The risk of not taking enough risk in investment
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The risk of not taking enough risk in investment

After the market turmoil last week, it might seem strange – or mildly self-destructive – to wonder whether Australian investors are taking enough risk.

But here's the thing. Those falls aren't "risk", but "volatility". They're a roller-coaster, not Niagara Falls. Markets have always been volatile. Yes, with occasional stomach-churning falls, but over more than a century, they've never failed to return to – and exceed – previous highs.

A trader works on the floor of the New York Stock Exchange during last week's volatile markets.

A trader works on the floor of the New York Stock Exchange during last week's volatile markets.

Photo: Michael Nagle

Risk, instead, is the potential for permanent loss. And Australian investors aren't taking enough of it.

Look over to the United States, at Facebook and Twitter; the social media companies that were born there. Check out the search engine giant, Google, and its forebear, Yahoo! Witness the rise of IBM. Microsoft, Apple. And it's not just tech. Think about consumer products companies, pharmaceutical businesses and large manufacturers.

Now, much of that success comes from the fact that each American entrepreneur has 13 times the number of people to sell to, and that once you have a critical mass of entrepreneurship in a region or country, the path is easier.

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But what about public companies? The ones on the stock market. Why are so few businesses going on to become world-beaters. Where is the next BHP, Cochlear or CSL?

"Be careful what you wish for," we're warned. "You might just get it". And it's hard not to wonder whether Australian companies (and Australian investors' financial returns) aren't held captive to low expectations.

We don't want outright gambling, but any business – any investment – is built on the premise of giving up something today, so we can have more tomorrow. Of taking some level of risk.

It is rare to find an Australian company that will express big dreams of global success (unless you count GetSwift). It's rare to find enough venture capital funds in Australia prepared to take a chance on an Aussie business with those hopes. And most investors, enchanted by Australia's system of dividend imputation, would rather a bump up in the dividend than money spent on growth.

Is it any wonder that we have few world-beaters? Atlassian, the Australian tech start-up that made billionaires of its founders, went directly to the US for listing. And woe betide the ASX company that dares contemplate cutting its dividend to fund growth.

While we pour investment funds into banks that are struggling to grow faster than GDP, American investors earned a 22 per cent share market gain in 2017. Yes, US stocks have fallen further than ours in the past couple of weeks, but they're still well ahead.

Consider the growth prospects for Amazon.com, versus Westpac. Or Apple and Woolworths. Compare Google and Telstra. Even here at home: a company like Domino's, with a tiny dividend yield, has hugely outstripped Wesfarmers. Corporate Travel's return has been stellar, compared with CBA over the past five years.

It feels good to avoid volatility and to invest in companies with high dividends. And that's not always a bad strategy, especially if you're in retirement and need the regular, tax-effective, income.

But in the long-term? What's the cost when a company chooses not to grow? Or can't get funding? Those companies will likely atrophy, be bought out, or bypassed (and perhaps killed) by competition.

Foolish takeaway

I suspect our banks would like to put more money behind the race for digital payments, before PayPal, Apple and Google eat their lunch. I suspect our supermarket giants would prefer to seek growth overseas. And I'd bet there are hundreds of tech start-ups desperate for funding.

In the short-term, safe is, well safe. In the long run, I suspect that being too conservative might cost investors – and the country.

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Scott Phillips is the Motley Fool's general manager. You can follow Scott on Twitter @TMFScottP or email ScottTheFool@gmail.com. The Motley Fool's purpose is to educate, amuse and enrich investors.

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