What are you hedging against?

Sonnie Bailey

4 March 2022

You can find useful insights anywhere. Whether they’re new insights, reinforcing insights you’ve already had, or rearticulating or recontextualising insights.

Take, for instance, Tyler Cowen’s recent interview with Chuck Klosterman.

At various points, Tyler explains to Chuck:

  • “high-quality real estate and cheap hobbies… are the best hedges”
  • “You are human capital, right? No one can touch that, short of you destroying yourself or just dying.”
  • “You can always earn more. That’s another great thing about being in your position…. Until you’re senile, you can supply more labour, earn more, give talks, write more books, consult, teach — whatever you want to do. You’re golden.”
  • “spending money is insuring against an early death. Because if I hit 96 years old and I’m broke, I’m like, “Oh my goodness. I made it to 96. I can at least read Wikipedia every day. This is still pretty awesome.”
  • “The real risk is premature death, in my view. You want to do things that are fun now, so if you die when you’re 63, you still will feel, “I got my stuff in,” whatever that’s going to be”
  • “If you just hold safe assets, and we have above-average inflation, you get hammered, right? You lose compound returns every year, that cumulates. Real estate, equities — you at least have a chance of outrunning the demon, so to speak.”

I’d add some minor caveats:

  • High-quality real estate and cheap hobbies may not be the best hedges, but they are excellent hedges. (I’m not employing there is the best hedge; I’m just pushing back against definitive statements like this.)
  • Tyler’s comments about human capital are apt – for someone like Klosterman, who seems to love what he does. You could say that’s another hedge: being able to work for a long time, in a domain you really enjoy. In Klosterman’s case, I’d also say he doesn’t just have human capital (skills and knowledge) but reputational capital – he is at a point in his career where people actively seek out his work.
  • The points about insuring against a premature death, and outrunning the demon (inflation) reflect something that is fundamentally true when it comes to investing and decision-making in general. There’s no such thing as a risk-free investment. There are only different kinds of risk. The secret with investing is to balance the risks that are relevant to you and your situation. Whether that’s financial risk (ie, short-term volatility versus ending up in a worse position over the long run) or personal risk (ie, different forms of regret).

Thanks Tyler! And thanks Chuck, for turning the interview around and asking for financial advice from economist for all of us to enjoy 🙂


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