Understanding risk is hard. But taming risk is the ultimate ingredient in a successful investment. Before you can tame risk, know that risk is personal. Everyone has his or her own risk tolerance. For example, a simple decision about whether to bungee jump will yield different answers from different individuals, even if given the exact same conditions. One individual will show excitement to jump, while an emphatic “are you crazy?” resounds from another. Both people have the same information with which to make their decision, yet both evaluated the risk of jumping entirely different. This may sound a tad philosophical, but the point is clear: risk is an element to be reckoned with in any decision making process.
Two “must do’s” that will propel you toward a clearer understanding of risk are
to 1) commitment to change your habits of evaluation and 2) prepare yourself for a more informed, conscious, and common sense decision-making process. Accomplishing these first two items will lead you towards a more serious focus on the investment.
The following five steps can lessen poor investment decisions and lead you to many more investment successes. At first these changes will seem uncomfortable, and possibly even frustrating as you assess your investment opportunity while being pushed for a close by the sales person. Remember this is your money and your investment; change your habits to achieve greater victory while building your wealth. Once these techniques become yours, success will flow abundantly in your direction.
Become a Smart Risk-Taker.
Many people fall prey to the idea of getting rich quick. But, instead of thinking in terms of “get -rich-quick”, change your mindset to “get-rich-constantly and forever”.
The get -rich- quick psychology implies reaching a stopping point. Real wealth builders never stop building wealth. They are looking for that next rung on the ladder to keep climbing, consistently improving themselves and their financial situation.
One get rich quick game that comes to mind is gambling (that’s right, Las Vegas style). If you want to get rich quick you may view stepping up to the craps table as an opportunity to do so. In the process, you may also place bets without the full knowledge of the game, which may lead to your squandering away all of your hard earned financial resources.
However, if you are thinking in the “forever” mode, you may step up to the same table with limitations, parameters, and even a loss limit that you are willing to accept. In this new mindset, winning is not a one-shot deal; rather, something to be sustained over and over again. Losing all your resources in the first go-around will put you out of business for sure and make it difficult to recover. So change your thinking to that of a lifetime of wealth building and you are on the path to being a smart risk taker.
Love the Facts
During different times in our day, and in our life, our risk evaluation process changes. For example, when sick with the flu, under stress or just plain tired, our ability to evaluate risk is clouded. That’s why it’s important to look at all the data required to make a successful decision. Don’t make a decision on incomplete information or emotion alone. Seek out the real information and remove your feelings from the equation. Explore the questions that are holding you back from making the decision. Ask yourself:
- Do I understand the project?
- Do I have clear description of the investment requirements,
including information on debt, equity, profit potential, and exit strategy?
- Do I understand the detailed cash flow projections?
- Do I know the players involved in the project?
- Do I like the project’s competitive advantage?
- Do I believe in all the facts?
By relying on the facts, you’ll make a wise investment decision no matter how you are “feeling”.
Protect Yourself and Your Money
There are three simple things you can do to gain control of the investment opportunity.
- Take time to get it where you want it.
- Check, check and recheck the facts. Don’t rely on the information you hear from the salesperson. Perform your own due diligence. This may seem time consuming at first, but it will result in huge profits later.
- Seek out the terms that are right for you. But, remember to be flexible in your approach, and negotiate to win. Placing a “take it or leave it” offer on the table will usually result in no deal. If you cannot reach a comfort level, remember, you can always walk away and return to the negotiation table later.
So be smart and protect yourself and your money by becoming intimate with your prospective investment before you invest. By doing so, you’re sure to achieve greater returns.
Be the Investor
If you can’t be the investor because of lack of funds, at least think like the investor. How do I think like an investor, you ask? This type of thinking will generate more sales for you and more success in whatever your business. Employing this strategy will give you the respect of the investor. So, if you can’t be the investor, here’s how to think the role:
- Be a longer term thinker
- Use objective analysis
- Become investment return oriented
If your short on personal investment funds and cannot invest, at least think as if it were your money on the line. Ask yourself, “Would I put my own money into this project?” If your answer is no, then you must answer “why.” Anything short of a positive answer could have you heading down the path to failure. By “being the investor” your understanding of risk will be heightened, and you will gain more positive investment results.
What do They Got That I Ain’t Got?
Evaluate, evaluate, evaluate. Look at your potential investment and ask what makes it good and what makes it bad. Some places to start your hunt are:
- Existing competition
- Missing elements
- Alternative investments
- Motivation of the salesperson
The more evaluation and questioning you do, the more information you will uncover. The more hard facts you have, the more control you will gain over risk.
Putting the Leash on Risk
Achieving consistent success in your investments requires objective evaluation and systematic self-control. Otherwise your long run won’t be so long as even the most proficient investors will fail to yield positive results without following these rules. So tame those risks by mastering the five techniques described above. When you do, victory
will be yours.
Al Auger is an expert in commercial real estate developing, investing, and financing. He consults with companies and individuals to help them locate, finance, permit and develop commercial properties. He is the author of Pure Profits: Pinpoint Winning Properties, Think Like an Investor and Succeed in Commercial Real Estate. He can be reached at (407) 804-9235 or at www.alauger.com.