Becoming Defensive and Lowering Your Exposure to Risks

Written by Charles Ngo
Written by Charles Ngo

My values are starting to change as I get older.
I want to “settle down” and start a family within a few years. Because of that, my mind is starting to focus more on security.
It’s not something I cared much about in my 20’s because no one relied on me, but things change when you get older and people start depending on you.
A few years ago, I was talking to a friend and he introduced me to the concept of becoming more “defensive” in business.
Most entrepreneurs are overly aggressive. We only have one direction (forward), and we’re always trying to generate more revenue.
But there’s a lot of power in thinking in terms of defense – about how you can protect what you’ve already made.
You’ve worked hard for your money. Now it’s time to build a wall to protect it, and to “patch up” any holes in the wall. Most people don’t realize how vulnerable they and their business really are.
Got a million dollars? It doesn’t go as far as it used to. All it takes is one lawsuit, health emergency, or horrible business decision to take it all away.
So I want to share some thoughts with you and get you into the mindset of lowering your risk exposure.
I’ve always heard that it’s a battle between spending money on material possessions or experiences. I want to bring a 3rd option of using money to become more secure and less stressed.

Protecting Against “Black Swans”

Earlier this year I started reading books by Nassim Taleb.
One book that really stood out to me was called Black Swans. Seriously, ever since reading that book, I’ve been using that term on a daily basis.
So, what does “Black Swan” mean?
A few hundred years ago, people didn’t think black swans (as in the actual birds) existed. Then, in 1697, Dutch Explorers found black swans in Australia.
In terms of life, a “Black Swan” is something people believe is impossible until it actually happens.
According to Nassim, Black Swans are random and extreme events.

“What we call here a Black Swan […] is an event with the following three attributes.
First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility.
Second, it carries an extreme impact (unlike the bird).
Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.” — Nassim Nicholas Taleb

Some Black Swans that have affected the financial world include:

  • The 9/11 Attack
  • The Global Financial Crisis of 2008
  • Brexit

All were unpredictable and had huge consequences.
Now, those are all huge, world-wide events.
But Black Swans can happen to people like us.

  • You just moved to Puerto Rico to enjoy the nice 4% tax rate. Boom! Hurricane Irma comes and destroys your home.
  • Everything’s going well with your job! You should be up for promotion soon! Oh no…your CEO got caught in a sex scandal. The company stock goes crashing and there’s a massive layoff.

That’s the crazy thing about Black Swans. They can hugely affect your life even though it wasn’t your fault in any way.
So what can we do?
Well…the nature of Black Swans means that we can’t predict them. What we CAN control is how robust we are and how we respond.
This is something I’ve been brainstorming about recently, so I’m hoping some of my ideas can help you out.

Most Black Swans Aren’t Really Black Swans

Airplanes hitting the Twin Towers? NO ONE saw that coming. That’s a Black Swan.
Your home getting destroyed by a hurricane in Puerto Rico? That’s one of the dangers of living in in the Carribean.
Tornado in California? Black Swan.
Earthquake in California? Not really a Black Swan.
Here’s an exercise:

  • Spend 30 minutes brainstorming things that can go wrong in your life.
  • Spend the next 30 minutes coming up with solutions to help prevent them.

Here’s one example.
One risk that we face in the digital age is being hacked. Imagine if your affiliate tracker was password was stolen or if your bank passwords got hacked.
What can I do to prevent this?

  • Use solid passwords that are unique to each site.
  • Use 2-factor authentication wherever it’s offered.
  • Make sure employees are aware of best password practices (sorry, but 12345678 doesn’t cut it).

We can’t 100% prevent things from happening, but we can lower the percentage of them happening.
I didn’t make much money in my early 20’s. It felt like I was getting hit with one emergency after another.
I thought I had the worst luck in the world. One car tire blew out and I was out $150. While I thought that was bad luck…it wasn’t.
If you have a car then shit’s going to break. I needed to budget for it.
Right now in my life I’m prepared for a lot of things.
My dog’s 11 years old. I know that paying for his Vet bills is only going to get more expensive, especially if he might need surgery.
I have a category in my budget just for him that I contribute to each month. So in a few years, if he needs that surgery, I can pay for it easily.

