WHY TAKE RISK? – RISK-REWARD RELATIONSHIP

  • Post category:Success
  • Reading time:11 mins read

Risk is one of the greatest common denominators of all successful people in all fields; THE LOVE FOR RISK. There can be no success without a considerable amount of risk.

Life is risky

In fact, we are always taking a risk in life. When you are traveling from one place to another, you are exposing yourself to accidents. The more you travel, the more your chances of getting involved in an accident, holding all other factors constant. This does not mean that we should stop traveling.

Eating in a hotel is very risky, someone might poison you. That does not mean that you will never eat in a hotel. Drinking piped water is dangerous. Someone might want to poison the whole city through the water. Voting is risky, the leader might turn into a bloody tyrant… etc.

We can confidently say that LIFE IS RISKY. However, we rarely think of this kind of risk because they touch on the necessities of life. We are ready to tolerate such risks because we have no otherwise.

When it comes to issues that we think we have an otherwise, we fear risk. Tell me, which risk is bigger, starting a business and failing or drinking poisoned food and dying? Your answer is as good as mine, the latter is riskier.

Why do we fear the former more than the latter? It can only be because of our PERCEPTION. We think that a business is not important enough to risk. Which one is worse, traveling and getting involved in a deadly accident or dating the wrong person? The former is way much worse yet we consider the latter one more than the former.

If you can eat in a hotel and not get sick, you can start a business and succeed. Similarly, If you can travel and get to your destination safely, you can marry and get happy. If you can drink water and not die, you can invest and get returns.

I have given these examples to show us that we only risk what we think is important and valuable to us. If you think of that goal as valuable enough in your life, you will be willing to take the risk to achieve it.

Success and risk

Successful people love and tolerate risk. Unsuccessful people prefer not to get out of their familiar comfort zones into the realm of unknown possibilities. As we said earlier, if you only go where there is a path, you will lose the first-mover advantage.

Politicians are willing to invest millions if not billions on an election campaign with no guarantee of success. It is said that in Kenya, presidential campaigns cost around 15 billion shillings (150 million dollars). Why would an individual or a party be willing to spend such a large sum of money just to increase their probability of winning an election?

These are the questions that poor people cannot understand. No wonder the politicians are so powerful and successful. They would rather risk and fail than not risk at all. This is the MINDSET of all successful people. Why would business people invest billions in a new firm or project without any guarantee of profits? Because they know the risk-reward relationship. They would rather lose chasing big profits than not invest at all.

Over my career in business, I have come to fall in love with risk. I risk a lot. Because I risk a lot, I have failed a lot of times and also succeeded sometimes. I have started businesses, injected capital, and plowed back profits and they still failed. To other businesses, I succeeded. I have traveled far and wide to market my books with no guarantee that I am going to make any sales. This is a risk.

I have written numerous books without a guarantee that people will read them. Over my business career, I have taken numerous risks, most have failed and some have succeeded. The good thing is that those that succeed end up bringing in more returns than the many losses made in the failures.

I have a friend of mine who is a tenderpreneur. He has invested large sums of money looking for tenders in schools. He has applied for hundreds of tenders without success and without giving up. This has cost him hundreds of thousands of shillings.

One lucky application went through and he got a tender to supply foodstuffs to a certain school. This was a multimillion shillings contract. This one success covers all the money he has so far used applying for the tenders unsuccessfully. This is the beauty of risk. When you lose, you lose less. When you gain, you gain more than you will ever imagine.

An insurance sales lady once came to my office looking for a business. We talked and decided to postpone the meeting to a later date. I suggested that we meet the following weekend because I would be free. The lady objected and told me that she will have traveled to Mombasa (Almost 500 kilometers from Nairobi) to meet a prospect. I marveled.

How can a salesperson travel such a distance just to meet a person who has not guaranteed to buy her product? The lady was willing to take a big risk just to get what she wants. My mindset changed from that day. I started becoming more and more of a RISK-TAKER. This is the kind of commitment that we need when pursuing our goals. With such a mentality, success is guaranteed. You cannot risk long enough without getting returns.

Risk-reward relationship

Back in my undergraduate finance class, I was taught the relationship between risk and reward. The professor told me that high risk is a requisite for high reward. High risk, high reward. This has proved to be true in every endeavor.

The more you risk pursuing a certain goal, the more your potential reward is. If I invest one million in an investment vehicle with a modest return of 10% per annum, the reward would be one hundred thousand in year one. When somebody else invests the one billion in the same investment vehicle, he would receive a reward of a hundred million after one year. If everything goes well, the person who invested more will gain more.

