Friday, June 06, 2008

Managing Financial / Investment Risks

You don't get successful just because you take risks. You get successful because of your passion for the work, the quality of your work, your focus to be successful and your attention to detail!

Greater risk = Greater reward……..right?
Well in my brief experience and study, I believe that’s true to a certain extent but there needs to be a clarification. Risk as understood by an entrepreneur or investor should imply opportunity and must relate to something he sees that no one else (or only a few) can see. His ability to discern more than others has to be a bye-product of insight, study, research, information and experience. Very importantly, he has to have learnt from the mistakes of others and must access and harness the wisdom of past greats (such as Warren Buffet, George Soros, Rupert Murdoch, Tayo Bamiduro…..e.t.c.)

I have made flawed investment decisions and demonstrated poor financial judgment in the recent past, despite all the information at my fingertips. This is where the concept of execution comes in. Knowledge is of little value except it’s applied and acted upon. We have reached a point in human evolution where there is such proliferation of knowledge and information that you could access almost any data or information you need in a split second. What is however lacking is the conviction and will to act on what we have learnt.

The next keywords are Greed and Impatience. Why should a person desire to exploit an opportunity (should we call it opportunity or THIEFotunity) that promises 10000000% ROI (return on investment) on initial capital in just 7 days? The simple answer is greed!
True enduring wealth is built brick by brick, and is based on genuine ideas (though many times stolen, but better to steal ideas than to steal real money/assets!).
More importantly, enduring wealth is a function of how much wealth (in terms of a unique value proposition and problem solving) has been exchanged for the resultant liquid assets and monetary rewards.

John Bogle (Founder of the Vanguard Group and named one of the investment industry’s four "Giants of the 20th Century" by Fortune magazine in 1999) remarked that hyper-creativity in inventing financial instruments (such as Consolidated Debt Obligations) constituted building blocks for the recent near-recession and global liquidity crisis. In-short, people get so greedy they invent ‘new-ways’ of draining everything out of little, and adding little value back. The consequences are always inevitable!

The motive of true investors should be to finance/support the offering of a unique experience and value-proposition to clients/customers in order to deservedly profit from such activity. Real and quality investors always pursue win-win scenarios where the sum of the whole is always greater than the individual units. They pursue what economists call Pareto-Efficiency (i.e. a condition where a party cannot further extract value out of a system without negatively impacting the other parties). Prof Colin Gilligan remarked at a recent British Council Seminar titled The New Rules of Strategic Marketting that you've just got to delight and excite customers. People want to spend, but they seek value-for-money.

Here’s an excerpt I recently came across. It’s a Book review (Why We Want You to Be Rich – Robert Kiyosaki and Donald Trump) by Matthew Paulson.
It is informing and there are points to take out. I’m sure you’ll enjoy it.

Donald Trump and Robert Kiyosaki's New Book is Not Looking Out for You!
Why would anyone read a book about how to handle money by two people who have both filed bankruptcy? Only people who do so poorly with money have to throw their hands up in the air and admit defeat that they cannot pay all of their bills file bankruptcy. Now, there are some perfectly legitimate reasons to file bankruptcy, such as a huge medical debt which could never possibly be repaid, but when people file bankruptcy because their business fails or they spent too much money, chances are you should not be soliciting financial advice from them.

Financial author, Robert Kiyosaki and Donald Trump, CEO of the Trump Organization, have recently written a new book about how you should handle your money. The book, entitled "Why We Want You To Be Rich" is Kiyosaki and Trump's attempt to get together to write a book about their "financial secrets." In the book, they offer specific advice on how to invest money and become very wealthy. It sounds great to begin with, but there's a problem.
Both Kiyosaki and Trump's corporations have filed bankruptcy. Why anyone would accept financial advice from them defies all logic and reason.

Taking financial advice from them would be like taking dieting advice from the 400 pound guy who lives down the street. It's just not smart! If you're looking for financial advice on how to become very wealthy, do what millionaires do! There's a very well written book by Thomas Stanley called The Millionaire Next Door, which will tell you what millionaires do and how their behavior makes them wealthy. The book tells us that millionaires save large percentages of their money, invest it wisely, and spend very little.

Trump and Kiyosaki have another message. They tell us that they have a new way of thinking, which involves defying traditional investment logic. They tell us not to invest in mutual funds and work hard "because that does not make you rich." They say that investing in mutual funds is playing it safe, and it won't make you rich.
They tell us that "safe is the enemy of rich." There is some truth to this, the greater the risk, often the greater potential gain, but they get it wrong because they ignore risk all together-that's why they filed bankruptcy!

When you let too much risk into your life you are asking for trouble. You could put all of your money on black in Vegas, but not many financial counselors will tell you to do that, because there's too much risk!
You don't get successful just because you take risk. You get successful because of your passion for the work, the quality of your work, your focus to be successful and your attention to detail. Kiyosaki seems to believe that the only thing you need to be rich is the desire to be rich, and this simply is not true!

This book really does not offer anything new. It's simply a rehash of Kiyosaki's previous books and Trump's view on personal finance, which no one should take seriously. There are plenty of much better books from people who actually have money and have held onto it for a long period of time that will enable to you become very wealthy, but it requires hard work, dedication, and much more. The Millionaire Next Door by Thomas Stanley and The Total Money Makeover by Dave Ramsey would be a good place to start for those who really want to do what it takes to be rich.