|We face risks all the time. Just the other day I was rushing to make my train and I almost got killed by a car. I'll tell you later in this chapter, how I could have avoided it and you can too.
So we can't stop living, but we can mitigate risks or take useful risks.
The word "mitigate" means alleviate or reduce. And that's exactly what we want to do with risks. Identify them then reduce their odds of occurring. If they do occur we have a plan B to deal with the situation.
There are also useful risks we need to take. Whether public speaking. Having your work criticized. Or just stepping outside of your comfort zone. These are all useful risks that will help you even if you fail.
There is a risk of investing in single stocks. I'm familiar with this due to a large amount of money I lost in the stock market during the dot com bubble. A single stock can fail for a number of reasons.
Your investment can drop by 100%. Even if you invest in index funds you can still lose 80% or more of your investment. And the famous statement by Humphrey Neill:
"Don't mistake brains for a bull market"Nissam Taleb, author of the Black Swan, says it best, and I'll paraphrase it. "The turkey lives for a full year and it gets to know the farmer. Its trust builds for it until Thanksgiving, when the trust is the highest the risk is the highest."
Everyone's doing it
The fact that everyone is doing something doesn't mean it's without risk. Everyone was invested in the stock market in 2001 and we know how that turned out.
Most things are so obvious in hindsight. Ask me today in 2017, was the market overvalued in 2001, "Hell yes!" Ask me in 2001 what I thought and you'd get a very different answer. Obvious in hindsight is how good an investment Google, Amazon, Facebook, etc. would have been.
Another risk we face is the Survivorship Bias. All the companies I want to invest in are the survivors. But many companies fail and we no longer see the data from them. If I do an analysis of the survivors without including the defunct merged or bankrupt companies, I'm not analyzing reality.
The Past and the Future
You see the warning all the time "Past returns are no indication of future returns." It's true that the past repeats itself, but the future is unknown. If I look back to the 1980s, there was no way to now such as things the internet, Google, smartphones would exist. Most risk management systems try to prevent past calamities and not future ones.
There are some trading strategies that look good due to past performance but they can be a hidden trap. An example is selling insurance. You get what's called a premium. You can have high profits and great past performance. But if what you're insuring fails then your losses can be devastating.
Don't put all your eggs in one basket
This is an important risk mitigation strategy. If you drop the basket, all the eggs will crack. This applies to you if you have one customer that brings in 80% of your revenue. What happens if the customer leaves? I see people do this when looking for a job. They have one job in mind and stop looking until they either get or lose out on the job they're seeking. Buying individual stocks instead of a stock fund is the same issue. Having one friend instead of many is another example of this.
People take risky behaviors for the excitement they bring. But they also bring oversized risks. Riding a motorcycle is an example of risky behavior. The fun and high people get outweighs the risk which can be death. I know someone who was killed riding a motorcycle and you probably do also.
There are many things you might do that increase your risk of injury.
When I played ice hockey years ago, I was trying to get used to wearing a cage on my helmet. This can prevent you from getting hit in the face with a stick, puck, or skate. I would start the practice with the cage on and it would be hard to play with it so I'd take it off. One day I took it off and my twin brother went to lift my stick to get the puck from me and missed. His stick flew into my eye. This might have been one of the most painful experiences I've had. I was rushed to the hospital in an ambulance to the emergency room. I got stitches on my eyelid and was lucky that it didn't take my eye out.
So if you play or do something dangerous wear protective equipment. I wish I did that day.
Another risk to mitigate is getting a new boss. You're at the job for some time and your current boss leaves. You liked him and he liked you. He even hired you. What about the new boss? This is riskier than most people realize. When you get a new boss you may have developed some bad habits that your previous boss was able to overlook. But the new boss will hold you to a higher level than the boss that hired you. The things you did when the job was new is the way you want to act with a new boss. Be very aware of setting up a positive confirmation bias with him.
An IP risk is your intellectual property. You create a risk of getting fired if someone can easily do your job, for less money, faster, better, or is more liked by your supervisor. I'm not saying to not share your knowledge but to think about it before you do. For example, if you're rated against your co-workers and you help them out, this could reduce your rating. For example, I review a subordinate's email and correct mistakes they make, this could lower my rating. Unfortunately some companies rate employees on a curve. If there are 8 people then 2 get "exceeds expectations", 4 get "meets expectations" and 2 get "below expectation."
I worked for a company that had a monopoly in its business. But eventually, we started to have competitors and lost business to them. This could affect your future at a job or in your business. Things change and you need to keep adapting to this change.
Loss of Clients or Customers
A lot of what I produce goes to a co-worker. He is my customer. If I treat him poorly or provide bad service, he can decide to do the job himself and would eliminate part of my need at the company.
When new management comes in your job or business might be at risk. They can change many things that can affect your security.
If you work for a public company there will probably be layoffs. Or costs will need to be cut. How are you prepared in case this happens?
Money in the Bank
One risk mitigation strategy is to have some savings in case you fall into hard times. This is even mentioned in the Bible with the story of Joseph and his dream of 7 years of plenty and 7 years of few. If you lose your job how long can you survive before getting a new one? If there is a calamity will you have the survival tools you need before it's too late?
Rules that give you employment today could change tomorrow. For example, my job is based on government regulations. It's possible that these regulations could go away and that would reduce my job security.
Loss of Customer
My work comes from a number of customers.
What if any of these people leave, what happens? How much is my job tied to them?
What if another group takes over my reporting?
What if their bosses change?
What is the quality of the work they receive from me?
Nothing ventured, nothing gained.
You take risks every day unless you're dead. But just be aware of the downside. Every Risk has an upside and a downside. Be aware of them so you know your reward is in line with the risk you take.
Key Person Risk
This risk is where only one person at your company can do your job. From your point of view, it means job security. From your boss's it means if you leave he's stuck.
I'm in this situation right now and my boss has used this term multiple times. So I'm making an effort to resolve it by training a person who works for me in this technology.
One risk that can pop up is a recession. Many companies will downsize or outsource to reduce costs.
Automation is destroying a lot of jobs. Will yours be one?
It's difficult if not impossible to prepare for a Black swan event. But think about how you can best mitigate it.
Avoid Getting Hit by a Car
Every time you step into the street you face this risk. I was recently rushing to make my train and while crossing a street a car stopped and waved me to go. So I started running across but as I got past the car another car was speeding by the stopped car that I didn't see and they didn't see me. At the last possible second, I stopped short and probably saved my life.
Current Knowledge Risk
My main skill that pays the bills is being an expert at Excel. I have a risk if there are tools that allow people to do the same things I can do with Excel. For example, Tableau is being used at my company. There will always be a need to reduce spreadsheets so this is an ongoing risk I always face.
So look at the risks you face and find ways to mitigate them.
Some common ways are:
Actions to Take