Wednesday, August 5, 1998

Risk Is In the Eye of the Beholder
by Alexander Grimwade
([email protected])

I want to squeak with aggravation when I hear Dr W.S.J. Marketwatch telling the world that they should be in something less risky than stocks after a one-day -- one day! -- loss of 3% in the DJIA.

Fluctuations, peaks and valleys are all in the eye of the beholder. A billiard ball, looked at under a microscope, has a surface like the Grand Canyon of Mars but it rolls along just fine when the surface it is rolling on has a similarly scaled smoothness. If I were an ant walking across a beach towards a picnic, every grain of sand would seem like a huge obstacle, each to be climbed and then descended. But like most ants, I have my eye on the long term goal; that big picnic basket sitting 10 yards away under the umbrella. I don't give a toss about those individual ups and downs as long as I can get to the ham sandwich.

Risk only has meaning within a specified time scale, which is the only reason that anyone ever dares to cross the road. Sure, I may have a 10% chance of getting hit by a car at some point in my life, but it probably won't be today.

The average fund manager has to minimize risk because every three months some aggravating report or another is measuring his performance by days or weeks, and working out beta risk factors on the daily movement of his holdings in relation to the market. He has to look at least as good as his colleagues, or everyone will twitch and take their money out of his fund and before he knows it he'll be looking for Twinkies in the dumpster behind the Walmart. This does not make for smart long-term investing, and must account at least in part for the abyssmal showing of most fund managers.

As for me, I might start getting nervous if things were to go in the wrong direction for, say, ten years. From my perspective the progress of the Dow Jones over the past 70 years has been a smooth ride. Even a dip like Black Monday of 1987 will not deter me any more than a kid dragging his wooden duck across the beach will deter that ant from his picnic.

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