The Real Risk: Not Investing at All

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Something crazy came across my desk the other day. I was catching up with an old friend of mine and discovered something that absolutely blew my mind:

My friend didn’t own a single financial asset. No stocks, no crypto, not even a house. Nothing!

For anyone who knows the truth about the wealth disparity problem in America, this might not seem like that big of a deal. There are, after all, millions of Americans in the exact same position today. 

What made my friend’s admission so shocking though is that he’s a partner at one of the largest, most profitable law firms in the world and has a salary well in the 7-figures!

Obviously, he’s someone who should not only own a house but also be massively long a diversified portfolio of financial assets.  I’ve resolved to do my best to help him get there.

Anyway, this reminds me of one of the great secrets to the art of investing. 

When people think of risk they tend to think about things like the probability of loss (Am I going to lose my money?) or the potential volatility in returns (Is this investment going to go up and down like crazy?) or liquidity concerns (Will there always be a market for me to sell this asset in?). These are all legitimate concerns but what they don’t teach you in school is that the biggest risk of all is in not participating. It sounds strange to say, but it’s the investments that you don’t make that cost you the most. 

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Let me explain.

It’s all about opportunity cost— i.e. the loss of potential gains from other alternatives when one is actually chosen. What happens when you choose nothing and sit completely on the sidelines like my friend is that your opportunity cost goes to infinity. While there’s not much in this life that you can take to the bank—especially in dark arts like investing—undoubtedly, the last place you want to put yourself is on the other side of bet with infinity!

The best way to understand this principle is by considering those fun counter factual examples floating around. “If you had invested just $1000 in Berkshire in 1970, or Apple in 2000, or Bitcoin in 2012, you’d have millions today!” These stories may make you cringe in regret, but they are true. You can also see it in the return profile of the S&P 500 these last years. If you didn’t own the Magnificent Seven AI Stocks (Nvidia, Alphabet, Microsoft, Amazon, Tesla, Amazon, Meta), your returns would be 50% lower than if you had. The idea here is that there is actually a cost and risk to not participating in the winners, even if it doesn’t feel that way. 

Interestingly, most people approach investing from the complete opposite perspective than my friend and compete vigorously to find (guess) the winners and “beat the market.” Prospects here are dubious at best but, hey, at least this way you give yourself a chance. Doing nothing might feel strategic, safe, or even intelligent, but it’s not. It’s an unforced error that not only makes you increasingly vulnerable to the ravages of inflation but also gives you a 0% chance of true financial success. 

I’m realizing now that there are grounds here for a new Profit+ Resolution:

If you are lucky enough to have some excess money in your life (aka “capital), you have a duty to intelligently put it to work! 

Why? Because money in the bank (after a prudent safety cushion) doesn’t serve anyone. More on that some other day.

The way to intelligently put your capital to work is to develop a strategy for the acquisition of financial assets. This can be something you do on your own or with the help of financial professionals. The latter is advisable for most. It’s not enough for these assets to be “good” investments from a finance perspective, they also must resonate with your values. Don’t invest in things that you don’t believe in or agree with just because they look attractive on paper. 

One of the big problems of our society is just how hard this is to do.  It’s shocking that more people aren’t talking about this but the market for sophisticated financial advice is completely broken. Table stakes for a good financial advisor is $500K in investable assets, something that over 90% of Americans don’t have!

If the biggest risk is not making the best investments, we want a system where access to these opportunities is widely distributed, right?  Well, unfortunately, we have almost the exact opposite set-up. 

The global elite has been out cheerleading the advancements of the last 30-years as the great era of financial democratization. To be sure, Wall Street is more open and accessible than ever but the best opportunities still largely accrue to the ultra-elite. Being able to trade for free on Robin Hood is great and all but it’s not nearly as valuable as being able to invest in the seed round of the most promising technology companies or the best private equity or real estate deals. Similarly, a small retail investor might be able to invest in the shares of Blackstone or KKR—better than nothing—but she cannot get a slice of the 25 IRR deals in their institutional funds. 

Our political leaders are mostly clueless about this issue or worse, in the pockets of the established players. There’s been some movement in the right direction on this both from a regulatory standpoint (e.g. opening up opportunities via crowdfunding exemptions to SEC registration requirements) and technologically (e.g. platforms and marketplaces for private investment opportunities), but things remain largely unfair.

There are three things standing in the way:

1. Accredited Investor Rules

This is a policy area that needs urgent reform. Accredited investor rules may be well-intentioned. We don’t want bad actors to take advantage of financially unsophisticated people, that’s for sure. But we know enough now to know that 1. Having some money or making a good salary ($1M and $250K per current rules) isn’t a great proxy for financial acumen and 2.  Way too many qualified people are getting unnecessarily shut out from opportunities.

What kills me about the whole debate around accreditation requirements is that we make this big deal about investments but are more than happy to open up more and more avenues for legalized gambling. Gambling is a horrific, predatory business where we know with certainty that people are going to get screwed, many will get addicted, and some will literally even ruin their lives. Why would we allow and encourage people to make bets where they are statistically certain of loss but not let them make private investments? It makes no sense.

2.  Institutional Capture

I don’t want to get too deep into this but suffice it to say that there are a lot of people making a whole lot of money from the way things are and they are absolutely determined to keep it that way.

The crypto movement started as a reaction to this actually. In the early days, crypto was an attempt to break free from the many masters of the established money order. In this sense, the movement can be seen as part of a true attempt at financial democratization. Interestingly, though, as the money got big, crypto prophets realized they would be better off bringing the movement inside the system. As a result, the industry has already lost much of its libertarian appeal.

3. Financial Illiteracy

We teach so little in the way of true financial education to our kids that it feels almost like a deliberate attempt to manufacture mass ignorance. This absolutely has to change. 

I am positioning Profit+ to be a significant player in the fight to level the playing field for investment opportunities in America. I’m going to put out even more educational content on the subject, advocate for policy changes in DC, support innovative companies seeking to open this world up for people in responsible ways, and am also planning to provide access to my own private real estate investments. 

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