How Life on the Edge Became Mainstream in Today's America
By BERNARD WYSOCKI JR.
Staff Reporter of THE WALL STREET JOURNAL
CLEVELAND -- Barbara Harkness, a retired professor of anthropology, is trying to explain how she turned into a stock speculator.
A child of the 1930s Depression, Ms. Harkness always protected her money in bank accounts. But in the early 1990s, she was seduced by the new Gilded Age. She discovered mutual funds, then individual stocks. A couple of years ago, she started trading shares on her personal computer, and recently graduated to day trading here in this Ohio office of Las Vegas-based Bright Trading.
Every time she got more aggressive, she made more money.
"I went from thinking banks are the best place for my money to the worst place," Ms. Harkness says.
From cautious saver to citizen speculator in just a decade -- that's quite a trek across the spectrum of financial risk. But if it's extreme, Ms. Harkness's journey points to something indicative of American behavior in the 1990s, in investments, careers and social life: a growing appetite for risk.
It shows up in the extraordinary interest in so-called "hard adventure" travel, where risk-seekers hack through jungles with machetes or scale the world's highest mountains. Closer to home are the more prosaic but economically important forms of risk taking: more aggressive career shifts and investment strategies.
A Risk-Taking Elite
Numerous barometers of cockiness suggest a looser attitude toward career moves. The so-called quit rate -- a measure of those who voluntarily left their last jobs -- is at 14.5%, the highest level since the boom of the late 1980s. Job-hopping, or at least the glamour of job-hopping, is rampant. Executive-search firms expect their revenue this year to be double the level of 1993. And the emergence of the instant Internet zillionaire has created a highly visible risk-taking elite, almost shaming society's risk-averse wage slaves to just "go for it." Especially on campus, this is the phenomenon of the moment.
"They're taking more risks, and they're not worrying about it," says Al Segars, a professor at the business school at the University of North Carolina in Chapel Hill. "Back in 1995, they were going to corporate empires first. Today, the Internet world is more exciting." At Harvard Business School, 30% of this year's graduates will join high-tech or venture-capital outfits, up from 12% in 1995.
In the portfolio of individual investments in the U.S., the 1990s have also brought a steady march toward the higher risks -- and so far, much higher returns -- of stocks and equity mutual funds. At the beginning of the decade, individuals had 50% of their financial assets in stocks and stock funds. Today, it's 73%, according to the American Association of Individual Investors.
If there is an underlying explanation for the rise of risk-taking in America, it's the cushion produced by so many years of prosperity. The enormous growth in financial wealth has created its own sort of safety net, giving millions of Americans greater wherewithal to take gambles.
Psychologists call this the "house money" effect. If subjects in experiments are told they are starting with zero in their accounts, they often take a sure gain over a risky bet. But, in experiments conducted by Richard Thaler of the University of Chicago, for example, when subjects started with $30 instead of zero, far more people took the gamble. Many other studies have found similar results, reversing an age-old theoretical belief that riches led to risk aversion.
'Let's Go For It'
Is that what's happening in the U.S. these days? "You can look around you, it feels like we have this 'house money' effect of 'let's go for it,'" says William Sharpe, a Stanford University professor who shared a Nobel prize in economics in 1990. Mr. Sharpe himself did a paper in the early 1990s showing links between rising wealth and lower "risk premiums" in the financial markets, but he cautions that much of what has happened in the 1990s has led scholars to be more confused than clear about the links between wealth and risk taking.
More clear is this: One of the strongest things inducing people to keep taking financial risk, experiments have shown, is the periodic big winner. This is what keeps people buying lottery tickets, even though, statistically, a lottery ticket is a terrible bet. With the well-publicized financial bonanza from the Internet and the spectacular gains of so many stocks this decade, there have been scads of big, episodic winnings. The result: People are mightily induced to be bold and hang in there.
This bothers some, of course. "One of the defining things about this market is lack of risk aversion, especially among small investors," says Edgar Peters, chief investment strategist at Boston-based Panagora Asset Management. He sees a dangerous sense of complacency about the U.S. stock market -- where investors were emboldened after the 1998 downturn was followed by a resounding snapback. He thinks the memory of past market bloodbaths is very faint. And that is a point. A large portion of today's investors have no personal recollection of 1973-74, when the Standard & Poor's index dropped 43% in 10 months.
Yet even gauging risk is notoriously tricky. By definition, risk is exposure to future losses, but that future is uncertain. Also, there are many kinds of risks. While betting heavily in the stock market leaves investors exposed to possible losses, there is also the risk of being left behind.
Analyzing career risk can be similarly complicated. Remaining with one company, or specializing in a narrow field, can carry more risk than jumping around. Then, too, looking for jobs in good times may be a way of minimizing risk. "The real risk taker looks for a new job in a recession," says William Dunkelberg, chief economist at the National Federation of Independent Business.
Throughout the 1990s, though, one of the main underlying features of the U.S. economy has been the devolution of risk onto the backs of individuals. Just as corporations have been forced to survive in a more Darwinian environment of global competition and deregulation, employers have become far less paternalistic. Where they once offered an implicit promise of employment for good service, even the best companies promise only "employability," meaning we'll train you to survive on your own. And on a parallel track, employers, including the U.S. government, put the burdens and risks of retirement planning squarely on the shoulders of individuals -- by replacing traditional defined pension benefits with "defined contribution" plans that are portable from job to job.
These risks have been thrust on people in the U.S. to a much greater degree than in most other developed countries. Every citizen is his or her own portfolio manager, however clueless about financial-market volatility. And every citizen is in charge of his or her career.
