Musings On Investing - Post 1

[Bryan Hancock]

I'm starting a blog series and thought I would put this out for commentary before I publish it more formally.  Thoughts/feedback are appreciated.  

“Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better to live under robber barons than under omnipotent moral busybodies. The robber baron's cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience. They may be more likely to go to Heaven yet at the same time likelier to make a Hell of earth. This very kindness stings with intolerable insult. To be "cured" against one's will and cured of states which we may not regard as disease is to be put on a level of those who have not yet reached the age of reason or those who never will; to be classed with infants, imbeciles, and domestic animals.”

~C.S. Lewis

The older I get and the more experiences that have shaped my being the more I have grown to understand that value judgement is necessarily rooted in both tradition and some deep narrative and the individuation of those charged with providing benevolent constraints masquerading and protection from one’s ignorance. The irony of the investment strategy of the average American – including those who meet the definition of an accredited investor – is that the bias toward optimizing for the downstroke and safety robs one from the benefits of individual growth and setting the stage for their future self. Having guardrails against the hubris is arguably noble, but the freedom versus safety infinite game can easily be framed in a manner to make the pursuit of safety the villain instead of the other way around.

The parallels of the current COVID conversation and vehement disagreement juxtaposed with long-ago litigated debates of freedom and safety in the financial realm are stark. Ironically over the last 10 years with the benefit of time and hard-fought wins in the legal framework we have given individuals choice back. This choice and the freedoms it affords optimize for liberty while arguably stabilizing the system for the collective. Which should rule the roost? That, my dear reader, depends a lot on your point of view and your individual circumstances. Who is one to say that their unique point of view is optimal? Optimal in what sense? A one-size-fits-all approach to defining the rules is extraordinarily difficult in the same way that writing down all of the laws in Napoleonic fashion is virtually impossible. Judgement in the name of prudent decisions with regard to complicated problems is needed.

Is it worth it to seek those extra few points of yield? To properly assess the proper path for one’s portfolio one must do so with a backdrop of accounting for the individuals’ skill in selecting sponsors, accounting for margin of safety in financial modeling, and an understanding of how much “risk capital” the induvial is allocating to the selected opportunity. By definition this risk capital is seeking a higher risk/return dispersion and thus the instrument in current law that limits how much one can invest with certain exemptions is prudent. How, pray-tell, would a rational person assess the capacity for one to make judgements about the skill of sponsors or how conservatively their opportunities are underwritten? The proxy for this in the current narrative are Series examinations, but these exams are largely biased toward industries serving markets with much smaller risk/return dispersions. This prescription seems tone deaf at best.

So how does one serve the interests of the collective sufficiently while allowing for exceptions without introducing bias that robs the individual of their liberty? The blunt instrument of using one’s net worth seems woefully inadequate and is designed to serve the bureaucrats providing oversight. What is a useful substitute that accounts for skill in this conversation?