“Risk comes from not knowing what you’re doing”
Warren Buffet
We all recognize there are risks we take each and every day. Some of the risks we take are random, while others are more calculated. The level of exposure to risk can also vary widely. The unfavorable outcomes we face in life range from minor pinched fingers all the way through to life changing traffic accidents and family tragedies. Financially it can be personal boom or bust in our savings plans.
There are many truly random risks that exist around us. We experience them in surprisingly random ways. Stories of being hit by a stray bullet while walking down the street may be extreme but it does happen. Picking up a nail in our car tire and getting a flat is a bit of a random risk. Examples of less “random” risk could include being in a high crime area at the wrong time of the day. The random chance of being struck by a stray bullet is going to be much higher in a place where more shots are fired without consideration for others area. We often spread risk in our financial assets by investing in more than one investment. Even diversifying between asset classes like stocks, bonds, real estate or gold spread the risk out
An improperly designed or maintained vehicle often poses higher risk to its passengers. Think about spilling oil on the ground or allowing oil to leak onto a vehicles engine where it can be prone to bursting into flames. If we knew the oil was leaking, we could fix the leak or clean up the oil to prevent a potential safety incident. Ignored, we only have hope that bad things don’t come our way. Similar to our investing strategy, if we do not spend the time to learn about our investing strategies, we will be susceptible to poor returns, no returns or even financial loss.
So what is the point? These are all obvious statements, right? Similar to not touching a hot stove or unnecessarily pointing a gun at someone, these poorly thought out behaviors lead to a risk of a bad outcome. It does sound rather simple, but we continuously remind ourselves with common phrases like “think before you act” and “look out for those around you.” It seems it is not second nature. So how do we actually think about investing. The common outcome is to enter the market on a rising tide, when the momentum has neared it’s peak and then subject ourselves to the pain of the falling market without exiting and allowing our fortunes to dwindle, in the hopes of a rebound…..until the pain is to great that we get out just before it starts to climb again.
In a business sense, the conversation about risk usually is tied to the bottom line of a company. What is the financial impact in making good and bad choices by those involved in the company’s business. The fundamental management of risk for investors usually involves insurance. Property insurance, life insurance, malpractice insurance and, of course, product liability insurance. For investors, it could be risk management with insurance against bond defaults and options to protect stocks. Typically we find US Gov’t bonds to be the least risky, for now at least. We all know that our ability to control loss claims comes from the decisions people make. These include employees, company leaders and customers of the products purchased from businesses. Decisions we make in how we build homes impact the asset’s stability in natural disasters. If we are going to purchase a business, we want to have the best assurance that profitability on our investment is possible. In order to facilitate the opportunity we MUST know about and understand the business. The sharper we are about the business, the better we can plan for the day to day expectations placed on the business. When we can forecast income and expenses, we can get razor sharp in setting budgets, set a purchase price and identifying the right levers to pull to improve.
Warrant Buffet’s comment that “Risk comes from not knowing what you’re doing” is very true. If we train and educate ourselves we will have the best shot at success. This is certainly the expectation and purpose with higher education for a variety of occupations. Having a doctor with the appropriate training certainly reduces the risk associated with a planned surgery. Running or managing a business has similar expectations. If we are not good at it, and it has a critical impact on our business’ bottom line. Trying to be an accountant and not understanding cashflow could be devastating as your bank account goes into the red. Spotting and resolving these situations takes a balanced combination of knowledge and experience.
As we continue to grow the Star branded services from a fledgling set of companies to one with over a million dollars in revenue, we have started to focus on key areas of the business where investing in risk mitigation has its most immediate returns. Positioning experts in areas like accounting, maintenance, property management and project management will help provide the right insights and actions to stave off problems and ensure successful and consistent results. Avoiding the most basic business failures related to profitability and cashflow remain a constant, but by supporting ongoing training and education we will stay well clear of those issues. The training and knowledge, like Warren Buffets quote mentions, keeps us from having to walk on the edge of a cliff while running a successful business. Risk remains around us every day, the challenges we face are continuously changing and we remain on the journey to learn and push risk away from our daily activities.
As you personally move forward each and every day, what knowledge and skills are you developing that will help you mitigate risk? How will you improve your financial future? For our investors, we strive to get better at process, decision making and business consistency that will continue to provide improving returns for them. We strive for sound integrity in how we run and manage the storage business and our residential rental business. We seek to exceed expectations for financial return at Star Capital Management and we invest alongside our investors to maintain alignment of goals.
What we do to educate ourselves and protect from excessive risk does impact our lives and our bottom line!