attitudes toward dividends (i): risk aversion

As a general rule, as people become older and as they become wealthier, they become more risk-averse.

The operative word here is “more.”  Virtually everyone is financially risk-averse.  That is to say, almost all of us want to be assured of some reward before we’re willing to take risk.  (A pedantic note:  the opposite of being risk-averse is to be a risk taker or risk seeker.  That is, someone who is either willing to expose himself to financial risk without any thought to compensation, or,who craves the rush risk brings and is actually willing to pay to experience the possibility of financial loss.  Until recently, you could have said risk seekers were like Cubs or Mets fans.)

The mainstream financial risk question is about the price of risk–that is, how many units of return are necessary for someone to assume one unit of risk.  As we get older/wealthier, that number rises.

war story

At one time, I worked for a man whose family had been wiped out during the Great Depression but who had built a company in the 40 years since bankruptcy that was earning him $20 million a year.  I asked him for $100,000 to fund a new venture for the firm that would likely be earning, say, $500,000 a year within a half-decade.

He said no.  I don’t think it had anything to do with his view of my competence.  For him, the loss of $100,000 was much worse than the potential of a $500,000 annuity that might run for 20 years or more.  That may be an extreme case of risk aversion   …or maybe not.  For many family companies preserving at least the current level of income is way more important than anything else.

For my old boss, a mature company gushing free cash flow and paying increasing dividends would be far more attractive than Facebook, Alphabet or Amazon, even in their infancies.


More tomorrow.