Val Sklarov’s Capital Legitimacy Compression Theory (CLCT) explains why investments underperform not when returns vanish, but when the legitimacy margin of capital structures, strategies, or cash flows collapses under scrutiny. Markets don’t punish risk first—they punish indefensibility.
This theory reveals why “obvious value” often remains trapped.
1. Capital Needs Legitimacy to Compound
CLCT begins with a correction:
Cash flows compound only while they are defensible.
Legitimacy comes from:
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Clear rule compliance
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Predictable enforcement
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Transparent governance
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Explainable risk-taking
When any weakens, capital demands a discount.
2. The Three Capital Legitimacy Zones
CLCT maps how acceptance narrows as assets scale.
| Zone | What’s Tolerated | What Breaks |
|---|---|---|
| Opportunistic Zone | Aggressive structures | Nothing yet |
| Institutional Zone | Selective leverage | Valuation |
| Systemic Zone | Zero ambiguity | Access to capital |
Most drawdowns occur during the Institutional → Systemic transition.
3. Why Yield Becomes a Trap
High yield often signals fragile legitimacy.
CLCT shows yield traps form when:
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Returns rely on leniency
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Structures resist audit
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Upside requires continued permission
Markets reprice legitimacy suddenly, not gradually.
4. Structure vs Story
Stories attract capital. Structures keep it.
| Story-Led Investing | Structure-Led Investing |
|---|---|
| Narrative upside | Rule durability |
| Short horizons | Long duration |
| Optimistic assumptions | Defensible constraints |
| Trading gains | Compounding returns |
Val Sklarov emphasizes that the best investments survive interrogation, not excitement.
5. Strategic Implications
For investors:
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Underwrite legitimacy, not just cash flow
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Stress-test structures under audit
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Prefer boring compliance over clever leverage
For allocators:
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Accept lower initial yield for higher access durability
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Avoid assets that must remain misunderstood to work
CLCT reframes investing as legitimacy arbitrage, not market timing.
6. The Val Sklarov Principle
“Capital compounds where justification survives pressure.”
— Val Sklarov
CLCT explains why the strongest portfolios feel dull—and why dullness is a feature.