Episode 016 - Risk Management

There is no progress without risk. Investment returns are tied to risk. You get up in the morning and live your life - that’s a risk. There are risks everywhere. The key is knowing your tolerance for risk, how to manage and live with them, and seek out enormous returns with proper risk management.

Click on the player above to listen to the episode or download it.  You can subscribe to the RSS Feed here.

Show Notes

PSA:  First a big thanks to all of our new subscribers.  I’m blown away by the number of people who have been downloading the podcast, visiting our website at beunconstrained.com, reaching out and writing to me.  As a result, I’m appearing on a lot of other podcast shows including Radical Personal Finance and an upcoming Evan Brand podcast.  Also I will be presenting for the local Phoenix ChooseFI group on December 12th here in Phoenix on “The Art of Financial Sustainability” so if you are in the Phoenix area for that, I’ll post the signup link for this in the show notes - its free to attend.

Here's the link:  https://www.eventbrite.co.uk/e/finimize-community-presents-the-art-of-financial-sustainability-tickets-83372757161

You may have also noticed a few small changes at beunconstrained.com   On the Home page we have added some buttons if you would like to support the podcast and our site.  I’m not doing this for the money, but I wanted to at least provide a way that those who are getting benefit from these episodes and the articles can tip us if they feel so inclined.  There is a button there for tips in Bitcoin (well Satoshis - I don’t expect anyone to send me a Bitcoin), or you can now also support the show through Patreon.  You can find the buttons on the home page at beunconstrained.com.

We also received a couple of iTunes reviews in the past week or so, which I will read out on the next episode.  Thank you so much for your feedback.  It is highly appreciated.  If you haven’t given us a review on iTunes, please do.  It helps the visibility of the show and we’d love to hear from you there.

Finally we have revamped the Comments functions at beunconstrained.com to make it easier to post comments to any podcast episode or article there, and I engage with anyone that has a comment, whether positive or negative, to what we talk about here, so feel free to use it.  Community feedback is a big thing for this initiative, and that’s a great way to engage with us.

OK, let’s begin with the show...

I was asked by a listener to do an episode on Risk Management.  This is that episode.  I realized going through this that I subconsciously deal with risks.  And that the returns I typically get on the things I do and invest in are based on some assumption of risk.  So this will be a fairly long episode because this is a complex and detailed topic, but it should help those that are looking to adopt some sort of change in their lives, or are looking to get extraordinary results from their investments of their time and their money. 

I’ve lived my life embracing risks.  I don’t particularly go looking for them.  But I know that if I am going to try and get any form of upside on my investments, there are risks.  Typically the higher the risk, the higher the reward.  Some people fear risk.  They may have had a bad experience, or they are more susceptible to suggestion that risks are bad.  The problem is that, to me,  a life without risk is not really a life worth living.

You meet someone that you like.  You ask them out.  That’s a risk.  They could say No.  You try and do business with someone.  You ask for the order.  They could say No.  Or they could say Yes and you find they are a difficult customer.  That’s a risk.  You get in the car to drive to work.  That’s a risk.  Anytime you cannot predict the future with some level of certainty, that’s a risk.

If there were no risks in life, it would be super boring.  We need dynamics - we need some uncertainty.  We have to keep things interesting.  When you play a game with your friends, and there are dice involved, that is to introduce some level of unpredictability and randomness.  Because if you could predict the outcome every time, it wouldn’t be a game worth playing.

A sense of self-confidence is key to being willing to embrace risk.  You need to know yourself and your limits.  And have a willingness to grow yourself in the process.  If you have given up on yourself, there’s no sense in trying to embrace risks and investments.  First, you should invest in yourself.  Know yourself - know your strengths and weaknesses.  Don’t be lazy and only focus on your strengths.  Start a plan to strengthen your weaknesses and grown.

But assuming you have done that, let’s have a candid discussion on how risks factor into outcomes.  And what you are actually risking when you engage with an opportunity.

There are levels of risks and you have to find your comfort zone.  Some people are “risk adversed”.  They have a very low tolerance for any risk.  Others are adrenaline junkies and need HUGE risk in their life.  For some, risks are addictive.  For others, risks are toxic.

