Your Risk Appetite

Years ago, there was an NPR story on how advancements in surfing technology correlated with surfers taking on larger waves. The stronger their safety net (leashes on surfboards, rescue jet skis, and inflatable vests), the riskier the waves they’d swim after. 

A similar comparison can be made with financial products. Throughout the last 50+ years, the finance industry has created products that help limit downside risk, while increasing or maintaining upside returns:

• Options/derivatives trading allows traders to guarantee income and limit risk. 

• The entire hedge fund industry specializes in risk management by “hedging” against risk via diversification, short selling, managing leverage, and many other sophisticated tools. 

Eventually, a crash comes -- either a large wave or a slew of toxic assets in the financial system like the Great Financial Crisis. Those who took on too much risk broke through their safety nets. 

Ozempic/Wegovy are the safety nets of 2024. Amongst other benefits, the drugs suppress appetite and allow many who couldn’t before, to lose weight. The effects have been so strong that Wall Street is largely betting against blue-chip food stocks like McDonalds and PepsiCo. 

_{Barclays issues their “Short McDonalds” report on 10/3/2023}

However, if we apply the above learnings about safety nets and risk appetite, there is a possible future where GLP-1 drugs actually allow people to eat more, because the risk of obesity is effectively overridden by the drugs. Like how the risk of wipe-out is limited by inflatable vests, or the risk of financial loss is limited by a Sell Put position in a stock. 

The learning here is that humans are both wired to take risks and be loss averse. Risk taking has allowed us to eat and breed. Loss aversion has allowed us to continue eating and breeding. We continue to develop technologies to keep getting more, while trying to lose less. It generally works, until it doesn’t.

Take risks, manage your downside, never stop learning.

PK