Monday, February 26, 2007

Suze Orman is Extremely Risk Averse

Suze Orman was interviewed today in the New York Times Magazine. I've read before about her extreme risk aversion. In the article she comments that her net worth is about $32 million allocated $7 million to owner occupied real estate, 24 million to municipal bonds (tax free), and $1 million in stocks. She says about the stocks that she put $1 million in them because if she loses it all it doesn't matter. There is no reason to be aggressive when you are as wealthy as she is. But her attitude that "you could lose it all" by putting money in stocks (you could lose 20% of it in a day based on historic precedent) is interesting and also that only 3% of her net worth is in that asset. This would make me less likely to take her advice.

But many people seem to be interpreting this comment in an exactly opposite fashion. This is also interesting. It might be related to what economists call "money illusion". Maybe talking about a million dollars not mattering is alienating to potential followers. I wouldn't like to lose $12000. But I've certainly lost more than that in a month. I even lost 3% of my net worth on a dumb trade in one day. The latter was not a pleasant experience to say the least. But in the larger scheme of things it didn't really matter. So losing a million dollars doesn't matter to Suze.

By investing in stocks to the degree I am I am setting myself up to potentially lose a very significant chunk of net worth. And that is what happened in 2002 for example. But I think it is worth taking on some risk for return.

P.S. For economics afficionados - if I feel the same way about losing 3% of my net worth as Suze does then I am assuming we must both have logarithmic utility functions. Which can't be true if she is more risk averse than I am.


moneymonk said...

"She says about the stocks that she put $1 million in them because if she loses it all it doesn't matter"

Wow ! I wish one day I can say that.

mOOm said...

If you have $33 million, one million doesn't matter. If I had $33 million I would care less about $1 million than Suze does apparently!

Golbguru said...

Agreed that $1 million is just 3% of her networth, but doesn't the buying power (or usefulness) of that kind of money matter to some people?

That being said, I think it will be hypocritcal for me to critcize Orman for saying that because I almost in the same boat...I just have about 1.5% of my net worth in the stock market...and my attitude is "don't care if I loose it"

However, personally, I would not take advice from a personal finance advisor who doesn't care about a million dollars...irrespective of whatever the net worth is.

mOOm said...

She also spends hundreds of thousands on private flights each year she says in the interview. Does that also sound crazy to you? If the value of Berkshire Hathaway falls by just 1% as it can on any given day, Warren Buffett "loses" about $350 million dollars. Would you take advice from him?

Empty Spaces Inc. said...

well suzy snoreman doesn't (and shouldn't) be giving stock advice. Most of her stuff is extremely basic stuff, so the people listening to her probably can't even comprehend having $1 million, let along losing it!

there was also an article today somewhere else that very high network people (i think that was >25 mill) are risk averse. they put most of their money in Tbills and only 4% are aggressive with their stocks.

mOOm said...

I wouldn't trust that article then. A huge percent of the outstanding stock is owned by high networth and ultra-high networth people with a large part of it in companies they either founded or are executives in. Of course there are also a lot of people in that wealth category who are retired and sold out of their businesses and there isn't a lot of point for most people in being very aggressive in investments if you have $25 million already. The Federal Reserve does a survey which tells us what the asset allocation is in each wealth class. There aren't enough people to split out the ultra-high net worth category, it might top out at $2million + or something like that from what I remember.

Golbguru said...

I would still take advice from Mr. Buffet because I am sure he won't say "oh $350 million is peanuts for me...I don't care if I loose it"

mOOm said...

Buffett said he wouldn't mind if the stock exchange was closed for ten years with no quotes. I think he actually would mind that :) Obviously Buffett doesn't care about his net worth going up and down $350million or he'd have gotten out and bought municipal bonds like Suze way back... Is it the wording in that interview that is pissing people off? I find this very interesting because I find it hard to understand where people are coming from on this.

Golbguru said...

You are probably right, it might just be the wording that shows her attitude in poor light.

It's like..a weight-loss-expert saying "I don't care if I gain a few pounds overnight" ...unless that statement is backed with some good (smart) follow-through comment, I don't expect to see many people taking his/her advice.