Louis CK on Risk Management

by Ben Carlson, A Wealth of Common Sense

“I never viewed money as being ‘my money.’ I always saw it as ‘the money’.  It’s a resource. If it pools up around me then it needs to be flushed back out into the system.” – Louis CK

The following comes from an episode of Louis CK’s brilliant TV show, Louie, as part of one of the short stand-up routines he intermittently mixes into the show. I found that it instantly clicked with me from the perspective of risk management in the different stages of the market cycles:

You try to keep your kids safe. Like, if my kids get in a car with me, I make them buckle up. I make a big deal out of it; I’m not even starting this car until you buckle your seat belts.

But if we get in a taxi, I’m like, ‘Just…it’s fine. Taxis are magic, nobody dies. Just get in, just go.’

I’m not digging in the seat for a belt. There’s no way I am blindly digging into the hepatitis and severed toes so that you can have a seat belt.

The genius of Louis CK — it’s funny, because it’s true. Has anyone actually ever worn a seat belt in a cab?

Using seat belts in his car symbolizes prudent investor behavior. The seat belt is risk management — discipline, patience, diversification, level-headedness and a plan of attack. You don’t expect things to go wrong at all times but you buckle up every time just in case.

On the other hand, his taxi strategy is what can happen during a bull market. Everyone starts to roll the dice by riding with no seat belt on. Conservative behavior is no longer at the forefront of investor’s minds. Everyone else is making money in certain areas of the market, so what’s the point of diversification, asset allocation or risk management?

After the near-10% correction in mid-October and subsequent snap-back rally to new highs I’ve heard many investors talking about the fact the market always comes back. Why worry? The market comes back every time? Nothing to see here. With stocks once again at all-time highs this is, of course, a true statement. The market has always come back. Every single time, in fact.

But that doesn’t mean there won’t be times where the market goes down much further than it did last month. There will be bear markets that last a long time before stocks fully recover from losses. This is an important reminder at times like this when it seems so easy. Investors are never as smart as they feel during a bull market or as dumb as they feel during a bear market.

It’s been a pretty spectacular 50% gain since the beginning of 2013 that basically no one saw coming. It’s amazing how quickly investors can go from being conditioned to only expect further losses following the crash to only expect further gains following the recovery. Eventually we’ll get to a point in the cycle when everyone starts feeling pretty confident riding in the back of the cab with no seat-belt on. Maybe we’re there already.

Source:
Louie

Further Reading:
Of course…but maybe: Financial advice from Louis CK
What stage of the bull market are we in?

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Copyright © Ben Carlson, A Wealth of Common Sense