Rock Climbing and Investing – Risk, Fear, and Reward

When most contemplate risk, feelings of anxiety bubble up and many tend to obsess about worst-case scenarios. This is somewhat ingrained in our DNA as a self-protective mechanism. But I think it is helpful to define risk as the uncertainty of an outcome … whether it’s negative or positive. I have spent my life thinking about risk and trying to navigate decision-making in the face of it. Experience has taught me a few critical things that can help serve investors and everyday adventurers.

Growing up in Mississippi, my parents were unique individuals. My dad “left a real job” with the phone company to pursue his passion for owning a motorcycle dealership. My mom fully supported this decision despite the fact that being an entrepreneur means nothing is certain. Additionally, my dad enjoyed racing anything with a motor, including dirt bikes and race cars. It is no wonder that as a child, my familiarity and comfort with risk were higher than most others. Today, I still love to ride dirt bikes, mountain bikes, snow ski, and my latest hobby is rock climbing. My adult life led me to entrepreneurism, but because money was tight, my views on financial management and risk-taking with money were fairly conservative.

This leads me to my first point; someone’s upbringing and background can have a profound impact on how they perceive risk. Additionally, someone’s perception of one type of risk (physical) may differ greatly from how they view others (financial or social). One of my favorite rock climbers, Tommy Caldwell, has taken on many death-defying feats and has expressed fear about public speaking about his feats. This is an extreme dichotomy akin to a Navy Seal who fears spiders!

Risk is synonymous with uncertainty. If we knew the outcome, there would be no risk. If you knew with 100% certainty that Prickly Pete would win the horse race, then you would certainly bet every dollar you have on that outcome. However, as we all know, nothing in life is certain … we live in a world of risk.

The best we can do in risk assessment is to understand two important components: the probability of something happening, and the impact or consequence of something happening.

For most activities and events, there is some semblance of a probability calculation. Whether we are trying to understand the probability of being attacked by a shark, in a car wreck, or winning the lottery, there is enough data to calculate the probability of the event happening. There is great merit in trying to estimate and quantify probabilities, to help us understand what the “big risks” (highly probable) are versus rare risks. When trying to ascertain the probability of a risk, one key step is to clearly define the action. For example, when looking at the possibility of getting killed in a fatal plane accident, you need to clarify the details: is it a commercial jet or private plane, or is the weather or pilot experience taken into account?

With investing, people think about the probability of losing money on an investment but may leave out the necessary clarifications. Is the stock public and widely held or is it a private investment? Most importantly, you need to ask what is the time frame? Imagine a fictitious, one-day investment where the probability of losing money is 50/50. If the time frame for this same investment is spread over 10 or more years, the probability of loss could change to less than 10%. Properly framing the question is critical to accurate risk assessment.

The second part of this exercise is understanding the impact or consequence of an action occurring. A famous analogy involves Russian roulette, where you have one bullet in the cylinder of a revolver. There is a one in eight chance of having a bad outcome, but in this case, the impact or consequence of being wrong is certain death. So, while the probability is only 12.5% (1/8) of a bad outcome, the consequence of doing so is not something anyone should ever do. The point of this outrageous example is that probability is important, but impact is also very important. We often focus on the probability, not the impact, or vice versa; however, both are important. If we overemphasize the impact and not the probability, we may never fly in a plane, drive in a car, or invest in a stock, because there is a non-zero probability of a bad outcome. I’m sure everyone has at one time thought about the risk of driving on a two-lane road, but because the probability is low, we have learned to accept it as a part of everyday life.

Most people don’t fully appreciate the risks they already take daily and may overemphasize other risks. Our background, life experiences, exposure or familiarity, and knowledge about a risk greatly influence our ability to assess the probabilities and impacts of risks accurately.

For example, I mentioned earlier that one of my hobbies is rock climbing. Some people immediately get sweaty palms when they hear that. However, understanding the type, method, and other factors matter greatly when discussing the risks involved in rock climbing. When I was first interested in the sport, I started to read about rock climbing accidents, which have surprisingly good statistics. This helped me identify a few types of climbing that were too dangerous to attempt. Alpinism in remote high-altitude areas with snow (think Everest, K2, etc.) is a high-risk climb. There are countless things that can and do go wrong all the time, making it extremely dangerous. Sport climbing, which is my favored style, is much safer. When analyzing sport climbing accidents, most included situations where climbers ignored simple rules about tying knots correctly or climbing in bad conditions. Like driving a car, if you wear your seat belt, don’t speed, and keep your eyes on the road, it can be highly safe and enjoyable.

Risk and our perceptions about risk lead to fear. Fear clouds our emotions and inhibits our ability to think properly, which is rarely a good thing.

While we should have a healthy respect for risks, operating on emotion, especially in the financial world, can have negative consequences. It may be easy to say, “Don’t be fearful,” but it is harder to do. This is the unique fun of rock climbing for me. One of the main challenges in the sport is to accurately assess what is real danger and what is just perceived. If you have done everything correctly, you have a good rope, and your harness is on securely, then the fear you feel could be based on a false perception of danger. Recognizing the difference between real and perceived danger and learning to cope with your emotions is a huge part of the challenge and fun of the sport. Similarly, Warren Buffet famously tells investors that you should be “fearful when others are greedy and greedy when others are fearful.” This is the financial equivalent of telling yourself to focus on the rational and not the emotional.

Don’t go through this exercise alone. Whether you’re rock climbing, starting your own business, or making financial decisions, it is helpful to have a guide to provide information, experience, and emotional support. While financial advisors aren’t psychologists, we do recognize that money decisions are influenced by emotions and our job is to provide the context and education to help clients to make decisions.

Carpe Diem!