I have mentioned in the past some of the challenges I faced over the past year as I tried to keep a flock of chickens. From the beginning, I knew that some losses would be inevitable. My primary reason for having chickens is to help control insects in my yard and pasture. That necessitates allowing them to roam freely, making them vulnerable to foxes, neighborhood dogs, and other predators.

As anticipated, I lost a couple of chickens each month all through the summer. By October, I was down to three hens and a tough old rooster. These surviving birds knew to fly up into the loft of the barn when there was danger, so I figured they would make it through until spring.

In February 2009, the remaining chickens attracted the attention of an old, wise raccoon. At first he was content to steal some eggs and I was willing to look the other way. Then in a period of about a week, he killed my last four chickens. By then he had also become familiar with my barn. Once the chickens were gone, he started eating cat food, and then rolled oats and corn used to feed the horses. In the process, he would knock over the buckets and spill a lot of grain onto the ground, causing it to be wasted.  His destructive behavior became a nightly occurrence that I could no longer afford to overlook.

I spent money on traps and devoted several mornings and evenings to trying to catch the raccoon. He eventually succumbed to a trap placed inside a bucket of grain.

There are many lessons about risk that one can learn from this situation. By becoming too greedy, the raccoon increased his personal risk. If he had controlled his appetite, he could have continued indefinitely stealing eggs and an occasional chicken.

I erroneously believed that my risk (and investment) ended with the chickens. It never occurred to me that the chickens could expose me to additional risk by attracting nuisances that would cause havoc in other areas of my barnyard.

The chickens did what I expected when it came to controlling insects and I am already raising a new batch of chicks. But now I have a much better knowledge of the type of effort I need to make to help protect them and to prevent ancillary problems.

Jeremy Grantham is the Chairman of the Board of Grantham Mayo Van Otterloo (GMO) a global investment management firm well known among institutional investors. Grantham began warning investors about a global credit implosion in 2006. More recently he described the circumstances that led to the current economic situation not as a housing bubble or a financial bubble, but as a risk bubble.

Grantham was among many experts who warned about impending problems in real estate or in the credit markets. Their warnings were generally ignored and key people who could do something to prevent the problems failed to anticipate how those difficulties would eventually impact virtually every facet of the global economy.

In a quarterly newsletter to clients in Fall 2008, Grantham commented on the underlying causes of the world credit crisis:

“I ask myself, ‘Why is it that several dozen people saw this crisis coming for years?’ I described it as being like watching a train wreck in very slow motion. It seemed so inevitable and so merciless, and yet the bosses of Merrill Lynch and Citi and even [U.S. Treasury Secretary] Hank Paulson and [Fed Chairman Ben] Bernanke — none of them seemed to see it coming.

“I have a theory that people who find themselves running major-league companies are real organization-management types who focus on what they are doing this quarter or this annual budget. They are somewhat impatient, and focused on the present. Seeing these things requires more people with a historical perspective who are more thoughtful and more right-brained — but we end up with an army of left-brained immediate doers.

“So it’s more or less guaranteed that every time we get an outlying, obscure event that has never happened before in history, they are always going to miss it. And the three or four-dozen-odd characters screaming about it are always going to be ignored. . . .

“So we kept putting organization people — people who can influence and persuade and cajole — into top jobs that once-in-a-blue-moon take great creativity and historical insight. But they don’t have those skills.” 

Over the past couple of weeks we’ve seen the major stock indices rebound strongly. In last week’s newsletter I wrote about bear market rallies and the danger they present by pulling investors back into the market only to begin another downward slide. Although the markets rise during these events, investor risk can actually increase.

Fundamentally our economy is still in a shambles. Jobless rates remain horrible. Many experts are forecasting very high inflation in coming months. The AIG bonus fiasco actually provides a break for congressional leaders because it diverts attention away from these more serious economic problems that impact many more people.

I think the current market situation might be comparable to the lull I experienced last fall when I went several months without losing any chickens. I believed I had weathered the worst. In reality, the greatest risk remained and it came in a manner that I had not considered.

Every time stocks take a few days break during this bear market there are investors and analysts willing to believe the worst is over. My guess is that the risk bubble is not totally deflated yet. And when the next part of this economic challenge confronts us, it might come from an unanticipated corner.
F.S.

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