Risk

“People who don’t take risk work for people who do.”

That quote is attributed to Linda from Substack. Someone forwarded it to me this morning, and it hit me over the head like a flying can of corned beef hash.

I hate to break it to you sell-side traders, but you don’t really take risk. Yes, it is bad if you lose money, but the bank will frequently tolerate losses for a long period of time before your ID doesn’t work. If one desk is losing money over here, then another desk is making money over there. Your bonus is sometimes dependent on how much money you make, but frequently not. If you were in business for yourself, you would have tapped out a long time ago. The hedge fund guys are risk-takers, though the hedge fund world has become much more institutionalized in the last 15 years. When I think of a risk-taker, I think of an independent trader sitting at his desk in his underwear, whose ability to buy food depends on his ability to produce profits. Eat what you kill.

But this is all capital markets stuff. The reason America is so special is because of the efforts of crazy gamblers, Elon Musk being the foremost example, the craziest gambler of all. Investing alongside Elon Musk is a high-volatility proposition. We take risk in America. Big risk. I am kind of wondering if some behavioral finance person somewhere could run an experiment to determine risk appetite in America versus other countries. In the mid-2000s, we had internet poker. Now we have sports gambling on our phones, where people do crazy 6-leg parlays to try to win a million bucks. There is a certain species of individual that always needs to have action on something. I knew a guy what was betting on the now-defunct World Sports Exchange 20 years ago, the online offshore sports book, when FBI agents showed up at his door. That did not deter him from gambling. People will bet on anything. I was the American Idol bookie on the trading floor at Lehman. For a time, people were trading Michael Jackson suicide futures. Again, this doesn’t really exist anywhere else in the world.

Most of this is nonproductive. A more productive use of taking risk is starting a business. You invest some money, you rent some office space, you hire some people, and if it doesn’t work out, you lose what you put into it, and if it works out, you get to keep it all. This is known as a call option—every single business started in America has call option-like returns. And I think something else that is unusual about America is that there is absolutely no stigma, none, zero, if your venture fails. In some quarters, it is considered a badge of honor. So if there are really no consequences to losing—you get nicked up, you get leaves in your hair and arrows in your ass, and you lose a little bit of money—you can keep on taking risk over and over again. Or, if you take a risk and it works out, you can freeroll it into something else and pyramid it, kind of like what Elon Musk has done. Exponential returns.

But I want to get back to that quote that I led off the piece with—if you’re not taking risk, you’re working for someone who is. There are a lot of people who don’t want to take risk—I’d guess 95-97% of people have absolutely zero interest in starting a business. Which means that the actions of a few crazy gamblers are what propels the economy forward. And if you’re sitting in a policymaking position, you’d probably want to ensure that you don’t create impediments or roadblocks for the crazy gamblers. That is often not the case. I know a guy here in town who made a living doing repairs and mods to RVs. He recently quit his job and went into business on his own, competing directly with his old firm. I talked to him about it. He said, why should they get all the money? Correct. An economist would look at this and say that there is a business out there that is earning excess returns, and sooner or later, competitors will appear on the scene, driving returns lower, in the economic state known as perfect competition. But if you work in the private sector, you have probably had similar thoughts about your own employer. The guy that is running the place is driving a Porsche. Why him? I can do that. Well, then go do it. Form an LLC and get a business license and invest some money and buy some shit and hang up a shingle. Many people get rich doing this. I can tell you that this is exactly what happened in the newsletter business. I was an early entrant, and people looked at me and said why him? I can do that. And they did, and now it’s tougher than ever, and the industry is much more mature. That’s capitalism.

The longer I do this, the more I think that being a W-2 employee is a really unattractive proposition, unless you’re getting a lot of stock and you can participate in the upside. Okay, so you get insurance, and health insurance is expensive. The insurance thing is interesting—there is a whole class of people out there who don’t want to strike out on their own simply because of the health insurance. They get it at their current job, and they don’t want to lose it. If I were in a policymaking position, that is something I would want to look at. I mean, single-payer healthcare is bad, bad, bad, but there is one silver lining—it would release people from the insurance plans that are tied to their employer, and maybe some of them would go out and take risks. A lot of entrepreneurs, like myself, have a spouse who is a W-2 employee with health insurance. If you’re single, and you’re paying $30,000 for Obamacare, it makes it a lot tougher. My health insurance is hardly gold-plated. It is basically a high-deductible insurance plan, and I am paying for most of the doctors’ visits more or less out of pocket. But I don’t have to worry about ending up on an iron lung and spending two million dollars.

But there is another reason to take the risk and start your own business: you will be happier, even if it fails. I set an alarm in the morning, but if I want to roll around in bed for another half hour, I can. If I want to get some exercise at two in the afternoon, I can. If I want to kill twenty minutes doomscrolling on Twitter, I can. I don’t have to manage politics up, and I don’t have to manage politics down. I don’t have to think about what I wear. I don’t have to think about how I carry myself. I can hang up my pants on the door when I enter my office like Mister Rogers. Beyond all the creature comforts, it is just good to be your own boss. You own all the successes, and you own all the failures. A couple of months ago, I saw a Twitter interaction involving the economist Claudia Sahm. She went after someone unprovoked, and that person responded (and I am paraphrasing the hell out of this) that she had never taken risk in her life, and she replied that she was proud of that fact. What? That’s not really something to be proud of. Kamala Harris was going around in the 2020 primary telling anyone who would listen that she had never worked in the private sector. It takes all kinds to be president, but I prefer someone who is a decisive risk-taker, and someone who at least has had at least some contact with risk-takers or who has had some idea how the private sector works. And no, I don’t think a trader should be president; traders are not good with nuance.

Not to say that I didn’t take risk when I was in the public sector. I carried a gun, for crying out loud. I got in small boats and boarded vessels in dangerous seas. A captain of a Coast Guard cutter or a navy ship must have a very sophisticated understanding of risk, the right risks to take, and which ones will get you in trouble. So people in the military are risk-takers. People in the intelligence agencies can be risk-takers. A lot of people in government are risk-takers. But it is a different sort of risk—no upside, versus all downside. Kahneman would have something to say about that. I read something recently that controlling for all other factors, golfers will make a birdie putt more often than they make a par putt. They are betting on upside, rather than avoiding downside. That should tell you something about taking risk.

Begin with the end in mind. Think about you, on your deathbed. You will regret the risks you never took, rather than the ones you did. If you’ve been thinking about starting a business for a while, and you haven’t done it, what are you waiting for?