Reaching the Top (Part 2)

“Getting to the top is optional. Getting down is mandatory”

That’s the formula Ed Viesturs developed as he pursued his quest to climb all 14 of the world’s 8,000 meter peaks. When he accomplished this in 2005 he was only the 12th person ever to do so. Since then only 19 others have climbed all 14. On a mountain, Ed describes himself as a risk-manager, continually evaluating whether the conditions or circumstances support the next move.

Similarly, risk management is an integral part of investing. Investors can’t control the markets and how the markets will behave. But they can control how exposed they are to the markets—what risks they’re willing to take, and what risks they need to walk away from.

If I were to re-state Ed Viesturs’ credo for investing, it would go something like this: “Return on capital is optional; return of capital is mandatory.” This has several significant implications. First, every investing activity involves risk. Even a small bank CD can be tied up for a period of time if the bank experiences financial difficulties and needs to merge with another institution.

Second, economic investments should generate cash for their owners. The cash may not immediately come back to the investors, but that is their purpose. So Google, which doesn’t pay a dividend, still generates cash. The managers just believe that the $60 billion per year of operating cash-flow should be reinvested into the business. Eventually, all maturing companies pay a dividend, as Apple started to a couple of years ago.

Third, bonds—which pay their investors back according to a pre-determined schedule—are deeply mathematical instruments. As time passes, their profile changes. They get shorter and the risk of non-payment becomes less. There’s less credit risk in a three-year instrument than in a 30-year obligation.

Climbing the 8000-ers requires understanding and determination. Reaching your investment goals can also be daunting. But by managing risk investors can improve their odds.

Douglas R. Tengdin, CFA

Chief Investment Officer

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