How much risk is risky in business and investment

 

“Taking risks” is a sexy thing to say. Many young entrepreneurs attribute their sensational rise to a daring spirit.

Jason Calacanis, founder and CEO of Inside.com, admitted that he went against the conventional thinking that “anything with less than one chance in a hundred is not a risk worth taking.”

Every business or investment is essentially a gamble. But while casino games are characterized by randomness, a clever gambler knows he must engage only when he has some sense of control

Entrepreneur.com elucidated: “No gambler would be betting on horses they have no idea about. They will get to know the odds, talk to the jockeys, stable hands, and just about anyone who might have any information on a race before making a bet.” To gamblers and entrepreneurs, “information is everything.”

I asked my friend who used to be the number one person in the country's biggest investment house. He said "the rule is this: if you don't understasnd it, avoid it."

In the book Risk Savvy, Gerd Gissenger described risk as having an awareness of many possible outcomes and the probability of their occurrence. When you have no knowledge of what can happen, that’s not risk. It's uncertainty. Gissenger added that an investor should always analyze and question how data and statistics are derived. Looking only at data we like can get us manipulated.He mentioned that making mistakes is not entirely bad. We learn from failures too. But we must be sure that after a loss, we have enough resources left for another try.

I know some people who built a business from scratch and grew it sensationally in two years. They did their homework in learning all about the products, the sources, and the suppliers. They also have many products consigned to them so they don't put out too much capital.

The durable companies

Jim Collins became famous for his books Built to Last and From Good to Great. Now in a new book co-written with Morten T. Hansen, he elaborated on how successful companies, dubbed “10x companies, “ use “empirical creativity” in making decisions. As you have surely guessed, it means innovating with the help of a lot of evidence.

Recognizing the unpredictability of market forces, these 10x companies balance innovation with prudence. The book cited how companies in a hurry to grow suffered when they innovated and over-borrowed without a strong operational foundation. For example, Intel beat a much more innovative Advanced Memory Systems (AMS.) Intel paid the necessary attention to costs, processes, and an efficient delivery system.

The authors wrote that 10x companies are also “productively paranoid.” Aware that unpredicted events may disrupt the status quo, these successful companies keep huge reserves of cash. The standby money is used for improved products or services while their rivals are paralyzed by a crisis.

Nassim Nicholas Taleb, in his book The Black Swan, advised that companies should save up and not discount the possibility of “black swans.” He said these are events “outside the realm of possibility” but happen anyway.

I would say that a recent example of a black swan was the covid pandemic. Governments, businesses, and medical institutions almost didn’t know how to deal with it at first.

Leaping but not falling

Too much caution can lead to stagnation. A little courage helps if we want to get ahead. But both

in gambling and in business, we are counseled to bet only the amount of money we can afford to lose.

With some safety funds to fall back on, one may take the leap, as long as it's not a blindfolded trust fall.