‘Margin of Safety’ Applies to Investing and Flooding
“Margin Of Safety” are the 3 key words of investing wisdom from Benjamin Graham
The late Benjamin Graham is one of the all-time investing icons, even in the eyes of Warren Buffett, his famously successful student (both pictured above). Graham said his secret to sound investing was three words: “Margin of Safety.” The words could also well apply to designing for flooding.
Graham’s succinct wisdom essentially says: while in the quest for good returns on investment, allow for human error, bad luck or, indeed, many things going wrong at once, so that you keep your losses to a minimum. In other words, look at the worst case scenario to reduce the chance of losing your assets. (Or as some would say, it’s more important to get a return OF your investment, than a return ON your investment.)
In my area of specialty — flooding — the way to have a margin of safety is simply to plan for higher water levels. Generally “we” are not doing that.
With flooding the causes can be a record hurricane hitting the coast, like Andrew, Sandy, Katrina, Harvey, Irma, or Maria. Extraordinary rainfall is another flood risk as demonstrated by recent record-breaking rains from Texas to India. As glaciers melt, sea level is rising faster and faster, causing the “king tides” during the full moon to get higher, even without hurricanes or rain. Each extreme flooding event causes a disaster on its own. When deluge rain, storm surge, and peak tides occur together it becomes catastrophe as experienced five years ago with Super Storm Sandy and along the Gulf Coast and India last month.
We are conditioned that the past predicts the future and tend to plan by looking to the recent past. In fact that is the basis of much risk planning from insurance to engineering. That works in a so-called stationery, or stable environment, but now things are different. The oceans are measurably warmer than just a few decades ago. Ice on land is melting at galloping rates. Effects are seen in the acceleration of the rate of sea level rise, and the increased rainfall and flash floods that are inevitable with a warmer world ocean and more evaporation. The rising sea is on a sure path to set new highs exceeding anything for the last hundred thousand years. Most cannot see or do not want to admit that we are in a new era and have passed a tipping point. Even reducing greenhouse gas emissions can no longer stop the seas from rising.
Yet in 2017 most elected officials, planners, engineers, and architects still act as if the future will be quite similar to the past. Given the acceleration of sea level rise, and the useful life of buildings and infrastructure, there is little, if any, margin of safety being built into community planning. I recall one meeting this year in Fort Lauderdale where I was asked to explain the phenomenon of rising seas. By chance the scheduled meeting was on a beautiful clear calm day, but at a full moon high tide. Throughout the area there was widespread flooding of streets and buildings. The Mayor and other city officials bemoaned that they had done such good analysis and planning, but the sea was inexplicably four inches higher than they expected. The cause appears to have been some shifts in the Gulf Stream and a persistent wind pattern across the Atlantic that “pushed” the ocean in the region higher than normal, adding to the rising sea level. My position was that planning for ocean heights with a clearance of just a few inches is a recipe for for disaster.
All over south Florida, the U.S. and the world, there is a mindset to plan for only modest sea level rise, and the usual “100-year” or “500-year” rainfall based on the median, the average, or the most probable. There is no margin of safety. Looking at other types of disasters and building practices, if anyone said we should only plan for a Category 2 (medium) hurricane or a 5.0 (medium) earthquake they would be instantly identified as shortsighted and irresponsible. We design and have building codes to prepare for severe Cat 4 hurricanes and Cat 8 earthquakes. We need to adopt the same mindset towards sea level rise and start building to withstand our latest understanding of worst case scenarios, or at least something close to such estimates.
Even if the design life for a building, seawall, or major infrastructure, such as a water or wastewater plant is 30-50 years, we should recognize that they often are used for a century and thus should be designed to accommodate flood heights that seem unimaginable today. Using the Southeast Florida 4-County assessment, as shown in the graph to the right, projected sea level by mid-century could be 2-3 feet higher, and by the end of century as much as eight feet higher. Since our homes, commercial buildings and infrastructure are typically our largest investment, we should treat them like other investments, building in a margin of safety.
A big part of the problem is our assumptions about insurance. There is a widespread belief that insurance will properly figure the risk and establish a cost valuation and be the solution. I will leave the explanation of that fat fallacy to another post, but for now will simply state that most insurance policies price risk for the period under contract, usually just one year at a time. The outlook for a house, street or neighborhood being underwater regularly, or even permanently, a decade from now, is not part of the insurance calculation today.
If I were making a long-term investment in a coastal asset that was vulnerable to flooding, and was evaluating its risk against possible sea level rise and flooding scenarios of 2 feet, 4 feet, or 6 feet of flood water above the present “high water mark”, I would surely plan for it to be useable or adaptable with at least six feet of higher sea level, and perhaps more. And just as important, I would also look at the vulnerability of the infrastructure and surrounding community. It’s of little value if your property is high and dry, but the access road and utilities flood regularly or permanently.
At the foundation is the need to create a new understanding about future flooding. Revising building codes, real estate financing policies, and flood insurance will all be helpful agents of change. The sooner we start building higher, the better––better for well-designed and functional communities and better in terms of solid investments. Designing intelligently can give us a margin of safety.