One thing I’ve noticed in life is that those that are risk adversed are typically the victims in economics.  They don’t understand that inflation happens without their participation, they are the ones that discover there is less money than month.  And as a result, they are the first to hit up the PayDay loan companies and get victimized.  Why?  Because they didn’t take any risks and life just flattened them like a steamroller.

On the other end of the spectrum is the risk junkie that can’t seem to get ahead because they shoot before they aim.  Looking at every opportunity through rose colored glasses won’t work, and only doing research that favors a positive position is just stupid.  But those looking for the quick fix of an upside win all the time are doomed to never get it either.

Where do you fall on the scale?  Are you someone who has a high or low tolerance for risk?

Those with a low tolerance for risks will typically get lower returns on their investments.  But they can play a long game.  Because the risks are acceptable and don’t impact their day to day lives, they can live with a low return over a long period and just don’t have to think about them.  However like a ticking time bomb, long term focus doesn’t allow for macro-economic adverse events, which are more likely to creep in over a long time line than a short one.  At the other end of the spectrum would be day traders or gamblers.  They live for the risks and they get massive returns or massive losses.  

What if I was to tell you that you can get massive returns, but low risk?  That’s been my life mission.  And in the medium term time line.  

Now the thing is how do you determine what is low risk?  What I might think of as low risk, you might think of as high risk.    What we are going to do on this episode is to discuss risks in your ventures & investments and what you can do to get comfortable with them, or to take what others might think of as high risk and you treat it as a low risk.  And the value of patience and developing a thick skin.  

It comes down to one simple formula:

“SUCCESS = PREPAREDNESS meets OPPORTUNITY”

If you embrace that, you can then scale it to a level of risk that determines a level of outcome.

Why is it that lion tamers exist?  Isn’t that a huge risk?  If you spent years training, started off with low risk animals, learned how the lion thinks, learned the right observation habits, have a plan B ready if there is some unpredictable thing going on, etc. then you could be a lion tamer.  I don’t know how much money a lion tamer makes, but I would be pretty sure that there is a premium for someone in a dangerous job like that.  They would get more money for taking on more risk.  But if you are a master of the craft of lion taming, you probably don’t see your normal job as that risky.

That’s because the Lion tamer is prepared.  There is a well rehearsed protocol for what they do.  They have spent years to become experts in their field and they can transcend the risks that most others would freeze with, and learn to befriend and tame the lion.  Knowledge and experience is power here.  But to the audience member, you are the hero.  And they pay good money to see you do your thing.

When it comes to investing, the same theory applies.  You don’t just become a great investor.  You pick a particular area to practice in, you research (sometimes for years), you learn from mistakes, and you eventually transcend the risk and are a master.  The better you are, the more able you are to invest in higher risk investments.  Why would you do this?  Because like the lion tamer, there is a premium paid for winning with higher risk investments.

Take gold mining, for example.  That’s a high risk investment field.  It is very expensive to do it, fraught with regulations and claims, requires expensive heavy equipment, requires highly knowledgeable geologists, lots of manual labor, there are accidents, etc.  But if you find the mother lode, then you make millions.  That’s what keeps them doing it.

If you invest in a gold mine, there is a very high probability you will lose money.  They won’t find gold, or if they do the value of it may be subject to the fluctuations in the market price for it.  Or the cost of energy to mine it becomes very expensive and exceeds the value of the gold you can dig out of the ground.  But again, you don’t know what you will find until you start digging.  So you take a risk.

How is it that there are mega-billionaires out there that got rich in these high risk fields?  What is their secret?

My adventures with an EMT 

When I was in my 30s, I wrote some software for the medical industry in Australia.  A company in Tasmania were interested in using it, so I flew down there to their office to determine if it was a suitable fit for them.  The guy they had doing their “IT” was a part-time consultant, who had a full-time job as a paramedic.  His life was devoted to saving people’s lives in the worst possible situations.  Car accidents, fires, violent crimes, etc.  The skills required were quick reactions and fast thinking.  You stop the bleeding - you don’t attempt to mitigate the risks of what created the adverse event.  Fix it, move on to the next one.

