Sunday, November 4, 2007
Another rant - Risk Avoidance
One thing I also have a problem with is the lack of responsibility and risk that seems to be prevalent everywhere today. For example, the housing/mortage "crisis" that is in the news every day now. IMHO, this crisis is being caused by the relatively new idea that a house is an investment, not a place to live. As recently as twenty to thirty years ago, the average house was bought as a place to live - period. People took out a thirty year mortgage and planned on living in the house when it was paid off. Obviously, almost all real estate appreciates over thirty years so when it was paid off you owned property that was valued at a much larger amount than when you started. Over the past five to ten years people looked for a house they could buy and then sell at a profit sometimes in as little as two or three years. This was especially feasible when mortgage money was very available and very cheap. Mortgage vendors then made this even worse by offering very unusual mortgage products at some especially low short-term interest rates. That was great when money costs were low and speculation was pushing real estate prices up and up. However, when you use a house as an investment vehicle you must remember the rule of investments - they can go DOWN as well as up! That leads to the point of this post. I was not going to use this post to specifically bash real estate speculation or buying homes as an investment. However, I do believe that housing investment is one of the best examples of lack of responsibilty and risk acceptance. One of the other prime examples is in the stock market. People do not have a historic perspective on stock prices. People don't realize that ten years ago the DJIA was less than 8,000 and twenty years ago it was less than 2,000! Even with inflation, being at more than 13,000 (and over 14,000 recently) is amazing. Look at the line above - investments that can go up can go down as well. AND THEY WILL. It is not realistic to expect prices of stocks, bonds, real estate, etc to keep going up. In fact it would be horrible for the economy by spurring rampant inflation. However people keep getting in on investments that are at all time highs and expect them to continue to climb. Not only climb, but appreciate significantly in a short time. Just like a house was an place to live just a short while ago, a stock was something you bought to increase in value over decades. Now, five years is considered a long term investment. People are shocked when a stock or other investment has not appreciated in value every time they look at it. That causes problems by requiring corporate boards and management to do whatever is necessary to increase revenues and profits short term. The problem with this is that short term is usually not the best way to run a business. The Asians have taken a large chunk of our economy through long term planning; sometimes looking twenty years out and more. Now the bottom line: Stockholders sue boards of corporations when their stocks go down. Mortage holders and issuers ask the government (read "taxpayers" - see previous post) to bail them out. Companies also go to the taxpayers for bail outs when their short term actions and plannings come back to haunt them. Just because someone will give you a $500,000 mortgage on a piece of property doesn't mean you should take it. Just because vocal stockholders want a company to maximize short term earnings at the expense of the long term value of the company does not mean a board of directors should follow suit. The entire investment philosophy over the millenia was based on risk. The higher the risk, the higher the potential gain - and loss. Queen Isabella was not guaranteed anything when she gave Columbus three small ships (in fact at least two other governments had turned Columbus away as too great a risk!). People should realize that life is a risk. We as a society are trying to eliminate risk from life. Kids play on swings placed over shock absorbing materials. We swung on a rusty chain or third hand rope thrown over a branch with a piece of wood tied to the bottom while swinging machetes; trying to go higher than the last guy! (maybe the machete thing was embelishment, but you get the point) People sue when hot coffee burns them. (they would probably sue if it was too cold) If a child is not a perfect flawless beauty with an IQ off the charts, parents want to sue the doctors that delivered him or her, or sue the pre-school or nanny for malpractice. We are now eliminating tag from playgrounds because someone may be hurt. Our society is looking for someone to blame if every aspect of our lives does not live up to some perfect ideal. "IT CAN'T BE MY FAULT - WHO DO I BLAME!! WHO CAN I GET MONEY OUT OF!" Good without bad is like a frog without a jump.