‘You need to turn around, Dad. I don’t want to go any further. I’m scared.’
My 12-year-old son as we approach the gravel road to Cape Palliser Lighthouse. At the base of New Zealand’s North Island.
It’s the middle of winter and howling a gale. The waves are busting up over the road. There’s a red danger sign and an ominous powdery dust coming off the unstable cliff face.
‘Turn back, Dad. You could get us killed. It’s not worth it.’
My 8-year-old daughter with one of her skilled emotional plays.
But my wife and I are keen to proceed. We’ve come all this way. Flick the big SUV into ‘rugged road’ mode. And off we go…
Then I do a quick risk calculation. We’ve had the scenic drive. Had coffee. Now we’d probably all rather be back in the spa pool at the Airbnb.
Why worry the kids and risk scratching up the car just to see an old lighthouse?
Cape Palliser Lighthouse in the distance. Source: Tour4Four
Investors make these sorts of risk calculations every day.
So do businesspeople and politicians.
Which is why businesspeople often make effective politicians. They’re used to calculating risk v. reward every single day.
If there’s one key block on people becoming successful investors — and being financially free — it comes down to this.
Failure to correctly price-risk
When it comes to risk, I see often two types of people:
1) Most people are overly loss averse.
They miss out on all the best opportunities every day. Where sometimes, just for a little risk, there could be huge gains. Sometimes the case with the stock market.
2) A much smaller number of people are overly aggressive.
I love them. They assume they’re bulletproof or just plain lucky. All their investments will be stars! Occasionally, they are. And they become rich. But, mostly, they lose out too. You can’t beat the odds of risk.
Anxiety badly distorts risk-pricing
Among those who are loss-adverse, there can be a bad case of anxiety.
Especially for those who have made some money, built some assets and are now afraid of losing what they have.
Unfortunately, anxiety skews the mind. Badly. You see risks and terrible outcomes that are not there. You do not calculate the risk rationally. You price-risk poorly and miss opportunity.
It is built into our caveman brain. The wild animal will come for you. A few say, ‘Bring it on.’ Many say, ‘I will lose everything and perish. Or end up on the street.’
You see this also in national characteristics.
I know many people from Singapore. And visit the country from time to time. It has done remarkably well to lift itself from the Third World to a very prosperous metropolis.
But people there often come across as anxious. Worried that something will happen and they will be plunged again into Third World terror.
Some commentators suggest this new thinking will not drive Singapore forward. It needs its old entrepreneurial spirit back. That built it to what it is.
I saw similar negative anxiety and sentiment in the UK and Channel Islands. Where, on top of fear of loss, there was a frightening compliance culture.
Not only can anxiety damage your investment decisions, it can slow economic growth. Limit relationships. And since it’s highly stress-generative, it can quite likely shorten your life.
So ask the question — are you thinking straight? Or just listening to the worry voice? And if that worry voice isn’t leaving you alone, you probably need a break. A change of scene. A different lighthouse.
What do you really have to lose?
This is the key question in pricing any sort of risk — financial, relational, wherever.
If there’s massive risk of loss for not a lot of gain, well, that’s simply not worth it. But a fair trade between some reasonable risk of loss and good gain with few other options, why not?
So we have a portfolio under monitoring. Active stocks where we regularly consider the risk levels of the underlying business and its assets. Our top pick since March has climbed some 70% at time of writing. You can see that over here in our Lifetime Wealth Investor premium research.
On Friday, we got quite a lot of response on our article on a potential Trump loss. And Biden policies. Mostly it was supporting. Some got emotional at the very mention of the man.
Well, there a few younger Republicans I’d favour in the role. Nicky Haley. Marco Rubio. No time here to go into that — but do get hold of Haley’s book ‘With All Due Respect: Defending America with Grit and Grace’. Amazing life story.
One thing with Mr Trump is he doesn’t seem to have a lot to lose. Maybe that’s dangerous in a pandemic. But it sure leads to some wonderful remarks. My favourite last week was this one from Donald Lynch at The Telegraph:
‘Forget Wuhan laboratories, or 5G broadband conspiracies: according to the President, “God was testing me”. A tongue-in-cheek (one assumes) Trump said the Almighty was punishing him for his hubris in boasting about building “the greatest economy in the history of the world”. So one pandemic later “now I have to do it again”, he quipped.’
I regret not making it to that Cape Palliser Lighthouse.
Missed out there. But decision made. No worries.
Editor, Wealth Morning