Time Defeats Risk

Jim Davidson is mad. I mean, angry. He’s angry because he believes Mom and Pop… and Junior too… are being led astray by popular ideas about investing. This popular notion of investing was laid out for me recently in the pages of the Halifax Chronicle-Herald, Mail Star newspaper. A column by Garth Turner revealed “how the young should invest.” The first item on Mr. Turner’s instruction sheet was this intriguing idea: “The first lesson to teach our kids is that saving money is a bad idea. Money has to work hard,” he says, “saving it at four percent just won’t cut it.” Then, he followed with this insight: “Time defeats risk.” Hmmm.

Perhaps he should have a talk with my Aunt. In tidying up her affairs I came across a genuine $25 War Bond. It was issued in 1945, redeemable in 10 years. Were it redeemable today at inflation-adjusted value, I could use the money to buy a new suit. But, in this case, risk defeated time. Risk also defeated time in the case of the growth industries of the ‘20s—autos and radio. If you had purchased an auto manufacturer’s stock in the ‘20s… you’d have had a one in 133 chance of getting a long-term winner. If you’d gone for a radio stock—your odds would have been zero. None of the 500 radio companies of the ‘20s exists today. Lest you have any doubts about what stocks your children should buy, Mr. Turner clarifies: “Computers today are the cars of the ‘20s. ” Uh oh. He also recommends “mutual funds that are devoted to e-commerce and the Net… Amazon.com and its clones.” Fearful parents are reassured that “kids today should be schooled in confidence, not fear.”

Mr. Turner, of course, merely echoes a refrain that is heard throughout the land. From the most mellifluous voice on public radio… to the raw tones of telephone broker pitchmen, the message is the same: Buy, hold, get rich. But, as Jim Davidson points out, the road to riches of the popular imagination and popular press is not only strewn with landmines—it doesn’t even take people where they really want to go. You can probably save your money and invest it to become richer than you are now. But getting really rich takes an entirely different strategy. Jim cites no less an authority (and as Alan Abelson would be quick to add…there are few lesser authorities) than Lester C. Thurow, a guiding light of the left wing of the Democratic Party. Mr. Thurow, at least, has recognized what Mr. Turner has not. If you want to get rich… you cannot just put your spare farthings into stocks and hope for the best.

“The rich see opportunities to invest in situations where great disequilibriums—imbalances or openings in the economy created by new circumstances—exist,” he says. “Carefully saving money and investing in normal equilibrium situations can make one comfortable in old age, but never really wealthy.” In other words, you have to do something different from what most people do if you expect to become richer than they are. It’s not enough. Compounding savings at the rate of GNP growth increases your net worth. But you have to either live a very long time…or have a heck of a lot of savings. Say you earn $100,000. You pay $40,000 in taxes…you live on $50,000 and save $10,000. Not bad. Still, you have to do it for a long time before you have $1 million. And I hate to break the news to you, but though you can probably accumulate a million dollars this way…you’re still a long way from having real wealth. And in any case, you’re not going to feel like a millionaire if you have to live on $50,000 a year.

What’s more, risk often defeats time. Getting rich slowly multiplies the chances that something will happen that will set you back. Inflation demolished the value of War Bonds. Changing demographics could wipe out the expectations in suburban real estate. A bear market could set investors in AMZN back substantially.

AMZN could disappear completely… along with the investment money that has been poured into it. In fact, of the 12 largest companies in America at the turn of the century, only one—General Electric—is still around.

Apart from the risk, though… the opportunity is an illusion. Thurow again: “Real wealth is ultimately not created by taking income away from consumption and devoting it to investment.”

And Davidson’s follow-up: “To create wealth on a scale that offends unsympathetic people, you must discover new ways of creating value on a large scale.” This is precisely what Davidson has set out to do. He offers a service only for accredited investors only that brings promising venture-capital investments to non-billionaires. One, for example, a company that has come up with a new process for manufacturing cardiac stents, has revved up initial investors’ money by 628 times. For the coupon clipping, but mathematically challenged, investor, that’s equivalent to a 100% return each year for 628 years. Other venture capital deals have similarly almost incalculable upside potential. They have incalculable risks too. But at least you don’t have to wait a lifetime to lose all your money. Or spend a lifetime as though you never had any.

Bill Bonner
August 10, 1999

The Daily Reckoning