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The key to managing risk lies in paying attention to both the big picture and the little picture. Here are five basic ways I’ve learned to manage and mitigate risks.
1. Be prepared and in a fundamental position
As a high-school football player, I learned that you always had to be prepared for anything and in the “ready position” when on defense. We also called this “fundamental position,” which was having both feet solidly on the ground at shoulder width, legs bent slightly and ready to spring into action in any direction, having both arms hanging straight down, hands just above the knees, ready to shed a block or make a tackle, and your head up and eyes alert.
Being prepared helped me when I took the biggest business risk of my life and started my own company. Over eighteen years, I worked in five different cities for four companies with six different bosses. I made a lot of mistakes and learned a lot of lessons. From all this effort and experience, I had become competent in my field and was confident that I could make this business succeed. Without this competence and confidence, I would never have been able to take the risk that led to my business success.
Related: Want Success? You Have to Take Risks. 4 Benefits of Risk-Taking
2. Diversification
The theory is that different asset classes (e.g., bonds, stocks, real estate, oil and gas) are not correlated and move in different directions at different times. Diversification can be applied to every aspect of your life. By having more diversity and balance in your life, you are less dependent on any one thing and are in a better position to deal with any loss.
Early in my career, soon after my wife and I started growing our family, I realized I could have time for only three priorities: family, business and health. There was no way I was going to sacrifice any of those. I never missed any of my sons’ games, performances or important activities. With few exceptions, I coached their teams and was home every night for family dinner. Usually, I worked on Saturday mornings, but on weekdays, never later than 6:30 p.m. I wasn’t in the office until midnight or out entertaining clients, and I also found time to exercise to keep my energy and sanity.
3. Ripcord
In business, the best risk managers have an exit plan for each significant risk they take. At Amazon, the fastest-growing company in the world, they call it “the double-swinging door.” They mean that for every door they walk through (risks they take), they need the ability to turn around and exit. They take many large risks but always have an exit plan to mitigate or limit their losses. Then, they do their best to make it work.
At Trammell Crow Residential in the 1980s, we followed a similar strategy called “the ripcord.” For every investment we made, we negotiated an exit strategy. If the deal went bad, we ensured we had a “ripcord” that we could pull to minimize our losses and parachute to safety. The real-estate developers who didn’t practice this principle became “victims” of the recession.
Related: The Entrepreneur’s Guide to Taking Calculated Risks
4. Alignment
General George S. Patton once said, “Take calculated risks. That is quite different from being rash.” One of the less-talked-about risk-management principles (which I didn’t really learn until late in my career) is the power of alignment. By alignment, I mean having your values and goals aligned with the people you are associated with in your business and personal life.
Our values in the homebuilding business were clear: quality, customer service, and profits, so alignment with our trades was usually pretty good. But getting alignment in philanthropy and investing in new ventures gets a lot trickier. As they say, the Japanese translation of “joint venture” is “same bed, different dreams,” so having the same dreams as your partner is important. I have learned that you can take risks with markets but not with people. Dealing with people of integrity is essential.
Related: Here’s What Science Says You Should Do to Achieve Greater Success
5. Equilibrium
This is a physics principle that can be applied to business and life. The main idea is balance in both areas. In other words, how can you get back in balance, or equilibrium, if situations get a little unstable or out of control?
One way to stay in stable equilibrium is to do business and have relationships with people you know and trust. We can all interact with friends, enemies, or strangers, but if we choose not to interact with friends and people we trust, we depend on enemies or strangers, essentially an unstable equilibrium.
We can avoid unnecessary risks and are much safer in a stable equilibrium position. So, avoid putting yourself in a vulnerable position in business or personal relationships, where a small vibration could create a life-changing disaster.
In conclusion, you can’t go through life without taking risks, so be the person who strives, takes smart risks, and gives it your all. And when you lose, as you sometimes will, get right back up and into the arena. That’s a life without regrets and a life worth living.