Investing Risk Is Okay. These Stupid Investing Risks Are Not

Life is all about risk.

From the second you rise in the morning to the moment you crawl safely back into bed at night, you are taking risks of some sort.

All day we make decisions about what risks we are willing to accept and which we are not.

Do we cross at the light in the crosswalk, or do we dash across a busy avenue avoiding traffic? Should we tell our boss what we really think, or just nod and move along?

What risks will we take and which will we avoid? Life is just a never-ending string of choices about risk and reward.

The big choices all have risk and reward trade-offs, don’t they?

If we follow the designated path of getting a job and working in a “normal” career, we should avoid the risk of ruin. But if we follow our dreams and become a writer, a singer, a ballplayer, the rewards could be tremendous.

However, dream chasing potentially has a very high cost and takes an enormous amount of dedication and hard work with the odds against you.

As Damon Runyan once noted “Furthermore, in Dream Street are always many hand-bookies and horseplayers, who sit on the church steps on the cool side of Dream Street in the summer and dream about big killings on the races, and there are also nearly always many fight managers, and sometimes fighters, hanging out in front of the restaurants, picking their teeth and dreaming about winning championships of the world, although up to this time no champion of the world has yet come out of Dream Street.”

If you dash across I-Drive against the lights here in Orlando, the local traffic stats tell me you have a pretty good chance of getting run over by a tourist looking at their traffic app for directions or arguing with their spouse about where to go to dinner.

Crossing at a crosswalk reduces those odds of a high splat factor. Meeting a woman at a church and finding out you have common interests and aspirations, then dating for a year and getting married, has much higher odds of success than choosing your spouse at the bar behind the crap tables at Caesars in Vegas at  3 am and getting married at the Elvis Love Chapel as the sun comes up.

Yet without risk, nothing great is ever achieved.

If Bill Gates doesn’t decide to bet on himself and drop out of Harvard, there is no Microsoft (MSFT). If Warren Buffett goes back to Omaha and becomes a stockbroker, there is no Berkshire Hathaway (BRK). If the pilgrims and pioneers do not take incredible risks to find a better world, there is no United States. Great dreams can require great risks.

But there are smart risks in life, like betting on yourself when you know you have an edge. Having a child in an uncertain world is also a risk, but trust me when I tell you that it can pay off handsomely. And then there are dumb risks in life as well, like the sunrise wedding in Vegas with the wedding rings fashioned for a tequila label.

So all of life involves decisions about risk versus reward.

And investing is yet another great example of that.

Here are the dumbest investment risks, and the smartest

Don’t Invest Until a Company Passes This Accountability Test

When it comes to investing, two very important factors will improve your level of profit taking.

The first factor is a margin of safety.

That means that you want to buy a company with close to zero chance of experiencing life-threatening financial distress. You also want to get more than you pay for, as that makes it easier to tolerate the often ridiculous short-term behavior of the markets.

The next factor, a very close second, is the idea of skin in the game.

Skin in the game is the ultimate measure of accountability for a company.

It means that when you buy a company, you want the people running it to have a large stake in it – at least a stake large enough to matter when things go well and large enough to hurt if they screw up.

It they don’t have a large stake, it’s as if they have a multimillion-dollar golden parachute. And if business heads south, you’re the one who is going to pay – not them.

So let’s take a deeper look today at how we can avoid losses and drastically improve our profits through this second very important factor, skin in the game