In 1990, an R&B trio got nominated for a Grammy award for their song “Let’s Talk About Sex,” which was (at the time) a more than usually overt song about a topic that is still pretty taboo in America.  It was considered by music pundits at the time a commentary on the state of women’s liberation that because the trio (Salt –n- Pepa) were women.  According to the music industry, the topic was slightly more salacious when it was women who performed the hit song.  Interviewers rejoiced in such great fodder, and along the way the question about whether we should be talking with kids about sex was raised, the debate between information was the same as encouragement entered the public discourse again, for a time.  I don’t know if good came of it, in light of the AIDS epidemic, or gender issues, or women’s issues, or any of the related issues.  I figure we will have to wait and see.  I do think that information is powerful, but not as powerful as wisdom, and that information and wisdom both need perspective. 

With that in mind, I am going to write a little sequence on risk.  Let’s paraphrase Salt-n-Pepa and call it “Let’s talk about risk.”  It is probably the equivalent taboo topic for investors and investment professionals.  Taken together, we don’t understand risk that well,  at least not in the way we think we do.  Financial Advisors don’t talk about risk in the same way that investors think about risk, from my experience.  I admit that trying to find ways to have an actual conversation about risk with clients can be a challenge because it is a huge topic. I have seen lots of varied approaches to the problem.  I have seem legal and compliance departments tell advisors exactly which risks need to be discussed, and provide terms in which to couch the discussions.  I have sat in a “storefront” investment office and watched the broker run through a complete presentation on an insurance product without actually talking about the risks or uncertainties, or the potential limitations or downsides at all.   He was done with the whole discussion in about fifteen minutes, which struck me as way too little, but was obviously also the extent of the customers attention span or interest, from what I could overhear.  I have sat and gone through tedious discussions with people about how risk is measured, and what those measures tell us, and what kind of theoretical reliability those measures may (or may not) have.  I have chatted with people who make entirely illogical decisions based upon their particular perceptions of what we call risk.  Risk is such a fundamental aspect of our world, that we don’t really even see it anymore.  In fact, the things that we commonly call risk might not even be properly risk at all. 

So the “Let’s talk about Risk Series” is going to feature the following tentative posts in no particular order (I reserve the right to add a few):

• “We all love our illusions”
• “A rose by any other name…”
• “What are we calling risk, and is it risk?”
• “The Big list of Investment Risks”
• “So, what about these other things that I think are risks?”
• “I am not averse to that, or am I…(parts one through four)
  • Risk Aversion—“I wouldn’t want to risk it”
  • Loss aversion—“I can’t afford to have that happen”
  • Disappointment Aversion—“It is just not what I hoped for”
  • Ambiguity Aversion—“Can’t you just give me a straight answer?”
• “Perspective Matters” (parts one through three)
  • “If you are on a boat, solid ground is awfully dangerous”
  • “Is that bunker in the backyard crazy or cozy?”
  • “Am I sailing, or digging a bunker…an evaluation of investment policy”

 Mostly this is a discussion about the things that are too time consuming for most people to talk to their advisors about.  When we try to get into these topics with clients, we are often met with glazed eyes.  There is a challenge that faces every investor, when it comes to investment decision making.  We all want to earn money on our investments, really this is the only point of making them.  We all recognize at some level that the making of money through investments involves some possibility that the money can be lost.  However when it comes to looking at how we compute the chances that the money will be lost, and how we project our expectations for the kind of money we anticipate earning from the investment, things quickly go in unexpected directions.  This series is a look at those directions. 

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