I got to know him pretty well and experienced how those that save our lives think.  His calling comes from an inner need for constant action.  It seemed like he was a true adrenalin junkie and needed that quick fix all the time.  I was humbled that people like that were out there if we needed them.

But when it came to me reviewing the work he did setting up computers, it was horrible.  There was no engineering involved.  No sense of creating an environment impervious to the day to day issues that comes with computer networks.  No predictability, no documented protocols, no backups and basically a total mess.  I’ve seen some bad installations before, but this was up in the top 5% of the worst.  Consequently over a year or so, that client was the most expensive to us in terms of labor costs because we would always be getting tech support issues from them due to the horrible technology environment he had created.

Looking back, it is completely understandable.  This guy lived for the moment.  He craved the quick fix.  He never looked at the long term of what is needed to build something of value.  It was always looking for what was needed immediately - the band aid approach.  There is a place for that - his EMT work was a perfect fit for that personality, but long term planning for growth and conservative positioning was not for him.  He fit the “Day Trader” model of speculation rather than a long term investor.  It would not surprise me to see him fall into the trap of gambling addiction with that personality.  Hopefully that never happens.

You can see, however, how we all have different personalities and we all need different things from life.  You have to know yourself here because that will tell you what you are most comfortable with, and know your weaknesses because it tells you (as much as you might find it distasteful) where you need to focus on building strengths.  For the EMT, it would be to slow down, plan things out, focus on proactive engineering - not reactive.  For the risk adversed investor, it would be learn how to live comfortably with risk knowing that without it, you will go backwards.  Risk management is probably the best cure to the risk adversed.

Venture Capital Firms

Back in the early 2000s, I was a software development consultant, working in a niche field in Southern California.  I took contract jobs that lasted maybe 3-6 months and I got to spend time in a variety of different industries.  From medical to academia to finance to entertainment.  I landed a contract working for a small venture capital investment firm in Irvine.  They had a $4 Billion portfolio that they managed.  To me, that was more money than anything I had ever heard of but to them they were a small firm.  There were about 5 partners in the firm, and they would invest in startups.  One of the partners was a young guy who was quite aimable and we sparked up a friendship while I was there.  

We’d go out to lunch from time to time.  I remember he used to have to fly to New York a lot - they had a sister office in Manhattan, and I suspect they dealt with a lot of the investment bankers in New York.  But they would focus on west coast startups.  Although the programming work there was quite boring, they paid really well and would put me up in the Hyatt Regency while I was there each week I was on contract, because it was a long drive from where we were living.  I wasn’t going to complain.

One day we were having lunch, and I decided to ask him, “So how does this whole VC investment business really work?”.  You’d think I’d know that stuff since I had to write the software for them, but what they had me working on was some quant finance stuff that was so specific to a particular thing they were doing, I couldn’t see the entirety of their business mission.  But I wanted to know.

He told me something very valuable.  This is what he said:

“Let’s say we invest in 10 companies.  We know that of the 10, 5 of them will go broke.  This is a high risk field.  But of the 5 left, 3 of them will make a modest profit.  One of them will make a good profit, and we hope one of them is Google.  Add it all together and we make great money.”

This was much the same model that I remember learning working with record labels in Hollywood in the 1990s.  They had a budget to invest in new bands, and they expected a large percentage wouldn’t go anywhere, but all they needed was one Elvis or Madonna or Radiohead or Beatles.  The thing is if you don’t try, you won’t get to land the whale.

So if you are going to invest in 10 things, and you take the same systematic approach as the VC company, you better be prepared to lose on 9 of the 10 up front.  That means you have to have the capital to do it.  You can’t do that without the capital.  You might get really lucky and find the golden ticket early.  But there is a 1 in 10 chance, it will be the tenth one.  Or maybe it will be the 11th one and you will stop before you get to it.  It is like financial Russian Roulette.

Like the prospector, you don’t know until you go out there and start.  But you have to be prepared for the worst case scenario.  That’s how I work.  I research, become an expert in my endeavor field, and I only go into something that I can afford to completely lose it all.  I will never bet something of value to me in a risky field.  That’s why we never borrow money from our own home equity to start rental properties.  If they go bust, I want a firewall between my personal assets and my investment risks.

