Bankers and financial professionals try to measure risk and returns using all kinds of academic and empirical bases - NPVs, IRRs, weighted average cost of capital, etc.
I introduce to you a new way of looking at risk: How much are you willing to lose?
Say you pay $10 to flip a coin. Heads: you get double the amount ($20), Tails: you walk away empty-handed. Now consider that it'll now cost you $1,000,000 to do this. Would you still take the chance?
Mathematical models involving the calculation of risk unfortunately omits the element of human emotion. For many investment decisions in Asia and other emerging markets, emotion is often a huge part of what drives the deal. This is probably the single biggest reason why your complex DCF and bullet-proof-calculated discount rates don't weigh very much in this part of the world.
Mispriced deals exist all the time because the stakeholders can't accept what they possibly could stand to lose.
Consider a scenario in which a business owner will never relinquish a partial stake in the company to an incoming buyer who has plans to break up the assets and change its corporate direction. Or a seller signing off on an under-valued transaction just to close the deal because he/she can't live with the possibility that there might not be another better offer on the table.
All risk models break down when you have everything (or nothing) to lose. Managing it gets easier when you are more diversified and don't go to the negotiating table with an all-or-nothing mentality.
The next time you are presented with an opportunity that offers a certain rate of return, think: what are you prepared to lose?
“Rome wasn’t built in a day but they were laying bricks every hour.”
"The problem is that it can be really easy to overestimate the importance of building your Roman empire and underestimate the importance of laying another brick. It’s just another brick. Why worry about it? Much better to think about the dream of Rome. Right?
Actually Rome is just the result, the bricks are the system. The system is greater than the goal. Focusing on your habits is more important than worrying about your outcomes. Of course, there’s nothing necessarily impressive about laying a brick. It’s not a fantastic amount of work. It’s not a grand feat of strength or stamina or intelligence. Nobody is going to applaud you for it.
But laying a brick every day, year after year? That’s how you build an empire."
[Excerpt from James Clear]
I've seen too many people attempt to be "heroes" in their organisations. They seek the recognition, adulation, whatever you call it. But a five-minute fame is short-lived. At the end of the day, it is about whether you and the company can bring home the bacon. That's all that matters.
In a fast moving and digital world that seeks instant gratification, patience and foresight, are two highly underrated attributes amongst the young and inexperienced.
That feeling of crumbling...
Here are some of the things that i had learned from these experiences:
1) Despair and greed (both) drive people to do irrational things.
Being in financial distress tends to force you into doing impulsive and irrational things. However, stumbling into a lot of money (or profits) (i.e. sudden-wealth syndrome) can also be equally destructive. It leads to misplaced optimism, self-fulfilling arrogance, and impairs one’s ability to make sound decisions, which then leads back to financial distress. Success is truly the greatest imposter and you are only as free as your last trade.
2) Blocking out noise and opinions.
Investing is a highly personal thing. Most people I meet so far tend to be very prescriptive about what they invest in i.e. they believe that what they say is the ‘holy grail’ based on their past experience and want to tell you what they know best. At other times, it is just pure ego doing the talking. I learned that disagreeing with them doesn’t work well. 99% of the time, it just pays more to nod and agree.
After all, what's the point of proving you are right if you do not get to keep your money?
I think sometimes people forget that:
"What applies to you does not apply to me. Ipso facto, what works for you does not necessarily work for me."
3) Diversification is not about putting money across 50 different stocks.
Diversification is not about beating the probability curve and putting capital to work across 50 different businesses. It is about setting aside an appropriate amount of cash, and with the deployed capital, to selectively invest only in the businesses which you understand.
The quality of an investment portfolio - whether it comprises tradable stocks or shareholdings in private businesses - should never be judged purely on their ‘rockstars’. Media has a tendency to over-hype on successes than failure (cos' who wants to be associated with a cynic?). Be realistic and accepting that a portfolio will inevitably have winners and losers. In my opinion, people like to judge their “stock-picking” capabilities on the winners, and undermine too much the missteps they make on their losers.
Collective performance of the portfolio is ultimately most important. Diversification is about risk management. And risk management is not about eliminating the bad eggs, it is about reducing the number of bad decisions, over time.
4) Make data-driven decisions.
Information is a privilege especially in a digital age today. Anyone providing you with privileged information is either trying to show off, or has something to gain from doing so. Constantly keeping this in mind will enable you to make more data-driven evaluations and eventually the right decisions.
The worst thing is ever do when it comes to investing is to blindly follow the lead of someone else.
5) Money is made in the sitting.
Humans are gamblers at heart. There is money to be made from gambling but we are also excited by its thrill - the thrill of knowing that loads of money can be made overnight in a few minutes. Somehow, we seek that thrill and the world today has also grown so used to instant gratification. The reality is that no one grows rich overnight. You are a winner if you had been able to leave the gambling table sober with a pocket of slightly more cash than when you came in.
Reality is: Stock markets exist to create avenues and platforms for companies to raise capital, not for investors to grow rich overnight.
I recall once a threatening trader abusing a terrified accountant with impunity, telling him things such as 'I am busying earning money to pay your salary' (insinuating that accounting didn't add to the bottom line of the firm). But no problem, the people you meet when riding high are also the those you meet when riding low, and I saw the fellow getting some (more subtle) abuse from the same accountant before he got fired, as he eventually ran out of luck. You are free - but only as free as your last trade.
- excerpt from the book "Skin in the Game", by Nassim Taleb