Capitalism – Hi Risk, Hi Reward

16 March 2009

Wikipedia describes the American Dream as a phrase referring to the freedom that allows all citizens and most residents of the United States to pursue their goals in life through hard work and free choice.

An important aspect of the American Dream (and capitalism) is the freedom to prosper.  Today, unfortunately, too many feel entitled to the prospering aspect of capitalism.  The downside is too rarely contemplated.

The equity markets are a good example of this.  A lot of people made a lot of money from 2003 to 2007. Now people are complaining because of the huge losses of 2008 and early 2009.  We need governments to step in, we need bailouts, and we need stimulus packages.  Some of these horribly run companies are even called “too big to fail”.

When an investor invests they have to be prepared to make a lot of money.  They also have to be prepared to lose a lot of money.  In some extreme cases – you make a ton of it, in other extreme cases – you lose it all. Investing is a dangerous game that is not meant for everyone.

Even if a friend, a broker, an analyst, an entertaining and well respected CNBC personality, or the company itself told you that a stock was a “safe” investment – as an investor, you have to be prepared to lose the whole thing.

Capitalism means freedom to prosper.  It does not mean guaranteed returns, unlimited upside, bailouts when needed, and protection on the downside.

2 Responses to “Capitalism – Hi Risk, Hi Reward”

  1. Boyd Neil

    But does it excuse greed when that greed leads to misleading investors big and small about the quality of underlying assets, for example, or creating strcutured products that are incomprehensible to even sophisticated investors.

  2. Anil Dilawri

    Interesting point.
    But is that greed or is it simply incompetence. One could argue that the leaders of many technology companies do not know the inner workings of some of there products and therefore don’t know the potential risks of those products failing. Would those same technology CEOs be called “greedy” because they touted products that ended up failing? My guess is that they would simply be referred to as incompetent.

    Either way, investors must move on.

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