One of the primary rules of business
I know I shouldn’t be surprised when someone poses this question, but I continue to be. In of all places the WJS, I saw it on Monday the 18th. I paraphrase. “Can you suggest a business that has good potential for growth with low risk?” I hope this person is just suffering from naiveté about how markets work. In business risk and reward always rise and fall together.
It’s the law of business. So say it out loud. In business risk and reward always rise and fall together. Now, think about what that means.
If the return on an investment (stock, piece of art, your business) rises quickly the premium you are seeing over other comparable investments (blue chips, government bonds) is the reward for taking on risk. The “dot com” bubble of the late ‘90’s was an example of this risk-reward relationship.
People who invested in “dot com” companies saw astronomical inflation of their investment through stock price rises. This price increase was their reward for taking the initial risk in some very small companies. What most people did not realize was that the very reward they saw was making their investment much more risky than before.
Eventually the market ran out of investors who were willing to take on the risk associated with “dot com” stocks. That showed up when there weren’t any more buyers for those stocks and they tanked.
As an entrepreneur what does this mean to you? Your business is your ongoing investment. You are taking the risk. It is very important to recognize this. Buying a franchise or pre-existing business may be less risky than starting one from scratch, but the premium you pay the franchisor or previous owner is your fee for reducing the risk.
What do we make of our questioner at the top? He or she is asking about the right things. They will just not come together in the way the questioner hopes. The questioner sounds as if he is risk averse. That isn’t a bad trait for someone running their own business. Risk aversion and the lost sleep trying to think of ways to keep a business’s risks under control are important characteristic in a small business person.
When it comes to risk and business they are a package. You cannot separate them. As a business person you have to understand what risks are around and how much of it you can stand. You also need to know how much and what kind your family and significant other can take, too.
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