Insurance Was Designed For the Unpredictable

What happens if you get into a car accident and you cause serious injury to the other person?
If you have car insurance, you’ll be protected (assuming it was an accident, etc.).
If your house catches on fire, you’ll be taken care of if you have home insurance.
It brings me peace of mind knowing that I have different options for insurance.
Most people know about the basics like home, car, and life insurance. What’s interesting is that there’s insurance for everything.
Did you know Jennifer Lopez has her butt insured? Seriously. So much of her career depends on it that she has between $30m to $300m of insurance in case anything ever happens to it.
Let me ask you this…

What would happen to your company if a hacker got in and erased everything?

No one expects it to happen, but it does.
Guess what…there’s insurance in the event of cyber attacks.
There’s also insurance if you’re a doctor against Malpractice.
So if you have the spare cash, the right insurance can be worth it.

Hold On To Your Cash

When Bill Gates was running Microsoft, he insisted on having at least one year of capital in case of Black Swan events.
That’s a really smart move.
If your company overhead is $10,000 a month, you should have $120,000 worth of savings by that metric. 
In the world of personal finance, people recommend that you have enough savings to cover six months of expenses.
Most people don’t have the discipline to do this.
It’s easy to have the mentality of, “The money’s being wasted sitting in the bank. I could be using it to earn more money.”
Yes, this is true, and you have to find the right balance on what works for you.
I’ve learned that shit (or Black Swans) happens, and it’s nice to have a “cushion.”

  • I couldn’t predict that my dog ate something off the streets and getting hit with a huge vet bill.
  • I couldn’t predict that someone close to me got married suddenly, and I chose to go to their wedding out of the country.

But fortunately, because I have money saved up, I can absorb these no problem.

Practice Stealth Wealth

This is a concept I read from the Financial Samurai.
It’s the opposite of “fake it till you make it.” If you’re wealthy, then keep it on the down low.
Read: The Dark Side of Success
Biggie Smalls said Mo Money Mo Problems.
Look at what happens to lottery winners and professional athletes. I remember hearing about one lottery winner who got kidnapped.
People try to scam professional athletes all the time knowing most of them aren’t the most financially savvy.
Stealth wealth means to live in a way that hides how well you’re doing.
Imagine if you get into a fender bender with someone. If you’re driving a Corolla…there’s a chance that no one cares and you both go on your way. Driving a Lambo? That guy magically has whiplash all of a sudden and wants to sue you.
People are always trying to take advantage of others who have money.
Well, if you look like you don’t have money then you’ll be out of their radar.
I try to downplay what I do when I meet people outside of the industry. If people ask what I do then I’ll simply say that I work for a marketing agency.

Communicate with People Who Are Important To You

Losing a key employee can be devastating, especially if your team is on the smaller side.
And nothing’s worse than being “blindsided.”
There will some cases where there was nothing you could do. Maybe they wanted to quit because they want to live the digital nomad life in Thailand.
But sometimes you can prevent these key losses.
One really good practice is to incorporate a MONTHLY 1-on-1 meeting.
I think the key to a good one on one is to ask uncomfortable questions.

  • Do you feel you’re being compensated fairly for your work?
  • What could I be doing better as your boss?
  • If you were to quit this year, what would be the top three reasons?

I’ve discovered that employees will rarely bring up these things. It’s your job to.
You can use this same mindset in personal relationships too.
It’s the mentality of killing the problem while it’s still a cub before it grows up to be a lion. By then it could be too late.

Make Sure Your Numbers Are Accurate

I like to use numbers and facts to make decisions.
Numbers don’t lie…
…as long as the numbers are correct.
But what happens if you’re making decisions and the numbers being presented aren’t accurate?
An example of this could be getting audited and then getting hit with a huge tax bill.
It happened because you chose to be cheap and went with a really bad accountant.
You always need to know the numbers and the facts.

Stay Defensive

I train in Jiu-jitsu a lot, and yet I’ve never been injured.
A big reason why is that I do everything possible to minimize the risk of injury.
I strength train twice a week, I stretch every single day, I get eight hours of sleep a night, I choose my sparring partners carefully (no thanks big, athletic white belts), and I choose to play positions that don’t put my body in harm’s way.
I’m bound to get injured sooner or later. Black Swans happen. But the more I minimize the risk of injury, the more successful I’ll be.
That’s how I think about life.
Shit’s going to happen that I never saw coming. But I’m building my defenses so I’m ready for whatever life throws my life.
Featured Image by pstedrak

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                The posts published by Charles are prepared and analyzed, including the author’s own experience…

The posts published by Charles are prepared and analyzed, including the author’s own experience…

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