What Warren Buffett Can Teach Us About Eliminating Risk

This post was originally featured on ScoreNYC

Warren Buffett, also known as The Oracle of Omaha, has been a shining example of investing and business acumen since he became a billionaire nearly three decades ago. There’s a multitude of lessons to be gleaned from his career, but perhaps most inspiring (and applicable across disciplines) is Buffett’s approach to risk. It’s a philosophy that has served him and his firm Berkshire Hathaway well throughout the years, and encompasses a few key points.

For Buffett and Berkshire Hathaway, risk is a four-letter word. That doesn’t mean that certain deals or investments are risky based strictly on their own merits. Rather, according to Buffett, risk is something that you either create or eliminate on your own through research and due diligence. As he famously summed it up, “risk comes from not knowing what you’re doing.”

We can eliminate risk, according to Buffett, strictly through our own preparation. This means resisting the allure of fast-rising bubbles, or propositions that carry a slight chance of getting huge with better odds of cratering out. For many, this requires a change in how we look at risks in investment. It’s less a dangerous entity to be fearful of than an unmapped territory, worth traversing but only with the right equipment.

Know the Worst Case Scenario

One prominent school of evolutionary thought proposes that species thrive due to an understanding of potential risks, and a thoughtful use of this instinct will serve you well in investing. Buffett’s primary criteria, before getting to the real research, is determining the likelihood of catastrophic failure in the investment you’re considering. Even if the ceiling is high, a low floor means that it’s not a chance worth taking.

A practical approach to investment demands such a measured stance. Some investors are in it for the thrill, but those ups and downs are no way to sustain a portfolio, especially one as consistently profitable as Buffett’s. We hold on to negative memories more than positive onesfor a reason: they reduce our chance of getting burned again. One advantage we have over our primitive ancestors? We can do our research.

Expand Your Circle of Competence

The ability to find a safe investment comes from your own knowledge, what Buffett calls your “circle of competence.” Thinking about investing in something new and exciting, like cryptocurrency? Unless you’re versed in volatile internet-based entities, it’s probably best to stay away. As Buffett likes to say “never invest in a business you don’t understand.”

That’s not to say that investment opportunities are a series of tantalizing items labeled “do not touch.” on the contrary, expanding your circle of competence is a primary component investment success. No investor is an instant expert, but building up your knowledge incrementally and organically not only makes you a more well-rounded investor, it sets you up to expand your portfolio as the years go by.

Be Ready to Miss Out on Opportunities

Risk avoidance is often a matter of knowing when to pull the trigger on a deal, and when to let it pass. Think of a professional poker game, the ones you see late at night on ESPN. These high-rolling players fold on the majority of hands, only playing in when they know they’ve got something worth bringing to the table. In investing, Buffett advocates for a similar approach.

A lot of investment opportunities might look enticing, but remember that without the right cards in hand, you’re exposing yourself to unwelcome danger. It’s best to err on the side of caution when you’re dealing with your investment dollar. There are always going to be opportunities, and it’s more about finding the right one for your knowledge than jumping on the same train that everyone else is getting on

Buffett’s refreshing candor about his bets that didn’t pay off illustrates how much success in investment is predicated on a healthy amount of failure. That’s the risk we take everyday, and an unavoidable part of doing business. Everyone faces failure at some point in business and in life. There will be an element of risk and failure in every step you take, especially in investing. You just need to be willing to learn from them.

In short, Buffett’s risk strategy amounts to this: apply a strong deal of hard work and common sense and more often than not, you’ll be able to identify which investments are worth making and which aren’t. This simple approach shouldn’t be too surprising to those familiar with the investment giant’s down-home image, but as is usual with Buffett, a great deal of hard-earned wisdom lies beneath these simple words.

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All Entrepreneurs Face Failure But the Successful Ones Didn’t Quit

This post was originally featured on Entrepreneur
Fear of failure is natural. In entrepreneurship, overcoming your fears is essential.

