This response is rather lengthy, so I’m putting in a new article.
In response to High Risk is Just Plain Dumb, Bob wrote,
I’ve been following this conversation with interest, but I’m done with it now because I just realized you’ve got nothing valuable to say, mostly because of this statement: “There is no such thing as a risky investment, only risky investors.”
I’ll take my paid-off house and mutual fund portfolio over this stuff any day.
Good luck with all this.
If you’re really gone, Bob, I sincerely wish you the best. It’s better to have some sort of plan than no plan. It will serve you.
It appears to me that Bob is upset because I put a bullet through the head of one of his sacred cows. We all have our sacred cows. We have deep, emotional attachments to them. When somebody shoots one, the act tends to trigger an emotional response inside of ourselves.
Bob proves my point. I would hope that Bob hangs around and engages in a dialogue to help us understand what is inside his head and heart. If he takes his ball and goes home, we’re diminished, and I’ll have to make some assumptions. That’s always dangerous, but that’s all I’m left with.
Where Does Risk Lie?
I want to follow a line of reasoning, expanding on what I wrote, so I’ll use fictional people, Alice, Charlie, and Dan.
Let’s say that Charlie has an attitude that resembles Bob’s, at least superficially. He believes in that investments have risk. He believes that putting money in a mutual fund is investing. He believes in hoarding building net worth as the Way to protect against an uncertain future.
Why does Charlie turn his money over to a third party, rather than directing his portfolio himself? Because he has no expertise in the matter. He knows instinctively that if he were to attempt directing his paper portfolio, he’s end up with a “capital depreciation fund” (a tip of the hat to the funny guys at Car Talk). His capital would disappear in a blaze of unhappiness.
For Charlie, directing his portfolio creates a huge risk. He might get lucky a few times, but eventually he’ll lose his shirt. Guaranteed. Why is this? It’s because he lacks the knowledge to utilize the markets effectively.
Let’s say that the worst thing happens, and Charlie gets lucky a few times. He start to think, “Hey, this isn’t so bad.” Dan sees this and wants to get a piece of the action, too. Charlie passes his “knowledge” to Dan, who then puts it to use. If Dan is lucky, he’ll lose his shirt now rather than later. When Dan is sitting shirtless in front of his computer, he thinks, “Man, these markets are ‘risky’.”
Are the markets themselves risky? They go up and down, certainly, but this is volatility, not the same thing as risk. Or, is the lack of knowledge inside the heads of Charlie and Dan a factor? I suggest that this is the key.
Furthermore, I would suggest that neither Charlie nor Dan were investors. They were speculating, certainly, but hardly investing.
Let’s turn our attention to Alice. She’s an actual investor. She’s developed the knowledge, insight, and systems that allow her to create a consistent positive cash flow from the markets.
If Dan were to study under Alice, gain the knowledge and expertise, and put the systems into place that allow him to obtain the same results as Alice, he wouldn’t have the same fearful aversion to the markets because he knows how to manage risk down to the point where profit is ensured. He’ll lose some but win more so to him, the markets aren’t “risky”.
Compare Alice and Charlie, the educated person and the ignorant person. They operate in an identical environment, but in one person there is high risk (Charlie), and in the other person there is low risk.
How, then, can we say that the market itself is risky when the person is what drives the outcome over time?
Another Tortured Simile
Labeling things “risky” and “not risky” is akin to calling the events in our lives “good” and “bad”. As I wrote in Life Throws Curve Balls, events are neither good nor bad. They just are. They may be desirable or undesirable… but good? Bad? How do determine “good”? Or “bad”? As a human being, some of the most powerful educational experiences I’ve had came from gut-wrenching undesirable experiences of my life. While in the process of going through the experiences, I desperately wanted out, but found no egress.
In retrospect, I cannot label those experiences as “bad” since the benefits I’ve derived from them have been tremendously powerful in my life. I don’t want to go through them again as they were horrible, but neither do I want to give up the knowledge gained.
They were not “bad” experiences, but simultaneously “undesirable” and “beneficial”. That’s one of the essences of life. How is it that I derived benefit from the “bad” experiences? I chose to. I could have chosen to be bitter and angry, but I chose otherwise. It was the human element that made the difference, not the event itself.
In a similar vein, calling a investment vehicle “risky” or “safe” is not particularily useful, seeing how outcomes are directly influenced by the individual involved in making the decisions… not by the instrument itself.
An Apology
In making the last post, I skipped some foundational concepts. I didn’t lay some groundwork and ending up shooting a sacred cow suddenly. I apologize for that and will try to avoid having sacred cow burgers for dinner again. I try my best, but know that despite my best efforts, others will be offended. So I do my best again.
