Insight




Risk Management Is Life Management

Failure to make the right decisions about risk can result in losing your money, business, reputation, health or even your life.

In order to help you overcoming your lack of confidence in taking risk, where many are thinking they can avoid the burden of taking risk by avoiding it, but that decision itself is also part of the risk, here are four principles in risk-taking to help you in facing your risk-taking burden:

1. Measure Your Risk

Measuring your risk allows you to picture how the outcome of your choices will affect you, whether it puts you in a good position with no risk, or a slightly bad position with small risk, or even at pure disadvantage with heavy risk. In measuring, the scope can be “monetary, emotional”, or “measured in time, effort or energy.”

Case Example :

Firestone’s firm, Aureus Asset Management, bought stock in Halliburton, an oil-services firm. Despite having bad reputation for polluting environment, they still chose to buy it because they believed that the stock value could increase and would represent a solid investment. However, one of their largest client, a West Coast nonprofit institution that owns and manages a nature preserve disliked owning Halliburton stock. Even after an explanation of investment rationale, for the chairman is a nonprofit person, it was in vain. In the end, they chose to let go of the oil stock investment, preferring their client.

2. Considering the Timing

Taking a risk requires a consciousness about timing. One would question themselves to release a small-budget movie at the same time of Marvel Cinematic Universe’s series release date. The same as choosing motorcycle as your vehicle on a rainy season.

Case Example :

Graduated from Harvard business school in 1983, Firestone joined Fidelity Investments. After spending 22 years with the firm, she managed large growth funds with assets valued at more than $12 billion. In 2004, Firestone presented a business idea to her senior executive and was turned down. Knowing her idea could do well if properly executed, she left Fidelity and set up Aureus Asset Management with her new partner, David Scudder.

The timing that she put into consideration was, by 2004, her children were all college age, which allowed her to focus on building a new business. Also, having spent 22 years in Fidelity, she had managed to earned complete financial security

3. Make use of your knowledge, skill and experience

It is common sense for people to have higher chance of success with knowledge, skill and experience in their own specialized expertise. Also, having higher chance of success means that you can minimize your risks with that advantage.

Case Example :

A Swiss jeweler – call him Roberto Conti, not his real name – works with his father at an antique-jewelry business serving international clients in Geneva. In 2007, a Milan associate contacted the Contis about an available 26-carat blue diamond, an extremely rare stone. The size and color were unusual. The only problem was it didn’t come with a quality certificate from an established rating agency – for example, the Gemological Institute of America (GIA).

After seeing it, the younger Conti believed that the stone would earn the best rating – “vivid” – from the GIA. His superior knowledge, skill and experience made Roberto confident that he and his father could make a healthy profit. After the diamond being taken to New York, where GIA resides, it was granted the top “vivid” rating. In 2010, the Contis sold the blue diamond to the head of a Middle Eastern nation at a nice profit. Their professional knowledge and acumen reduced the likely risks to manageable proportions.

4. Ignorance is not a bliss, be skeptical

At the end of the day, you could minimize, or avoid unnecessary risks by being skeptical. If you delegate an important task to your coworker, instead of letting them handling the task on their own only to be ended up being revised by you and getting them a do-over, it would be better for you to always check on them on a daily basis.

This should be applied especially on financial data. Evaluate the individual providing the information. Question yourself whether that person can be trusted or not? Does he or she have ulterior motives in convincing you to take action based on the data? How likely or unlikely is the conclusion the information suggests?

Source:
Firestone, Karen. Even the Odds: Sensible Risk-Taking in Business, Investing, and Life. Brooklyn, United States: Taylor & Francis Inc., 2016.

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