As a successful investor, how do you deal with uncertainties? originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.
A number of defining moments, memorable comments, and pieces of sage advice have shaped how I deal with risk and uncertainty. I'll share my experience and then also share some of the research and other approaches I've read over the years about making decisions in the face of uncertainty and taking risk.
- The first time I unconsciously made a decision that involved risk and uncertainty was when I made a career change from auditor with a multi-national firm to corporate finance advisor with the firm's mid-market practice. I was faced with a choice - I could provide transaction support (i.e. perform financial due diligence) or I could be an M&A advisor. In my opinion, the former was an extension of being an auditor and was familiar to me. The latter was a potential risk because I had little understanding what M&A advisory actually was. So I chose the path that was more uncertain to me. It was a life-changing decision, led to more opportunity, and I wouldn't be where I am today had I not made this change. That decision seeded a guiding principle for making decisions in the face of uncertainty - don't be afraid of uncertainty. From uncertainty, great rewards could be reaped.
- I was a lender in investment banking for a number of years. One of my lending colleagues advised me against being an equity investor. He didn't think I could tolerate risk and uncertainty. In hindsight, he was likely projecting his own aversion to risk. But the comment stuck with me and delayed my transition to equity investing. However it did spur me to understand risk, reflect upon how I felt about risk, and ways of managing or mitigating risk.
- My mentor is an entrepreneur for life. He has been making business decisions in the face of uncertainty for over 40 years, yet he refers to himself as a risk manager and often says he doesn't like risk. I've learned several things from him. A) Taking risk is about managing risk. B) My mentor believes as long as he makes the right decision 51% of the time, things will work out fine.
What others say about risk-taking and making decisions
John Coates, senior research fellow in neuroscience and finance at the University of Cambridge, The Hour between Dog and Wolf: Risk Taking, Gut Feelings, and the Biology of Boom and Bust that "rising levels of testosterone that increase both one's self-confidence and, crucially, one's appetite for risk." So, our bodies and physiological factors can influence how we approach uncertainty.
Jason A. Voss, CFA, content director CFA Institute and former portfolio manager says "one of the great lessons of investing: there is no such thing as a future fact. By definition, facts are things that have occurred in the past, but investment results unfold in the future. So, again, by definition, ." Voss is an advocate of practising meditation to be able to gain insights from one's emotional and intuitive state and make better decisions in the face of uncertainty.
How do I deal with uncertainties?
- This is a core philosophy of , the approach and methodology for investment decision-making that is applied at and the funds that we manage. .
- Not get too attached to specific desired outcomes. In a sense, I , but even then I have to know when to let go of the idea of things turning out a certain way. Uncertainty inherently means things may not (and often do not) go to plan.
- After Plan A, have a Plan B and Plan C because as noted above, uncertainty inherently means things may not (and often do not) go to plan.
- Risk = probability of loss multiplied by the amount of loss. Manage risk by managing the amount. For investment opportunities that are compelling due to their high-potential founders, potential outcomes or impact, but where I've identified a significant level of risk and perhaps high probability of loss, we sometimes manage the risk by initially only investing a small amount, seeing how things go, and then have the potential to top-up or follow-on later.
- Our due diligence includes experiencing how entrepreneurs make decisions in the face of uncertainty. This one of our .
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