Risk V Reward

The mainstream financial advisor methodology focuses on finding low risk but decent return investments and selling them as a product to their customers.  This typically means equities.  You will also find many players in this market selling life insurance policies.  This is mainly due to the commission structure that they earn in hawking these plans.  Whether they make any money for the end customer is debatable because it is pushed out so far into the future that it is hard to draw a correlation between investment and return.  My general experience is that returns are negligent at best.

With central bank interest rates being brought down to almost nothing, traditional investing often doesn’t yield enough return anymore to have any significance, let alone keep ahead of inflation.  That forces most of us into riskier and riskier investment products.

If I could get a decent return on a low risk product, I didn’t feel that I had to do any research into what that product was about.  That meant I could just elect to invest in bonds and get a return that would at least grow the principal in the investment.  That is no longer possible as the current US bond return rates do not even keep up with published inflation rates.  This means I can’t avoid not being more active in my investments.  I know that if I am going to take on risk to get higher rewards, my ability to feel comfortable shouldering the risks is going to be a big part of that strategy.

Like the VC company, I know that I have to be diversified and spread my risk around.  This is just the way it has to be now.  I can’t put all my money into equities, real estate, gold & precious metals, etc.  I need to spread it around to allow one part to go up while another part is going down.  And that geographical diversification gives me some chance of being able to benefit when one economy is heading up and another isn’t.

But that isn’t enough risk management for me.  This is putting faith in avoiding collapse rather than really mastering the dance with risk to get the returns.

Know your domain, and your limits

One thing I learned early on..... If you really want to invest successfully, stop looking for new territories to conquer and look in your own backyard first.  This means take stock of what skills and knowledge you have.  If you have worked in a niche field, then you know that market better than others.  You already have the advantage if investments in that field become apparent to you.  Remember that if you follow the herd into an investment, the returns will be divided up to a huge number of participants, which typically means each member gets a very small piece of the pie.  Like participants in a class action law suit - you are not going to get rich being one of the tens of thousands of participants in that pool.

You need to find something you know and you are comfortable with.  For example, if I was a general contractor in the construction business, the first thing I would look at investing in is real estate.  Why?  Because I know at least something about the nature of that business.  I can tell a good from a bad building by looking at the construction of it.  I would always favor that over, say, the Forex market.  This is basic sense, yet so many of us forget our own backyard.

Maybe you are a car mechanic.  Wouldn’t it make sense to buy cars that you know would go up in value as junkers, fix them up and flip them?  Wouldn’t investing in junkers cars in this case be a wise investment?

That’s what happened with me & Bitcoin.  I discovered it in my work in the software business, so it made perfect sense to me to be a reasonable investment - it was what I knew.  It worked out very well for me, netting over 1000x my original investment.

If I worked in the medical field, I would know of new discoveries, research, etc. and that could lead me to making some investments in new startups.  Only because I know that market.  Sure, it is hard to predict the future, but wouldn’t I have more of a chance of success in that market than the general contractor would if they attempted to invest in it?

You see risk is a perception thing.  What some might think of as high risk, you might not because you know the business well.  When you hear them saying, “I’d never invest in that, because you’ll go broke doing that”, it reminds of me of what I heard over and over again in about 2014 regarding Bitcoin.  Sure, to those that don’t understand cryptography, economics & money and have never tried to send payments internationally on a repeating basis, they wouldn’t get it.  They wouldn’t understand that this made perfect sense.  I did, which is why I stumbled into it in 2011.  But when I tried to tell others about it, I got a lot of flack and push-back.  

I was in a meeting with a client a while ago, who I told about Bitcoin in 2014 or so.  At the time I think they could have bought it for about $200 per BTC.  They had just received $50,000 of investment capital to invest, and they chose not to take my advice but to invest in a medical startup venture that within 18 months went broke.  Someone did some retrospective calculation on what the BTC investment would have been worth in 2017/18 (when I sold my holdings) and it must have been close to $5 million or so.

But I can’t blame them for investing in what they knew.  I wouldn’t have invested in the medical startup because that isn’t my industry.  Sure, it could have done really well but I was sticking with what I knew.

