Thursday, July 28, 2005

Risks vs. Rewards

After my posting about stock options, I thought it might be interesting to cover my opinion on risk vs. reward. I believe I mentioned that I ended up buying the stock in my first start-up, not necessarily because it seemed like a good deal, but because I would kick myself if they did well, and I was not able to partake in this part of the ride.

In finance courses I took in school, the term used was Risk Adverse. The question, "How risk adverse are you?" The prof would often ask "Would you ride a motorcycle without a helmet?"...I understand the connection to risk, but not so much the connection to money. But this is something that people should think about. Therefore, anyone reading this, should have an understanding of my tolerance of risk.

The fact that I was willing to join a start-up, before they were in vogue, should give you a pretty good understanding that I consider myself invincible. I, much like most 20 something men believe that nothing can hurt me. Unlike most 20 something men, I am no longer 20 something, in fact, I am closer to 40 something, but I digress. Invincibility leads one to do stupid things such as take undue risk. I am one of these people.

Much of the money that I have made in the past has been made by taking risks that most people are too intelligent to take. Now I should temper that by adding, that intelligent is probably not the right word. What I really mean is that they can not easily find the upside, and therefore they do not bother investigating how something like this might work, and how to limit the liability.

These are things I like to do. I like to look at something and think "How can I make this work for me?" If I am flipping the channels on TV and one of Carlton Sheets informercials comes on, I will watch it. I am not planning on buying his program, but I believe there is something to it. I am sure that Mr. Sheets makes more money selling those cassettes than he does on real estate, but his ideas have some merit. I do not believe that all of these get rich quick schemes have zero basis, but I do believe that 99.9934313 people who try them will fail. That is not the risk I want to take.

No, my risks have been in the form of small amounts of money, and sweat equity. These two things do not cost me much. In order to lessen the risk to my loved ones, I continue to work at at places that can pay me a regular paycheck. That is to say, my risks are calculated. I figure out the worst thing that can happen, and I run from there.

An example, back before I got married, I started tinkering in the pinksheets. These are stocks that are traded on a little known exchange. They are typically very small companies that have very little chance of success. There are a few monsters there such as RR Donelly and Toshiba, but they are there for different reasons that the majority of the companies on "the pinks". Most companies on the pinks are there because it is a board that does not require any reporting. Companies that can not make it on the OTC, AMEX, Nasdaq, or the NYSE look to the pinksheets to generate revenue. There is a tremendous amount of risk involved in investing in these companies. One does not have much to work with...basically a website, perhaps an Investor Relations folder, and that is about it. Due to the risk, the returns CAN be very high. I followed on stock from $0.06 on up to $13.00 before I sold it on its way down at $7.00. A huge return by any standards. That stock is once again trading at $0.06 by the way.

Anyway, the point is, this is a very risky platform. In order to mitigate the amount of risk that I have to endure, I only invest a limited amount of money. I invest $1000.00 or less. If everything goes to hell in a hand basket, I have only lost $1000.00. While that hurts, it is not going to prevent anyone in my household from eating.

If I were to invest more money, say $50,000.00, and I were to lose it, again, probably everyone would eat, but everyone would be me as my wife would mostlikely take my son and go some place SANE. That is more risk that I want to take.

So, my point being, I am happy to embrace risk under the right circumstances. Those circumstances have a habit of changing though, and it is good to have an exist plan...



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5:47 AM  

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