Last week we touched on how the best performing companies during frightening times hoard cash and bound risk. This week we’ll dive into how bounding risk helps companies not only survive but thrive in chaotic and unstable environments.
In my own experience and from what I’ve observed over the years, it’s widely held among the most capable and accomplished project managers that the difference between successful projects—within budget and on time—and projects that are late and over spent comes down to properly mitigating risks. But in order to mitigate the negative impacts of risks realized, you need to know how to identify and manage them. Standout organizations adhere to a type of productive paranoia that allow them to do just that—seeing all sorts of risks, constantly imagining all the things that could possibly go wrong. And with fanatic discipline, they take all of these apocalyptic scenarios and prepare for their arrival. And if only some or none of the events actually happen, then the organization and its people are just that much more prepared to pull ahead of the competition. The built up margin of safety compounds and can be reallocated toward breakthrough growth.
The productively paranoid do 3 things better than most when it comes to how they manage risk. We’ll outline them below referring to how David Breashears, who successfully led his IMAX crew to the summit of Everest, applied each of them during their climb as told by Jim Collins in Great By Choice.
First, they thoughtfully avoid fatal risks that can kill the enterprise. Rather than holding everyone back and risking getting caught in the dark, Breashears made the decision to not let one of his team member’s, who was falling behind, make the final attempt to the summit. Though a very tough decision, it was the right one. Another team on the mountain, led by Rob Hall, had a similar situation with a team member but decided instead to wait and allow him to make the attempt. Ultimately, that decision led to several fatalities on the mountain.
Second, they stay away from asymmetric or lopsided risk—where the cost heavily outweighs any potential upside or vice-versa. Hall only brought enough oxygen for one summit bid to avoid the burden of carrying more gear; whereas Breashears and his team carried enough for multiple attempts, because in their minds, the downside cost of not doing so could be deadly.
And finally they steer clear of uncontrollable risk by minimizing their exposure to forces or events that they cannot manage or control. In the investing world these are known as black swan events. Breashears saw how crowded the mountain could get with the number of climbers just behind them. So they decided to head back down and make another attempt when the crowds cleared, giving the IMAX crew a clean summit shot on their next bid. His decision to turnaround and avoid that potential uncontrollable risk gave the team another opportunity to accomplish their goal and most critically they were able to avoid that fatal storm high on the mountain. In fact, the IMAX crew’s preparedness enabled them to help aid in rescue efforts ahead of their next bid for the summit.
Investing guru, Burton Malkiel and author of the renowned investing book “A Random Walk Down Wall Street”, has written about how small company stocks have statistically outperformed large ones in the long run. Since 1926, small companies have seen 2% greater returns over larger companies. With this added return comes additional risk. It is known that smaller companies are inherently more risky. The interesting duality here is that the best public companies, masters at managing risk that have consistently outperformed their peers and the broader market for a 15+ years, all started out as small vulnerable companies in turbulent, fast-moving environments—riskier investments—before ascending to greatness, giving their investors remarkable returns on their long-term investments. This is the key reason why our R&D efforts at UVstocks.io are focused on small cap indexes like the Russell 2000 where the next generation of great companies are yet to be discovered—the veritable diamonds in the rough.
“Take calculated risks. That is quite different from being rash” — George S. Patton
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P.S. I'm sharing some investment information, but it's important to remember that what I'm providing is for informational purposes only and should not be construed as financial advice.
Happy Investing,
John
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