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Forty feet, said Henry.
I’d just asked about the largest wave he’d ever surfed. He took a drag on a cigarette and a sip of coffee as he stared at Lyman’s, a surf break supposedly favored by King Kamehameha himself. The waves made a loud “boom” when they hit the sharp coral reef before us and a “shush” when they receded. Henry said he’d been surfing for 60 years.
On a wave that big, what happens if you crash? I asked.
I can hold my breath pretty good … I free dive, two and a half minutes under I'm good, he said. He smiled, finished his cigarette and grabbed his board.
Second to perhaps sleep and becoming a parent, travel forces a perspective change. We encounter the unfamiliar. This is vital. At the same time, precisely because it is unfamiliar, it is harder to accurately evaluate risk.
Water seems to be a particular challenge. A visitor is 13 times more likely to drown in Hawaii than at home. According to the US State Department, about 1000 Americans die while traveling abroad each year, typically in a car accident. Right after automobile crashes comes drowning.
When I got home, I pulled Deep Survival by Laurence Gonzales off the shelf. It’s a book about “Who Lives, Who Dies, and Why” in extreme situations. He has a chapter on drowning in Hawaii. “A scientist named Chuck Bly did extensive research on death by drowning in Hawaii … the rate was directly proportional to the number of tourists who came to the island. Put another way, drowning is normal.”
Our ancestors walked about six miles a day. That’s one perspective on the rate at which we are programmed to adjust to change. Now we are forced to adapt much faster while at the same time being cocooned in risk controls that we don’t fully acknowledge or even understand.
I’d covered the 5000 miles between home and Hawaii in a day, traveling in a plane with layers of engineered redundancy. My phone transmitted the current information revolution. We are becoming experts in blocking information out. The combination of speed, safety nets and information overload makes it harder to spot when we are faced with real risk.
Thinking about the waves, I drew parallels to investing. A wave has many different moving parts––tide, current, wind, ocean bottom, angle, frequency, temperature and distant seismological events. Investing is similar. You must take risk to make money, there are many moving parts and none are precisely predictable.
At first glance, investing looks simple. First, become familiar with the price of an asset. Second, learn how to combine that single asset with another asset. The combination of assets is what’s called a portfolio.
When it comes to buying and selling things that are familiar, most people are pretty good. They know a loaf of bread costs between $2 and $5. At $20 they’d consider it ridiculous and at 20 cents they suspect the bread was made of sawdust. Investments are more like waves (many moving parts) and less like bread (water, salt, flour).
Consider real estate. Typically, you take on debt to buy. There is maintenance, taxes. You get rent and a physical structure in return. The rent minus the costs are your profits. Divide profits by the cost of purchase and you have your yield. All assets have yields, they compete and you can compare them.
Yet, there are moving parts within the moving parts. Interest rates on a real estate loan are determined both by the interest rate on government debt plus your own personal credit risk, the risk you don’t pay back the loan. Understanding the interest rate on government debt is an entirely separate essay.
The rent also has moving parts. This has become particularly clear during this pandemic. There can be huge swings in demand for a structure. For instance, a Covid-led permanent shift to more remote work equals less demand for offices, so prices fall. Some office buildings in mid-town Manhattan have been appraised at 20% of their pre-Covid prices. At the same time, there is a surge in demand for suburban homes. The point: no investment is ever a sure thing, ever. For sure when people bought the mid-town Manhattan buildings a pandemic was far from their thoughts.
The chart below (from Rose) shows the loss from peak of 30-year bonds, US stocks, Amazon and bitcoin. Each of them at different points in time has almost entirely wiped out your wealth.
Pairing assets is a way of reducing this unpredictability. I utilize a 1/3, 1/3, 1/3 approach to investing, stocks, long-duration bonds and real estate, as a start. I am surprised that savers who lack an asset allocation will leap into crypto. (NOTE: this isn’t investment advice. I am sharing my thoughts, not telling you what to do).
After staring at the surf for a while, I paddled out. A wave came. I grabbed it. I was moving along, the water gathering strength under my board. Then, suddenly, the tip of my board sunk sharply. I pitched forward, trying to avoid hitting any coral, hard as concrete.
A moment later a surfer paddled up.
You know why you fell, right?
No, I said.
There is a big rock, just under the surface. You surfed right over it. The water gathers strength and then boils, sucking your board down. Next time, go around it. Otherwise, you can whack your head.
I will continue to travel and surf and speculate. I also know there are submerged rocks all around us. Experienced surfers drown. Experienced investors sometimes get wiped out. Risk can’t be avoided, only managed. Hawaii was a good reminder about slowing down when facing the unfamiliar.
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