Income and growth are investment objectives that are sought after in real estate, equities and bond markets, as well as through entrepreneurial efforts (although the latter has more components to the return). Income and growth are thought to be proportional to risk exposure, at least under theories of efficient markets. But, there are unseen attributes to all investments, as completely unexpected events can occur at any moment, challenging the sustainability of any investment or financial position (or, indeed, any position in life). Accordingly, risk can be more appropriately viewed as a situation or investment’s vulnerability to such events (as presented by Nassim Taleb in “The Black Swan”). Of course, unknown events are just that: unknown, and cannot be removed entirely from any risk profile, but exposure can be understood to some degree. Taleb’s Black Swans can at least turn gray.
Investment decisions usually rely on some type of valuation, whether rigorous or implied. Is a fixed asset or security fairly priced? Is the pricing context short- or long-term? The short-term view usually includes only very recent history, and thus excludes past events that may have had a profound impact on value. While history cannot be counted on to repeat itself, the fact of a vulnerability to unexpected events can be revealed in part by looking at long-term trends. Long-term views can be incorporated in to the valuation process, influencing our current understandings of risk, and revealing whether current valuations are supported, depressed, or riding on a bubble. Short-term analysis, on the other hand, has no relative perspective, being only a narrow slice of market activity. Are your investment decisions informed by the long view? Does your investment capital structure create unwelcome exposure to unexpected events?
Long-held views have been dismantled by the recent financial market meltdown, and new thinking is called for (definitely not the type of thinking that got us here) . Not fear of the unexpected (which does not support action), but respect for changing conditions, and maintaining responsibility (the ability to respond) for one’s assets, values and life are being called forth this time around. We are developing views and processes to support a healthy and sustainable way to view the value of assets, (Toward Sustainable Finance: The Trouble with Asset Values) and welcome your contributions to thinking on financial sustainability.