Thursday, May 9, 2013

Risk, Investments, and Life

As many of you know, I am passionate about business. I hope to serve others and glorify God through a business career. Today I’ve been thinking about the financial markets, and how they are an indication of real life. Since the market is a direct result of people’s choice, I think the market, in many ways, can reflect us.

Risk is a central aspect of the market. It is what makes financial markets work. Investors take risks by entrusting someone else with their own money. They are trusting that the company will invest that money in some type of project(s) that will earn the investor more money than they had initially handed over. They cannot be certain that they will receive back all the money that they gave this company.

Just like investors take risks in the market, we as humans take risks in our daily lives. The biggest risk we can take is to invest our very life in something outside of ourselves. This can be seeking God and His plan in our lives, giving ourselves to those we love, dedicating ourselves to a vocation, devoting ourselves to our passions, and trying to make a difference in the world around us. I call this risk because we cannot be certain that we will receive back all that we have poured out.

So why invest? Why risk? History has shown that in general, the more risk an investor is willing to take, the higher their return will be over time. Yes, they will have some bad years; for example, if someone took a lot of risk in 2007, they got burned in 2008. But- and this is key- over an investor’s lifetime as a whole, every dollar invested in a riskier investment will provide exponentially higher returns than money that is safely tucked away in the bank.

So it is with life. I think we can all agree that if we lived fully passive lives and never took risks, our lives would be very small and unfulfilling. Even though we get burned sometimes, in the long run it is better to put ourselves out there.

What is most interesting to me is not that we risk, but rather how we go about incorporating that risk into our lives.

Another fundamental concept of finance is that investors are risk averse. They do not like to take a risk unless they will be fully compensated for it. There is a formula in finance that is used to determine what the rate of return on a certain investment should be based on the level of risk the investor is accepting by buying it. This would be the required rate of return, or essentially, “If I’m taking this level of risk, I must expect to receive this much return or I won’t give you my money. It wouldn’t be worth it.” However, the ideal goal of many investors is to seek alpha, or excess return. A stock has positive alpha when it has typically provided a higher average return than it should have given its level of risk.

We are risk-averse, and we spend our lives seeking alpha. We know that we have to put ourselves out there, but we don’t want to give too much of ourselves if we cannot be assured that we will be compensated for that risk. If we are honest, we hope we find that wonderful alpha. We hope that we can invest just a little of ourselves and somehow get more in return than we deserve for the amount of risk we actually took. I call this the pray-before-a-test approach to life: I didn’t study much, but I really want that A!

The thing is about alpha, it’s getting lucky. It shouldn’t exist, or if it does exist, it shouldn’t exist for long because the markets will realize that people are getting too high of returns and adjust accordingly. The same is true in life. Your luck will run out eventually, if that is all you rely on. You cannot always hold yourself back from God, from others, and from opportunities and still have the life you’ve always dreamed of having.
I have been thinking a lot lately about another approach to life, which is seeking beta. Beta is the amount of risk each stock has historically. Beta indicates how a stock reacts to the condition of the market. When the market is good, a high-beta stock performs even better; when the market is bad, a high-beta stock performs even worse.

I don’t know about you, but I want to live a high-beta life. I want to put myself fully out there. I want to trust God even when I’m scared and anxious, to care about people deeply, to run fast and far, to travel, to always be learning new things, to do things that scare me, to take jobs that stretch me and help me grow. When life is hard, it will probably be really hard. But when life is good, it will be really, really good. In the long run, I will have a better life than I would if I had risked less or didn’t risk at all. And the best part about it? It’s not based on luck, on crossing my fingers and hoping everything will work out ok. When I invest myself by giving of myself freely, I can have full faith that my life will be whole and fulfilling.

My hope is that you would come on this journey too. Seek beta, my friends. Seek beta.