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How I minimize risk...

kidgas

Contributor
Jul 25, 2007
532
49
33
Indiana
There was a suggestion on the One Trick Pony thread about starting a new thread about controlling risk. I thought I would give a few personal examples to get the ball rolling.

In general, there are several ways to minimize risk.
1. One Trick Pony aka focus. Warren Buffet believes that you should have a focused portfolio but watch it carefully. Trump does real estate very well. Gates does business well. Tiger can hit the ball well. Study and become knowledgable in one particular area of expertise be it real estate, stocks, businesses, etc through reading, obtaining a mentor, and actually doing. This allows one to see opportunities that others don't and identify potential risks that other don't see. I know more now about SFR owning 6 than I did owning 1. Nothing is a better teacher than getting out, doing, and making a mistake or two. Example: Because I have no education or training as a pilot, it would be very risky (and in fact fatal) for me to fly a plane. However, for those with the proper education and training, commercial aviation is actually very safe given the number of people who fly daily.

2. Diversification. If you look over the Forbes 400, you will find that many obtained wealth using a certain vehicle but that they ultimately diversified into many different industries and investments. In real estate, diversification might entail investing in SFH, apartments, commercial. Geographic diversification is another possibility. Owning business of different types may be a way to diversify. Investing in the stocks of companies in differing industries, bonds, other types of paper is another way to diversify.

3. Dollar cost averaging. DCA is another way of minimizing risk. I have been "dollar cost averaging" in my real estate in that I buy some every year or two and just keep adding. This guarantees I will not buy at the peak of the market (of course, there is little peak in Indiana--mostly flat) The stock market took 25 years to get back to levels seen in 1929 after the crash. Pretty devastating for a buy and hold investor. However, with DCA, you could be even after only 5 years. Jesse Livermore would split his planned investment into 3 or 4 pieces. Only when the first chunk of stock went in the direction that he thought would he invest more. That way, he already had a profit. If the market went against him, he would close the position, taking a smaller loss than if he were all in.

4. Options. It is said that Mark Cuban placed a 3 year collar on the Yahoo stock he received after selling out Broadcast.com. By doing this, when the bubble collapsed, he "saved" himself over 1 billion dollars.

5. Position sizing. This is a favorite of Chris Peruna. I am still working on the Van Tharp book which discusses this. Maybe Chris can shed some light on this.

How I minimize risk...
1. I have focused on SFR in the county where I live. I know the area and the rental market. I put 10-20% down and make sure that the house has some positive cash flow. I focus on lower middle class tenants, hard workers who can't quite afford their own home.
2. I am starting to diversify into commercial real estate with a friend who runs a printing shop. He wanted to get into his own building. The plan is to build 4500 sq ft. He will occupy 2500 and rent out 2000.
3. In stocks, I am fairly focused in the number I invest in at any one time but they represent a few different industries. I also have been legging into the stocks as they rise. Also, I use collars extensively in my business account, personal account, and retirement account (see my thread on stock collars).

I look forward to seeing how others minimize risk.
 

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Adam

New Contributor
Aug 12, 2007
68
15
20
Minneapolis
Great post.

Being in the RE biz, diversification has saved me in this market. I can't stress it enough. We have diversified ourselves not only in the types of properties we hold, but whether or not we even obtain ownership. We used to buy whatever made sense, lately we have been presenting the deals to other investors, collecting the commission, obtaining the management contract, and then going out to find them the next deal. At the end of the day, everyone is happy and we haven't taken on all of the risk of ownership (but also not as profitable).

Not only has this minimized risk, but it has helped us build valuable relationships that are sure to generate more profit.

Also, within the past two years, instead of just owning the RE brokerage and commercial finance firm, we have built other real estate related service companies that are sure to profit when RE and finance aren't. These companies are not commission based, but contact based and provide monthly income regardless of monthly RE and finance volume.
 

Diane Kennedy

Bronze Contributor
Aug 31, 2007
795
209
49
My answer is short:

(1) Cash. You can ride through the downturns and wait out a market if you need to. Watch your liquidity as you build wealth.

(2) Cut the losers FAST. I will never forget someone I know riding a stock down to zero because she didn't know what to invest the money in if she got out...so might as well lose it. (And she didn't have the money to lose...)
 

AroundTheWorld

Be in the Moment
Speedway Pass
Jul 24, 2007
2,909
1,862
550
.
1) learn, learn, learn
2) Know your exit before you enter
3) Always have a shit provision ... uh... plan B in place before you enter.

and... I second Diane's. Cash or access to cash and cut the losers - QUICK.
 

RAiMA

New Contributor
Aug 24, 2007
95
7
17
44
Sydney, Australia
1. Create the mindset build and sustain wealth
2. Educate yourself in the area you're investing. What you want to aim for is building as much awareness of the industry you're in as much as possible. That means finding out the things that you don't know that you don't know about.
3. What ever you decide to invest in, have a plan to protect your capital at all times. Find out all the things that could go wrong, then find a solution to minimise, manage or even eliminate the risk.
4. Have an adequate amount of equity at hand to cover potential risks that may have been missed or overlooked.
5. As an investor, it's then your responsibility to make the protected asset profitable.
 

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