Everybody enjoys a success story. Vicariously living out our fantasies through those who achieved success gives us hope it will happen to us. But, listening to these stories doesn’t do us any favors because those tales aren’t the whole picture: the struggles, the tough breaks, the defeats that set the stage for the eventual big win.

The fact is, while there are an infinite number of ways that successful entrepreneursmake their money, there’s only one thing they all have in common: failure.

There’s no shortage of examples of great successes who had to struggle before they became the winners we now know them as. Oscar-winner Steven Spielberg was rejected from U.S.C film school. Thomas Edison went through thousands of prototypes before perfecting his light bulb. “Colonel” Harland Sanders didn’t hit it big with KFC until he was 68 years old.

Even Bill Gates, maybe the most successful businessman in history, didn’t rocket straight to the top with Microsoft. It’s not a well-known fact that his first company, called Traf-O-Data, was an early attempt at using computerized data to improve traffic surveys for municipal governments. Gates and his partners spent countless hours refining their hardware and working out all the details to make the business work. But, when it came time to wow the county officials who would be their customers, the machine was a bust.

Gates and his number two, Paul Allen, were certainly discouraged but ended up being better suited for their real business revolution that was yet to come. To hear Allen tell the story: “even though Traf-O-Data wasn’t a roaring success, it was seminal in preparing us to make Microsoft’s first product a couple of years later. We taught ourselves to simulate how microprocessors work using DEC computers, so we could develop software even before our machine was built.”

That valuable experience in development led to the founding of the software company that would make them both multi-billionaires.

Now, this certainly doesn’t mean that failure is a guarantee of future success. If that were the case, private jets would outnumber commercial ones. What failure is, for the lucky ones, is a stepping stone to greater things. By refusing to let it define you, and learning from the experience, you give yourself the wisdom to make big things happen for yourself going forward.

One thing failure gives you is a picture of the other side of trying. As you’re getting ready to make your move, that unknown looms large. Once you’ve failed, as long as you’re still standing on both feet, you’re better off knowing that what hasn’t killed you has only made you stronger. Every successful business story starts out with failing. In doing so, you’re in good company.

When you do get moving, you’ll be better off with the knowledge gained from your endeavor. Life is a constant process of learning, and it’s a well-worn cliche that you learn more from mistakes than successes because it’s true. Seize the opportunity by taking a good, hard look at where you went wrong.

Failing hurts, that’s no secret. Even after reaching the heights of success, the failures that come are difficult as any. But, like a wound that heals itself, you end up with a thicker skin once the pain subsides. Being ready to weather every new storm means holding onto the lessons from the ones that have hit you already.

Your character is defined by your response to adversity. Since failure is a fact of life, there are ways to deal with it so you’ll be able to overcome the setback. It’s a process that can take some time, but responding healthily to lost opportunities is the only way to get back on track. Whether it’s your family, good friends, a favorite book or place to visit, let yourself recharge with familiar comforts. Then, get back out of your comfort zone. This resilience is a requirement for entrepreneurial success.

First, remember that failure doesn’t have to leave a permanent stain you unless you let it. Every future opportunity is a potential win, and you’ll only truly be a failure if you stop trying. Losing out will hurt, but the best salve is to get back to working on that next project. Hang onto the lessons and the knowledge gained, but forget about the pain.

Don’t fool yourself — this failure might not be your last. Embrace it. Risk, after all, is part and parcel of the entrepreneurial experience. When you’ve eliminated your fear of failure, you’ve given yourself the best possible tool for getting to where you want to be. Failing isn’t the destiny of a certain kind of person. Failing is just a byproduct of trying.

I’ll finish by telling you about one of the greatest successes who ever lived: baseball’s best hitter, Ted Williams. He retired with a lifetime .344 batting average, attaining over 2,600 hits in a 19-year career even while missing three years of his athletic prime to serve in World War II and another two years as a combat pilot in the Korean War. With a bit of well-earned humility, the Hall of Famer regarded by most as the greatest to ever swing a bat summed it all up by saying “baseball is the only field of endeavor where a man can succeed three times out of ten and be considered a good performer.”

