How to get more upside, with less downside

You walk into the office one sunny, Monday morning and find this great opportunity waiting for you. You're a can-do action kind of guy or gal, so you pounce on it. Carpe Diem. Seize the day. Nothing ventured, nothing gained. You go to lunch feeling like another master of the universe, secure in your ability to make quick decisive moves. Ahhh, pride.

A month later, sun has given way to clouds. The deal is in the toilet. You've lost your investment and, worse, you staff had been taken off other projects to do this one, so momentum has dropped to zero and cash flow isn't looking too good either. So what went wrong and how can you keep it from happening again?

What usually goes wrong is that many optimistic entrepreneurs tend to overweight upside potential without adequately considering the proverbial worst case scenario. Yet, only when you know how bad it can really get can you fully evaluate the risk reward ratio of your actions. When you consider the worst and then decide to push on, that means that you are fully willing to take the risks and, at least, you won't be shocked if it all goes south.

Risk analysis is best applied in the insurance industry, but it applies to all aspects of life. If more people applied the downside risk test, this one test, Aids would disappear along with lung cancer, high automobile fatalities and most Oliver Stone movies.

Financial pundits now claim that the economy is on the rebound and will grow throughout the new year. I don't really care, because, regardless of what the economy is doing, every day I see there are companies outpacing the market, while others, in the same competitive marketplace, are getting their clocks cleaned. Don't take my word for it. Look up any day in the past ten years on the internet. Check the Dow. On any day of any year, some companies will have set new highs for the year and some will have sunk to new lows.

This occurs every day, regardless of local news reports, regardless of what the economy is doing, regardless of what investor confidence, shopper confidence, or Donald Rumsfeld's confidence is.

Why? Because, if you operate on a margin of 10% falling to the bottom line, it only takes the cost of one bad deal to neutralize the accrued benefits of ten good ones and some managers toss away all their great work on a few deals with unacceptable downside risk.

Tip for the day: Downside risk analysis and a little judicious self control will save you from wiping out your many good deals with an occasional stinker.