J. P. Morgan Debacle is a Good Learning Lesson for any Entrepreneur

Risk is the evil-twin of opportunity and not something to be gambled with, if success is to be achieved

The big news in business this past week has been the frolics of J.P. Morgan that have resulted in the company losing somewhere between two and five billion dollars in a series of transactions designed to “hedge risk.” (Now, that is an oxymoron, if I have ever heard one.) Maybe even more incredulous was J.P. Morgan’s claim that all of this anxiety over a multi-billion dollar loss was “just a tempest in a tea pot.” As the management of J.P. Morgan seemed to proudly point out, this loss was on an investment of $100 billion; so what’s the big deal about losing two to three percent? (Talk about “too big to fail.”)

It may be difficult for any of us to comprehend or relate to numbers like these, let alone to be so cavalier about them, but there is a good lesson here for any entrepreneur. The most fundamental message to take to heart is:

No matter what size a venture might be – whether fledgling start-up or Fortune 500 company – its ultimate success or failure will be determined by how the issue of risk is understood and dealt with.

Risk Management is Fundamental to Successful Business

Risk is considered a fundamental tenet in capitalism. So fundamental, in fact, that when asked to list the characteristics of an “entrepreneur,” most people will cite the entrepreneur as a “risk taker.” And they would be correct since the first risk an entrepreneur faces is foregoing a steady paycheck and related perks and inheriting a world of feast or famine. Hence, as they often say, “No risk, no reward!”

While this is true, such a generalization leads to a myth of what risk really is and to confusing a “risk” with a “gamble.”

There is this notion that being a capitalist entrepreneur requires a swashbuckling, swaggering attitude that encourages high-stakes risk-taking conduct and wild-eyed schemes all designed to make a buck. Mention the word entrepreneur and most people conjure up an image of a wild dreamer who goes into business by the seat of the pants and risks all to make some elusive pipe dream come true.

For those who are successful as entrepreneurs, nothing could be further from the truth. For the true entrepreneur, risk is as abhorrent as lacking the courage to take a risk. How can this seeming incongruity be explained?

Risk is both the Enemy and the Energy of Opportunity

The serious entrepreneur understands that risk is both the enemy and the energy of opportunity. The most important concept to understand is the distinct difference between a “risk” and a “gamble.” In simple terms, a “risk” is an action over which there is a degree of control in dealing with it and achieving the objective. A “gamble” is to take an action over which there is no control as to the outcome.

While entrepreneurial ventures are as diverse as opportunity, successful capitalists share two important traits: They make a consistent, unswerving effort to understand and manage risk; they demonstrate a guttural abhorrence of taking a gamble. Risk cannot be eliminated, but it can be mitigated and that is what provides for the opportunity of success. A gamble, on the other hand, by its nature cannot be managed and that is what ultimately turns opportunity into an illusion and failure into a reality.

The successful entrepreneur is able to differentiate between a risk and a gamble in three ways: 1) Making sure that the risk is fully understood and comprehended. 2) Determining and implementing actions that enable the risk to be managed and mitigated. 3) Avoiding a risk where the outcome of the risk can be influenced by the actions of others that are beyond the control of the entrepreneur.

It’s really a matter of degrees. A risk that is not fully understood becomes a gamble. A risk that cannot be managed becomes a gamble. A risk that is influenced by the actions of others becomes a gamble. Unfortunately, the business world abounds with examples of actions taken in violation of these three basic elements of risk taking that have led to failure. AIG (for all its expertise in the insurance business) took a huge risk in “credit default swaps” that it clearly did not understand, and these became a gamble that they lost. Banks offered mortgages to those the clearly recognized did not qualify. J.P. Morgan took a risk based upon the actions of European governments (which they could not control) to resolve the economic crisis, and this became a gamble that they lost. We could go on and on.

The other myth about risk that seems to be pervasive in the thinking of many is that risk is most threatening when the venture is small or in the early stages of development. To an extent, that’s true since risk can quickly bankrupt a start-up. But risk can be far more damaging to a successful company.

Success and size seems to bring an anesthetizing attitude toward the risk of risk. Success has a way of lulling one to sleep and dulling the instincts when it comes to risk. Even one as talented and experienced as James Dimon, the CEO of J.P. Morgan, who became exceptionally successful understanding and managing risk, can fall prey to this malady of assuming that success conquers risk.

In a Wall Street Journal (May 18) he was quoted as saying, “The big lesson I learned: Don’t get complacent despite a successful track record.” Dimon went on to admit that the losses incurred by his company were “self-inflicted” and that he paid less attention to the details of the activity as profits increased. Kudos to Dimon for owning up to these mistakes and promising to correct them, but he is not alone – except for maybe admitting the mistakes. The WSJ article also pointed out that Dimon failed to take the time to fully understand the risk being taken by his company. He understood the concept in general, but did not vet the specifics of the risks. As Dimon is purported to have told his wife, “I missed something bad.”

One lesson the successful entrepreneur internalizes is that the time to worry is when there does not seem to be anything to worry about; when all seems to be going well and there are no problems. The truth is that there are always problems when risk is present and risk is always present. If you don’t understand the problems or recognize the risk, it is not because they are not there, it is because you are not close enough to see and understand them. Running a business is a metaphor for life: Just when it seems like you have everything in place and sorted out, something jumps up and bites you. What separates winners from losers is not the elimination of risk – which is not possible – but those who make the effort to understand mitigate and manage it. Everything else is just a gamble.

And the Moral of the Story

Risk is not to be feared, but is should always be respected. With no risk, there is seldom opportunity. But it is important to be able to distinguish between a risk and a gamble. Three things are needed to deal with risk: The risk must be fully understood. There must be specific actions available and taken that allow a risk to be managed and mitigated. And, the element of risk must not be defined by the independent actions of others. If these parameters do not exist, then any risk naturally morphs into a gamble.

J. P. Morgan is just another example of a company that did not clearly understand the risk it was taking; did not take (or in this case eliminated) actions designed to manage and mitigate the risk and allowed the level of risk to be determined by the independent actions (or lack of actions) by others, and for this lapse, paid a high price.

We may never face the size and scope of the risks taken by J.P. Morgan, but it is a great lesson for us to learn, because we will all face risk and risk should be an opportunity, not a gamble.



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