That’s the key - you have to take inventory of what you know and use it as your advantage in your investments.  If you are a school teacher, look to new on line teaching startups as a possibility and analyze if they offer something that doesn’t yet exist.  If you are a police officer, maybe you can see the value of new technological inventions in body armor or weapons or surveillance technologies, etc.  You can see what would work and what would not, for the intended use case.  I can’t see that.

If you try and take a 1,000 foot view on investments, you will get a small return from a large pool of players like a class action lawsuit beneficiary.  We all know that only the lawyers get rich with those lawsuits.  

Eating your own dog food

What if you are looking at the risk of inventing or creating something yourself?  This is an investment of your time rather than your money.  There are risks here too - just ask any small business operator.

There’s a saying I heard over and over again in the software development world.  “Eating your own dog food”.  The idea was that if you wanted to invent something new, first look to your own personal experiences and what you would do to help yourself out.  That meant if you do something repetitively that is a pain and you have constructed a way to automate it, that’s a product.  There is a 90% chance that your needs are someone else’s need and with that, your creative approach to solving your own need is exactly what the successful inventor has.  It is then a matter of how you package it because there is no assumption of knowledge here.  You invent something you would love to have, and package it for others, and there’s your answer. 

That’s how things have worked for me.  Sometimes I time it right and stumble into something.  Other times, not so much.  Sometimes I don’t research enough and find someone is already doing that better than I could have done.  So that’s not a market.  But many times if you are a contrarian, you probably already do things differently and that may be what people want.  They want to know that just repeating the same process that isn’t giving them them outcomes they really are hoping for can be improved or evolved.  Again, the new solution may not be that radical or it could be entirely radical.  

I bring this up because new inventions typically have the greatest return on investment.  However they run a massive risk, so you have to be willing to lose whatever you put into it.  Maybe you put your own time & energy into building it up.  And it is a failure.  What did you get out of that investment?

Maybe nothing financial in the short term.  But the education is priceless.  And the wisdom to know what works and what doesn’t in certain circumstances.  Now you have value.  That is what could make you 100x return on your next venture.  Dust yourself off, understand you just paid for an education that is priceless and take that knowledge, wisdom and power forward to the next venture.  Because the VCs are out there looking for you.

The other thing is that during the time that you worked on that project, you probably came into contact with countless other opportunities that were peripheral to what you were doing.  They use the term “pivot” quite a lot in the world of business because often the fact you were out there doing something, allowed you to uncover things you would never have seen before and maybe calling an end to your initial idea but to re-focus on this new opportunity might be the answer.  Remember, you would never have seen the new opportunity until you immersed yourself the initial project.  That’s a huge return on your investment of time.

Remember your venture that may have failed is 1 out of 10 before you hit the big one.  If you get lucky, it is #1 in the chain.  If not, you may have to end it, and move onto something new because you may need to keep the process moving in order to stumble onto that big one that is out there.

In this case, your investment is time.  Maybe some money, but probably more time.  As we know in the world of the unconstrained, time is more valuable than money, but if you invest time and get back a return of wisdom, then you are making the best possible use of your time.   That’s a win in my book.

The risk here is potentially an opportunity cost in that you couldn’t participate in other opportunities during that time.  Maybe you have to put some reasonable limits into how much time you are willing to invest in something.  That takes some objective thinking because you are immersed into what you are doing.  You have to be to get something over the finishing line.  But the risk here is a “forest & trees” scenario where you can’t see the forest for the trees.  That’s where sharing openly what you are doing with others may be the only hope you have for some objectivity.  But belief and faith in a venture is really what makes it come together, so be careful to protect that at all costs too.

This is where my cynical opinion of retirement kicks in.  If life is a journey of discovery, and you are self-motivated to invent and create something, then the last thing in the world you want to do is to stop.  Who knows if the next venture you are going to do is the 1 out of 10 Google invention?   But one thing is for certain - stop now, and you are out of the game entirely.  You may have to look back in regret in your older years saying things like, “If only I continued with X, I might have made it”.  Don’t live your life in regret.  Do what you need to do and be proud and happy that you gave it your best.  That’s the best return on the investment of time I could ever think of.

Even if you never hit the big time, you tried.  That’s a huge win and something to look back proudly on in your older years.  At least you have a story to tell.

