So said Fran Tarkenton, the legendary quarterback who held many records when he retired in 1978 and was elected to both the Pro Football and College Football Halls of Fame. Tarkenton always played as if he were unafraid to lose, scrambling this way and that, extending the play and then throwing deep, taking many risks along the way, and eventually being rewarded with 342 touchdown passes.
Similarly, when it comes to your money, “winning” might mean being unafraid to lose. Your greatest possible financial gains could come when you take risks that would make others question it. Even though taking risks involves a lot of instinct and gut feeling, there is a bit of a science to it as well. Here are a few tips on taking educated risks that could lead to great profits:
1. Do Your Homework
A risk can be defined as a move that has a high probability of failure, but not every financial move is seen as a risk to every player. That is, what might be a risk to someone else would not be a risk to you if you have done the necessary research to learn that your new investment actually has a high probability of success.
That abandoned store on the corner downtown that no one has been able to make profitable over the years? Perhaps you have done your homework on the changing demographics of your town and you know with certainty that your town is primed for a Starbucks franchise. To others, your purchase of the building looks like a huge risk because they have not researched the possibilities for business in that location. To you, however, the probability of Starbucks thriving on that corner is so high that your risk factor is actually low.
Many good risks that pay off later were based on sound data, not mysterious hunches or visits by soothsayers.
2. Draw up a Budget
Taking a financial risk should not mean saying, “I’m all in for whatever is required. Just tell me!” In very rare instances (you discover oil on your friend’s farm) should you make a move without figuring out what it will ultimately cost. In most cases, you need to draw up a budget and save for a time when you are sure that a risk will pay off.
This risky-day saving strategy will position you to strike quickly when the right opportunity arrives. Most financial counselors would tell you to have emergency savings and retirement taken care of before starting a risky-day fund. You can call this new account your risk budget.
3. Sleep on It
Even though most risks do involve the gut and strong hunches, they should never be totally driven by emotions. Many propositions can cross your desk and excite you, especially if they are being pitched by a skilled salesperson or a close friend that you trust. You might be ready to sign on the dotted line by 5 p.m., but you probably shouldn’t.
Take some time to reflect on the offer, do your own research, then make a more logical decision once the emotions have died down. If the risk still gets you excited days and weeks later, then you should probably move on it. If the risk looks stupid in retrospect, then bag it.
4. Free Yourself to Fail
As Tarkenton’s quote indicates, you must allow yourself the freedom to fail. If you have a risk budget, that failure will not devastate you. You need to make sure that your self-image will not be devastated either.
You can pick any top business book off the shelf that tells stories of huge successes and you will find that every person involved had failures along the way. Not every idea worked, not every plan unfolded according to prediction, markets and conditions changed that doomed even the wisest moves to failure.
Once you are over the fear of failure (and have funds in place to soften your landing), you will be much freer to win in the financial world. So, go ahead: start your own business, buy that low-priced property, invest in that new technology. You will learn something along the way, and you might win big. Risk-taking is part of what makes life worth living, adding a dose of adrenaline to the mundane.
For more investment topics and historical perspective, please visit Jim’s site, Critical Financial by clicking the link!