When considering an investment, most of us focus on potential profit. After all, profit is what we’re after. But if in our quest for profit we ignore potential loss, we have already put one foot squarely on the investment road to Ruin.
This principle applies equally to an investment in people, but let’s look at the financial context first.
Suppose you have $100,000 to invest. You decide to diversify (generally a good idea) and put $20,000 into each of five stocks.
Four out of your five selections turn out to be excellent. They earn a return of fifteen percent the first year. This means that on your first $80,000 you are ahead $12,000. So far, so good.
But your fifth investment, in Disaster, Inc., turns out to be a blunder. In fact, Disaster loses eighty percent of its value. That’s a $16,000 loss on your final $20,000 investment. Ouch!
And double ouch. On your first four investments you ended up with a profit of $12,000, but on Disaster you lost $16,000. So your net result is a loss of $4,000, which means that in the first year your $100,000 shrank to $96,000.
If you do just as well, or poorly, the second year you will end up with $92,160. The same performance for ten consecutive years will leave you with $66,483.
To summarize, if four out of five of your financial investments perform really well but your fifth is Disaster, in ten years you could lose more than one third of your stake. Even worse, had you earned seven percent each year for ten years on all five of your investments you would have ended up with $196,715, which is almost double your original capital.
This is why, in my business, I live by a simple rule, “Avoid Disasters.” I focus just as much on avoiding bad investments as I do on finding profitable possibilities. In the long run, this strategy generates far greater rewards. Of course, I have invested in more than one Disaster myself in the past fifty years, but I’ve learned a lot from my own mistakes.
The same rule applies to people. One person named Dismal can devastate your life for years. When I was practicing law one of my first clients called me after their bookkeeper had stolen more than $100,000. We recovered a minor portion of the money from one bank, and the ex-bookkeeper even began to repay a small amount each month—until she was arrested for stealing from her next employer and thrown into prison for five years. It took my client one year to pay my bill, and three years to recover from the loss.
Both in business and in my personal life I want to be surrounded by people who I can trust and who are happy and enthusiastic. Why should I invest my time, which is more valuable to me than money, in Mr. or Ms. Dismal? Moods and attitudes are contagious. For that reason I choose to hang out with people who are both positive and trustworthy, and it takes time to earn my trust. The best and most rewarding relationships I have are those based on consistent and enjoyable experiences.
Let us stroll then, you and I, along the road to riches and rewarding relationships, leaving Dismal and Disaster to totter down the road to Ruin by themselves.
Alan
