The Investor as Hero

How did investors respond to these crises? For the most part, with silence. What is striking about this reaction is what investors did not do. They did not ask the government to return the money they had lost. They did not complain that the system had treated them unfairly. They did not ask that the markets be closed to prevent similar disasters in the future. What they did (in all but a few cases) was accept their losses as part of the price of risk-taking.

This attitude used to be common among Americans: If you take risks, you have to take an occasional loss. Although this attitude still predominates among American investors, they are unusual in this respect. More and more, Americans are willing to accept the rewards of risk-taking but not the costs. Consider some illustrations.

When several state-insured thrifts collapsed in Ohio a few years back, savers—who for years had been happy to accept the above-average interest payments of these institutions—were confronted with the downside of their risk-taking. How did they respond to their losses? They petitioned the State of Ohio to bail them out. The state was glad to comply with their request. It not only made good their losses, but let them keep the rewards (i.e., the above-average interest payments) that their years of risk-taking had earned them.

North of Los Angeles one finds a rather special breed of risk-takers: people who own million-dol-lar homes on Malibu Beach. There is strong evidence that Mother Nature does not want houses built on Malibu Beach. In one season she sends down boulders and mud slides to crush the houses, and in another she sends massive waves to wash them away. The residents of Malibu Beach are content to accept the rewards of their risk-taking, but no sooner are they asked to pay a price for it than they request various forms of government assistance—funded, one should note, by people who cannot afford million-dollar homes.

Farming is by its very nature a risky business, and one would assume that farmers realize as much. In this century, though, farmers have shown themselves to be far more adept at banking the profits of good years than they are at absorbing the losses of bad years. As a group, farmers are notorious for their willingness to turn to the government for subsidies in times of adversity and for their unwillingness to relinquish these subsidies when adversity is conquered. A point of interest: Five decades later, farmers are still benefiting from programs created to deal with the drought conditions of the 1930s.

Businessmen, too, have a tendency to run to the government when they gamble and lose. For years bankers have been trying to palm off their bad Third World loans onto America’s taxpayers. The bankers would have resented it if, in the 1970s, a government official had advised against these loans or taken steps to block them; now that the loans have gone bad, these same bankers are happy to turn to government officials for ad-vice-and, more important, for financial help.

This list could go on, but I think the point is clear. In years gone by, Americans who took risks expected to pay for their losses—and were expected to do so by the rest of us. These days, though, Americans who take risks all too often view Uncle Sam as a form of disaster insurance: When times are good, premiums cost nothing; when times are bad, claims can be filed with the media and various elected officials.

This attitude is unfortunate in two respects. First, it reveals what many would take to be a serious character flaw. If you expect freedom to do as you choose, it is only right that you should be willing to take responsibility for your actions. Likewise, those who accept praise for what they do should be also willing to accept blame. The desire to accept the rewards of risk-taking but not its costs is at best a sign of immaturity and at worst a sign of amorality.

Second, when the government has a policy—stated or unstated—of bailing out risk-takers, the economic consequences can be disastrous. If we tell risk-takers that they will have to pay the price for their miscalculations, we give them an incentive to think long and hard before taking risks and thus improve the chance that they will take only “rational” risks. If, on the other hand, we adopt policies that let them pocket their winnings and walk away from their losses, we encourage recklessness in their risk-taking. Worse still, we force taxpayers to pay for the damage caused by this recklessness.

This brings us back to the investors who were sent reeling on Black Monday in 1987, and on Friday the 13th in 1989. Taken as a group, America’s 40 to 50 million investors took their losses in a matter-of-fact way. In doing so, they showed us the stuff they are made of. The silence of America% investors was not, as some might suggest, a sign of their inherent fatalism or masochism. Instead, it marks them as responsible risk-takers, a breed whose numbers have declined substantially in recent decades.

America’s investors may not have emerged from the recent crashes with their nest eggs intact, but at least they emerged with their dignity intact. Not every American risk-taker can say as much.