I played a lot of chess with my dad when I was a kid. Initially I was fond of an all-out attack style. I’d sally my bishops and knights gallantly forward, in slashing, daring raids after my father’s king. I gave no thought for tomorrow, had no concern for the consequences of failure. My father, in turn, constructed a careful defense of interlocking positions from which he launched cautious probes.
On occasion, my impetuosity would work, for I did possess a certain tactical talent. For the most part, however, my father’s prudent strategy won the day. Once the high water mark of my high-risk moves had passed, he would slowly, carefully, pick apart the pieces of my tattered position and eventually carry the day.
From that early experience, I learned a valuable life lesson.
I have always, always, always thought through the down side. What happens if my strategy fails? What possible reactions/counters can there be? How can I cover myself? What is my fallback position? Thinking three to five moves ahead became second nature to me and I learned that others don’t always play and react in ways I expect.
I preach “risk-adjusted return” to my deal managers: Not all returns are created equal. A solid 9% return with very little downside risk may be infinitely preferable to a 30% return where there is a very real possibility of the total loss of an entire investment.
“Realistic optimism” is what I call my approach of always conducting an intense evaluation of the down side. Protecting vigorously against the down side is innate to me. Realistic optimism nicely balances the part of me that is a “radiant optimist.” I cannot conceive of not having deep reserves and in-depth contingency plans. I expect things to go wrong and am prepared for it when they do.
I am continually astounded at the frequency at which people disregard risk and blithely assume the future will be a serene and blissful extrapolation of the past.
I am a positive thinker and I whole-heartily embrace optimism. But only after I’ve made sure that it is safe to do so! This lamb only lies down with the lion after making sure the lion is well fed and is de-clawed AND de-fanged.
I’ve been in real estate for 35 years. I’ve been through several major recessions and a few minor slowdowns. And I’ve slept soundly through them all because I had a solid capital structure and a firm financial foundation. When it comes to risk, I’d rather be the tortoise than the hare.