Economics

Thanksgiving Is A Reminder For Investors To Embrace Risk?

Thanksgiving was the result of a lot of risks paying off – a treacherous sea crossing where only half the passengers survived; trusting, working and living with strangers and then sharing a harvest at a time when food could be scarce. All these decisions were risky but marked the start of a new chapter of religious freedom and land ownership for the pilgrims, and what has become a treasured national holiday for Americans.

Embrace Risk
HoliHo / Pixabay

Gerry Frigon, Chief Investment Officer at Taylor Frigon Capital Management comments on why it’s important for investors to embrace risk:

Get The Full Ray Dalio Series in PDF

Get the entire 10-part series on Ray Dalio in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q3 hedge fund letters, conference, scoops etc

  • Risk is not merely a byproduct of innovation and growth, it is a key component of innovation and growth, and it is in fact a beneficial part of the process.
  • Central planners may be tempted to try to protect citizens from risk by implementing public policies that make it next to impossible for people to lose their jobs, but doing so can lead to a situation in which entrepreneurship is stifled and new businesses, new innovations, and new jobs are never created, all of which might have been created if conditions had been less stifling.
  • Many European economies have tried to do away with "risk" over the past several decades, only to throttle the ability of decentralized citizens, acting on their own initiative, to pursue the risky path of innovation and growth.
  • By trying to eliminate risk, danger, and downside, these countries have made their economies less diverse, creative, and resilient.
  • This subject, of course, has profound implications for the investor.
  • For one thing, we have long argued that investors should view their investing activities as the allocation of capital to businesses, and to seek out businesses that are creating "surprise" in their field.
  • Investors should become concerned when they see central planners moving in a direction that inhibits the ability of businesses and individuals to create surprise and (in Bret Swanson's words) "generate newness" -- a process which can only happen when there is a possibility of failure.
  • There are signs that, for a variety of reasons, central planners in many parts of the world (including the United States) are implementing policies that try to eliminate risk, even though such policies in reality only create bigger problems in the long run.
  • While investors may not have much control over the direction taken by policy-makers, they can and should consider the above discussion on the subject of risk, and realize that the temptation to try to eliminate risk can actually be more hazardous than embracing risk.
  • For example - the idea that owning indexes with hundreds or even thousands of individual securities provides better "risk-adjusted return" than owning a smaller number of carefully-selected securities.
  • If you think about it carefully, you will be able to see that this idea (which is at the heart of the "just index" or "passive investing" argument) was also behind the construction of the various structured investments and synthetic vehicles full of sub-prime mortgages which banks and other financial institutions bought under the illusion that enough diversification and the right mathematical models would make the analysis of the individual loans unnecessary. This fantasy led directly to the disastrous financial meltdown of 2008 and 2009.