Note: This article was featured in the Fall 2022 issue of AGC Houston's Cornerstone Magazine.
When Paul O’Neill took over as CEO of aluminum industrial giant Alcoa in 1987, he stood in front of a crowd of Wall Street analysts and told them very plainly that his number one priority for the company was worker safety. Not profits, not growth, but safety. As Charles Duhigg recounts in his book The Power of Habit, one investor ran out of that meeting and hastily called his clients to share that Alcoa was about to be run into the ground by a crazy hippie, advising them to sell every share of Alcoa stock that they owned. He later admitted that this was the worst piece of advice he gave in his entire career; over the next thirteen years, under O’Neill’s leadership, the company’s annual net income would grow by 400%, and its market capitalization would increase by $27 billion.¹
It’s worth noting that, when O’Neill took over, Alcoa already boasted impressive safety numbers. The number of lost work days per 100 employees across the entire company was a mere 1.86. The national average at the time was 5. However, O’Neill wasn’t satisfied with being above-average. As he shared with his baffled safety director, his goal was zero, and by the time he left the helm in 2000, the lost work day average had dropped to 0.2 - an almost unheard-of number for a company specializing in aluminum smelting and other hazardous industrial activities. By focusing relentlessly on worker safety and developing, in his words, “habits of excellence,” O’Neill managed to defy Wall Street’s early expectations and achieve remarkable financial results. More importantly, he succeeded in making Alcoa one of the safest companies in the world, saving lives and livelihoods in the process.
Putting People First
As in the world of aluminum manufacturing, success in the construction industry simply doesn’t happen without focusing on safety, risk management, and human resources. After all, construction is an extremely risky business: it involves working with heavy equipment to build large structures using hazardous materials, often in close proximity to existing structures and roadways. Broadly speaking, injuries and fatalities happen regularly. In fact, according to data from OHSA, roughly one out of every five workplace fatalities occurs within the construction industry.²
Many construction-related risks are known and can be planned for accordingly. These include fall risk, risks specific to various pieces of machinery and equipment, etc. However, many risks - such as severe, unexpected weather events, and even suicide risk - are much harder to foresee and prepare for. As Donald Rumsfeld famously said, there are known knowns, known unknowns, and unknown unknowns. The unknown unknowns are the risks that pose the biggest threat to any organization.
For all these reasons, successful construction companies invest heavily in human resources, risk management, and worker safety, since failing to do so can result in catastrophic accidents, financial liabilities, even loss of life. Moreover, the construction industry exists to facilitate the progress, efficiency, and comfort of civilization. Prioritizing people – employees and other stakeholders – is consistent with that overarching purpose.
Portfolio Construction Parallels
2022 has been a reminder that investing can be a risky business, too. Through the first half of the year, the S&P 500 was down ~20%, encroaching on bear market territory. Even bonds – generally considered to be a safe investment with a low correlation to stocks – have not been spared, with the Bloomberg Aggregate Bond Index down ~10% through June 30. For most asset classes, it’s been a challenging start to the year.
It's worth noting that this volatility is not a “bug” in the system – it is a feature. In investing, in construction, in every realm of life, risk and reward are two sides of the same coin. Investors who put their money in stocks expect to be rewarded with higher returns over time, while accepting higher levels of risk (or volatility). Meanwhile, investors who keep their assets in cash expect to be rewarded with lower levels of volatility, while accepting lower returns. Of course, as we’ve been reminded this year, the risk in being less “risky” is that inflation will erode the value of that cash over time.
To borrow from an old maxim, nothing ventured, nothing gained. Or, to quote another old saying, you’re either growing or you’re dying.
While risk cannot be completely avoided, it can – and should – be managed. Furthermore, it should be managed in much the same way that a construction company manages risk: by putting people and safety first.
In the context of financial planning, putting people first means crafting personalized plans that center around the investor – who they are, who their loved ones are, and what they want to achieve. For all the various categories of risk that exist in investing, the number one risk that investors face is failing to meet their individual needs and objectives. Therefore, investment planning must begin with questions specific to the individual. What are the investor’s goals? Their fears? What’s their time horizon? Their tax situation? What kind of a legacy do they want to leave? Once these and other questions have been addressed, investment risks can be contextualized and managed accordingly, enhancing the safety and security of the individual’s financial situation.
For example, the risks faced by a business owner who’s on the cusp of selling their business will vary substantially from the risks faced by an employee who’s on the cusp of retiring. If the majority of the owner’s wealth is tied to a privately held business, a 20% decline in the S&P 500 is not their main risk. Instead, their primary risk might be more qualitative, like finding purpose and identity after they’re done running their business, or perhaps maintaining family unity. On the other hand, for the retiree whose wealth is largely tied to a 401k account, a 20% decline could represent a significant risk, compromising their future cash flow and forcing them to consider delaying retirement. The key, again, is to be aware of these individualized risk factors and plan accordingly.
Keep Building, Keep Buying
This article has mostly focused on risks and sobering statistics. Let me finish, then, by reminding you of some encouraging data points.
I mentioned earlier that one out of every five fatalities occurs within the construction industry – approximately one thousand per year. However, considering that the construction industry employs over 7.6 million people, that translates to a job-related mortality rate of about 0.01%. Thanks to an industry-wide commitment to safety and human resources, the vast majority of construction projects are completed without major incidents.
In the stock market, the bad news is that 20% declines happen every few years, and 10% declines occur just about every year. However, on any given day, the market is still slightly more likely to be up than down. Over one-year periods, the likelihood of earning a positive return is approximately 77%. Over five-year periods, the likelihood improves to about 92% and over ten-year periods, the likelihood is about 97%. If your time horizon is fifteen years or more, congratulations! The market has never experienced a loss over that amount of time.³
So keep building, and keep buying. Whether you’re constructing a building or a portfolio, know your risks, plan accordingly, and always put people first.
¹Duhigg, Charles. The Power of Habit. Random House, 2012.
²U.S Bureau of Labor Statistics