The Hedging of American Life

Welcome back, and hello to those of you here for the first time. Excited to have you. Over the next few weeks, I'm going to start experimenting with different formats for this blog. As always, appreciate if you have any feedback! Let's hop into it.

Many of the most impactful people throughout history had track records of rebellion, creative expression, and upending the status quo. America's early founders had such conviction in their beliefs that they sacrificed everything in order to preserve those core values — democracy, equality, opportunity, independence, liberty, freedom, the pursuit of happiness.

Somewhere along the line, we lost that culture of conviction. We started hedging.

Hedging in Investing

Before diving deeper, when we say "hedging" as an investment strategy, we are not referring to hedge funds. Rather, we're talking about passive index funds (a strategy with limited downside and decent returns as a "sure thing"), which have grown in prominence over the last few decades.

Passive index funds first emerged in the late 1970s, pioneered by the infamous Vanguard CEO, Jack Bogle, as a way to "buy the index" and limit downside risk. Prior to Bogle, passive investing was not common — after all, what kind of American would you be if you were okay with average?

Common strategies yield common results.

Fast forward to now and passive investing has become the norm. Ask any personal finance expert, and they'll inform you that passive investments outperform active strategies, on average, over long enough time horizons. Minimal trading yields maximum returns in the long run.

The rise of hedging manifests itself not just in finance, but in our broader culture too. Whereas throughout history America became powerful through original thinking, boldness, and creativity, we've shifted to a society that is more risk-averse, less innovative, and generally less likely to commit to something new.

Just look at how disruptive science has declined over the last 50 years.

A decline in disruptive scientific papers doesn't necessarily mean we've gotten less innovative, but it certainly doesn't support the notion that we've improved.

Let's explore how hedging has arisen across our culture, as well as the positive and negative implications of what that might mean.

Hedging in Careers

As any ambitious college student will let you know, the best and brightest young people often go on to work for consulting firms or investment banks after college. With the promise of "preserving optionality," these talented young adults can push off making a decision of what they actually want to do with their lives.

To truly be the best at something (i.e. in the top 1%), we need to go all-in on it. But before that, we need to decide what that "something" is. We must act rather than over-analyze.

We see the trend of career hedging in the amount of time employees spend with a single employer. Long ago, people would spend decades in a single career; whereas now, 1-2 years stints, especially early in one's career, are not uncommon.

In a January 2022 BLS survey, the median tenure of employees 65 and older was 9.9 years at a single company, while for employees 25-34 years old, it was only 2.8 years (down 13% from the same figure in 2012).

Hedging our careers in order to preserve optionality has become the status quo.

Hedging in Relationships

Think about how dating has changed in just the last 20 years. There was a time before smartphones when people actually met in-person. The dating market was certainly less efficient before apps; and as a result, people were much more likely to commit to someone they liked early.

Now, in an age where meeting through dating apps is the norm, it's common for people to go on several dates (often with several potential matches at once), but not committing to any of them. You can see this trend play out with people getting married later in life, young people having "commitment issues" (whatever that means), and a decline in the number of people with a significant other.

Hedging is not necessarily a bad thing, but there are downsides.

Many of us are risk averse, and that's okay, but we should be aware of the potential negative consequences of hedging.

"Mid" Results

In investing, you'll get good, maybe even great, but not exceptional returns (just like everyone else you're investing passively alongside).

In your career, you'll probably have a decent job that pays well, but you'll be limited to the upside of your salary. You also probably won't be passionate about your job or fully pursuing something that excites you (if you were, you wouldn't be hedging).

Lack of Distinction

Someone who hedges their career is 1 of N, rather than N of 1. The same holds true of one's personality when they hedge their behavior — changing how they act in an attempt to please everyone.

No individual expression, easily replaceable, and just one among their peers.

Poor Creativity

If we are hedging, we are following a path taken by others, rather than creating our own. As such, our thoughts and experiences are, generally speaking, not original. Original thought is the origin of creativity, and creativity will suffer.

Despite these consequences of hedging, those who choose to hedge will still probably do pretty well, but not as well as they could be doing if they were fully committed or producing their own ideas.

Take investing as an example. Just the fact that someone invests already says something about them. 42% of Americans don't own any stock at all. And if someone is indexing (rather than actively trading), they're likely doing better than they otherwise would. 90% of passive index funds have outperformed their active counterparts over the past 20 years.

Hedging Impacts Exit Strategies

Investing

With passive investing, your exit strategy during a bear market is limited. Yes, theoretically you can sell anytime, and with a long enough time horizon this shouldn't really matter; however, you're at the whims of the market cycle in the case that you do want to liquidate your holdings.

Careers

When people hedge their careers, taking jobs which they ultimately may not enjoy, but which provide the most optionality and decent pay as a sure thing, there is typically no exit strategy.

We all know the type — Ivy League graduate, a stint at a bulge bracket investment bank, a few years at a private equity megafund, MBA at Harvard Business School, and then what? They actually have to decide what they want to do with their lives?

