No matter how the current downturn unfolds over the next few quarters, one thing is certain. We have to re-learn the art of taking risks in a highly de-leveraged world.
What does this mean for the average CEO? Look at it this way. Imagine that from today all your credit cards are taken away from you and you are forced to live life the old fashioned way - on cash. How would this change your behaviors and, most importantly, your view of risk?
For those readers who are as old as I am, you might remember a time before the proliferation of credit cards. We used to wait for the monthly pay-check, make a list of purchases we must make (consumables, mostly) and then make a separate list of 'discretionary spend' - stuff we've always wanted to buy, but couldn't afford. We would then painstakingly prioritize the second one and arrive at a very short list of items we felt we could 'afford' that month. Say, we decide that a sound system makes the cut. We would then go about studying the various options in the market, talk to friends at length about the pros and cons of each and then go out and make the purchase - in cash. As we handed out the money to the store keeper, we would feel a serious level of anxiety and dissonance (called post purchase dissonance by marketing people in those days).
Then came the age of credit and we forgot most of the steps and jumped straight from urge to splurge. The same holds true for the corporate world - investing on credit was never quite the same as investing in cash.
Well, looks like things have changed a fair bit around here. Leverage has suddenly become a four letter word and investors are returning to value today as opposed to growth tomorrow. How on earth do you make a risky move in these markets.
Here's my list of 4 things that we need to do to embrace risk in the new world
Understand the difference between good and bad risk. Good risk is the risk you take after you make lists, prioritize heavily, do the due dilligence, talk to people and seek out best value. Without good risk, you will simply not be successful in business or in life.
Don't indulge in anything that you don't understand. Even Warren Buffet owns up to the fact that he would not put money in a deal that wasn't crystal clear to him. So, trust only yourself, not the smart-talking financial advisor. Your own limited intelligence is a wonderful filter - use it.
Feel the dissonance, its good for you. The dissonance you feel when you have to pay for things in cash is a natural and powerful force that makes you build your own sixth sense about value. Running away from post purchase dissonance is a step towards the lala land of avoidance. So, whether you're buying a BMW for yourself or an asset for your business, embrace PPD.
Learn from your mum. Mothers have an amazing ability to scope out value. Over generations, mums have done the little things that constitute the art of 'buying into value'. That huge bottle of shampoo that you needed both hands to lift is an important lesson from your mum. If you are getting cheaper assets today at bargain prices that you can consume well into the future, have the sense to invest now. Conversely, conserve cash if you believe that the swanky jacket you saw in Saks (or Saks itself) will go into sale in a couple of months.
Hopefully, if we all do our bit to bring risky back ... we'll end up saving the world ...now that's a risk worth taking.
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4 comments:
Well written!
Excellent Article ! Risk is must in every one's life, without taking risk no one can be successful. Hopefully this article is useful Thanks!
Great post by you.....it very helpful for anyone in life.
Great one....we should not take risk in life....
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