The Reign and Romance of Risk

I was taking the Amtrak from SF to Sacto last night and sped through Redleaf’s book Panic: The Betrayal of Capitalism by Wall Street and Washington.   (You can find more info on Redleaf and his fund Whitebox here on Hedge Fund Letters.)

There are two chapters that are fantastic, and I will have to revisit them after a few days spent mulling them over.

If you have any of Redleaf’s investor letters send them over.

Some great quotes:

“The moral defenders of capitalism have repeatedly staked the system’s legitimacy on the notion that those who take great risks deserve great rewards.  It is this combination of an appealing intuitive notion (investors who risk more must be paid more) with a thrilling moral tale (the capitalist knight wins the kingdom not by counting the beanstalks but by slaying the dragon and leveraging the damsel) that surely explains why the notion of risk as the source of return remains so powerful.

Powerful, persuasive, deeply intuitive but wrong, dangerously and destructively wrong.  We believe that the reign of risk is at the root of the repeated crises in modern financial markets and that overthrowing it is the key to successful investment….risk is not the foundation of profit but its most dreaded enemy.

…Risk is not the source of wealth in securities markets or anywhere else.  The notion that risk equates with reward is worse than a myth – it is a mass delusion, a mass delusion that in our time has cost investors of trillions of dollars that we can measure…It has lulled an entire generation of financial advisors into complacency about the risks to which they expose their clients.

At every turn of economic life, the reduction of risk is the key to prosperity.  Except in financial markets?  Why should it be so?”