Maslow’s hierachy of needs

I discovered this theory in the 1980s and it became the backbone for me with where I spent my time & money.  The idea of Maslow’s hierachy is that we humans spend our time & resources attempting to transcend from basic survival through to our version of Nirvana.  It is more of a study on human psychology, but it also is an economic thermometer that allows investments to be classed by risk.

Maslow’s hierachy is basically a triangle or pyramid that starts at the bottom where the largest amount of horizontal area is devoted to physiological needs.  These are the basic things of survival that we humans require - Food, Shelter & Clothing.  As you move upwards through the triangle, it changes to more industrial needs like energy, telecommunications, healthcare, etc.  The further up you go, the more advanced things like entertainment, learning, etc.  and at very top of the pyramid is your ability to give back to society, mentor, teach and help others.

Using this as a model for investments has worked out well for me.  I know that areas at the bottom of the pyramid typically exist regardless of where an economy is in a cycle.  For example, regardless of a bull or bear market, we all need a roof over our heads to exist.  We all need food and we all need protection from the elements.  If your investments are in these areas, you will be steadily gaining.  However since everyone needs these things, everyone invests in these areas and returns are typically smaller.  

However as you move up the pyramid, the rewards can be greater but the audience is less.  Plus if you are investing in things that are considered “non-essential” or “luxury” items, in times of economic recession, people won’t buy them.  So the risks are higher in bad times than if you owned low income housing, for example.

I think we all need to look at Maslow’s hierachy as a way to determine risk vs reward here.  However there are some investments that are BOTH low on the hierachy and yet high on rewards, and for me the best one is real estate.  That said, I also believe that energy is a huge area for speculation, particularly in a time when we are transitioning from one form to another.  If you know this industry, you can do very well, but the early adopters will be those that learn how alternative energies work.

Double whammies

What if you could make income from an investment that ALSO saves on expenses?  The double whammy, so to speak.

I think that energy production might offer some advantage to those that are in areas where alternative energies are available.  For example, the move towards solar power is huge in the USA.  Interestingly it is on everyone’s shopping list when there is an administration that is supportive of climate change, getting off fossil fuels, etc.  But when an administration is in power that doesn’t share this importance, then it isn’t something that everyone is buying.  When supply & demand plays out like this, you can probably get deals and bargains.

The thing is that if you are paying $500+ per month for power, there might be some advantage in participating in this space even if it is a minimal position.  Maybe you have a way to offset some costs or to just get something to learn how it works.  The one thing that is relatively predictable is that as technology advances, things get cheaper.  And this is a game where economics matter.  If you can generate and store as much energy as you will need, not only could it offset your expense cost, but if you produce a surplus you could potentially sell it.

That ticks all the boxes for the unconstrained and Financial Sustainability.  No time and labor required to generate money.  You get the immediate benefit of reducing expenses and you get the potential to scale it up to sell at a profit.  It focuses on low end Maslow’s hierarchy areas (energy) and it is an every increasing need in a world of power requirements.

The thing is that you have to run the numbers to see if it makes sense for your use-case and everyone will be different.  Rules & regulations may get in the way of this in your region.  But with that, what might not work one year may work the next.  As things get cheaper, and changes in government policy allow for more decentralization of power generation, this could be a huge deal for those that take advantage of it.  

This is one example of where investing in what you know makes sense. It means that if you don’t know anything about electricity, you better learn before you plonk down a bunch of money to buy into this.  Study in this area will either make you rich or protect you from loss.  Either is a positive.

I’m not telling you to buy into renewable energies, but it is one area that shows a nice correlation between low Maslow’s hierarchic areas, contrarian thinking, expense reduction and income generation without labor required.  It ticks all the boxes of Financial Sustainability if it is something that makes sense for your specific situation and I can’t tell you if that works for you.  Only you can. 

The opportunities are out there

The best opportunities that I’ve come across over the past decades have been when I have been out there in the world and seen them with my own eyes.  That means travel and a willingness to stop looking at what other people are doing and live in a FOMO (Fear of Missing Out) mindset, but to go out there and own my own decisions.  I need to see something with my own eyes, feel it, touch it and when decide if I want to act.  When I encounter an area I don’t understand, that is a negative to my decision to take a risk and invest in it.

