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Calculated Risks

Every investor is taking a risk, whether you are backing a small fledgling business with a great idea, or playing it safe with a corporate giant like BP. Like a game of poker, you simply cannot know what the future will hold. That small business could turn out to be the next Facebook, while many people’s so-called ‘safe’ investments in BP went up in flames along with Deepwater Horizon.

Image source: Wikimedia

Many investors saw their money go up in flames with Deepwater Horizon

Why risk it?

With so much uncertainty in any investment, wouldn’t we be better off folding our poker hand and taking our chips home? Absolutely not. As Mark Zuckerberg once said, “the only strategy that is guaranteed to fail is not taking risks”. If you constantly throw in your cards, you are never going to take home the big prize pot. And if the risk you thought of taking turns out to have been a good one, you’ll get a bonus pot of regret in its place.

Steve Bezos understood this when he considered folding and walking away from his new company, Amazon. “I knew that when I was 80, I was not going to regret having tried this…I knew the one thing I might regret is not ever having tried. And I knew that would haunt me every day.”

Calculated risks

Just like a poker hand, the key to success is calculating your risk and acting accordingly. Leonard Green, lecturer at a top American school for entrepreneurs states it clearly: “The difference between risk takers and calculated risk takers is the difference between success and failure.”

Simply being a risk taker is a lazy approach. Calculating your risk involves much more work, research and due diligence, but that will nearly always pay off in the end. Card players who can work out the value of their hole cards in Texas Hold ‘em, using one of the systems devised by Phil Hellmuth or David Sklansky, or by applying the Chen Poker Formula, will be much better at taking calculated risks than poker players who haven’t put in the time to learn these systems.

Image source: wikimedia

The Sklansky tables for Texas Hold ‘em

Famous risk takers

Of course, we are constantly bombarded with stories about how the most successful people are the biggest risk takers, making you feel like you have to go all-in to make it big. However, when you look a little more closely, you’ll find that most of these ‘risk takers’ were more cautious than popular myth would have us believe.

Apple founder and chief inventor, Steve Wozniak kept his day job for a year after founding Apple with Steve Jobs, while Larry Page and Sergey Brin continued working for two years after they created Google. According to legend, Bill Gates took a huge risk by dropping out of college to start Microsoft, yet when you dig a little deeper, you’ll find that he actually took a leave of absence, calculating the risks and keeping his options open.

Image source Wikimedia

Bill Gates kept his options open

Reducing the risk

Our brains are constantly playing poker with the world around us, taking small risks every day. The risk of it raining, the risk of getting a ticket for parking in the street for just a few minutes rather than paying to use the multi-storey car park, the risk of missing the train if we stop for a coffee at the station. But each one of these is a calculated risk, and consciously or not, we work out as many variables as we can before we take them. And the same is true for successful investing.

Of course, you can never know everything, just as you can never know what cards your poker buddies have in their hand. However you can swing the odds in your favour by doing your homework, and if you do, you’ll find calculated risks are much more rewarding.

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