While hiking in Switzerland years ago, Launa and I were surprised to see someone jump from a nearby cliff wearing what we later learned was called a wing suit. Just before hitting the ground he pulled a small parachute and landed on his feet, to great excitement from a nearby crowd. This was followed by several more performing the same feat, each appearing to be in a contest to see who could get closer to the ground before pulling the chute. As we observed this amazing, and in some ways disturbing activity known as base jumping, I wondered how long it would take before a jump would end in tragedy.
It has been a few years since that day and I often go back and look at the video we shot of those jumpers, wondering how many of them are still alive. It isn’t that I wish misfortune on anyone, but I am a firm believer in Stein’s Law. Herbert Stein was an American economist and his law was written for investors, but it applies across the board to every other activity. His law states, “If something cannot go on forever, it won’t.” I am pretty confident that base jumping, with its zero margin for error, is not an activity someone can do for a long time without a disaster happening.
Sometimes the investing world gets its own version of base jumpers. These individuals see something exciting going on and feel the need to jump into the action without fully considering the risks involved. At first it may seem like a good idea and the more times another participant has a successful landing, or in economic terms – makes money – the more additional investors want to join in. It’s human nature to not want to miss out on a perceived great opportunity.
Thinking back on my own experiences in the investing world, I remember the disastrous silver crash of 1980, the dot.com bust of 2000 and the real estate market bubble of 2006, to name a few. In each of these situations investors got so caught up in rapidly rising prices of an asset that they forgot to consider if prices had any relation to real value. They saw other people jumping in and walking away with huge profits, and so they wanted to have their own shot at the same profitable experience. They failed to recognize that a rapidly rising price may not coincide with rapidly rising value.
Base jumping is an exciting activity, but how long can one continue to survive with so much risk? Likewise, jumping into a sky-rocketing investment seems like a fun idea, and it can be tempting watching other investors making money without you. But before you strap on that financial wingsuit, consider Klein’s Law. Ask if these rising prices can go on forever and if not, how will it affect you if it happens to be on your personal jump that it all comes crashing down.
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
Member www.finra.org / www.sipc.org , a Registered Investment Advisor. Wyson Financial, 375 E Riverside Dr, St. George, UT 84790
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