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Article by Morgan Housel:Risk does not like prophets. It’s not even fond of historians. You can plan for every risk except the things that are too crazy to cross your mind. And those crazy things do the most harm, because they happen more often than you think and you have no plan for how to deal with them.
Risk in most professions is managed by studying what’s common. Maybe 10 topics and their solutions, said slightly differently, dominate business and investing books.
The problem is that historical risks you can study are dwarfed by risks you actually experience. There are a zillion treacherous risks, but most on their own are not common enough to take seriously or collect data on. Like mice destroying tanks.
© 2015 Mutual Fund Observer. All rights reserved.
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Comments
Regards,
Ted
https://www.mutualfundobserver.com/discuss/discussion/40956/nobody-planned-this-nobody-expected-it#latest
https://www.theguardian.com/us-news/2018/may/19/hawaii-lava-40-homes-kilauea-volcano-eruption
“Grand Canyon” is a great film from the early ’90s which puts into perspective the many levels of “risk” or “danger” we encounter during a lifetime - and does so in a highly entertaining way. Relationship to investing? It’s the reason I diversify broadly among both asset classes and managers.
https://www.imdb.com/title/tt0101969/?ref_=nv_sr_1
As you said, people don't insure against very rare events. Does volcano insurance even exist? Even when insurance is available, few people often buy it. How many people in California have earthquake insurance? Too expensive. Flood insurance? Not nearly as expensive, but (at least until recently) underappreciated. Do people buy replacement value insurance or just minimum homeowners'?
One way to avoid the problem of diversifying (or insuring) one's home is not to own at all but to rent instead. Plusses and minuses with that.
Or instead of avoiding the asset class (home), or insuring against a wide variety of risks, one can try to reduce the known risks (similar idea to buying a "widows and orphans" stock). Avoid areas with a history of earthquakes or near known fault lines, avoid areas with a history of volcanic activity, avoid tornado alley, avoid flood zones (FEMA is continually updating its 500 year risk zones), avoid coastal areas prone to severe hurricanes, avoid localized areas above a former lake or landfill, etc.
If you own one of the dozen or so homes in the country that successfully avoid all these hazzards and risks, congratulations
Now, you and I know the area was / is geologically active and prone to this. Agree the folks who built homes in the vicinity were flirting with chance (or Mother Luck as you would have it). Nonetheless, the shock on one resident’s face was undeniable. “Never in a million years did I dream this might happen” he kept repeating.
So by your (I think somewhat sanctimonious criterion) no one in his right mind would ever build a home in Sanfransisco, prone to earthquakes, or in the Florida Keys, prone to hurricanes, or along the New England coastline, prone to storm erosion and flood damage.
BINGO - Here’s a great video showing what’s going on.
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ALSO - “Why you need volcano insurance”: https://www.trustedchoice.com/catastrophe-insurance/all/volcano-coverage/
States that have active volcanoes:
Alaska
California
Hawaii
Oregon
Washington
Wyoming
States that have dormant or extinct volcanoes:
Arizona
Colorado
Idaho
Mississippi
Missouri
Nevada
New Hampshire
New Mexico
South Dakota
Texas
Utah
Virginia
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Matter of fact ... Let’s clear everyone out of NYC as well!
https://en.m.wikipedia.org/wiki/List_of_New_York_hurricanes
. We are prone to drought, which we are in right now, its high desert here. Living a mile high and without summers above 100, where winters are 50ish has its charms. Of course this NY transplant has to deal with no great pizza or seafood, but thats what the airport is there for, to take me to the ocean or NY when I need.
• "but I guess in the socialist mind, spending someone else's money is hardwired."
Say what?
I don’t have any further thoughts except to say from experience most homeowners here in Michigan try and avoid flood insurance. And even land “high & dry” can become suseptable if near a stream and when we have big spring runoffs. The lenders go by the published FEMA flood zones (which seem to be tightening) in whether they require flood insurance at time of closing and they insert a clause that if FEMA moves you into a designated flood zone at any time, you must purchase flood insurance. I hear it’s very expensive.
During the last refi I nearly backed out on account of that clause. But decided to go ahead with it because in a pinch I could afford to pay off the relatively small balance. What I did resent (and still do) is that the clause was absent from the disclosure papers they provided me to read over a few days in advance. Sprung it at the last minute during closing. Don’t know how banks can get away with that crap.
Thank you for a clear explanation of how to confront the issue should it ever arise.