But it also is a driver for me to begin the process to learn about that field.  I learned a lot about solar energy production by immersing myself in that field in 2018 and discovering the key metrics that I needed to align in order for this to be viable for my use case.  I’m no expert, but I’m at least able to have conversations with the experts now.

I’m sure you are an expert in something, and you probably skip over investments in that area because you are listening to everyone else who are not experts in it.  You need to shut them out of your influence so that you can make your own decisions and remove risks because of your knowledge.  Start there first.  Don’t think that because everyone else is buying stocks that you should   Yet this is the world of investing that we are told to participate in.  The reality is that we don’t know about how that works, and until we do, we can’t see that it could be a manipulated market designed to steal your treasure.

Those that will tell you that over time, you can’t do better than stocks, are probably those that know that industry.  Experts in that field.  But there are experts in thousands of fields out there, and you can’t be an expert in all of them.  So start with what you know first.  Don’t just put your faith in a good sales pitch.  You manage your own risks because you are active in fields you know.  That’s the best place to start, in my opinion.

The bad guys are out there

You also have to be realistic.  Human nature has good and bad characteristics.  There are plenty of people that would swindle you into any investment.  They come in all shapes and sizes and the most successful are those that cloak their true intentions well.  If you haven’t had a bad experience with this, either you are not involved at all in money, or you will have.  Greed is an evil demon that lurks in everyone to some degree.  Those of us that have learned to recognize it and distance ourselves from it, have risen to a place that has incredible views.  Looking out on the landscape like that and surveying where you might want to journey with your investments is a quest that those who don’t fear to go over the mountain will benefit from, but you need to realize that you should not be participating in risk investments until you have at least lost everything at some point in life.  You need to go around the block so to speak, because you won’t be sensitive to danger without having first danced with it.  They say that most learning occurs in failure - not success and that means you have to have failed.  At least once.  That means you need to build in a plan for that failure.

Once you have been through that journey, you can smell the bad guys.  Like a police officer develops a sixth sense towards those they encounter.  The ones that are able to rise above the constant lies and deceit that they deal with in society are amazing to me.  And they would actually be best positioned to succeed in investing because they don’t have the fear to deal with this.  But they need to harness their ability to recognize that most opportunities can be wolves in sheep’s clothing and that you can’t see them from a surface level perspective.

How do you tell if there are bad guys?  Research.  Start with OSINT (Open Source Intelligence) gathering.  This means check out someone’s social media, reviews, etc. on the Internet first.  This will help you determine if the opportunity is one of the 5 (per the VC formula) that will fail.  That’s 50%, so you have to be ready to assume that half the time you punt, it won’t work.  But you are looking to the other 50%, so learning to pick what falls into that category is the key.

But don’t think that the Internet is the total answer.  It is not.  They guy who said, “Never believe anything you read on the Internet” was partially right.  You have to take large amounts of data and be objective with that.  However the best way to research is to get off your ass, get in the car, and drive to where the thing is and look with your own eyes.  Research first, before you commit to anything.  If the investment is in another country, get on a plane and see it first.  Talk to real people who you find that have done things before, but get a good sized sampling - not just 3 people.  But 10 or so.  If something comes to you that doesn’t have at least 10 pariticpants you can find (not the ones that the vendor who is peddling the opportunity presents) but ones you find, and you can reach out to and get a sense of whether this will or will not work over a reasonable time period.  People love to talk if you know how to approach them.  

The key here is to realize that business is about people.  You have to develop the ability to have conversations with strangers that are not creepy.  Learn to break the ice in a conversation, but not like a slimey sales person.  Like a human being.  Find common ground and talk to that.  Once you gain trust, expand the conversation towards your goal and finally ask the questions you need answer to.  They won’t give you that until you develop trust.  Trust is everything.  Just as you don’t trust anything that comes to you, others won’t trust you either.  It is about developing trust both as a participant in an investment, but also as a person out there looking to find the truth.  Like a detective.  Remember, people can smell your caution and will mirror it back to you.

Analysis Paralysis

There is a high risk to you that you fall into this category.  Our fears to take action and get involved in something can be thwarted by over-thinking and over-researching.  Time is important.  There is value in when you get into an opportunity (remember my story in previous podcasts about the “Surfer Mentality”).  

