4 Simple Questions to Avoid the Risk of Ruin

Greetings from Jackson Hole!

Read Time: 2 minutes 31 seconds

Last week's topic poll winner was "Writing Your Personal Operating Manual," but I'm punting that one to next week.

Instead, this week, I want to talk about risk.

Many of our readers had a stressful 4 days this past weekend with the FDIC stepping in to seize control of Silicon Valley Bank and Signature Bank. Fortunately, many quickly mitigated the risk by moving their money elsewhere. And even those that weren't as quick had their deposits fully guaranteed.

But should they have been in a position where a failed bank could have ended their company?

At the same time, our family has been skiing in one of the more extreme mountains in North America. And while we're all considered expert skiers by most standards, Jackson Hole is not most mountains.

We're making risk calculations with every run, sometimes implicitly and other times very explicitly. Can I make this turn? Do I know what's beyond that edge? Is that landing soft?

Fortunately for us, we've hired an expert guide to help us answer these questions.

But how should we think about risk in our business?

The Big Questions

As the Tram arrives at the top of Rendezvous Peak, the driver issues its 100 passengers a final warning:

"WE RECOMMEND THAT BACKCOUNTRY TRAVELERS HAVE THE APPROPRIATE EQUIPMENT, KNOWLEDGE, A PARTNER, AND A PLAN.

IF YOU DON'T KNOW..."

And the passengers respond in unison, "DON'T GO."

This simple message contains all the wisdom we need. If we are not fully prepared to take the risk as safely as possible, the best path is often to avoid it altogether.

But how do we decide if the risks are worth it?

Let's start by building a list of all the possible things that can go wrong and size up each risk with two fundamental questions.

What's the probability it will happen? Is this something almost guaranteed to happen, or is this something that's one in a million, like a lightning strike?

How significant is the impact if it does? Is the damage relatively minor, or is the loss catastrophic?

Putting these together, it should become quickly apparent that you need to focus first on the high probability / high impact combinations.

You will also want to devote some time to high probability / low impact "annoyances" since their frequency can drive the costs up over time, and low probability / high impact "black swans" as these can be the ones that wipe us out.

With your risks prioritized, you'll want to answer two more questions.

How effectively can I mitigate the risk? Sometimes, there are simple measures that dramatically reduce the probability (automatic breaking) or the impact if it does (seat belts).

Is it worth the cost? Some measures cost you little more than the time to identify them. Others might be expensive to the point of being more costly than the risk itself.

So how can you implement this with your team?

What Gets Measured Gets Managed

You can get most of the bang for your buck in just 90 minutes each quarter.