Mar 5, 2010
Mark Twain on Risk
This is a real gem:
But I was mistaken. There was never a prize in the lot. I could read of railway accidents every day — the newspaper atmosphere was foggy with them; but somehow they never came my way. I found I had spent a good deal of money in the accident business, and had nothing to show for it. My suspicions were aroused, and I began to hunt around for somebody that had won in this lottery. I found plenty of people who had invested, but not an individual that had ever had an accident or made a cent. I stopped buying accident tickets and went to ciphering. The result was astounding. ‘THE PERIL LAY NOT IN TRAVELLING, BUT IN STAYING AT HOME .
I hunted up statistics, and was amazed to find that after all the glaring newspaper headings concerning railroad disasters, less than three hundred people had really lost their lives by those disasters in the preceding twelve months. The Erie road was set down as the most murderous in the list. It had killed forty-six — or twenty-six, I do not exactly remember which, but I know the number was double that of any other road. But the fact straightway suggested itself that the Erie was an immensely long road, and did more business than any other line in the country; so the double number of killed ceased to be matter for surprise.
By further figuring, it appeared that between New York and Rochester the Erie ran eight passenger trains each way every day — sixteen altogether; and carried a daily average of 6,000 persons. That is about a million in six months — the population of New York city. Well, the Erie kills from thirteen to twenty-three persons out of its million in six months; and in the same time 13,000 of New York’s million die in their beds! My flesh crept, my hair stood on end. “This is appalling!” I said. “The danger isn’t in travelling by rail, but in trusting to those deadly beds. I will never sleep in a bed again.”
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Most people fixate on interesting accidents over frequent accidents. This often causes sensationalist reporting and people start to fear a shark attack over crashing into a deer, even though the latter is 300 times more likely to occur.
For investors there are some take aways too. If you talk to an ordinary person about what they are interested in investing in, you are likely to be disappointed. Most would rather have the thrill and excitement in investing in what everyone thinks will be the next big thing. But if you look at the evidence from the past, these investments are usually almost always failures. The powers of creative destruction almost always ensure that new industries are rife with failures as businessmen gradually figure out the right economics. Instead, You are much better off looking at industries that have withstood the test of time and are trading at undervalued levels.