On Risk and the Cost of Inaction
Fred Smith was at his wit’s end. He had already sunk most of his net worth into starting a package delivery company called Federal Express (later FedEx) and General Dynamics, the company that he had obtained funding from previously, had just denied his request for additional funds.
It was Friday and Fred knew that a payment of $24,000 was due the following Monday to pay for the week’s jet fuel. There was just one problem — Federal Express only had $5,000 in its bank account.
On the following Monday, Roger Frock, Federal Express’s General Manager and Chief of Operations, noticed that there was $32,000 in the company bank account and asked Fred where the money had come from. Fred responded:
The meeting with the General Dynamics board was a bust and I knew we needed money for Monday, so I took a plane to Las Vegas and won $27,000.
Fred Smith had gambled the company’s last $5,000 playing blackjack and he had won big. Still in shock, Roger asked Fred how he could risk the company’s last $5,000 in such a way. Fred responded:
What difference did it make? Without the funds for the fuel companies, we couldn’t have flown anyway.
This story is told in Changing How the World Does Business: Fedex’s Incredible Journey to Success and it illustrates an important lesson about risk and the cost inaction — sometimes not acting can be worse than taking a big risk.
While this probably isn’t true in investing (i.e. staying the course usually works), it is likely true for your career and income prospects.
I discuss this issue because increasing your income (with a similar increase in savings) will do far more for your personal finances than just about anything I could teach you about investing.
And sometimes the only way to raise your income is to “roll the dice” and take a risk by society’s standards. However, the act of doing nothing can be far riskier if you think about risk properly.
Corey Hoffstein has a phrase he uses all the time that clarifies this idea:
Risk cannot be destroyed, only transformed.
So when you decide not to make a big move you are also taking a risk, but that risk happens far later in time.
For example, you can hold 100% bonds and experience little short term volatility (i.e. low risk right?), but you now risk not having enough principal in the future after your portfolio battles against the scourge of inflation for multiple decades. The risk still exists, it has just shifted through time.
So remember that you are always taking risks. The key is understanding what risks you are taking and when you are taking them. Using this framework can be incredible helpful when you evaluate your career and whether you are progressing like you would like to.
I personally believe that most people don’t take enough career risk. They stay in jobs they don’t like because they are comfortable. But nothing could be worse for your career and your growth as a person.
History is riddled with examples of great businesses that experienced similar declines because they didn’t take enough risk. Blockbuster and Kodak are two names that easily come to mind. Don’t be like them.
Lastly, when you do think about taking a chance and moving into a different career, try to find something where the payoffs are asymmetric. In other words, find a career where when you fail the cost is small, but when you succeed the gain is large. Most traditional jobs don’t have this aspect to them, but some do. And the upside doesn’t have to be monetary.
You can find a career with social upside (i.e. meeting lots of new people), status upside (i.e. being a respected member of a community), or some other non-monetary attributes that you find worthwhile. I know that this isn’t for everyone, but there are few things in life that I have found comparable.
Go All the Way
After five and a half years and over 10,000 billable hours as a consultant, I recently decided to roll the dice for my own career.
I’ll be headed to NYC to start working in a business intelligence/data scientist role at a wealth management firm. I am excited that I get to combine my passion for investing and programming full time now.
I tell you my story as proof that if you work hard enough and get a little lucky, you can achieve your dreams too…but you have to roll the dice. So take a chance. Start your own thing. Write. Blog. Paint. Found a business. I don’t care what you do. Just do something. Why?
The biggest risk you can take in life is taking no risk at all.
If you need anymore motivation, I recently discovered this poem called “Roll the Dice” by the late Charles Bukowski that inspired this post and was eerily relatable to my experience blogging over the past year:
if you’re going to try, go all the
otherwise, don’t even start.
if you’re going to try, go all the
this could mean losing girlfriends,
wives, relatives, jobs and
maybe your mind.
go all the way.
it could mean not eating for 3 or 4 days.
it could mean freezing on a
it could mean jail,
it could mean derision,
isolation is the gift,
all the others are a test of your
how much you really want to
and you’ll do it
despite rejection and the worst odds
and it will be better than
you can imagine.
if you’re going to try,
go all the way.
there is no other feeling like
you will be alone with the gods
and the nights will flame with
do it, do it, do it.
all the way
all the way.
you will ride life straight to
perfect laughter, its
the only good fight
Thank you for reading!
This is post 62. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data