e.
How do you handle objections? Are you able to create win-win scenarios for everyone?
Action Step: After you have evaluated the seven skill sets required to play Money, People, Deal, organize the skill sets from strongest (scores closest to ten) to weakest (scores closest to one) and determine your strengths and weaknesses. Your top three strengths should be your greatest skills that you bring to your team and your three weaknesses should be the skills that you delegate to other team members. Remember, no one is perfect, and we can’t be excellent at all seven skill sets—it’s impossible. Focus on your strengths and delegate in the area of your weaknesses to run your business efficiently.
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Chapter 5
Risk Tolerance:
How Do You
Personally
Define Risk?
I
n life, there is no such thing as a guarantee. Everything we do always has an element of risk, even everyday actions like driving to work or
crossing the street.
I googled the definition of risk, and this definition came up from thefreedictionary.com:
risk (rsk)
n.
1. The possibility of suffering harm or loss; danger.
2. A factor, thing, element, or course involving uncertain danger; a hazard: “the usual risks of the desert: rattlesnakes, the heat, and lack of water” (Frank Clancy).
3.
a. The danger or probability of loss to an insurer.
b. The amount that an insurance company stands to lose.
4.
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a. The variability of returns from an investment.
b. The chance of nonpayment of a debt.
All of the definitions above involve some form of loss, hazard, suffering, and an element of variability, probability, or chance. What I find intriguing about risk is that every single person I meet has a different subjective definition. Often, when I am discussing risk with another investor, I will ask what their personal definition of risk is. More often than not, investors will define risk as the chance or probability that they lose on an investment. This common definition is sufficient, but I find it to be an unsophisticated definition because it does not address control.
Robert Kiyosaki, author of the Rich Dad Poor Dad series of books, says that intelligence is the ability to make distinctions. The more distinctions we can make, the more intelligent we are. For example, there are over 7,500 variations of apples in the world. When it comes to apples, I am unintelligent and can only name a few variations: Red Delicious, Granny Smith, crab apples, and Macintosh. A person who can name one hundred variations of apples is much more intelligent than I am on the subject of apples. When I hear a person’s definition of risk, I can immediately find out what their sophistication level is when it comes to business and investing.
My personal definition of risk has changed many times throughout my life. I used to believe in luck, and now I do not. All I believe in is actions performed and numbers. Life and business are a numbers game; if you can produce the volume and hit the numbers, you will succeed every time. There is no luck.
My definition of risk is an inventory of the elements that are under your control compared with an inventory of elements that are out of your control.
Ask yourself, Am I comfortable with my degree of control? If you are comfortable, then you may proceed with the risk. If you are not comfortable with the degree of control, then do not proceed.
My definition of risk has two primary distinctions that the average definition does not:
Risk Tolerance: How Do You Personally Define Risk?
47
1)
My definition of risk assesses your degree of control in a situation.
2)
My definition of risk assesses your emotions and how you feel about your level of control.
Notice that I eliminate “probability” or “chance” from my definition of risk. In my world, actions and options are more important than probability. No matter how bad a scenario gets, there are always actions to be performed and options that can be explored. Probability and chance come from past data, and may or may not apply to the present or the future.
Naturally, there are things that can happen outside of my control, and I must address and mitigate all contingencies before proceeding. Should something outside of my control become an issue, the question is: how do we recover from this position? In my world, I understand that in life and in business, plans fail, people fail, systems fail, and markets fail. And what is more important than relying on all these imperfect elements is to understand how to recover and “fix” the failures. I build failure and multiple contingency plans into my ventures and understand that failure and recovery are part of the game.
In real estate, between 5 percent and 10 percent on the balance sheet of a buy and hold will be factored in for vacancy on multifamily buildings. On a buy, fix, and sell, at least 3 percent will be factored in as a “sales discount,” meaning we cannot plan on selling at full price. Restaurants and traditional businesses will build theft into their balance sheets. Sophisticated business people understand that failure, loss, and recovery are all part of the game and factor it in to their projections and balance sheets in advance.
My definition understands that there are elements in our control and out of our control. There is no luck—only degrees of control. If you are OK with your degree of control, then proceed with the risk. Of course, there is always that moment where we must take a “leap of faith,” and no amount of due diligence can protect us from the elements out of our control.
What is most important when entering an endeavor with risk is to ask yourself, How do I escape if I want to exit? For myself, one of the reasons I love real estate is that no matter how bad the deal goes, there is always
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a large tangible asset attached to the venture that can be liquidated to recover the investor’s capital.
Again, we come back to elements under control and elements out of control. When raising capital from an investor or considering a “risky” venture, take them through the following scenarios to asses if the venture is right for them: the best case, the realistic case, the worst case, and the nightmare case.
As for myself, I have a low risk tolerance, and I always say to my capital partners, “If you are OK with the nightmare scenario, then we are OK to do business.”
At the end of the day, risk is all about emotions. If we are emotionally OK with our degree of control and how the nightmare scenario would affect our life, then we are ready for the risk. If you cannot handle the elements that are out of control and would not be able to live with the nightmare scenario, then the risk is not for you. There is a famous saying “Nothing ventured, nothing gained,” and we must all take calculated risks in our pursuit of success. The question is, after exploring a few definitions of risk, How do you personally define risk going forward?
Your