About Laszlo Szombatfalvy, founder
The Global Challenges Foundation was founded in 2012 by Swedish financial analyst and author Laszlo Szombatfalvy (b. 1927). Laszlo Szombatfalvy authored the book The Greatest Challenges of Our Time (published in 2009 by Ekerlids förlag), in which he assesses the greatest threats to humanity, and outlines various opportunities for overcoming them. The Greatest Challenges of Our Time is available in English, Swedish, Mandarin, German, French and Spanish. Laszlo Szombatfalvy is also the author of Känslor och förnuft – en bok om moraliska beslut (Emotions and Reasoning – a Book on Moral Decisions), published in Swedish by Ekerlids Förlag in 2010.
In the following interview, Laszlo tells about his background and professional career, what led to the formation of the foundation, and gives his view on global catastrophic risks threatening humanity.
"There is another dimension to magic. Since magicians are expected to do the impossible, a true magician doesn’t wonder so much if something can be done, but focuses on how it could be done."
Tell us about your early life growing up in Hungary, your family environment and your formative influences.
I grew up in a middle-class family. I was the youngest, with a brother who was six years older, and three even older sisters. My mother was a housewife. My father began as a secondary school teacher; by the time he retired, he was a deputy director at the ministry of education. I think what influenced me most was that at least once a week, my father would sit beside my bed – this was when I was between about 6 to 15 years old – and say that we could “discuss things” if I felt like it. I could ask him about anything I had been thinking about or wanted to know. These conversations, which could be about any topic from the perpetuum mobile to the concept of justice, were about an hour each. I think those talks have had a decisive impact on my way of thinking throughout my life.
What impact did World War II have on you?
World War II dominated my teenage years. I graduated from secondary school in 1945, a few months before the end of the war. My brother died in a Russian labour camp in the aftermath of the war. Budapest was besieged for two months, and several times also bombed, so I experienced the hardships that war brings civilians. I became convinced that there are no humane or just wars, and I believed and hoped that the existence of the atomic bomb would end all wars.
What was it like to watch the genesis of a new global organisation, the UN – a system that grew from the ashes of World War II?
I considered it completely natural to create a world organisation with the purpose of preventing all future wars. Unfortunately, it has become a half-measure, which has been unable to live up to its original goal. My belated conclusion is that no governance system can guarantee that there will be no future wars, unless we implement global and total disarmament.
We’ve been told you used to work as a magician – could you tell us a little about this?
After graduating from secondary school, I studied law for three years and wanted to become a judge. But suddenly, about 18 months before graduation, there appeared a message on the university’s bulletin board with a list of about 20 books on Marxism-Leninism that all students had to read and be tested on in order to get their diploma. This made it clear that the legal profession had been politicized. I turned on my heels and terminated my studies. Instead, I signed up for the magic program at the state academy of the performing arts. Earlier, this had been my hobby. Being a performer was the least politicized profession in Hungary at that time. A couple of years later, I had a diploma as a professional magician, and could almost earn a living doing magic. I also bought and sold used books – my other hobby – in my little “used book shop” located in my bedroom.
There is another dimension to magic. Since magicians are expected to do the impossible, a true magician doesn’t wonder so much if something can be done, but focuses on how it could be done.
What impact did the events of 1956 in Hungary have on you? Why did you come to Sweden and how did you experience your arrival?
In 1956, most people had had enough of Communism. The revolt gave me an unexpected opportunity to leave the system. The reason why I chose to go to Sweden – two of my sisters fled to the USA – was mainly that we knew a very nice old Jewish couple who lived in our building. A younger female relative of theirs had been allowed into Sweden directly from the concentration camp in Germany. She was married and lived in Stockholm. She used to visit the old couple and would talk about conditions in Sweden, which I thought sounded very pleasant. Besides, Stockholm was only a two-hour flight from Budapest.
My arrival in Sweden, and the first months in a refugee camp, were completely problem-free and exceeded my expectations. The only thing lacking was a course in Swedish. I felt deaf-mute. I knew no English (at school I had only studied Latin, German and French), and my only aid was a Hungarian-Swedish glossary of about 600 words. Consequently I mostly had to make do with the natural method – i.e. listening and reading, and then trying to guess the meaning.
How did you get established in Sweden, and started to make a living?
During the first three years I worked as a labourer in a printing workshop and a warehouse, while sporadically making extra money doing magic in the evenings. When my language skills became good enough, I took a one-year course at a business school, which led to a job at the accounting department of Shell Sweden. In the evenings I took a business course by correspondence. Thanks to this, I became interested in stocks, and in 1966 I began to trade to a very modest extent on the stock market. In 1972, when I had earned an initial capital of SEK 100,000, I left my job to devote all my time to financial analysis and investments. During a number of years, I also wrote financial analyses for a business newspaper, as well as being a partner in a stockbroker firm.
In 1987 I realised that I had more capital than I and my family needed, and that I wanted to spend my time doing other things than earning money. At the same time, I felt that the prices on the stock market were high enough, so I liquidated my active stock portfolio, luckily right before the great stock market crash.
Can you explain your financial risk analysis approach – how you developed it? Why hadn’t anyone else thought about it this way?
I don’t think that my way of viewing risk is fundamentally very different from how others do it, or at least it shouldn’t be. However, there are two things that set my way of relating to risk apart from how many others do it.
First: when I take a risk, I want to know how large the risk is, and assess whether it is wise to take it – if I have the choice. I think many people would rather avoid thinking about risks than analyse them. Some even dismiss the issue of risk with platitudes such as “living is risky”.
Second: there are two types of damage that can occur. When the damage can be expressed in money (i.e. the damage is compensable), it is easy to understand and apply the following general definition: risk equals the potential damage times the probability of its occurrence.
