Timeless Space & the Mismeasure of Risk

Some may cry cynicism at the suggestion, but skepticism is a choice filter through which the assertions of anyone with authority should be passed—lest the credulous, gullible and unsuspecting be easily duped. Ask yourself: how might this person benefit by telling me this? Is their appeal one to prevent my loss or to enable their gain?



Astronomer Martin Rees was quoted this week, saying “As in all explorations of uncharted domains, there may be a risk but there is a hidden cost of saying no." I liked that quote, but abhorred his book written a few years back. Interestingly, in the U.K. the book was called, “Our Final Century”. While in the US—where fear has become Pavlov’s bell, conditioning the masses to a call to action—the book was called: “Our Final Hour: A Scientist's Warning: How Terror, Error, and Environmental Disaster Threaten Humankind's Future In This Century - On Earth and Beyond.”



In short the book says this: the odds we’re all going to die this century are about 50%--from the effects of destructive technology.



Of course, were you an astronomer, like Reese you too would follow the wisdom of Ben Franklin, “would you persuade: speak of Interest not of Reason”. And what greater appeal to interest is there, than not dying? Viewed through the lens of incentive-caused bias (Rees’ own self-interest), his proposed answer to this “crisis” serves any astronomer whose advice would need seeking and whose field needs funding. His answer: Go to outer-space!



In his own words: "Once the threshold is crossed when there is a self-sustaining level of life in space, then life's long-range future will be secure irrespective of any of the risks on Earth (with the single exception of the catastrophic destruction of space itself). Will this happen before our technical civilization disintegrates, leaving this as a might-have-been? Will the self-sustaining space communities be established before a catastrophe sets back the prospect of any such enterprise, perhaps foreclosing it for ever? We live at what could be a defining moment for the cosmos, not just for our Earth."



Our credulity always amazes me. Consider that according to the Journal of Consumer Research, U.S. businesses lose nearly $1 Billion every Friday 13th because some people are superstitious and won’t come to work, travel or make decisions on the date. Or consider that last month N.Y. State lotto officials had to shut down betting on the number combo “871” because too many people bet on it. Why that number? It was the hotel room Spitzer used. Talk about recency-bias and availability-bias!



Of course we have terrible innate grasps of very low probability things, vastly over inflating the salient and available and under appreciating the unimagined.



Consider in markets what I’ve now dubbed “The Mismeasure of Risk”: volatility. Price movement isn’t risk (the real risk is that you don’t have money when you need it). Volatility is opportunity. And it allows for more rapid transfer between people with vastly different expectations of the future. The wilder the price swings, the more likely you are to bump into someone who completely disagrees with you and is willing to trade their claims on the future for yours. And this overreaction of counterparties allows you to either buy pieces of businesses (which are in your opinion attractively priced with even higher expected returns—from someone with the precisely opposite view) or conversely sell pieces of business you already own at much higher prices to people with much higher expectations. Volatility increases the odds you can do both.



Time is what matters most. Just as time is the friend of the great business and the enemy of the not-so great business, so to time, like volatility, makes friends with the long-term investor and antagonizes the short-term one.



I predict (nay, hope) lots of things will change in investment management in the coming years. The way risk is measured for one. Just because everyone else uses the same wrong measure doesn’t mean it’s worth anything. Sharpe Ratios and Beta are the opposite of fax machines. The more people that use them, the worse the system is. I enjoy taunting my friends at hedge funds and fund-of-funds who report monthly numbers or allow their investors to withdraw every month. How can you possibly make long-term decisions when your investors expect and demand steady linear performance? Expecting the implausible leads to attaining the inevitable—blow-ups and permanent loss of money. And that is the real risk.



Consider this; diners don't demand from a chef, Le Cirque quality in McDonald’s minutes. Those that want McDonalds go and get it. Should not investor-chefs and their LP-patrons be the same? Imagine star chef Jean-Gorges quickly ladling out his concoction to his clients, spoon by uncooked spoon, for fear of his clientele uprooting and walking out the door before their palate could rebel. The patient investor like that patient patron is rewarded with a much more fulfilling experience.



Asset managers without long-term lock-ups (or with impatient clientele) are surely more likely to be asset gatherers—appealing to the poorer judgment of their clients who want instant returns and low volatility. Those asset managers are no different than politicians—winning votes with popular short-term promises at the expense of long-term consequences. Politicians figure the next guy will be left holding the bag and have to deal with the mess. Short-term money managers, figure their clients will.



As in every recession, some self-help author will come along and console the masses (surely rocketed by Oprah’s help) telling them to stop and smell the roses, slow-down and remember that there’s more to life than money and all is not lost when money is. Of course during frenzied boom times, a different incarnation of the self-help guru peddles the paradigm of the uber-productive, (“5 minute meetings”, “getting stuff done”, “seize every second”). As George Carlin said, “It’s never just a game when you’re winning.”



But I will say this: there’s something to be said—about time and permanence, the lasting business, the lasting building, the lasting idea, the timeless principle—those timeless things. Walk through Old Europe or New York and contrast the details of the Flatiron Building with the flat iron buildings erected in weeks. Detailed architecture, like detailed literature or detailed letters or conversations used to matter more and people had the time to appreciate it. In a world of twitters, texts, six-second sound bites and finger-popping food bites, the universal lament is “we just don’t have the time.” Like I said earlier, perhaps its time that matters most. Perhaps, in fairness, it’s because those all those less appreciated timeless things are also lifeless. They’ll still be there when we won’t. Perhaps seizing every moment of life is just the way some of us cope with the fight against entropy and time’s arrow. But this weekend take the time to appreciate something or someone you take for granted.