As a long-time "creator" with hopes of working on tech projects so that one day they may be used in every nook and cranny of the world, I suffered many setbacks. For one, I'm not a gifted individual, and so it becomes crucial for me to try my utmost to make up for that. I achieve equilibrium by committing more than my peers, and perhaps the only person who comes close to my commitment is my brother. I also entrench myself in whatever task I take on, and I do it wholeheartedly, every time... but sometimes, these aren't enough.
Startups, especially one in tech, require more than just knowledge and commitment. They require partners/employees, capital, and most importantly, a valid solution to a valid problem. These requirements are high, and even after one gains access to them, the chance of failure remains remarkably high, as evident by statistics around startup failures.
But, Finance requires almost nothing but capital and perhaps a bit of commitment. Most of what it actually requires is intangible, like patience and sticking to principles like glue, whatever the word for the latter is.
One may think that by nature, Startups are uncertain and Finance, risky. Because the word risk is so deeply embedded into finance, that upon every investment opportunity, the first thing a good investor will do is assess the risks associated with that investment... and, rightfully so.
But, I'm coming to realize that risk in finance can be mitigated to the extent that it becomes insignificant. But uncertainty cannot be eliminated, and it cannot be mitigated. Such a thought differentiates the two very clearly, and after hearing countless investors like Buffett, Simons, Dalio, and Monai, speak on the subject, the following is my lesson;
Risk is intrinsic to the investment and a factor that can be controlled by a party (e.g. company, investor, etc.). Uncertainty is extrinsic and cannot be controlled by any individual entity, rather it is a macro-economic phenomenon, a result of innumerable things coming together.
For example, risks associated with a company can be the following;
- Financial health depicted by the balance sheet
- Company efficiency and strength relative to competitors as depicted by the income statement
- Competence of the management and its decisions as depicted by cashflow
- Industry and sector strength depicted by general research and trends
Whereas, uncertainties are not associated with a company, but rather the environment in which it operates. Also, the environment is not limited to its industry but can be the general condition of the market. For example;
- Unknowns surrounding a pandemic and the underlying virus
- Conditions surrounding household strength (e.g. unemployment, savings, etc.)
- Conditions surrounding the economy (e.g. GDP growth, debt crisis, inflation, etc.)
Risks can be assessed and mitigated, whereas uncertainties are beyond our control. This means when uncertainty is high, assets will be discounted. The market and the general investors dislike uncertainty and treat those uncertainties as if they were a risk associated with the company. A good example of this being true was during the height of the COVID pandemic where assets in the travel and leisure industry were discounted by up to 90%... despite some companies being in remarkable financial health, with competent management and applaudable decisions.
In such times, you must seize the opportunity and buy all the discounted assets you can. The general rule of thumb is to buy anything with high uncertainty and low risk. It will yield a much higher return in the long run than any other investment.
