When we look back at a bad business decision by us or someone else, one common criticism is, “They were too risk-averse.” This is inaccurate. Everyone is risk-averse. Personally, having been through over 50 life-threatening scenarios, having an attraction to high-risk sports, and having made most of the money in my career from my a modest hobby of trading stocks, I know that I am more risk-averse now than ever, and I am still taking a lot of risks.
What’s different is whether people assess and mitigate risks with vigilance versus ignore risks or assume the risks do not apply to them. Everything we do has risks. Growing up in Colorado, I loved to ski and spend time in the backcountry. In every mountain town, there is a t-shirt store with an obnoxious t-shirt listing all the activities that could kill you, ending with sitting on the couch. However, I learned about risks before I could read.
Learning to live with risks
I have life-threatening food allergies (nuts) and, when I was young, had a rare combination of diseases that would have killed if it were not for an experimental drug. So by the time I was 8, I probably had a dozen near-death experiences: people were not as careful with food allergies in the 1990s. It was around this age that I learn my best risk mitigation tactic: treating my allergic reactions with Benadryl and epinephrine. Asking if things had nuts didn’t always work. At the time, some parents ignored food allergies to accommodate for being a picky eater. When one of my pre-school friends brought in snacks, his mom made me a special cupcake because she knew I didn’t care for the chocolate cupcakes she made: the only problem was the special cupcake was a banana nut muffin.
Even now, I am weary when I go out. Restaurants now are so terrified of people with food allergies, I am constantly told by worried wait staff, “our kitchen is a facility that processes nuts.” I brace myself, and admit, “That’s fine. So is my mom’s kitchen.” That’s the truth too. My parents are great cooks and love to try fancy recipes. They have gotten so excited about what they made that they have fed me nuts, multiple times. It’s okay. The point is I couldn’t live the life I wanted to live — going to nice restaurants, eating with people with sophisticated tastes, or shopping at the grocery store — without acknowledging and mitigating risks with a foolproof strategy.
Growing up in Colorado, I grew to love the mountains. This was an unnatural evolution. When I was little, I loved staying inside playing with Legos. It wasn’t until high school, being forced to be athletic and play sports for over a decade, that I embraced being an athlete and loving the outdoors. However, this really became an undying love. Today, I know that any day of the week for $10 in gas, I can wake up early, hit the trail, and see a sight more beautiful than I can imagine. I am so fortunate that having a unique, once in a lifetime experience is part of my everyday life.
“There are only three sports: bullfighting, motor racing, and mountaineering; all the rest are merely games.”— Ernest Hemingway
However, the mountains are deadly. Even the “easy” fourteeners — mountains over 14,000 feet — have casualties. Hemingway recognized mountaineering as a true sport because it was one of the few activities where your decisions could mean life or death. So you need to learn how to mitigate risks, and then you need to practice. Instead of paying thousands for a once in a lifetime experience, like Fyre festival (couldn’t resist), I have to pay for these once in a lifetime experiences with sweat equity. Hours of training, weeks of practice, and years of observation. Each day getting better at assessing and mitigating risks. There is a choice: will you pay a guide to give you the luxury of assuming that risk mitigation is taken care of for you or will you own the risks that you take every day. As in the last section, risks happen every day. The better that you get at assessing and mitigating risk, the more spectacular your day.
How I profited from risk
Disclaimer: I am not a professional. This is not professional advice. It is merely a recollection of one trade. Do not interpret this as investment advice. I intentionally call my hobby trading because there is a large component of luck, and I do not want to mislead people to think I am a savvy investor who has some advice to follow.
In college, I learned about the stock market and trading. A family friend was a day trader on the NYMEX, and he mentored me. I studied the markets more than my own classwork. I read Barron’s cover-to-cover for a year. Spent a summer reading Market Wizards, Reminiscence of a Stock Operator, Technical Analysis of Stock Trends, and Elliot Wave Principle. Tested all the theories I learned by tracking paper trades. Started a multi-year debate with a few economics professors on the validity of the efficient market hypothesis after reading A Random Walk Down Wall Street: my professors eventually conceded that I had a unique theory when I argued that the assumption of market convergence assumed continuity, where we know that transactions are discrete and non-continuous, so assuming absolute convergence was a fallacy.
After testing paper trades, I started a small portfolio in college. My philosophy for the portfolio, in the midst of my debate with my professors, “Who cares about theory? I just needed to not lose.” So I started to trade very slowly. It took me a good hour to figure out how to buy a stock on ETrade. I was very fickle. I bought a lot of tobacco and defense stocks. I would have sleepless nights, even while earning an 8% dividend. I knew I needed to add more risk, but I was so afraid of loss. It took years of observation to get over this.
Fast forward to my first big trade in 2011. Three years after opening my portfolio. I was a management consultant working on an insurance client for a short-term project. While getting to know my teammates, I let out that I dabbled in the markets (knowing, but not saying that my portfolio appreciated ~60% over the last 3 years). Suddenly, the whole team erupted about Bank of America! I never traded financial service companies because I valued a bank in an internship in the past and was uncomfortable with the dividend-based DCF model I used. However, everyone was going nuts on how Bank of America could go below $5 again. So I started to watch the stock closely.
On Monday, December 19, 2011, BAC went below $5! Okay, time to test the theories I practiced for years on if this was the bottom. I was looking for a drastic positive reaction followed by a minor reaction, then the next response would be the trend. This happened like clockwork. By the end of the week, BAC was up 5%. The next Monday, the stock dropped two consecutive days. I bought on the following reaction on December 30, 2011. In a month, I was up over 30%: the same as half my appreciation from three years of work.
What made this trade successful was how much leverage I had in the trade: I put everything I had into it, about $6,000. I realized that this trade the moment was where years of studying could pay off. I had to ask myself, “What if I lost everything?” I realized if I saved a lot the next year, I could rebuild my portfolio. Testing several years of work was worth the risk of having to rebuild for a year. I also knew volatility was huge, and there could be a huge upside. Then I reconsidered the worst-case scenario. The worst that would happen was something terrible, like the Accenture flash crash in 2009, where the SEC canceled all the trades. I knew that I had to watch the stock every day, but I had to simultaneously believe in myself and not fear cutting a loss. I don’t think I slept at all the month of December.
Ultimately, December 31, 2011, changed my life in the most positive way possible. Earning an investment income allowed me to take risks in my own career with navigating startups. It also bought me a house and a car. When I came back from the holidays in January 2012, I asked my team, “Did anyone buy Bank of America?” No one did. They said it was too risky. Some people would say this is too risk-averse. I disagree. My risk tolerance never changed. I would argue they did not properly assess and mitigate the risks of chasing a life-changing opportunity.
We are all risk-averse
In startups, founders go in with the intention of legendary results. This is often misinterpreted to just go big. However, just going big is not the full picture. In order to go big, there needs to be a structure to mitigate risks. We are all risk-averse: no one living plays the St. Petersburg Paradox with their life. It’s not until you hit scale, that the organization can seemingly act risk-neutral. So really building a habit of recognizing risks and developing strategies to mitigate risks makes the risk of going big palatable.
Risk mitigation is an essential skill of legends. Legends can go beyond what has been done before. They have the drive and vision to go beyond conception. However, to reaches these heights, they need to become an expert in recognizing and mitigating risks, or they won’t be able to last. Lasting is what makes the legend a legend.