If you read biographies of successful people, you’ll discover something quite interesting.
All these people were or continue to be masters in removing risks from risk. In other words: They never bet everything on one card and still managed to achieve great things, while those who failed often bet everything on one card. These were the findings of the U.S. psychologist Adam Grant. In his book “Nonconformists: Why Originality Moves the World,” he describes how our planet’s most successful people implement their ideas in a safety-conscious way.
For example: Larry Page and Sergey Brin, the founders of Google, suspended their dissertation to Stanford University only when they were 100 percent sure that Google could earn money. Shortly before that, they were close to selling the business for one million dollars. Luckily for them, no one wanted it. Henry Ford, the founder of the Ford Motor Company, continued to work as Thomas Edison’s head engineer until he was able to secure the patents he developed. Only then did he resign from Edison’s employment in order to fully focus on his company.
In 1976, Steve Wozniak and Steve Jobs founded Apple but continued to work as engineers at Hewlett Packard until 1979. Before he dedicated himself full-time to writing, the award-winning bestselling author Stephen King still continued to work as a teacher, janitor, and gas station attendant for seven more years after publishing his first book. Pierre Omidvar, the founder of Ebay, continued to work for nine more months as a programer after launching Ebay. Philip Knight, the founder of Nike, sold his first pair of shoes from the trunk of his car in 1964 and continued to work as an auditor until 1969.
The Art of Balancing
The world is full of these kinds of success stories, and the people who wrote them are united in their ability to keep risks at a manageable level. Within a financial context, we’re talking about diversification or balancing out risks. This is possible by distributing your capital across various different stocks, for example. It’s helpful to think about the setup of a football team in this scenario: The defence, which consists of a goalie and a four-person backfield defence, would be composed of defensive stock from the food-, pharmaceutical-, and consumer goods industry. The midfield would also consist of a four-person chain, which would include medium-sized businesses. And the two strikers would consist of two speculative stocks from the tech and/or biotech fields.
The legendary investor Warren Buffett also made use of risk-minimising concepts early on in his investing career. He only bought businesses that were available at a significant discount to their book value (in other words, the company’s equity). For Buffett, risk minimisation consisted of trading a stock at a significant discount to its actual worth. For Buffett, this created a safety margin. Even if the stock market didn’t adjust to his desired direction in the near future, the safety margin would give him enough of a buffer to wait out the situation.
The success strategy behind these examples is: We can take on calculated risk in a certain area if we have sufficient security in another area in order to ensure that we don’t end up in financial troubles if something goes wrong. The success stories listed above show us that great success can definitely be achieved without having to put everything on one card.
About the Author:
Georg Redekop is managing partner of Redekop & Partner KG and specialist author for the magazines "Börse Online" and "€uro am Sonntag".