SYDNEY WILLIAMS: “RISK”
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Recently, while walking around Boone Hall Plantation and Gardens, in Mount Pleasant, South Carolina, my son and his family came across an alligator. They watched it, but wisely did not approach it. Risk aversion can be a wise decision. Seth Klarman, president of Baupost Group once wrote: “In contrast to speculators preoccupation with rapid gains, value investors demonstrate risk aversion by trying to avoid loss.” But as Paul Singer, another wise investor, remarked regarding the role of government in our economy: “…the forces of risk aversion and constant conflict serve to stultify and narrow the range of ideas up for debate.” We must walk the line, avoiding obvious risks, but being unafraid to speak out and take risks. “Security,” wrote Helen Keller, “is mostly a superstition. Life is either a daring adventure or nothing.” Eleanor Roosevelt’s advice: “Do one thing every day that scares you.”
Every day we make hundreds, perhaps thousands, of decisions that involve risk. Many, if not most, are subconscious – standing on one leg to put on our trousers, reaching high for a coffee cup, ignoring the slippery spot on the floor, crossing a street. Do we take the short cut over the mountain, or the longer but safer route? Determining risk is a measurement of success versus failure. In investing, businesses calculate the potential for profit against the possibility of loss, which is why the Biden Administration’s proposal to strip Pfizer, Moderna and Johnson and Johnson of their patent protections for COVID-19 vaccines add risk to all future investments drug companies make in research. If patent protection can be breached, what does that say to those who invest in scientific research, and to those who risk everything in the creative arts, all of which are supposed to be protected by intellectual property rights?
At a time when hesitancy has caused the number of daily vaccinations to decline by almost two thirds, the President, who was fully vaccinated in December, should not have worn a mask when outside and not surrounded by others. Yet he did just that last week when he and his wife left Jimmy and Roslyn Carter’s home. The message: the vaccine does not assure safety. When the FDA ordered Emergent BioSolutions to suspend production of Johnson & Johnson’s single dose vaccine because seven out of seven million vaccinated patients developed life-threatening blood clots, was the risk worth the cost of scaring people off being vaccinated? On Jimmy Kimmel’s show last week, Dr. Anthony Fauci said he was frustrated that nearly 26% of the population won’t get the vaccine, yet he said he would not dine in an indoor restaurant, despite being fully vaccinated. What kind of a message was he sending? Being vaccinated will not eliminate all risk of getting COVID-19, but it greatly reduces it. Responsible leaders lead, not inject fear.
While COVID-19 made us more risk averse health-wise, we have become more precipitate in our willingness to take financial risk. Financial and commodity markets soared over the past twelve months, especially products like crypto currencies, with the price of Bitcoins having risen over 500% from $8815.23 on May 12, 2020, to $56,871 yesterday. Given its volatility, is it possible to gauge what a cup of coffee or a tank of gas will cost in Bitcoins tomorrow or in two months? Over the past year, the value of Tesla stock has risen 280%, from $161.88 to $617.20 yesterday. While the company’s growth rate has been phenomenal, has not risk for the investor increased with a price to earnings ratio over 500 times? During that same time, the Dow Jones Industrial Average rose 44%%, from 23,764.78 a year ago to 34,269.16 yesterday. Over the past year, copper prices are up 100% and wheat is up 22%, suggesting inflation may well be in our future. Stock markets reflect future economic growth and imply a discounted rate for forecasted earning. US GDP is forecast to be up 6.5% in 2021 and 3.1% in 2022. Based on consensus earnings estimates, the S&P 500 is selling at 22X 2021 earnings and 19X 2022 earnings. How does one measure risk in valuations and the likelihood that forecasted earnings will be correct? With Treasury borrowing record amounts, what interest rate should be used in discounting future earnings? In the May 1, 2021 issue of The Credit Strategist, Michael Lewitt wrote: “We are in a bubble because valuations of virtually every asset class are untethered from economic fundamentals.” However, the decision to sell assumes one can successfully time markets. But, as Laszlo Birinyi in his May Market Commentary wrote, “…since 2009 [with the S&P 500 up 280%], there have been 3,082 trading days, but just 60 of those days have accounted for the entire gain in the market.” Who among us is that astute?
Government believes it can remove risk in people’s lives and achieve equity, by focusing on equality of outcomes, rather than equal opportunities. But does not an anti-meritocratic, government-led diversity policy risk unintended results? Historically, individuals were free to make choices, assume responsibility, and then reap the benefits or suffer the consequences of their decision. In the Republican response to President Biden’s State of the Union address two weeks ago, Senator Tim Scott (R-SC) made the point: “The beauty of the American Dream is that families get to define it for themselves.” In mediating risk, will the opportunity to better one’s life be diminished? To live freely is to accept risk. When does cradle-to-grave security interfere with the freedom to create individual opportunities?
We should not live in fear, yet a well-intentioned government intent on protecting us makes people Eloi-like. Schools and colleges have created an environment – now passed on to businesses, government offices, Hollywood and the media – where to challenge the consensus is to risk retribution or worse. Whites are told to view themselves as oppressors, to atone for the past sin of black slavery. To disagree is to risk condemnation. To question whether a trans woman should compete in female sports is to risk rebuke. To question Critical Race Theory, which itself is discriminatory, is to be tagged a racist. Is aversion to risk in expressing opinions what we want for our children, students, employees and citizens?
One result of this preference for a collective emphasis on conformity and government-ensured safety over freedom and personal choice has been a rise in pessimism for the future. A Gallop Poll last year found that pride in the U.S. is the lowest in two decades. A Pew Research survey in 2019 noted that by 2050 the U.S. will be worse off in many ways, including the national debt, political division and the cost of health care. That pessimism has manifested itself in record low fertility rates. For 2020, according to data from the CDC released last week, the total fertility rate (TFR) was 1.64, the lowest since tracking began in the 1930s. (A TFR of 2.1 is needed for a population to remain constant.) This was not simply a response to COVID-19, as total births have been declining since 2007, the last year the TFR was above replacement. By 2050, it is expected that the number of people over 65 will exceed those under 18. People who fear the future don’t have children. How do we recover the optimism of our Founders who risked so much?
Fifty-seven years ago, Caroline and I took a risk in getting married. I had done my military service but was still in college, with no idea as to how I would make a living. Despite a future we could not see, we had faith in each other. The road ahead held challenges and included potholes, but we believed in ourselves and in the Country in which we were blessed to be born, raised and where we lived. So, my advice: Be not afraid to take risks, just not foolish ones, like petting an alligator. “In a world that is changing really quickly,” said Mark Zuckerberg, “the only strategy that is guaranteed to fail is not taking risks.” Margaret Thatcher once wrote: “Discipline yourself to do what you know is right and important, although difficult. It is the high road to pride, self-esteem and personal satisfaction.” My advice: Be self-reliant, responsible, and accountable. Do not let government dictate choices or deter you from taking sensible risks to improve your lot. Look ahead, optimistically, with clear, wide-open eyes.
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