Assuming we all lose the money, the person who invested more will lose more. This means that investing more money is riskier but has a higher probability of returns. The same applies to buying shares in a firm. The person who invests more money will have higher ownership and will receive more returns in dividends and capital gains if the share value increases.

If the share value reduces and the company is wounded up, the one who invested more loses more. This means that the more you are willing to risk, the more the success would be in case of success.

This concept applies to EVERY other goal that you want to achieve. If you want to make your marriage happier, you have to invest more. Investing more involves higher risk because, in case of divorce, all your efforts will be lost.

If your goal is to become a better parent, lose weight, and become fit, change your character and behavior, become more spiritual, etc. You cannot increase potential rewards without increasing risk.

If your fear of failure is bigger than your love for success, you become risk-averse. A RISK AVERSE person is one that hates taking the risk. If your love for success is bigger than your fear of failure, you become a risk-taker. A RISK TAKER is a person that loves taking the risk. For you to succeed massively, you have to become a risk-taker rather than risk-averse.

Calculated risk

A calculated risk is also called an EDUCATED RISK. We take calculated risks when we first analyze the risk and look for ways to minimize it without jeopardizing the high returns. The more knowledge you employ when taking risks, the less risky it becomes.

Knowledge does not eliminate risk, it only minimizes it.

Successful people do not just take risks foolishly, they bring in their massive knowledge and skills to minimize the risk while aiming at the returns.

The more knowledge you employ when taking risks, the less risky it becomes.

For example, if I am investing in a certain business, I have to carry out what we call due diligence to reduce my chances of losing money. DUE DILIGENCE is just prior research concerning an issue. I have to look for the best location for my business to reduce the risk of failure.

If I just start a business anywhere without due diligence, that is an uncalculated risk. Uncalculated risk is riskier than a calculated risk. In whatever you want to achieve, due diligence should be carried before any activity is done to reduce the level of risk while pursuing success.

Not taking risk is risky

People think that they are not risking just because they are in their familiar zone. The fact that you are not undertaking that risky activity does not mean that you are not risking. As we said, people who take high risks often get high returns. If you are not taking the high risk, you are risking losing the high potential returns. This is a big risk.

For example, if I fail to start a business because I think it is risky, I am already risking not having the flashy and wealthy life the successful business people enjoy. If I prefer to become an employee rather than an entrepreneur (Because it is riskier), I am risking not having the opportunity to own a Ferrari or a private jet one day.

In economics, we call it opportunity cost. It is the cost of the foregone alternative. If I choose not to invest, I am foregoing the returns I would have gotten from the investment. In my mind, I am trying to evade the risk of loss without knowing that I am also evading the potential high returns I would have gotten. Most people do not think this way, they only think of the possibility of failure without thinking of the possibility of success.

Any risk of failure you avoid is coupled with the loss of potential success.

Therefore, not taking a risk is also a risk. In fact, it is riskier. This is a complex concept but you have to understand it if you are to achieve your goals. Do not only consider your CURRENT activities but also the FOREGONE activities.

As we have seen, taking the risk is not an option because all options are risky. You cannot separate life from risk. Even what you are doing right now is risky. If risk is part of life, we need to enjoy taking them because we have to risk anyway. I choose to risk having the life I want that not to risk and retain the life I have now.

There are INFINITE POSSIBILITIES in the world but they are only gotten by those who are ready to risk all they have to achieve what they want. You cannot shy away from risk and become successful. Always take the calculated risk; knowledge is important when dealing with risk because knowledge reduces risk without reducing potential returns.

Practice risk-taking

Practice taking risk by engaging in arguably risky activities. Try engaging in activities that you fear and you will find your TOLERANCE for risk increasing. If you fear swimming, take swimming lessons. You fear heights? Do sky diving or mountain hiking. If you fear darkness, spend time in the dark. The secret is to do what you perceive as the highest risk. I sometimes cross big rivers on foot just to conquer my fear and change my mentality of risk.

I am not suggesting in any way you do this. You can start with activities that are less risky. If you fear rejection, go out and try selling a product to unknown people and the fear will disappear. This is the fear of risk. You will find yourself taking risks that will catapult your life to massive success. Risk having the life you want because if you do not, you will always have the life you do not want.

Risk having the life you want because if you do not, you will always have the life you do not want.

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