Energy Drinks, Motorcyle Daredevils and the 2008 Financial Panic
publication date: Feb 1, 2009
Update February 3, 2009: As I explained and documented in this article originally published 1/6/09, the "energy drink" Red Bull and its peers (such as Core Fast, Elevate, HI NRG, Naughty Boy, Pulse, Rockstar and 'V') aren't worthy of your spending dollars due to its low nutritional value and adverse health consequences. Here's another case of a young adult who medical professionals believe died of a heart ailment exacerbated by drinking a lot of Red Bull. If you or someone you know drinks these types of beverages, you could save money and avoid serious health problems by kicking this habit.
For those channel flipping on New Year's Eve, if you made a pit-stop at ESPN, you may have caught Robbie Maddison's death defying motorcycle jumps. He's a modern day Evel Knievel. Maddison and his team designed and built a long ramp to enable him to attempt to jump on his motorcycle up to the top of the 96 foot high replica of Paris' famed Arc de Triomphe at the Paris Las Vegas hotel and casino, owned by Harrah's. After landing on top of the arch, Maddison would then free fall on his motorcycle back down onto a different ramp to get back to terra firma. The prior New Year's Eve, Maddison set the world record for motorcycle jumping by leaping 322 feet (about the length of a football field), on live television.
Maddison's daredevil jump was not the only one to take place on the Las Vegas strip New Year's Eve. Maddison was joined by Rhys Millen, who backflipped an off-road truck over a ramp and at a different site, Robbie Knievel, the late Evel Knievel's son, also performed a long motorcycle jump.
So what relevance does this have to the world of money and investing? Well, you had daredevils engaging in extraordinarily risky and dangerous behavior presumably to make money. The media (ESPN, a Disney subsidiary and Fox) was there to broadcast it and profit from it while the public at large got to play spectator and consumer. Meanwhile area politicians allowed, approved and encouraged such events. This sounds like the events in the housing market and on Wall Street in recent years!
An ESPN spokesperson described Maddison's New Year's Eve jump as "anticipation television." In the lead up to his jump, ESPN commentators regaled the audience with tales of Maddison's previous jumping injuries which included a broken neck, punctured lungs, snapped knee ligaments, broken ribs, etc. Simulations graphically depicted all the things that could go wrong and showed the resulting crashes complete with a Robbie Maddison figure slamming into the ramp facing, ground, etc.
Plenty of people, including many teenagers and young adults were tuned in to watch Maddison's live jump after mid-night eastern time. While his ESPN "New Year, No Limits" show sponsored by Red Bull ran from 11 pm to 12:30 am EST, it didn't take a television executive producer to know that he wouldn't jump until close to the end of the programming time slot. (I watched and listened to the event the next morning thanks to TIVO.) Red Bull, in case you don't know, is an "energy" beverage comprised of lots and lots of sugar, vitamins and caffeine and other stimulants marketed to the youth set. It's pretty unhealthy stuff about which health professionals and studies have raised serious concerns.
So, let's stop and think about this. ESPN/Disney, a company which is heavily marketed to the youth audience, paid for the rights for an extremely dangerous motorcycle jump at a hotel and gambling casino in Las Vegas which was sponsored by an unhealthful energy drink which medical professionals tell us could also kill you!
While I have an extensive background in the social sciences, including psychology, I always like to get a psychology expert's take on these things so I turned to psychologist Dr. Brian Russell, who you may have seen during one of his many appearances on CNN. "Teenagers especially are at a time in their lives when their perceptions of risk are distorted -- they find risk ‘cooler' and more exciting than they probably will later in life, primarily because they tend to underestimate downside risk greatly," said Dr. Russell.
His advice to parents on this topic is, "Rather than feeding into that by watching the New Year's Eve daredevils in awe, I'd much prefer to see parents teaching their kids how to figure out what things in life are really worth risking, what's worth taking risks for, how to evaluate risk/reward, etc."
The 2008 Financial Crisis
The financial crisis of 2008 provides plenty of lessons for all of us in that regard. The recent turmoil in the financial markets and economy was caused by excessive leveraging of bad investments and by too much borrowing by high risk home buyers and real estate investors. Regulators overlooked the risks and did nothing to prevent disaster from striking. Before the party came to a crashing halt, investment banks and other financial institutions made unbelievable profits, enabling their executives to take home individual annual bonuses of the tens of millions dollars and even hundreds of millions of dollars.