But there is damage that cannot be expressed in money, such as severe suffering or the loss of human life. In these cases, many people find it hard to apply the equation, which leads to a serious underestimation of risk – especially if the event is in the far future. Let’s say that we succeed in stabilising the carbon dioxide level in the atmosphere at 450 parts per million – which is far from a given at the moment. The probability of a 6 degree Centigrade increase of the average temperature (which would be catastrophic) would still be 1.6 percent. That may not sound so bad, but who would ever fly if one in every 63 planes crashed? And yet, in the plane example, only a limited number of people would die. In contrast, a 6 degree increase would be a serious blow to all humankind. It cannot be ruled out that such a temperature increase, due to threshold effects, could make earth uninhabitable. The damage would be infinite. And if the damage is infinite, the risk is infinite, as long as the probability of the event happening is non-zero.
"Never bet more than you are prepared to lose – or, as I like to say: Never confuse the improbable with the impossible."
When it comes to assessing the value of stocks and making investments, risk assessment mainly crops up in two contexts.
The first one is the required return on an investment. It is generally agreed that stock investments should yield a higher return than risk-free investments, and therefore a risk premium is added to the risk-free yield. But this risk premium varies, since different shares entail different risks. The market usually grades the risk level of stocks according to their volatility (the size of the variation in value). I myself prefer to grade the risk based on the forecasting uncertainty of the company. In practice, this means that you make two long-term forecasts for a company: one optimistic, based on the best-case scenario, and one pessimistic, based on the worst-case scenario. For example, you assess what the profit and return will be in ten years. The size of the gap between the two results determines the level of risk.
The other factor concerns the loan-to-value ratio of a stock portfolio. On the one hand, you can always try to increase the return on an investment by financing part of the investment with borrowed money (if you believe that the return will be higher than the interest on the loan). On the other hand, this also increases the risk of loss, and, in the worst-case scenario, risks the entire capital.
My rule when it comes to this is never to bet more than you are prepared to lose – or, as I like to say, never confuse the improbable with the impossible.
How much money have you made over the course of your career?
I made my first investment in stocks in 1966. I invested SEK 6,000. Half was my own, the other half was borrowed.
After six years, the capital had grown to SEK 100,000. That is when I left my job and began investing full time. In 1987, when I got out of my active stock investments, the capital was about SEK 250 million.
After that, I decreased my risk exposure, and since then I have more or less only made long-term investments in a few low-risk real estate stocks. When I started the Global Challenges Foundation in 2012, my portfolio was valued at about SEK 1 billion [USD 110 million]. Since I started with a small capital, the rate of return has been good – about 30% a year for 46 years.
At what point did you start to think more deeply about global risks? Did something specific happen or was it a gradual realisation?
The realisation that something must be done about politically motivated violence is something that I have carried with me ever since World War II. My awareness of the other risks grew gradually. After I quit actively trading in 1987, I had time to read other things than financial statements and business texts.
I originally intended to write a book about moral decisions. This was in the early 2000’s. But because I had simultaneously become aware that new global risks – such as climate change, other environmental degradation, and population growth – posed an even greater danger than nuclear weapons, I realised that our moral decisions in these areas are also among the most important ones. The part that involved these global problems was originally planned to be the last chapter in the book on morality. But the text had grown to the extent that it became its own little book – The Greatest Challenges of Our Time, which was published first, due to the urgency of the subject, and appeared in 2010. The book on moral decisions was published a year later.
What made you set up the Global Challenges Foundation? Why not donate your money to some charity working with issues that are relevant to you?
I had the same thought, so I researched whether there was an organisation with the same aim as the foundation I was planning. Unfortunately, I couldn’t find one.
Then I discussed the issue with my wife. I wanted us to donate our 10 million shares in the real estate company Castellum – the lion’s share of our assets – to the foundation. My wife disagreed. She wanted us to give, or bequeath, half of the shares to our children and grandchildren. The upshot was that we decided to split our assets between us. I donated 5 million shares to the foundation, while my wife kept the rest.
"When I look at the global problems and the risks facing humankind today, I can only see one rational solution: We have to find a new, more effective way to cooperate globally."
What is it that drives you in this work, what motivates you?
Throughout my life I’ve tried to think logically and act rationally. When I look at the global problems and the risks facing humankind today, I can only see one rational solution: we have to find a new, more effective way to cooperate globally. Today we live as much in a global community as in national communities. This means that the inhabitants of each country impact the vital interests of the inhabitants of all other countries by their behaviours and decisions.
For example, greenhouse gas emissions in each country impact global climate change. But technological development and the rise in population have happened so fast that the global political system has not had time to adapt to today’s global community. Sovereign nation-states are unable to manage global challenges in a satisfactory way. We are trying to solve the problems of today with the tools of yesterday: multilateral negotiations. The result is that the actions taken are inadequate or come too late, and this leads to an increased risk of global catastrophe.
About the book The Greatest Challenges of Our Time
The world has undergone an unparalleled transformation in the past 100 years. The population explosion, the astoundingly rapid developments in science and technology, and the changes in lifestyle in industrialized nations, have all created major problems and imbalances. In this book, Laszlo Szombatfalvy – who became a well-known actor on the Swedish stock market in the 1970s – discusses the lack of risk assessment when it comes to the global problems we are now facing.
The risks we are accepting when it comes to the threats facing us are many times greater than what we would consider acceptable in other areas, such as traffic or aviation. In The Greatest Challenges of Our Time, Laszlo Szombatfalvy identifies, analyses and assesses four mega-threats to humanity – environmental degradation, climate change, political violence and extreme poverty. He also outlines various ways of overcoming those threats or, at least, minimizing the risks.