Risk Sucks and Shark-Infested Waters

I’m a risk-taker.
I have a high tolerance for risk.
You can’t get big rewards without putting it all on the line. 

These are lies I’ve told myself for a while now, even taking pride in my risk-taking nature. Here’s the truth, as I now know it:

Risk sucks. 
Minimize risk however possible.
Don’t lose money.
Find ways to create outsized rewards for very little risk - that’s what the best investors do.

We believe the lies because we buy into the idea the market is always efficient. That there is some law of nature saying you must be willing to lose as much as you want to gain in any given deal. But this is not true, and the only ones who don’t know it are the people who lose. Read Michael Lewis’ book Flash Boys about high-frequency trading and then tell me the market is always efficient. There are sharks swimming in the waters, making more money than they can count, and transferring all the risk to the unsuspecting public. As the great investor Charlie Munger said about the unsuspecting public, “The trouble is that if even 90% are no good, everyone looks around and says, ‘I’m the 10%.’” We are overconfident in our abilities to get lucky and we assume we are the pros. By definition, most of us are not the pros. 

I don’t think it does much good to be upset about this. There are plenty of ways to make money if you know the rules to the game. I’m constantly trying to learn the rules, and training to be one of the sharks. A good guy shark, though. So maybe more like a dolphin. But a bad-ass dolphin.

Practically, this is how bad-ass dolphins do business:

• They get creative to reduce risk. Maybe they buy a house on a lot that can be subdivided, then sell the other lot to reduce their cost-basis by 30%. The house will have to go down in value by 30% to lose money in this deal (that didn’t even happen in most places in 2008)
• They want to see actual profits, strong cash flow, and their money back as quickly as possible. 
• They look for free options. Imagine being allowed to bet on a horse race anytime before it was finished. You’d be mad not to wait as long as possible to see what happens and drastically reduce your odds of picking a loser. This is what smart investors and entrepreneurs do. Whenever possible they get their money back if things don’t go as planned

I don’t know how to do this in the stock market or investing into tech companies that don’t make any money for years. Others do, but fewer than you think. That’s why I don’t want to swim in those shark-infested waters. I’d rather swim in waters I know, where I can be sure the dolphin is king. If you pick your waters carefully, I suppose you don’t even have to be a dolphin. You can be a bad-ass trout. Or a manatee. Just make sure you’re not getting eaten. This metaphor is getting away from me.

So if you’re in the deal business, and we all are to some degree, be sure you understand the rules of the game you’re playing…then get creative. You can often reduce your risk (risk sucks) and still make great returns.  

Here are some resources to begin digging deeper:

- A Dozen Things I’ve Learned About Investing - by Tren Griffin
- 13 Practical Ideas That Have Helped Me Make Better Decisions - by Shane Parrish
-Thinking Fast and Slow - book by Daniel Kahneman 

More on how exactly to reduce risk in a future post.