : "Rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity." The rule of law accounts for 57% and education accounts for 36% of intangible capital. Switzerland scored 99.5 on the rule-of-law index while the US scored 91. By contrast Nigeria's score on this is 5.8. Overall the average per capita wealth in the OECD countries is $440,000, consisting of $10,000 in natural capital, $76,000 in produced capital and a whopping $360,000 in intangible capital. Low income countries in contrast have $7,216 per person. Consists of $2,075 in natural capital. $1,150 in produced capital and $3,991 in intangible capital. Through rampant corruption, some are destroying their intangible capital and ensuring that their people will be poorer in the future. Who wouldn't walk across the border in such circumstances?

The World bank study bolsters the deep insights pf the late development economist Paul Bauer. In his brilliant "Dissent on Development" Bauer wrote : If all conditions for development other than capital are present, capital will soon be generated... If however the conditions for development are not present, then aid will be necessarily unproductive and therefore ineffective. Thus if mainsprings of development are present, material progress will occur even without foreign aid. If they are absent, then it will not occur even with aid. This path breaking study demonstrates that the mainsprings of development are the rule of law and a good school system. The big unanswered question is : How can people rid themselves of the kleptocrats who loot their countries and keep them poor?

Buffett went on to stress the importance of temperament when it comes to investing, saying: “Independent thinking, emotional stability and a keen understanding of both human and institutional behaviour is vital to long-term investment success.”

The Rule of 72

The 'Rule of 72' is a simple way to calculate the number of years to double your money : divide 72 by your annual returns and the number of years it takes your money to double follows.

So, if you expect an annual return of 12%, it takes 6 years to double your money (72 / 12 = 6). You can also calculate the 'required return': Divide 72 by the number of years. If you have 10 years to double your money, you need 72 /10 = 7.2%. Only 5 years? Your required annual return would be 72 /5 = 14.4.