If you spend all of your time in research, you don’t act.  That’s a great way to avoid acting and something I see those that are risk adversed using as a shield against doing anything.  Don’t do that, but don’t think that you have to act either.  There is a balance here and you need to use some gut feeling to make the right call.  That gut feeling is stronger with age, but it comes with wins & losses in life so you have to start somewhere.

Set realistic limits to research because research costs time & money.  There has to be something that you are willing to say is a minimum level, but then you have to just realize that you have to act (either to engage or detach) after a certain period of time.  If you do nothing and vascilate, then the opportunity goes to someone else.  If you only engage all the time, you get the 50% chance of a loss like the VC formula.

Trust your gut

This is key.  We all have the ability to sense things.  It is in our human DNA and it is what allowed us to survive despite not necessarily being the dominant species.  We get a sense of danger.  We get a sense of opportunity.  This is impossible to scientifically study, but if it was quantifiable, then we would have invented every major blockbuster thing in the universe by now.  The fact is that sense is something you can develop, in the same way that an athlete develops muscle in a gym.

Sense (the ability to detect danger or opportunity) is developed by exercising participation.  It isn’t done in a laboratory or by remote control.  It is first a willingness to go out and seek things.  Travel, socialize, be faced with adversity yet be humble and respectful of where you are.  And demand the same respect from others - not by telling them that, but by your actions.  Walk away from things you don’t agree with, yet run to those things you do.  

Be sensitive to feedback that you get that isn’t logical.  The “right brain” here is more likely to feel something than the left, so be willing to listen to it.  Everything doesn’t have to be some scientific or mathematical result.  People react better to feeling things than learning things.  That’s why music and other art forms are so popular.  They don’t get the attention they deserve, but in retrospect you can probably think back to the music of your teens or 20s and it will resonate to you until the day you die.  Yet think back to the school tests & exams on subjects you did, and there is a high chance you have forgotten them already.  

Those that have developed a strong sense can go and travel and see things and immediately detect opportunity or risk.  That’s a huge thing.  It isn’t a gift as much as people would love to think it is.  It is a developed skill and comes from your willingness to take on risk and learn.  It is the prize at the end of the rainbow so to speak, and yet we rarely talk about it.  Unlock that sensitivity and you will be rich.  

Summary

So in summary, there is no progress without risk.  The VC firms know that 1 in 10 ventures are the “big one” and in order to find it, you have to begin the process.  You could be lucky and it could be the first one you try.  You might have to slug through 9 before you find them.  But patience and stubbornness matters. 

If you have no stomach for risk, then you run the risk of going backwards financially.  If you have too much stomach for risk, you run the risk of not seeing the importance of quality over quantity.   It is a balance - you have to find your comfort zone and realize that the evolution of you is as important to see opportunity and manage risk as the ventures themselves.

Never invest money you are not prepared to lose.  But don’t go into an investment by dipping a toe in the water if you are not intending to dive fully into it.  Immersion matters.

Also if you are investing your time into a venture, that’s a great thing.  That’s how creativity that changes the world works.  Be aware that your return on that investment may be far greater than the financial ROI because it has the double whammy of entertaining a money return but more importantly it is growing you and your wisdom every day.  Be thankful for the struggles and the challenges that come with that.  By choosing that the buck stops on your desk, you become stronger.  And be willing to pivot if you determine that a reasonable amount of your time has been invested in your venture.  Maybe you discover along the way another opportunity in the long chain that is a better chance to be the 1 in 10 mega investment that you are looking for.

That said, if you are not the creative entrepreneur type, that’s fine too.  Invest in other people’s visions - whether some corporation on Wall Street or some real estate developer or some miner.  You find what works for you and your situation.  Just know that everything in life has a risk.  Without risk, life would be super boring.  

These cookies allow us measure how visitors use our website, which pages are popular, and what our traffic sources are. This helps us improve how our website works and make it easier for all visitors to find what they are looking for. The information is aggregated and anonymous, and cannot be used to identify you. If you do not allow these cookies, we will be unable to use your visits to our website to help make improvements.