I car pool sometimes with one of my friends from work because we live fairly close to each other.  The other day, when I was driving him home, we somehow struck up a conversation about business ideas and what it takes to start a business.  During that conversation, he said two things that made me think about and revisit some of the ideas I’ve written about and explored on this blog.   

I thought it would be helpful to quote him in this post to illustrate how the majority of society thinks and feels about money, risk (including risks for investing money and business risk), and businesses.

“That Is Too Risky.”

The first thing he said that caught me was embedded in a story he told me about one of his own friends.  Here is how the conversation went:

Me: “It really doesn’t take much to start a business.”

Friend: “Yeah, it doesn’t seem like it.  For example, one of my friends from law school made these flash cards on Microsoft Word when he was studying for the bar exam.  He ended up having hundreds of them, and they were real helpful.  So he put an ad on Ebay to sell copies of them for $50.  When someone bought them, he would just print them out from his computer and mail them to the buyer.  He sold over 200 of them!”

Me: “That’s a nice $1,000 profit.”

Friend: “Yeah, I know.  Another thing he did when we were in school was he found a car for sale on Craigslist.  He bought it for like $4,000 and then turned around and sold it to someone else for $8,000.”

Me: “Wow.  He must have figured out that the book value of the car was much more and thought $4,000 was a bargain for it.”

Friend: “Yeah, but man, I could never do something like that.”

Me: “Why?”

Friend: “I mean, that’s risky.  I’m not about to go buy a car on Craigslist and then try to sell it.  What if I get stuck with it, and then I’m $4,000 in the hole.  He has this mind that I don’t have.  He doesn’t seem to care about risk.  That’s just way too risky.”

“I’m So Conservative.”

The second thing my friend said was a followup to his story and his comments about risk.  Here is how the exchange took place:

Me: “Well, what he did wasn’t really risky.  He knew and understood what he was doing.  He probably researched the car.  Looked at its market value.  He most likely inquired about the mileage, etc.  I’m sure he did his due diligence and figured out that he could probably sell it for much more.  All that knowledge decreased his risk.”

Friend: “Yeah, I guess.  But I just could never do that.  I’m so conservative.  I have a family.  I’m so conservative with my money.  I can’t just take risks like that.”

Me: “OK.  Think about it this way.  You say you’re conservative with your money.  So you wouldn’t do like your friend did and buy a car off Ebay for $4,000 for a short-term business venture.  And you probably wouldn’t spend even $1,000 or $500 on starting a business, right?”

Friend: “Exactly.”

Me: “That’s fine.  But what I see is the following . . . and I’ve seen this with myself in the past: Someone who is unwilling to spend $1,000 on, for example, putting up a website and developing a product to sell instead goes and spends that money on 7 or 8 dinners at fine restaurants.”

Friend: “Right.”

Me: “How is that being conservative?  If you think in terms of investing your money in assets, investing $1,000 on going out to dinner over the course of two months doesn’t yield you one penny in return.  You had a good meal, but that money is gone.  On the other hand, investing $1,000 on starting a business is more likely, if done with proper research and due diligence, to yield you a return on that investment.”

Friend: “Right.”

Me: “So, to me, it’s more risky to go out to dinner consistently than it is to save that money you use on expensive nights out and invest it in a business idea.  When you go out to dinner or buy a TV, you’re just throwing your hard-earned money away.  You’re putting it in a depreciating asset.  When you start a business, however, you’re investing your money in an asset that can appreciate and possibly yield you substantial returns in the future.”

Friend: “Yeah, I guess that makes sense.”

Risk Is Nothing But A Myth

I was fascinated listening to him.  He’s a good friend, and the above exchange shouldn’t paint him in any negative light.  His thoughts about risk and being conservative with one’s money are an epidemic that affects a lot of people in society.  And it used to affect me, too.

Risk is just a myth.  It’s an excuse we create to forego an opportunity, and it simply masks our lack of knowledge regarding that opportunity.  In other words, the more we know about something (i.e., a product, a market, an industry), the less risk there is in pursuing a business opportunity in that direction.

But people use “risk” as an excuse to stay in their comfort zones, and they think–erroneously–that those comfort zones are actually safe.    

This line of thinking probably needs its own blog post (or posts).  So I’ll finish this with two important and related thoughts about why I think risk is simply a myth:

1) Risk is inversely proportional to knowledge.

2) People use “risk” to hide their fear of uncertainty.   

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