Saturday, December 28, 2019

What Makes An Investment "Risky"?

A few years ago, I had a chance to attend a roundtable conference with local business owners. My intention was to meet with at least 3 people who may be interested in learning more about my business so we could potentially discuss a mutual benefit of working together.   This could have been through either as a borrower or knowing someone who needed a loan, or finding a really good real estate deal, or to possibly discuss investments available within my business at the time. In other words, I was looking to meet someone who may be interested in investing someday.  

Thankfully, I was able to talk to at least one person about investing some money, and as I described our business model to him, the topic of risk came up. He said to me, "Isn't that risky?"

Personally, I love when this topic comes up because it allows me to discuss the difference between “risk” and “risky.” 

Everything has risk, I told him. Is there risk in walking down the street with your net worth in your briefcase?    Is there risk with just putting your money under your mattress or in a safety deposit box?  Is there risk in just keeping your net worth in a savings account?  Yes to all of it, so in essence, the amount of risk may then lead you to determine if something is “risky.”  To this, he agreed.

I then asked him, "If you knew the downside was covered, how many deals would you get involved with?” In other words, if you had a very high comfort level for covering the downside, would you still consider a deal to be “risky?”

I shared with him that “risky” is associated with lack of the right financial education, and that a savvy investor's goal mentality is to cover the downside first. We manage risk by studying it, managing it, and covering it as much as possible. While it is impossible to eliminate all risks, if we can manage these risks to the largest extent possible, we can maximize profits by rarely losing.

This is what I call the “Banker's Code Investment Strategy.”


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