Recession Driven Riches. Heru Nekhet

with annualized returns of over 40% (after fees) in its first years, on August 21, 1998, Long Term Capital Management lost in a single day $550 million. In total it lost $4.6 billion in less than four months following the Russian financial crisis.

      The risk models on which LTCM based their analysis were developed on assumptions that the market would always respond the way it did in the past. They did not factor the potential of a drastic occurrence in the market like Russia defaulting on its bond payments because it had never occurred before. However, knowing that Russia had faced continued financial crisis throughout the 1990s, Russia was certainly capable of defaulting.

      In such a fast paced market, it is easy to forgo the proper steps to minimize risk. However, failure to do so is a recipe for disaster. The risk you face is inversely proportional to the relevant preparation you do. Thorough due diligence is critical. You must know, not guess, what risks you face, the possible outcomes if they come to fruition and how to offset those risks before you take action. Create contingencies in advance of problems.

      It is important in reducing risk that you constantly analyze and reevaluate all deals that you are currently in. Analyze the numbers meticulously. Once it is determined that a deal is no longer profitable, do what is necessary to get out of that deal as fast as possible. You can’t make a bad deal good.

      Risk Assessment

      The first method for minimizing risk is to become market-centric. If you are considering opening a business, only provide what your target market wants and it significantly reduces the risk of failure. If you are considering investing, the cardinal rule is you should never invest in anything you don’t understand.

      Before fully committing to any deal, business or investment, make sure you do the math. The numbers don’t lie. You will have a good idea of potential profit just by analyzing the numbers properly. If the numbers appear profitable, go to the next step which is to write a detailed business plan.

      Even with a well written business plan, it is important to test your plan on a small target market or a small investment first. In business, it’s a small offering to a select target market before going forward with a full production run. In real estate it could be doing a lease with an option to buy instead of a traditional purchase. In stock investing it could be purchasing options instead of the actual stock. The rule is test small lose small, test big lose big. If the test proves your plan to be effective, only then should you fully rollout the plan.

      Do your due diligence on anybody you plan to do business with. If you discover that the person or company you want to do business with has questionable business dealings with others do not do business with them. You can’t do good deals with bad people. You will not outsmart them and they will not treat you different than any body else. Bad people eventually get everybody they do business with.

      Check local and federal regulations to ensure that the venture you get into isn’t so heavily regulated that it becomes too difficult or too costly to be profitable.

      After thoroughly, researching, planning and testing ask yourself this key question: “Can I live with the consequences if this doesn’t work?” If the answer is no, it does not matter how good the odds seem of success, if you cannot handle the outcome of the deal if it fails, then let that opportunity pass.