Understanding risk is difficult, but taming risk is the ultimate ingredient in a successful investment.
Before you contain risk, know that risk is personal. Everyone has his or her own risk tolerance. For example, if you ask two people if they would like the Bungee jump, they may respond very differently, even under the same exact conditions. One individual will show excitement to jump, while an emphatic “are you crazy?” resounds from another. Both people have the same information upon which to base their decision, yet each evaluated the risk very differently. This may sound a tad philosophical, but the point is clear: risk is an element to be reckoned with in any decision making process. Two”Musts” that will propel you towards a clearer understanding of risk are (1) the commitment to change your habits of evaluation and (2) preparing for a more informed, conscious, and common sense decision-making process.
The following five strategies can lead to many more investment successes. Remember this is your money and your investment; changing your habits will help you build your wealth.
Become a smart risk taker
Many people fall prey to the idea of getting rich quick. Instead of thinking in terms of “get rich quick,” change your mindset to “get rich constantly and forever.”
The get rich quick psychology implies reaching a stopping point. Real wealth builders never stop building wealth. They keep looking for that next wrung on the ladder, constantly improving themselves and their financial situation.
One get rich quick game that comes to mind is gambling (That’s right, Las Vegas style). If you want to get rich quick, you may just head for the craps table. If you place bets without being knowledgeable about the game, you may squander away all of your hard earned financial resources.
However, if you are thinking in the “forever” mode, you may step up to the same table with limitations, parameters, and even a loss limit that you are willing to accept. In this new mindset, winning is not a one shot deal; rather, it is something to be sustained over and over again. Losing all your resources in the first go around we’ll put you out of business and make it difficult to recover. By changing your thinking to that of a lifetime of wealth building, you’re on the path to becoming a smart risk taker.
Love the facts
During different times in our day, and in our life, our risk evaluation process changes. For example, when sick with the flu, under stress, or just plain tired, our ability to evaluate risk can be clouded. That’s why it’s important to look at all the data required to make a successful decision. Don’t make a decision based on incomplete information or emotion alone. Seek out the real information and remove your feelings from the equation. Explore the questions that are preventing you from making the decision. Ask yourself:
- Do I understand the project?
- Do I have a clear description of the investment requirements, including information on debt, equity, profit potential, an exit strategy?
- Do I understand the detailed cash flow projections?
- Do I know the players involved in the project?
- Do I like the projects competitive advantage?
- Do I believe in all the facts?
By relying on the facts, you make a wise investment decision no matter how you are” feeling.”
Protect yourself and your money
There are three simple things you can do to gain control of the investment opportunity:
- Take time to get it where you want it.
- Check, check, cheque, and recheck the fax. Don’t rely on the information you hear from the salesperson. Perform your own due diligence. This may seem time-consuming at first, but it really felt in huge profits later. Seek out terms that are right for you.
- Remember to be flexible in your approach, and negotiate. Placing a”take it or leave it” offer on the table will usually result in no deal. If you cannot reach your comfort level, remember you can always walk away and return later to the negotiating table if you want. The choice is always up to you. Be smart and protect yourself and your money by becoming intimate with your perspective investment before you invest.
Be the investor
If you can’t be the investor because of lack of funds, at least think like an investor. How do I think like an investor, you ask? Here’s how to think the role:
- Be a longer-term thinker.
- Use objective analysis.
- Become investment return oriented.
- Think if it were your money on the line. Ask yourself,”What I put my own money into this project?” If your answer is no, then you must answer”Why.” Anything short of a positive answer could have you heading down the wrong path. By “being the investor,” your understanding of risk will be heightened, and you will gain more positive investment results.
What do they got that I ain’t got?
Evaluate, evaluate, evaluate. Look at your potential investment and ask what makes it good and what makes it bad. Some places to start are:
- Existing competition,
- Missing elements,
- alternative investments,
- Motivation of the salesperson,
The more evaluation and questioning you do, the more information you will uncover. The more hard facts you have, the more control you’ll gain over risk.
Putting the leash on risk
Achieving consistent success in your investments require subjective evaluation and systematic self-control. Otherwise, you’re long run won’t be very long. So take those risks by mastering the five techniques described above when you do, victory will be yours.
Albert Auger is an expert in commercial real estate developing, investing, and financing. He consults with companies and individuals to help them locate, finance, permit, and develop commercial properties he is an author and is published in over 60 articles in national publications on the subject.
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