Now don't get me wrong, this person is probably financially better off than >99% of the population. But now they're stuck. As their income increased to several hundred thousands of dollars per year, so too did the cost of their lifestyle. If this person now wants to make a career pivot, they're going to have to take a salary cut (and a lifestyle cut). Meanwhile, their opportunity cost of leaving (the amount they currently make at their "hedged" job) has only gone up as they rose up the ranks. They can theoretically exit whenever and to wherever they want, but the choice to leave is that much more difficult to make.

The promise of optionality was not what it seemed.

Relationships

Now, let's see how exit strategies look for hedging in relationships. Someone in a noncommittal relationship can hypothetically exit at any time, while someone who is deeply committed (think married for life) has determined that they're going to push through any hardship and has devoted their life to their partner.

In this case, it would seem that the noncommittal relationships provide greater opportunity and an easier path to exit. Generally speaking, this strategy is probably a good way to approach relationships early-on in life. HOWEVER, if you never commit to someone (whether this be a spouse, a friend, a business partner), you're never going to experience the deep connection that is only possible through years of knowing someone and spending quality time with them.

When Should We Hedge?

Many of us are doing quite well for ourselves but feel "stuck" — chances are, we're hedging, protecting ourselves from downside risk and not fully committing to what will elicit outlier results, deeper feelings, or creative expression. We might say we're settling with "pretty good" rather than striving for outstanding, when we know deep down that we could do better.

Settlers, rather than visionaries.

Let's assume our current society looks something like a normal distribution, where most people converge to average results.

Hedgers fall into the green box below, improving their results and reducing downside risk, but they'll never reach the far right of the distribution and get outstanding results unless they stop hedging.

In the examples we discussed, it really only makes sense to fully commit to something if you have conviction that you will have the passion, talent, and dedication required to become extremely successful with that thing. Otherwise, you're just setting yourself up for even poorer results.

A great example of this idea is with investing. Most of us don't have the time, desire, or intellectual capacity to do what it takes to be in the 99th+ percentile of active investors, and as such, we (understandably) invest our money in passive index funds.

But there are areas of life where we would be better suited to fully commit — whether that be something we are passionate about but never had the courage to stretch our limits, developing deeper relationships with our closest friends, or going all-in on a career move.

Why don't we? Because full-sending is scary.

It's apparent that the culture of hedging has crept its way into broader areas of society. What are the areas where we're hedging? Are we hedging intentionally?

For me, it was my career. From an early age (probably sometime in high school after discovering How I Built This with Guy Raz), I knew that I wanted to work in the startup world; and yet, I was a sheep — doing the traditional investment banking internship that I thought the "successful" kids did. Do I regret it? Not at all. I learned a lot about finance and met some incredibly talented people. But I knew the whole time that I was never going to be an outstanding career banker. So, I got off the treadmill, took a leap to join a startup and move to the west coast, and it was probably one of the best (though scariest) decisions I've ever made.

Where are areas we can hedge less and fully commit? Maybe it's a friend we wish we spent more time with. Or maybe it's a major career move we're afraid to make.

At its core, hedging is really just protecting downside (and in many cases, this is the right move). But the reality is that, for most of us, the downside isn't as bad as we think. We can make back lost jobs or money, but we can't make back lost time.

Life is too short to spend it half-committing to things.

We need less hedging and more conviction. Less settlers and more visionaries. Hedging may often be the safer move, but it's not the one that leads to outlier success, satisfaction, and fulfillment.

I'm optimistic that we might just be seeing a reversion of trends (at least across the culture) — away from hedging and back towards conviction.

We've seen more creators than ever pursuing their own career paths and building their own businesses. Remote work is making it possible for people to uproot the routines and monotony of daily life. We're currently living through some major technological breakthroughs, particularly in AI.

Maybe, just maybe, the societal changes brought about by the pandemic have forced us to pause and think about what makes a life well-lived, what really matters.

To do something truly exceptional, we must be willing to be bold and step into the unknown. We must play our own game, not someone else's.

Hedge wisely.

-Owen

Fresh Finds

A few favorites from this week:

John Fio - Creating Magic for Consumers (Invest Like the Best)Podcast | 81 minutes

This interview was unlike a typical episode of Invest Like the Best. Fio has an unconventional perspective on consumer brands, particularly his view that ideas are far more important than execution. He also doesn't invest in consumer businesses — "If you need an investment, you don't have a business... If you can't convince the consumer that the thing that you're selling is so compelling that they should wait 6 months for you to deliver the thing that you are describing, you either don't have a good product, you can't describe it well enough, or the market doesn't give a shit."

Optimizing Life for Maximum Fulfillment | Bill Perkins (The Peter Attia Drive)Podcast | 103 minutes

This episode may be one of the most life-changing interviews I've ever heard, so much so that I think I'm going to write a future blog post on it. Bill Perkins is the author of a book called Die with Zero, where he discusses how living a fulfilling life is a matter of balancing health, wealth, and time. He argues that we need to have certain experiences at the right time before it's too late — that people are over-saving and under-living. His perspective, mixed with Attia's engaging interview style, had me unable to stop listening.

The Recruit (Netflix)TV Series | 8 EpisodesAn entertaining series about a new CIA lawyer who has no idea what he's doing, yet manages to find his way into some of the agency's biggest problems. I'm not one for crime dramas, if you could even call it that, but for some reason you just want to keep watching this one.