On Wall Street, the bankers taking the big risks have the reward of big paydays while taxpayers and others got to pick up the tab when crisis hit in 2008. In speaking with the 27-year old Maddison, who seems like a quite pleasant and decent guy, it's clear he didn't get the big payday you might expect from doing such a dangerous jump on ESPN. He told me that he still very much has to keep working at other activities to keep "paying the bills."
Jeff Lowe, who is Robbie Knievel's agent tells me that he knows people working with and at Red Bull and that last year, Maddison got paid just $20,000 for his football field length jump. "Maddison is young, not well know and does it for the bragging rights and recognition," says Lowe. Knievel's jump, which was far less dangerous, brought him a high six-figure payday according to Lowe. Knievel, who is 46, and has name recognition thanks to his father, doesn't accept outside sponsorship and got a bigger payday from jumping on more widely viewed Fox and at the Mirage Hotel and Casino.
From a business standpoint, it's interesting that the younger Maddison is beholden to and apparently not well paid by his sponsor. To try and make more money and get more recognition, he's been taking extreme risks which younger money managers, especially in the hedge fund business, have been know to do.
The government and investment community response to the extraordinary events of 2008 demonstrated that few people understood the enormous risks in the system and how it could blow up. Looking back, there were warning and some folks calling for greater oversight but no one clearly understood and articulated how it would result in the failure of the investment banking industry and the seizing up of the credit markets.
In Robbie Maddison's case and that of other daredevil jumpers, we know how this could play out. He could end up a quadriplegic or could die as a result of a botched jump.
This time, Maddison was fortunate to have a relatively smooth jump:
Rhys Millen wasn't so lucky last year when he broke his neck in three places and his back vertebrae in two places in a training jump (video below). Undeterred, Millen came back to do his stunt this year and while not completely successful, he came through this time unharmed as did Robbie Knievel.
If Maddison, Millen and Knievel continue to do ever more dangerous jumps, sooner or later, something really bad will happen and on live television to boot and probably on a channel like ESPN/Disney which has a large youth viewership. Or perhaps a young teen or young adult will try to mimic this dangerous behavior and suffer the consequences. Then the hand wringing may begin and perhaps folks will ask where was the government oversight and why was such dangerous behavior being marketed to youth?
In the case of the Las Vegas strip, activities there are overseen by the Clark County Commission which governs the unincorporated section of Las Vegas. I contacted them to ask about their approval of these jumps. "For these events, they needed a special events permit, to provide evidence of property insurance and to name the county and metro police as a covered party and sign a hold harmless form," said Jennifer Knight, Clark County spokesperson. (And for all of you upset with all the fees you have to pay for a local building permit - get this, Clark County charges no fee to apply for and obtain a special events permit!)
Looking Down the Road for Problems
An important part of my job as a financial advisor and risk evaluator is to look ahead and identify potential risks and to help you mitigate those. Through my books, columns, and speeches, I nag folks to plan for the future, diversify and carry proper insurance coverage. Sounds simple in concept but the devil is in the details. And, you can do all of those things though and still run into some problems.
Unfortunately, those in government are too often dealing with problems well after the problem has mushroomed and become obvious to everyone. We didn't worry too much about terrorists until after the attacks of September 11. Little was done with financial institutions and mortgage lending until after the 2008 financial crisis was in the news every day.
As investors, we seek to diversify and take other sensible approaches to reduce the risk to which our money is exposed. There's always risk in any investment - some are more obvious than others. You've got to understand all risks and protect yourself because there's not going to be a personal bailout program for you.
Investment daredevils who claim or post high returns or stable Bernie Madoff-like returns should always, always, always be viewed with great skepticism. And, you can't count on government regulators to ferret out the bad guys or flawed strategies before you fall victim.
One emerging area that concerns me are the leveraged exchange-traded funds that magnify up or down returns by two or even three fold now. If you invest in those, you're doing the investment equivalent of Maddison and Knievel. It may be an exciting and even profitable ride when things go well but watch out for that ugly downside. And, if something sounds too good to be true or you're leery of some supposed gurus approach, e-mail me and I'll look into it. Look out for red flags, do your homework, and get second opinions from trusted, independent, expert sources.