Dr. Jekyll and Mr. Hyde
Investor behavior is a fascinating study, particularly when it comes to classifying risk. For example, people will always use a ‘Dr. Jekyll’ approach when managing assets that they tend to have more control over. These might include their own company, their home or cottage, their collectibles, and their holdings of other commercial and residential real estate. Dr. Jekyll is an astute investor and attributes his success to his management style. He takes a long-term perspective. He does not monitor everyday news as he realizes most of it is of little value to him. Returns aren’t frequently or accurately measured. He understands that there will be volatility and is not concerned.
However there is a second group of assets that can not be as closely controlled. These include other people’s companies (the stock market), commercial or government bonds, precious metals like gold and silver, and commodities such as coffee, cattle, and lumber. For some strange reason our investor turns into ‘Mr. Hyde’ and takes on a management style that is geared for failure. He now takes a short-term perspective. He monitors everyday news closely and considers everything important. He feels returns must be regularly measured and questioned. He is suddenly constantly concerned with volatility.
Why are these two investors defining and treating risk so differently? Risk is simply not having enough money when you need to have it. This could happen due to inflation, mediocre long-term investment returns, lost opportunity cost of taxes, premiums, and commissions, not properly protecting your assets, and hidden costs like DSC mutual funds. Ironically risk is not what most people think it is or what the financial services industry wants you to believe it is. It is not business cycle volatility, variations in company earnings, or stock market corrections. These have been taking place for 100 years and will continue to do so. All the best in 2007 Dr. Jekyll.
[newsletter]
