Personal Finance

A Mountaineer’s Approach to Risk

Years ago I did the cliche “backpacking around Europe” for a summer at university. While chilling out in a hostel in Moscow I got drinking with some Englishmen (and an Englishwoman) who were heading out to climb a mountain.

Besides downing the half-vodka, half-coke drinks (mixer was more expensive then booze) I was quite interested in picking the brains of these people who were quite enthusiastic about something bizarre (you’d have to pay me lots of money to climb a mountain of any height).

The one comment that I found most interesting, is that mountain climbers try to minimize the risk by climbing up and down the mountain quickly (in case the weather changes on them). Basically they’ve decided to do something that they supposedly enjoy, then they rush through it in case things turn bad. Weird.

I recently read “Succeeding” by John T. Reed, and in it he made a similar comment. Basically when he was young he decided he wanted to have a net worth of $5 million. While working towards this he had to get quite aggressive, and got hit very badly by a real-estate market correction in Texas. He has a similar idea to the mountain climbers: Make a conservative goal, then accomplish it as quickly as you can to minimize your exposure to risk. The more money you want to be worth (the higher mountain you want to climb), the more risk you’re going to have to take because it’ll take you longer to get to the top. So he advocates only targeting a networth goal that you’d really need, not just a big number for the sake of a big number.

It seems to me that there’d have to be “risk mitigation” approaches, where you’re aggressive for short bursts with only part of your savings in order to get to a goal, then you ratchet back the aggression and try to fortify your position. When you’re ready to push towards the next “base camp” of wealth, you put money and time aside for the attempt, talk to people who have done it before, then try to push up to it as quickly as you can.

I assume the very first base camp is income being greater then expenses. This is kind of like digging yourself out of a pit before you start climbing the mountain, and luckily this wasn’t ever a position I was in.

A Everest summit attempt would be getting onto the Forbes 400 I guess.

I’m not sure if this is a reasonable metaphor for accumulating wealth or not. My currently goal is the second base camp of passive income being equal to expenses. My “hustle” over the next 2 years could be to keep working contracts, even if they aren’t terribly interesting, keeping my cost-of-living down, buying blue-chip dividends, and trying to get a couple more investment properties similar to my current one in order to reach the first base camp of wealth accumulation (retirement basically).

At that point I can decide if going further up the mountain is interesting to me or not.

2 replies on “A Mountaineer’s Approach to Risk”

This is an interesting idea on getting rich quick. So if I wanted to be a millionaire, I would just load up on S&P 500 futures contracts and hope that the bottom in the US stock market has been set. Then when S&P 500 goes back up to 1500 I would be super rich. 🙂

I guess that kind of thinking got us into the mortgage and CDO/CMO mess in the first place.. The get rich or die tryin’ mentality that is.. 🙂

BB: Yes, there certainly are “long shot” gambles you can take to get rich or die trying (as you and $0.50 so eloquently put it 😉 ). The one thing I kind of liked about this idea is there’s a point when you STOP the high risk behaviour. Most people attracted to higher risk seem to keep at it until they get unlucky and lose it all. If you HAVE to go the high risk route, deciding a goal and the start, and quitting if/when you’re lucky enough to hit it seems worthwhile to me…

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