It is only one big step from that idea to the emergence of a culture of risk taking, not just in Silicon Valley, but way beyond, where failure can be a career plus because it provides valuable experience. That is how people tend to think at the business incubator at Georgia Institute of Technology, where more than 20 companies struggle through the earliest stages of their lives.
Failing Up
In one modest suite of offices, Patrick Brannan, 35, and Henry Topping, 30, co-founder a company in 1997, straight out of the M.B.A. program at the University of Virginia. The company, which prints and distributes books on demand, is called Sprout Inc. Messrs. Brannan and Topping won a prize for the business plan back at school in Virginia. But when they tried it out in the real world, they almost failed on two occasions.
"We were down to less than $10,000," Mr. Topping says. They seriously thought of folding before they got a substantial investment from Borders Group Inc.
But even in the darkest days of Sprout, with eight employees, the founders had woven a rich fabric of safety nets. Mr. Brannan had savings from eight years in the Navy. Mr. Topping's wife had a job at Coca-Cola Co. And with M.B.A. degrees and a start-up under their belts, a failure wouldn't hurt them; it might even have helped them get a new job.
"One time when we were on the ropes," Mr. Brannan recalls, one of the company's advisers comforted him by saying, "I can find four companies that would take you within a week."
Indeed, future employability is a major element in making these entrepreneurial risks into carefully bounded ones. (It is also one of the biggest drawbacks in Europe and especially in Japan, where besides the lack of venture capital, there's a much smaller secondary job market.) Take the case of 23-year-old Dick Protus. He joined tiny Digital Furnace Corp. upon graduation from Georgia Tech last December. A specialist in telecommunications networks, he was offered other jobs, including one at networking giant Cisco Systems Inc.
But with that validation of his worth in the marketplace, he felt perfectly comfortable joining Digital Furnace, a start-up less than one year old. It provides broadband networks to offices.
'The Next Great Thing'
Wayne Hodges, director of the incubator, says the mood is the most ebullient since its founding in 1982. Every day, business plans pour in over the transom. Some of them tread the fine line between risk taking and sheer recklessness. As Tony Antoniades, a manager employed at the incubator, looks at a pile of plans on his desk, he says that only a single company even has any revenue. But the founders of these companies are aggressive, pushy and incessantly demanding. "I've got this plan today. Tomorrow, these guys will want to know why I didn't return their e-mail. They all think they have the next great thing, and they demand to be here," Mr. Antoniades says.
The possibilities of a downturn do bother some of the founders here. Like most entrepreneurs, John McIlwaine is a born optimist. Yet as he thinks about the "faucet" of venture money, he is somewhat concerned. His company, a four-year-old online training firm called KnowDev, is counting on capital to fuel expansion. "If the capital markets dry up," he says, "we're in a world of hurt."
That so few Americans seem to contemplate a future full of hurt is what bothers some of the experts. Dallas Salisbury, president of the Washington-based Employee Benefit Research Institute, points to the flimsy financial safety net of so many Americans. In a January 1999 report, EBRI estimated that 9.8% of individual 401(k) plans had balances exceeding $100,000. More disturbing, many people have borrowed against these plans. Today, when they leave a job, about 70% of Americans remove the plans from their tax-sheltered status, often cracking open these funds to square the debts.
Mr. Salisbury walks through the disaster scenario of lost jobs in a forthcoming recession. And it doesn't look pretty if they have to break open their retirement accounts for living expenses or to repay debts. A $100,000 401(k) balance would shrink fast in the face of perhaps a 25% federal tax bite, plus a 10% withdrawal penalty if the holder is younger than 59 1/2, and maybe a debt repayment. That $100,000 could well become $50,000 overnight, even without a downturn in the stock market.
Risky Business
What really disturbs Mr. Salisbury, though, is his belief that few Americans are preparing for hard times at all, in large part because the job market has been so strong. "You assume that finding another job will be 'click' like that," he says, snapping his fingers.
There's the rub. Today, finding another job is easy. If all else fails, you can become a day trader. That's what Joe Phoenix, a 38-year-old Clevelander, did after he lost his job as an environmental engineer last fall.
Mr. Phoenix had turned a $50,000 stock-market profit in 1998, mostly by trading highflying Internet stocks in his online-brokerage account. He decided to put aside half for living expenses, and used the other $25,000 to stake himself as a trader at Bright. At first, he spent his weeks in Cincinnati, where Bright had its only Ohio office, and this spring he opened the Cleveland office of Nevada-based Bright. He surely acknowledges the risk of being a day trader, noting the volatility of price moves, all of which can be amplified by using margin, that is, trading with Bright's funds. The risks are acknowledged by the other seven people who gather here each day, on the 22nd floor of an office tower in downtown Cleveland.
Over there, in the darkened room, is a Russian emigre, trading between consulting jobs. Across the way is Ms. Harkness, the anthropologist who commutes from nearby Kent (she had been on the faculty of Kent State University). And down at the end of the room on a recent day is Mr. Phoenix, peering at screens, eking out a "teeny," which is trading jargon for a 1/16-of-a-point rise in a stock. And as he describes how he has done, he mentions that when he makes a $1,000 in a day, he rewards himself with a Beanie Baby. So far, in six months, he has rewarded himself exactly once. Overall, his $25,000 account is down to about $21,000.
"I thought I knew something about the market," says Mr. Phoenix, looking back on his bravura performance in the stock market in 1998. He gives himself a while longer, though, hoping to learn what he considers the craft of day trading. In the meantime, he has bit of humility about his financial prowess. "Looking back," he says, "I was lucky." |
