Recounting a personal experience may be the most effective way

to explain why risk should be of paramount importance to investors.

In the early 1970s, when I was just nine years old, my father

died of cancer. He had struggled to try and leave me a trust

fund with enough money to finance my future college education.

Since I had at least a decade to go until reaching college age when

my father set up the trust, he put it into stock funds managed by a

bank. From the end of World War II to the late 1960s, stocks had

been in a wonderfully profitable bull market. The public was participating

in stocks to the highest degree since 1929, and the prevailing

wisdom was that if one just hung onto stocks over the long

run, they showed a better return than nearly any other type of

asset. (This type of environment should sound quite familiar to

investors of the late 1990s.)

Things did not go according to plan beginning in 1972. From

1972 to 1975, the value of that trust fund declined by over 70 percent

along with the decline in U.S. and global stock prices of a

commensurate amount (the S&P and Dow dropped by around

50% during this period, but the broader market dropped by much

more than that). By the time I started college in the early 1980s,

even the blue chip indexes had lost more than 70 percent of their

value from 1972 in after-inflation terms. While my trust had recovered

somewhat from 1975 to the early 1980s, it was nowhere

near the level it had been before my father died. In the early

1970s/ he believed he had provided enough funds for me to go to

an Ivy League school—but a decade later the diminished trust led

me to opt for U.C.-Berkeley instead. In no way could the trust

have covered the cost of an elite private school.

There appears to be no incompatibility in covenant theology, then,

between either the idea of divine omnipotence, or that of the absence

of any new right accruing to God from the alliance with man, and

the offer of such a pact. God’s perfection and his desire to be glorified

by a peculiar nation or part of mankind devoted to the celebration

of his greatness, together with man’s natural attraction to his own

good, suffice to legitimize the institution of the covenant. Claiming

that God derives no new right from this contract is not a valid criticism

against covenant theology, not in general nor in its Hobbesian

version. As A. P. Martinich rightly points out, it is wrong to

believe that being a party to a covenant necessarily means acquiring

rights; two persons may covenant to give something to a third one,

by which they will gain nothing; thus the social contract deprives

those who enter it of the right to everything they enjoyed in the

state of nature.47 It would seem equally true to say that, from the

observation that it is not necessary for God to covenant with man to

expand his dominion, it is wrong to conclude that God cannot establish

contractual relations with his creature – unless one postulates

that God’s actions must be determined by some extrinsic necessity,

which would be quite un-Hobbesian.