Risk & Reward - Betting on Yourself

Every action in life has a Risk:Reward ratio.

What is the potential return you can get, PER unit of risk?

This is the same concept as miles per hour, which is quite literally (Miles Travelled) ÷ (Hours Elapsed)

So our equation here is this: (Potential Return * Probability it Happens) ÷ (Emotional Damage of the Loss)

As I've discussed previously, there are only three ways to acquire new business:

1.) Content marketing

2.) Outbound marketing (cold email, cold dm's)

3.) Ads

Each of these has a requirement.

Content marketing's requirement is time.

Outbound marketing's requirement is time + a little bit of capital.

Ads' requirement is capital.

The only way for these to scale is via the resource is required in the first place.

Meaning, if you want to scale content marketing, you can only do so to the local maximum of hours that exist within the day.

There are only so many YouTube videos you can post.

There are only so many emails you can scrape.

This is all well and fine when you're below $20k-$30k/mo, because you don't have a lot of capital to use on ads in the first place.

However, the problem is that when you reach these levels, you become frustrated with the pace of profit.

You cannot accelerate time, so you have no choice but to simply wait for content marketing & cold outreach to work over that time.

If you want to go faster, you need to start risking more resources. You need to stop ONLY risking your time, and begin risking your CAPITAL.

Here's a practice you should put yourself through.

Let's make the assumption you have $10,000 saved right now in cash.

When I say cash we are using the financial definition of this. It means it's liquid & available to you.

You ARE a portfolio manager.

You have resources that are constantly in some form of an allocation.

You can say "I'm not an investor," but the reality of the situation is that you are, and for every instant in your life you have money you will not escape this fact.

And this capital will always be deployed somewhere.

Let's make the assumption it's in a 4% high yield savings account.

Your $10,000 is going to make $400 over the course of 1 year.

An abysmally terrible return.

As a portfolio manager, let's assess the available options to you.

Does there exist a location by which you can deploy $10,000 that has a higher return per unit of risk?

There definitely does.

So we're going to walk through the math of your alternatives here.

The savings account situation will be called Situation 1.

The investment in your own business will be called Situation 2.

Situation 1: 4% savings account

(Potential Return * Probability it Happens) ÷ (Emotional Damage of the Loss)

In this situation, the return is $400.

The probability the return actually occurs is 100%.

We'll assume the emotional damage of losing the $10,000 is a 5. Meaning you're not going to starve and lose your home, but it's going to be a little uncomfortable.

So the equation is as follows:

($400 * 100%) ÷ (5)

= 80

This is your Return Per Risk (RPR)

It is quite literally a ratio between the potential reward per unit of risk you assume.

This number doesn't mean anything unless in relation to an alternative.

So let's do your alternative:

Situation 2: Investing in yourself

(Potential Return * Probability it Happens) ÷ (Emotional Damage of the Loss)

Let's assume the potential return is $30,000.

We'll also assume the probability it happens is 70%.

And we'll assume the same emotional damage of losing the $10,000 is 5.

($30,000 * 75%) ÷ (5)

= 4,500

So...

Situation 2, even though is has a lower probability of experiencing the return, has a substantially more massive payoff.

This is how you need to be assessing your life.

You should always be taking bets with an outsized Return per Risk (RPR)

Situation 2 has an RPR that is 56 times higher than leaving it in a savings account.

It is a financially irresponsible decision to choose Situation 1, particularly if you are below the age of 50.

Now if the Risk would result in total loss or death, you shouldn't take it.

After all, if I were to give you a spin the wheel bet where there's a 99% probability of winning $100 million dollars but a 1% chance of you and your family dying, you're not going to take the bet.

Because it's the ultimate risk: total loss.

The problem, though, is that you are not intelligently assessing a situation for what the real risk is.

Being uncomfortable and having to miss out on Uber Eats'ing food for a couple weeks is not intelligent.

It's quite frankly, being a pussy.

And if you have any hopes of running a successful venture in any capacity AT ALL, EVER, then you need to begin getting comfortable with the concept of risk.

Because if there were no risk at all, everybody would have a $100k/mo business.

But they don't.

Because as we've just discussed, they're all pussies.

But the New Year is starting, and there's no more of a convenient time to reinvent yourself.

It's time to become an investor.

A real OPERATOR.

And if you want to see the YouTube version of this, go here:

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