A great entrepreneur doesn’t always think about success. Sure, having a winning mindset is really important but it’s equally important to think about the big picture and the fundamentals that pave the way for success. In this particular case, it’s thinking about hedging and fallbacks.
To triumph, especially when business is concerned, you must strive to fulfill your goals, which often requires different ideas and methods – not to mention the sheer will to execute them. Most entrepreneurs envision a mix of their abilities and their idea(s) as a pathway to success. However, great entrepreneurs typically imagine one way to succeed that contains within numerous contingency plans if something (un)predictable happens. That is arguably the key difference.
Hedging improves your business IQ
Investing is a prime example of how hedging on a different source is super beneficial. I remember watching one of those TED talks (or something like that) when I stumbled upon Robert Kiyosaki explaining what four assets can make people rich. These are:
- Real estate
- Paper assets
Naturally, there are more ways to invest and build wealth but for someone just starting out, this method is great for getting the hang of investing and starting off on the right foot. Having a company or investing in one provides a steady level of working capital with the goal of creating a return back to the business or you as an investor. Real estate investments are generally a great option as they can generate passive income such as cash-flow from rental properties or capital gains from flipping a property, which make it a good long-term investment.
Then, paper assets like stocks, bonds, mutual funds, savings, and such are necessary because they are liquid. They are quick to get into and quick to get out of, unlike investing in a business or real estate which can be a longtime burden if not done right. Finally, commodities like food (grains, coffee, sugar, etc.), raw materials like oil and gas, and precious metals will always have certain value because those are the things that people will always need. Plus, they are easy to buy and great for building financial IQ.
Kiyosaki also made a great point by including guns and bullets as precious metals as people will “always kill people and eat corn”, to paraphrase – at least in the United States or other gun-happy, corn-eating places. The thing is, sometimes that’s actually a true example of hedging.
If you have a business that’s running, you always have some kind of motion. If you have stocks, you can always get that money out. If you own real estate, you have something that’s making money, while a commodity is a fallback for everything.
In many ways, it’s a game of percentages. If you put 100% of your investment in a business, what happens when that business fails? There’s always a chance it will – just take a look at the mess the COVID-19 pandemic has made. However, if you tie up 50% of your capital in a company and 50% in real estate, you’ll be a little bit safer. On the other hand – you won’t be liquid so if a good opportunity comes up, you won’t be able to react and pounce on it. But if you put a third of your investment money in stock, for example, you’ll gain liquidity and become ready for opportunities. And if none of those work, you can always have a failsafe in a commodity.
Obviously, it’s not the asset class that makes a person successful or not investment-wise – it depends solely on how savvy the investor is. A smart one will make a ton of money in the stock market while an amateur will lose it.
Hedging has a broader meaning
I need to point out that there is a broader context to hedging than just the standard application as a risk management strategy to limit or offset possible losses that may be incurred by investments or by changes in the financial market. The moment you grab an umbrella on your way out because you don’t want to be surprised by a summer shower – you’re hedging.
Perhaps a more precise term would be using a fallback. I’ve previously written about it in the sense of entrepreneurial commitment. It makes you comfortable but if you want to be big and successful, there’s no room for it in the beginning. Being comfortable is dangerous if you want to take a plunge in the entrepreneurial world.
But once you’re there, fully committed – the situation changes. From an entrepreneurial standpoint, “hedging” can be applied when you’re starting a company – the same one that barely ends up exactly as envisioned from the get-go. Almost always, there is a pivot because you expose your business to risks of fluctuations. It changes things so you always have to have a fallback when you’re thinking about the best way to protect the company from the risk. The key is to understand what you stand to lose, as well as gain.
Anything that has to do with yourself, you can bet on. You may get into an accident but it’s a good bet if you believe in yourself. There will be so many unknowns that at one point, it won’t make any sense BUT to trust yourself to make good decisions. A great entrepreneur wakes up in the morning, sees there’s a problem to solve, and solves it quickly. That’s one of the best things about great entrepreneurs – they are great leaders at the same time.
Have a plan B
The path to success is never completely straight. There will be situations where a number of people working with you or for you will be looking your way with that stare that just about says “now what?” because there’s a barrier they don’t know how to get around to. Because you think about the fallbacks, you can offer a template to success the employees will know how to deliver on. You’re giving them the initial blueprint but always thinking about what’s going to happen, how you can expand or cut corners. If you have one stream of money, what does it take to have another steady stream in the same business if something happens to the first one? Those are the machinations that make an amazing entrepreneur and leader.