When we hear the word risk, we automatically think of the bad stuff. The stuff we hope never happens to us, or anyone else. Like the risk of developing a disease; the risk of getting run over if you don’t look twice before you cross the road or the risk of getting ill if your immune system has gone to pots.
But do we ever stop to think about the good risks? The risk that lies in the untapped opportunity? This might sound paradoxical but it’s far from it! See, risk can be both good and bad. But the issue is that since we’re so used to associating risk with danger and all sorts of unwanted circumstances, we often end up dismissing its (positive) power causing us to miss out on all sorts of pretty potentially positive possibilities. What a tongue twister!
The risk in risk
Risk is a curious and frankly complex concept. It is in a sense unreal. It is always concerned with things that haven’t yet happened and might never happen but they form the bedrock of the decisions we make and the paths we choose from who we marry to the career we choose.
But here’s the thing, the unknown is both good – and bad. And it’s time we start to focus on all the good things that could happen rather than obsessing over the bad that might never happen. And this applies to the stock market as much as it does other aspects of our life.
When it comes to risk in the stock market it’s as much about what can go right as it is about what can go wrong. And it’s that first bit that we should focus on more often! See, when people talk about the stock market, risk is the first thing that comes to mind. And when I ask friends what it is that holds them back from investing, it being too risky always springs to mind. (Read here why optimism will take your portfolio farther than pessimism ever could!)
The stock market is not a risk-free land. It is known to be a place laden with risks (especially when compared to the bond market) and this is what scares people off. Risk of things going wrong. Companies getting entangled in lawsuits, missing their profit targets, getting swamped by competition or worse, going bankrupt and any other nasty things you can think of what would wipe off some (if not all) of their market caps. Or, it’s the plain old risk of inflation (more like stagflation) mixed in with a war, high debt and rising rates that causes markets to sell off anyway!
If this was the only side of the story, do you think that there’d be any investors left?! No way. And that’s because there’s another side of this story that needs to be heard. So let’s give it a voice. The voice of opportunity. It’s the risk of things going well. And I mean really well. It’s unknown, sure (which is why it’s a risk!) but it’s a possibility – and a probability – nonetheless. Just as much as all that bad stuff is.
C’mon, be happy!
Being an optimist can help your returns as much as your overall state of mind. How miserable would it be if all you thought of were the things that could go wrong? I doubt investing would be any fun at all. And even if you did venture into that world, you’d probably be scared off by the probability of bad things happening to the companies you own.
The flipside to all the doom and gloom is that you could be buying the next Amazon. Or the next Tesla. You could be buying into Tomorrow’s Winners. If all you thought about where the bad stuff that might never happen, you aren’t giving yourself the chance to participate in the greatest stories of all.
Have you ever stopped to think just how much wealth is sloshing around? In China, millions upon millions are escaping poverty; India’s middle class is growing and the rich just keep on getting richer. The top 1% now own a whopping $10.2tn and their wealth rose by 25% during the pandemic alone. All this wealth means more spending and more spending leads to greater GDP which basically means better standards of living. In a nutshell, of course!
There’s also never been a better time to be alive. Apart from the fact that we’ve had a raging pandemic (and now Monkeypox) that doesn’t seem to want to go away. Not to mention a war in the East and sorts of other nasty stuff. But look at technology and how it’s improved lives, saved lives and will continue to do so. And it’s only going to get better from here on out. So why wouldn’t you want to own a bit of history and profit on the amazing things that are happening and are yet to happen?
For every dark cloud there’s a ray of sunshine and if you only focus on that one (miserable) cloud you might miss the brilliant, bright light. And that’s where the returns will be.
So what’s the deal with me and start-ups?
Back when I started uni, I had managed to save quite a bit and as much as I wanted to invest it in the stock market, I decided to invest a chunk in start-ups. You may be wondering why on earth would I risk my money plus have it locked up for ages until the company goes public or gets bought out when there’s a very real risk that it might all just go belly-up? Or never sell out! That’s a possibility, too.
Firstly, I was young enough to be able to lock up my money for a while and since you only get your money back if the company gets bought out or goes public (via an IPO) there isn’t really an exact time in mind. No company can tell you exactly what will happen. And that’s the risk you take. I’m praying for my start-ups to be bought out right before I buy my first property in who-knows-how-long. But as we all know, life doesn’t work like that. To be honest, knowing my luck, I’d probably get a pay-out right after I buy my property!
Then there’s the other thing. Since I have a great stretch of time ahead of me, I was able to take this big risk in the hope of being rewarded later down the line. Make no mistake, more than 90% of start-ups fail but of the 10% that succeed, the 1% will literally fly. And I want to be a part of that. I knew my risk (the good and the bad) and it made sense to me. At the time. If you think of assets on a scale of risk, think of start-ups as being as risky as it gets! But with this risk, the chance for rewards are way, way higher. Nothing is guaranteed and that’s where the risk lies.
But the government gave me back some of the money I invested since I invested via SEIS & EIS. A lot of start-ups I had looked at weren’t under these schemes (because they were a lot larger so probably didn’t qualify for these tax perks) so I didn’t invest in them since there are no tax incentives and they still carried a large risk.
I reckon that a handful of my start-ups will totally flop but all I need is for one or two to really take off! And then it’ll all have been worth it. And if you’re lucky enough to get into a company early on, making a 100,000% return on your investment is not unheard of. But yeah on the flip side, companies can go belly up. And it happens all the time. And there are risks from every angle.
Right now, there’s a big risk and that’s the state of the economy which means investors are less willing to open their fat pockets which is why VC capital is drying up. As capital markets tumble, this is definitely spilling over into the private realm. One of my start-ups recently raised close to £30m but they did this via a convertible loan note so they didn’t disclose the valuation which I bet has crumbled by ~30% but the good thing is I can’t panic sell even if I wanted to! And they aren’t planning on going public for at least another 5 years so all’s good but it’s no doubt a tough environment out there and only the fittest will survive.
One of the great things about my small start-up portfolio is that it isn’t on the stock market. This means that it’s protected from all that market volatility. Instead, they get on and do their own thing. In private. With no one watching. With recent market turbulence (Covid’s going round again!), I am actually glad I have a chunk of my cash outa the stock market. And that’s what’s cool about start-ups (aka unlisted companies) because they don’t have the pressure of short-term stuff.
But the investing is the fun bit, too. I’ve met with entrepreneurs from all sorts of backgrounds and since the world is so small, I never know who I may cross paths with later down the line. So I’m keeping my options open and networking wherever possible!
So, next time you think of making a decision (finance or otherwise!) remember that there’ll always be a risk. But sometimes it does us good to focus on the inherent opportunity rather than the reverse.
There’s a risk in absolutely everything. So why not take on some risk. Take the risk of starting something yourself. Take the risk of investing.
In markets, sure, but most importantly – in yourself. They’ll pay dividends for a lifetime and the risk to not doing so will be far, far worse than any failure you’ll incur.
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.