Safe Is Just Risk Wearing a Cardigan
I've become increasingly suspicious of the word safe. It's one of those words people use when they want to stop thinking. Safe job, safe investment, safe pension, safe house, safe career. Stick safe in front of something and everybody relaxes, as though risk has seen the label and agreed not to come in.
Anton Kreil's fifth secret to financial success is to understand that risk is subjective, not two dimensional. In other words, something isn't simply risky or safe. Risk depends on who's taking it, what they know, what they own, what they owe, what alternatives they have and how badly they get kicked in the bollocks if they're wrong. That sounds obvious when you say it, yet most of the financial world still talks about risk like a light switch. On or off. Safe or dangerous. Green box or red box. Fill in the questionnaire, add up the numbers and apparently somebody you've never met now understands your relationship with risk.
I've never seen it that way. To me, one of the biggest risks in life is depending on one source of income and then calling that security. Millions of people do it. One employer pays the mortgage, feeds the family, funds the pension, pays for the car and keeps the lights on. If that employer decides one Tuesday morning that your services are no longer required, the entire financial kitchen cupboard falls off the wall at once. Yet starting something of your own is described as risky, while having one company responsible for nearly every pound entering your life is called a safe job.
That's not safety. That's concentration risk with a staff discount.
The same thing happens with pensions. Hand over part of your income for decades, trust governments not to move the rules, trust markets, trust pension providers, trust inflation not to chew through the value and trust that you're still healthy enough at the other end to enjoy whatever comes out. Apparently that's responsible. Suggest that there might be some risk in postponing a large part of your freedom until you're old enough to receive promotional leaflets about stairlifts and people look at you as though you've proposed investing the pension fund at Cheltenham.
Time rarely appears in people's calculation of risk, which I find bizarre because it's the one asset guaranteed to disappear. Losing £50,000 would piss me off enormously, but there's at least a possibility of making another £50,000. Lose ten years and they're gone. There's no complaints department. Nobody checks the warehouse. You can't phone Tuesday from 2017 and ask them to send another one because you've misplaced it.
That changes the calculation for me.
At 48, I don't think about risk the way I did at 28. Why would I. I'm not the same bloke with the same resources, knowledge, obligations or experience. Something that could've flattened me financially twenty years ago might be irritating now. Something that made perfect sense when I was younger might look completely fucking stupid today. Risk moves because the person carrying it moves.
This is the bit I think Anton gets exactly right. Risk is subjective. A £100,000 loss means something completely different to somebody worth £150,000 than it does to somebody worth £20 million. The number hasn't changed. The consequence has. It's the difference between dropping a brick on your foot and dropping the same brick on a tank. Same brick. Very different afternoon.
Knowledge changes risk as well. Put me in charge of a restaurant and I'd consider that extremely risky because I know fuck all about running restaurants. I'd probably bankrupt the place while trying to work out why there were twelve different types of spoon. Give the same restaurant to somebody who's spent thirty years in hospitality and the risk looks different. The building hasn't moved. The customers haven't changed. The difference is the person holding the keys.
Yet people constantly judge other people's decisions using their own circumstances. They look at something they don't understand and call it dangerous. That's not risk analysis. That's fear wearing reading glasses.
Investing is full of this nonsense. Cash is safe, apparently. Shares are risky. Gold is risky. Businesses are risky. Property is safe. These labels get repeated until they become nursery rhymes for adults with pensions. But cash has inflation risk. Property has leverage, liquidity, concentration and political risk. Shares have market risk. Businesses have operational risk. Everything has a fucking risk. Even doing nothing has risk. You don't remove risk by refusing to choose. You just accept whatever risk came bundled with the chair you're already sitting in.
That's probably the mistake I see most often. People confuse familiar with safe.
If you've sat on the same leaking boat for twenty years, you know where the buckets are. You know which floorboard creaks and which window doesn't close properly. Somebody offers you another boat and suddenly you're a marine safety inspector. What if the engine breaks. What if there's a storm. What if I don't like the cabin. All perfectly reasonable questions, except you're asking them while ankle deep in water on a boat you stopped examining fifteen years ago.
Familiarity is comforting. It isn't insurance.
There's also a strange social element to risk. Do something conventional and if it goes wrong, nobody thinks you were reckless. Take out a huge mortgage at the same time as everybody else and if house prices fall, that's unfortunate. Put a smaller amount into something unconventional and lose it, and suddenly Uncle Barry is Warren Buffett at Christmas dinner. The financial result might be identical, but one loss came wearing the approved uniform.
That's why I don't think risk can be separated from independence of thought. If you need everybody around you to approve of a decision before you make it, you're not assessing risk. You're conducting a referendum. Most people voting won't suffer the consequences either way, which makes their confidence remarkably cheap.
I've made decisions in my life that other people would've considered risky and I've avoided things other people regarded as safe. Some worked brilliantly. Some didn't. I've lost money. I've made money. I've changed my mind. That's part of it. The objective isn't to eliminate mistakes because the only reliable way of doing that is to spend your life hiding under the kitchen table, and even then the ceiling might come down.
The objective for me is to understand what happens if I'm wrong.
That's a much more useful question than asking whether something is risky.
How much can I lose. What does that loss mean to me. Can I recover. What am I getting if I'm right. What am I giving up by doing nothing. How much time is involved. How dependent does this make me on somebody else. How much control do I retain. Those questions produce very different answers depending on who's asking them.
This is also why I have very little interest in generic financial advice. Somebody who knows nothing about your life telling you how much risk you should take is like a stranger looking through the window of a pub and deciding how many pints you can handle. He doesn't know whether you've eaten, whether you're driving, whether you're six foot four or whether you've already had eight.
Context is the whole fucking point.
Anton calls risk subjective rather than two dimensional and I think that's one of the most useful of his ten secrets because it attacks something much bigger than investing. People build entire lives around avoiding things labelled risky without calculating the risk of the alternative. They worry about losing money but don't price lost time. They worry about uncertainty but don't price dependency. They worry about failure but don't price twenty years of doing something they despise because it came with a pension contribution and a lanyard.
That's not risk management to me.
That's hiding from one crocodile by climbing into another crocodile.
I don't want a life with no risk. Apart from being impossible, it sounds fucking boring. I want risks I understand, risks I can afford and risks where the upside means something to me. More importantly, I want them to be my risks. I don't want somebody else deciding that something is safe because it fits neatly inside their spreadsheet.
Safe is often just familiar with better marketing.
And familiar has fucked plenty of people.
Anyway, I've got money in the markets and I've made the mistake of looking at it today. Apparently risk has decided to introduce itself.
I'm heading to the fridge to crack open a beer.