Eliminating Risk Makes No Financial Sense

What is the relationship between freedom and wealth? This is one of the subjects we spoke on at the Wealth Symposium in Vancouver last week. What makes a country free? Is it elections? Laws? A parliament?

“What makes a country free is the freedom to fail,” we answered. Failure, in the economic sense, allows the markets to get rid of bad investments and misallocated capital. Failure, in the personal sense, means that you are free to take risks and benefit from them. If you’re free to fail then you’re free to succeed, without having the rewards of your risk confiscated by the tax law or the legislature.

The trouble with politics, markets, and culture today is that we’ve tried to ban failure by banning risky personal and financial behaviour. We do this by banning chain smoking and trans fat. You can’t make a person healthy by restricting his freedom, though. All you really do is rob him of the chance to learn and profit from his mistakes. If we don’t learn from our experience, we’ll never learn at all.

But there is a broad effort in the culture to eliminate risk altogether, from the markets, from athletics (there are no winners and losers), and from life. Why, with such affluence around us, should anyone go without a home, a good job, universal health care and 4,000 calories a day?

The incentive to take risks that others might not is that you’ll enjoy gains you wouldn’t otherwise have. This broad social effort to enforce an equality of outcomes—rather than just equality of opportunity—turns people into complacent, whining, rent-seeking, Big-Brother watching automatons. People stop taking risks and start looking for handouts. And instead of getting really wealthy by building capital and savings, they seek shortcuts…debt, asset speculating, and when it comes down to it, voting themselves benefits via the political process (otherwise known as the advanced auction of stolen goods.)

Taking calculated risks to grow your wealth is what investing is really about. You can’t preserve your capital until you’ve accumulated some first. It’s a real shame that the newspapers and the TV are full of discussions about what the best government or public policy is. Our culture is dominated by politics. That’s a bad sign.

Your real focus shouldn’t be on the Federal election but self-government, your own personal policy of freedom and wealth. How can you use the next five years of globalisation to grow your capital without risking too much of what you already have?

Dan Denning
The Daily Reckoning Australia

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