Risk is Not Always a Bad Thing

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk is an interesting animal. You can take her out, buy her flowers and even marry her. They only thing you cannot do is eliminate her. Risk, like Keith Richards' liver, cannot be eliminated.  It can only be transferred and managed. Insurance policies do not eliminate risk. They transfer it to professionals who embrace it, manage it and monetize it.

 

Warren Buffett built his fortune on risk. Take a look at the Berkshire Hathaway website (www.berkshirehathaway.com). The company spared no expense in the design of this eighth wonder of the modern world. Click on "Links to Berkshire Subsidiary Companies".  Numerous Berkshire subsidiaries are insurance or reinsurance companies.

 

They retail and wholesale risk.  Risk is their most important commodity.  Without risk, there can be no return. The eternal pursuit of risk avoidance will lead to "a life of quiet desperation and death with your song inside you" (Thoreau).

 

In 2016, David Rubenstein interviewed the Chief Executive Officer of Goldman Sachs, Lloyd Blankfein. Rubenstein asked Blankfein a question that, at first, seemed dumb. It turned out to be brilliant. He asked: “Lloyd, what is your job?” One would expect the following answer: “Well, Dave, my job is to make strategic decisions about the bank's products, customers, employees, stockholders, and goals”. Instead, he said his job was risk management. That reply blew me away. The job of the CEO of the world's most powerful and influential investment bank was risk management – not risk transfer or elimination, but management. 

 

Risk and return go hand in hand. If you want more return, you need more risk. Jeff Bezos of Amazon became the world's wealthiest person in 2018 by taking risk.  He put all his eggs in one basket.  He went all-in on a little company that sold books over the internet.  He grew it to a  $1 trillion valuation. On Sept 4th, 2018, Amazon became the second company after Apple to reach a $1 trillion market capitalization.

 

Risk is good as long as it is managed. Bezos made a calculated bet. He knew he could convert Amazon into the world's leading e-commerce site and the world's leader in cloud computing. Now he is working on making Amazon the world's leading online grocery store (through the purchase of Whole Foods) and the world's leading streaming service (competing with Netflix). Client satisfaction is his obsession. Amazon’s mission is to optimize the customer experience. Bezos suggests you "should start with the customer and work backward".

 

Most companies do the opposite – they start with the product or service and then work towards the customer.  In every Amazon internal meeting, there is the rule of one empty chair. If there are five Amazonians in the meeting, there need to be six chairs. Whom/who does this chair represent? It represents the customer. Bezos does not want decisions to be made without taking the customer into account.

 

If you start a business, and you believe in the business with all your heart, mind and soul, go all in. Commit to it and believe you will succeed. This belief, commitment, and drive will act as a risk management tool.