Betas and definition of risk:

Although I disagree with the use of betas to identify the level of risk an investment carries, it is understandable. At bottom using betas as a gauge of risk says your’ definition of risk is volatility. This fits with the reasoning that the more uncertain a future benefit is the more risk it carries and the more it should be discounted today, which is correct. The issue becomes whether variance or volatility and uncertainty are the same thing. The answer is inseparable from your investment time horizon. If for example you had a strong conviction that the competitive strengths of an investment would produce a very good return over the next 10 years, but there could very well be a terrible two or three years during that time (and maybe that’s the case at time of purchase which makes the price appealing), if your horizon was 10 years, you don’t care about the volatility, because you feel there is a high degree of certainty that it will perform well over your ownership period. If, however, your time window was 6 months, volatility would more equate to uncertainty. This concept has similarities to the concept of “probability as a limit” or “relative frequency”. The probability of rolling a 3 on a six sided die is 1 in 6 or 16.6%. It is however possible to roll a die 20 times and not get a 3 once. But eventually, as more and more rolls are made the probability of 1 in 6 will take affect. If the time horizon was 3 rolls, the volatility would dictate your level of certainty, however if the time horizon was 200 rolls, the degree of certainty would be less affected by variance.

Are you an “Expert”? Be careful!…

The spill in the gulf could wind up being the biggest in U.S. history. Now there is a website with a live feed where you can watch the oil come shooting out of it’s casing and into the ocean. You can just watch millions of dollars of oil being lost while it’s simultaneously causing millions of dollars in damage.

The nature of sitting back and watching it happen live makes you ask the question why can’t it be stopped. In thinking about this, there are two basic reasons: 1- inaccessibility and 2- foreign environment. Simple but true and this has a lot to do with building wealth…

1-      Inaccessibility. The break is about 1 mile below the ocean’s surface. This is a very challenging area. People can’t just dive down there and mend the break. Pressures at that depth would be over 2,000 pounds per sq. in. and would crush a human.  This makes for a place that’s difficult to get to. This is also the case with certain investments, they are inaccessible to those who have not specialized in that specific arena. Everyone has their niche, their focus, their own business, etc. While you can’t know everything about everything, you can know others whose expertise you can leverage and benefit from. This opens up possible investment opportunities that would otherwise be closed.

2-      Foreign Environment. This level of the ocean in largely an unknown. You may disagree, but this is why the attempt to correct the problem by placing an oil catching dome above the leak failed. They placed the dome and there was an unexpected build up of icy gas hydrates that prevented a seal. It was unexpected because the environment is largely unfamiliar. This also is instructional in wealth building. Straying outside of your area of understanding can lead to undesirable results. Real estate is no different. It’s actually a fairly illiquid investment, which does not lend itself to incompetence. We’ve watched those who did not gain the proper expertise and give their investments the attention they needed, wind up becoming the motivated sellers that provide opportunities to those who are prepared.

Much like the oil spill, inability to act on an opportunity equals value slipping away. The remedy is to engage those who you can leverage…

Can you imagine what your life would be like if there were no problems? Here are some of the ways it would look:

• You would be broke
• You would under utilized
• You would be unfulfilled

Are you surprised? Do you completely disagree with me because you feel that problems make your life difficult? I’ll challenge you to change your perspective, how you define a problem. This is my definition of “problem”:

1. The opportunity to get better and advance
2. The opportunity to add value

I said above that if your life was problem free you’d be broke.  It’s true. Without knowing you or what you do for a living I can say this with surety, because the only reason that you get paid is because you solve a problem. If you are a flight attendant, you get paid because the airline had a problem—they have thousands of passengers who need direction and assistance to have a good, orderly experience with their company. If you’re a doctor you get paid because people have a problem, they’re sick and need advice, a surgery, or medicine. If you’re a cab drive you get paid because someone had a problem, they didn’t have a car or someone to give them a ride to where they need to go…

You are designed to solve problems. If there were no problems for you to provide the solution to, you would be completely unfulfilled and unsatisfied. Stop running away from problems and start to realize that they provide you with a platform to show your potential, to add value.

Other people’s problems are your opportunity to add value to them and get paid. Your problems are your opportunity to add value to yourself and advance. In academic vernacular, problems are called “tests”. What happens when you pass a test, you can move to the next level!

Don’t be average. Average people live their lives trying to minimize their exposure to problems. Be uncommon, embrace problems, because they are opportunities to develop and shine. The more value you can add (the bigger the problem) the more you get paid. Be a problem junkie!