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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

Years ago I bought a residential lot in Carmel Valley and hired a contractor to build a house which I hoped to sell at a profit.  The project took more than a year to complete, but I finally listed the home for sale at $420,000.

It took three months to receive the first offer, which was a disappointing $360,000.  I countered at $390,000.  The potential buyer came up to $370,000.  I countered again, this time at $380,000.  My counteroffer was refused.  “Oh, well,” I thought.  “Soon I’ll find another buyer, and at a higher price.”

A month went by, and after making another loan payment and paying the property taxes, I reconsidered.  I contacted my broker and asked her to call the first buyer and accept the $370,000 offer.  Unfortunately, during the month my potential buyer had purchased a different house.

I wish this story had a happy ending.  It doesn’t.  Nine months, and many loan payments later, I finally sold the house for $320,000, which was $50,000 below the first offer.  After that experience, I resolved that in the future if the first offer was reasonable, I would always try to make it work.

Here are five reasons, in life as well as in business, to make the first offer work.

1. The first offer might be the only offer you receive.
2. The first offer might be your best offer.  In my real estate business I have seen this happen time and again.  As they say in the stock market, “Bulls can make money, bears can make money, but pigs go bust.”
3. By making the first offer work in a social setting you will develop a reputation for being reliable.  When I receive an invitation from someone I would like to spend time with, I accept, even if a better offer might come along later. This helps me to build relationships and also to develop a reputation for being trustworthy.
4. Accepting the first offer will push you to make your decisions more carefully.  For example, if I am invited to a party on Saturday night two weeks from now I will think about whether that is something I really want to do and consider any possible conflicts before I say “yes.”  In this way I make a better decision in the first place.
5. When I make the first offer work, I also make my life work better. This is true even when I later have misgivings.  Last week my wife and I woke up very early on the East Coast, worked all morning, and then flew back to Los Angeles to attend a Christmas party. At the party, by 8:30 pm, we both felt like tottering zombies and politely told our host that we had to leave early. He said, “Stay for twenty minutes – Ed is going to present his annual Christmas show, and he’s really good.”  We stayed.  Ed was really good. Daveen and I left the party an hour later with broad smiles and with more energy than we had when we arrived. I was grateful we had accepted our host’s request to stay.

As the saying goes, “A bird in the hand is worth two in the bush.”  I respectfully disagree.  Sometimes a bird in the hand is worth at least $50,000 in the bush.

Happy New Year.  I’m going to make 2015 work.

Alan