Quantifying Risk

Risk is such an interesting topic. There are hundreds of books written on the topic and mathematicians have spent many lifetimes studying how to quantify, measure and calculate risk. The entire body of statistics is dedicated to this ‘science’. Yet after all these years we are still no closer to knowing which path to take in life.

In a recent presentation we had a very interesting discussion between a former employee, Denise, and a former business owner, Jan. It went something like this.

Denise, “I would like to open a business but it is too risky”.

Jan, “I don’t know, I think being an employee is too risky. Why do you think being the owner is risky?”

Denise- “Everyone knows being a business owner is risky. You need to invest your money.”

Jan – “But being an employee can be risky also. If you lose your job, you lose 100% of your income. With a business, I own it. I can grow it and I can sell it. That has been a good way for me to create wealth”

Denise- “Every investing newsletter will tell you that the best way to reduce risk is to diversify. I diversify by buying a wide variety of mutual funds. Much safer than owning a business.”

Jan – “True, but wouldn’t having some money in the market and other money in income generating assets, like a business, increase diversification?”

Denise- “Yes, I guess so, but if I fail with the business, then I lose my money that I invested”

Jan – “True, but if you succeed with the business then you build a valuable asset that creates cash flow, provides tax benefits and has value when you sell it. Wouldn’t that be much better than owning stock.”

Denise- “Maybe, but it still seems too risky for me.”

As a class we discussed these two differing points of view. It was an interesting, engaged discussion that shows the many and varied ways in which different people can view the same world.

What do you think? Who is right? Who is wrong? Leave us your point of view below.