In too deep

I’ve spent a lot of time lately thinking about risk. I’m not 100% sure why. It could be because two of the happier people in finance podcasting did a show about death. Or maybe it was because Steve Eisman was just on Odd Lots (though for Steve he was surprisingly upbeat!).

But truthfully, it is just who I am. I worry. I think about what could go wrong. A lot.

Regardless, it was OceanGate that really turned everyone’s attention to risk over the past few weeks. For those unaware (and given I was on a rock in the Atlantic Ocean with limited Internet and I was aware can’t imagine who isn’t aware) an OceanGate submersible with five passengers took a dive to see the remains of the Titanic, and never returned.

We should pause here and note this is a sensitive topic. My heart goes out to those lost, and their families. But it is also an example of hubris. And just the sort of thing that demands lessons be learned. And it is a great lesson for the rest of us in how to think about, and how not to think about, risk.

This quote from last year, from OceanGate CEO Stockton Rush to journalist David Pogue, is worth revisiting:

Rush is (rightfully) the target of a lot of criticism right now due to quotes like this, and related actions. But here’s the thing: He’s 100% correct here. He’s also greatly mistaken.

Risk is not a black and white concept. We can’t just avoid it. Most everything involves some amount of risk, and it takes a coma to avoid it. Every action we take involves risk. I am about finished with a fantastic vacation. I’m also writing this in a country I never intended to visit this year, but which I might end up remaining in for the next few days. Even vacations carry risk.

Stocks are riskier than bonds. But bonds have risk. A savings account is less risky still. But tell that to the Silicon Valley Bank depositors. The cash under your mattress can catch on fire. You can’t eliminate risk.

The important thing, then, is your relationship with risk. We can’t eliminate risk. So therefore, we need to understand it. And understand our relationship with it.

At a very basic level, this is where Stockton Rush went so tragically wrong. It appears an understatement to say that he gravely underestimated the risk he was taking on. And understated that risk to his passengers.

But it is not as if he wasn’t warned. He was repeatedly warned. It was the incessant warnings that prompted that quote from above. Those warnings, from some of the top experts in the field, were designed to save the lives of Rush and his passengers. But he didn’t hear them.

He wasn’t honest with himself. Or at the very least, he didn’t understand his relationship with risk to an extent that he could be honest with himself.

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We spent a lot of time talking about risk in the investment class I taught this past semester. (Talking to high schoolers about risk is an interesting experience! But that’s for the book.) Each student was required to take a personal assessment of their own risk tolerance.

I’d recommend everyone do one. The one we used was from University of Missouri and I think it is pretty good but there are a lot of options. There are no wrong answers. There is no wrong score. The important thing is to be honest. And to listen to the result.

I suspect Stockton Rush never really took the time to understand his own risk tolerance. And because he didn’t understand it, he was somewhat blind to the risk he was taking on. He didn’t intentionally set out to take on so much risk. He wasn’t so dismissive of criticisms just because he was a daredevil. But rather because he was such a daredevil, and because he believed in what he was doing so much, he wasn’t fully able to understand how much risk he was taking on.

It is ok to be scared of your own shadow. It is ok to have no fear and crave huge amounts of risk. But if you don’t fully understand your tolerance, if you don’t have an honest understanding, things tend to go wrong at the worst possible time.

Say you are an investor, riding the wave of a bull market, feeling like a genius and taking on all sorts of risk. What happens the morning it all crashes down, as it inevitably will? That is the worst moment to figure out your risk tolerance (or have it figured out for you).

The only way to survive the inevitable volatility of the markets (and life) is to have some understanding going in about who you are, what you are likely to do at that crucial moment, and make decisions along the way based on that understanding.

We can’t hide from risk. We take chances every day. Our choices will be inconsistent and vary based on our moods and what is going on around us. We are destined to be who we are, and no one else.

If you can’t avoid those moments, the best you can do is be ready for them. Have an honest conversation with yourself about the amount of risk you are comfortable with, not when times are good, but when times are very very bad. Understand who you are and make decisions based on that wisdom.

There is a huge middle ground between not getting out of bed, and not ending up doomed by your hubris. To thine own self be true.

NOTE: We have another AMA on the schedule. So get your questions in now via email (lou (dot) whiteman (at) live (dot) com) or, if it still exists, on Twitter. Nothing is out of bounds, especially since I can just ignore the questions I don’t like.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.