Risk

I have believed for a while that quality of life depends directly on the amount of risk you are willing to take. Part of a person’s risk tolerance must be genetic, but a portion of it is certainly choice. I took very little risk in my life until my late 20’s. Even since then, I’ve only been willing to take very calculated risk. Of course, the definition of calculated risk is different for everyone.

My wife and I both quit our jobs when we were 27 and started our careers over. Many thought we were crazy and taking too much risk. Our thoughts were that we had no kids, a little bit of savings, and few expenses. I was leaving a good paying job that was sapping the life out of me. My wife was teaching, and while she didn’t despise her work like I did, she knew she could find something similar anywhere else. The change seemed a reasonable, calculated, risk to us.

I have started or been involved in starting six businesses. I have sold two. My current business has served me well for the past seven years. The other three are either failures or marginal successes, depending on your point of view. The failures were probably victims of my decisions; to not fund them enough, not take enough risk, or to not see them through to success.

My first business was a success because it had to be. I had burned my bridges and, with neither my wife nor I having a job, we weren’t going to eat if I didn’t make some money. I recently closed a business that wasn’t performing as well as it should have been largely due to our lack of interest. My partners and I are making money in our main business and the reward to stress ratio in the new business was considerably lower than we have become accustomed to.

It’s all a tradeoff. Writing this blog post is a risk. I’m not spending time with my four year old on a Saturday morning. This is precious time spent with him that will never return. I’m taking him rock climbing at the gym after lunch. More risk. Actually, the drive to the gym is probably more risky than the climbing. At least with the climbing, the calculation of the risk is largely mine. I check the anchors and equipment religiously before each climb. I have very little control of the amount of risk the other drivers impart to me while I’m driving to the gym.

The difference between a hero like Charles Lindbergh and a Darwin Award winner is slight. If Lindbergh had crashed into the Atlantic, which was likely, as the airplanes of the time were notoriously unreliable, he wouldn’t even have warranted a mention in the newspaper. He would be just one more nut who tried something crazy and failed. As it happened, everything went right for him; at least on this trip, and he was an instant celebrity upon his landing in Paris. His risk captured the imagination of a generation. His risk could have easily only satisfied the appetite of some hungry sharks.

I believe society rewards risk at an unreasonable level. It’s almost like we attach some mystical quality to the successful risk taker. Does God smile with favor on one who takes big risk and a failure is just a failure and deserves no further thought? Nobody has time for a loser. How do you make informed decisions on how much risk to take in business and avoid shutting your doors before you make your millions?

1. Understand your risk tolerance.
This is the number one mistake I come across. Either the principal in the business hasn’t thought this out completely, or has hired someone to manage the risk who misunderstands the amount and type of risk the principal is willing to take.

2. Understand the risk you are taking.
I constantly hear financial planners tell people that the stock market, over time, will yield a (insert claimed percent here) return on investment, and then ascribe risk to not having your money in the market. There is certainly some truth to this. However, there is no way of knowing if this will actually happen over your chosen time frame. That’s why past results are no indication of future performance. I choose to take very little risk with my personal money. I will pay off my house first, as opposed to investing in the stock market – an almost guaranteed 5% return. I do invest money in the markets for my child’s college fund, but I don’t look at this as money that will be critical for his future. I could always take out a line of credit on my house to pay college expenses. I choose to take much greater risk in business ventures, where I have more control over the results.

3. Make sure you are calculating the correct risk.
When you think about the risk of rock climbing, don’t forget to include in your analysis the risk you take driving to the wall, and the health risk you take by not exercising at all. I hear many business owners complaining that clients are getting free loans by not paying bills on time.  This can be turned to a positive.  We aren’t a bank, but we are happy to front equipment and/or consulting to clients where we believe we can correctly calculate a positive return on our investment.

4. Take the risk you are comfortable with and outsource the rest.
I have many friends who are big idea men but not implementers. I am not a big idea man, but I can make things happen given a big idea. When we work together, we get a perfect synergy, as we are only taking the risk we are most comfortable with.

Above all I often think about a good friend of mine who squandered the capital (time) he had with his family for great success in business. Now he has no one to share his great (monetary) success with. Can the risk he took ever be worth the price he paid?

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