So just remember this: even the best baseball hitter in history failed 70 percent of the time he stepped up to the plate. So go ahead and take your swings; it’s what the greats do.

Looking Back: 7 Things I Would Tell My Younger Self

Listen to your gut.

This post was originally featured on Entrepreneur.com

When I was first starting out in real estate, I had a lot of passion, and I thought I knew what I was doing. But let’s face it, I was bound to make some mistakes along the way. But the great thing about mistakes is that when you learn from them, you gain some measure of wisdom. Now, some 20 years later, I still have that passion and drive, but there’s a thing or two I’d definitely tell my younger self. If only he’d listen.

1. Being good can be good for the bottom line.

Solar energy is the future. Fossil fuel has a definite expiration date, and it’s going to come sooner than later. Pollution caused by fossil fuel is getting increasingly worse, and solar energy can go a long way to offset that. Not only is it a highly efficient renewable resource, it is also good business. These days, there are so many tax credits, rebates and incentives that help encourage sustainability and going green. It’s an investment in the future in more ways than one.

2. Listen to your gut, not other people.

It’s not that I don’t value other people’s opinions, but I’ve learned that it can be even more important to listen to your own gut. If you look at most successful people, you’ll see that often, they did the things that others wouldn’t. If they had let other people dissuade them, they would have never created these incredible businesses or followed through on those seemingly crazy inventions and ideas that turned out to be brilliant.

When I was first starting out, I trusted the wrong people, and I trusted the advice and information that they were sharing with me. But that voice in your head exists for a reason. You should listen to it. Over time, you may find that it gets louder.

3. Take more risks.

There’s a Warren Buffett quote I love — “Risk comes from not knowing what you’re doing.” When I was younger, I played things a bit safer, but as I learned more and learned to trust my own gut and gather my own intel, I began to take more risks. As everyone knows, more risk can mean greater rewards. You have to buy when others are afraid to. You have to seek out opportunities before others discover them. At the racetrack, you’re not going to win much money if you bet on the horse that always wins. Now, I’m not suggesting betting on the horse that always comes last. But if there’s a new horse that you’ve studied and looks like he’s the next undiscovered champion, you should probably bet on it. You just have to do your homework. Then your gut can make good choices and go all in.

4. Be consistent.

One thing that I’ve learned is that people want to do business with people they trust. The quickest way to earn their trust? Consistency. No one wants to work with someone who’s erratic and who can change their mind on a whim. They want to work with people who are reliable, stable and who they know will always keep their word. Wouldn’t you?

5. Learn to love numbers.

When I was just starting out, I didn’t realize just how much I would grow to love numbers. Often, passion starts with an idea, but numbers are just as important. As a businessman and investor, I crunch a lot of them. Before an idea can be turned into reality, the numbers have to add up. Without that, an idea alone won’t flourish. So loving and caring about numbers isn’t something you should look at as greedy. Rather, it’s something that’s essential for making sure that a business idea is sustainable.

6. Don’t be afraid to be different.

As you’ve probably realized by now, I am all for implementing environmentally friendly approaches to real estate — whether that means solar panels, like the ones in the Atelier condo building in New York, or other green technology. In a landscape that’s often referred to as a concrete jungle, making people feel truly at home means giving them something that connects with them in a unique way. So any project I take on, I try to give it a special twist. The Atelier, of course, has stunning views of the city and the Hudson River, but it also has the highest skating rink in New York, a huge health club, a basketball court and a movie theatre. Being involved with the Atelier really taught me how being different, taking risks and putting new ideas into what could have just been another typical luxury project can lead to others responding passionately to it too.

7. Don’t just try to predict the future. Learn from the past.

Keeping up with the trends and ahead of the curve is essential if you want to make good decisions. When I was starting out, I was especially excited about figuring out what would catch on in the future. But as I’ve grown, I’ve realized that it’s just as important to know what happened in the past. History keeps repeating, right? Besides, it’s much cheaper to learn from mistakes other people made in the past than make your own.