Should You Slap A Simple Single Or Swing For The Fences?

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This could easily become a column on successful investing, but it’s not. It does, however, reflect a Noble Prize-winning concept that has propelled successful investors for more than half a century. It’s simple. I’ll explain it quickly.

Every investment option possesses two critical factors: risk and return. Scholars credit economist Harry Markowitz as the first to identify the correlation of risk and return. In his 1952 paper “Portfolio Selection,” Markowitz, the father of “Modern Portfolio Theory,” says low-risk investments can yield low returns and high-risk investments must yield high returns. The “can” and “must” refer to the price you should reasonably pay for the investment.

But this column isn’t about successful investing, it’s about life. Specifically, your life. More precisely, the choices you face in your life. Understanding the dichotomy between “low-risk/low-return” and “high-risk/high-return” can not only help you make more informed decisions, but it could also make you happier no matter which option you pick.

To better flesh out the practical nature of this decision node, let’s consider a couple of examples we should all be familiar with.

Given we have entered baseball playoff season, it’s appropriate to bring up the competing strategies of “Small Ball” versus “Swinging for the Fences.” Put another way, to score runs, do you want to rely on hitting a lot of singles, or do you prefer trying to hit home runs? The first approach is less risky but takes a lot of batters and scores only a few runs at a time. The second strategy makes it more likely you’ll get out, but when you connect, it’s an instant run (or more if there are players on base).

How does this translate in real baseball history? If you’re of a certain age, you might remember two MLB stars of the 1970s. Dave Kingman was a home run hitter. Hitting home runs is a high-risk/high-return strategy. Kingman hit 442 home runs in his career. Nearly every player with over 400 career home runs (not including those from the “juicing era”) has been elected to the Baseball Hall of Fame. Except Dave Kingman. He had a low batting average (.236). He struck out a lot.

Compare Kingman to Rod Carew. Carew only hit 92 career home runs. He hit a lot of singles. He batted .328. He’s in the Hall of Fame. Elected in his first year of eligibility. What’s that familiar adage? “Slow and steady wins the race.” Oddly, he never scored a major contract with the Minnesota Twins because he wasn’t a home run hitter. He started hitting home runs (and striking out more). He became the highest paid player in 1979 when the Twins traded him to the California Angels.

It’s not just baseball, it’s Hollywood, too. Think of the biggest blockbuster hits and the biggest bombs. Both come from big budget, mass market movies. With smaller “Indie” movies, it’s easier to make back your original investment. Of course, you almost never get blockbuster ticket sales. These low-risk movies yield lower returns compared to the high-risk big budget movies.

Chances are, however, you are neither a professional baseball player or a movie maker. If you’re like most of us, you work for a living. It’s a steady job. It puts food on your table. But have you ever been curious about starting your own business? That presents a much higher risk than your regular nine-to-five job. On the other hand, after a few rather lean early years, think how much more you can make if you run your own business. This choice offers a much higher bang for your buck.

Allow me to step aside. I’ve written in the past about entrepreneurial risk (see “Why It’s Important You Become A Calculated Risk Taker,” Mendon-Honeoye Falls-Lima Sentinel, October 27, 2022). You can check it out if you want to see how starting a business doesn’t have to be too risky.

When it comes to career decision making, it’s not limited to when you’re actually working. It can start well before then. Think about the options high school seniors face. They can go to a four-year liberal arts college or they can learn a specialized skill or trade. Learning a trade can get you earning money at a younger age, but your lifetime earnings might be capped. Going to college can you land a high-paying job with the potential for much higher lifetime earnings. This assumes you pick an appropriate major like engineering as opposed to medieval philosophy.

Of course, the high risk of attending a four-year college can entail a substantial student loan. This might delay other aspects of your life (including buying a home and starting a family) that those who learn a trade can start sooner. Part of your decision must take into account what’s more important to you.

This gets us to the meat of the discussion. We’ve talked about what’s in it for you. What you need to consider is what the various factors mean to you. You may not be someone who enjoys taking any kind of risk, no matter how small. That’s OK. No one can understate the importance of comfort and reduced anxiety.

Of course, sometimes money makes your decision for you. If you’re in a tight financial situation, any risk might be too high. You have no option but to take the slow and steady route. On the flip side, when you’re flush with cash, you’ve got throwaway money. No risk is too large.

Finally, what is your lifetime dream? If you’re ambitious, you’re likely to achieve more than others. But that will require you to take more risks. If you have more modest goals, you may not have to take higher risks.

Now, here’s the key to being happy no matter what you decide. If you understand and accept why you make the decisions you make, you’re more likely to be satisfied with the outcome, even if it doesn’t go the way you want. To accomplish this, you’ve got to get your arms around your personal psychology. Think about these:

• What do you fear more? Do you fear missing out (FOMO) or do you fear failure?
• How patient are you? Do you want it right now (instant gratification) or are you OK waiting for it?
• Do you overreact to recent events? Do you overweight/underweight the latest information?
• Where do you get news? Do you get it from the same sources, or do you actively search for opposing sources?

Finally, have you ever experienced buyer’s remorse? Do you suffer from choice paralysis when confronted with too many options? Many people say “yes” to these questions. Many people have found that once they learn more about themselves by addressing the above bullet points, they can overcome these problems.

One of the biggest mistakes is believing you can have it both ways. People fail when they too often feel they can take a “low-risk/high-return” strategy. This is what con artists rely on. They try to get people to believe you can get something from nothing.

Spoiler Alert: You can’t.

This doesn’t mean that you have to apply the same strategy in every case. Sometimes it makes sense to go the low-risk/low-return route. Other times, it’s better to pursue the high-risk/high-return path. There is no one-size-fits-all answer.

Here’s another clue for you all: no one bats a thousand. Even the best hitters (like Rod Carew) fail to get on base roughly two out of every three times they’re at bat. Don’t let a bad outcome fool you into thinking you made a poor decision. Analyze what happened. Was it your decision or was it random factors? If it was the decision, figure out how your next decision can be more informed. If it was a random factor, just move on.

Life is full of choices. They don’t have to be right or wrong. It could be they’re all right. They just have different risks and different returns.

Don’t let the perfect be the enemy of the good.