what happens when you eliminate all downside?

You’re left with…

The secret to success is not in the chasing of more upside, but in eliminating the downside.

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That's the strategy employed by Wall Street giants and billionaire investors.

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It may look like these types always get “lucky...”

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But the truth is they ENGINEER luck.

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In other words, they MAKE luck happen for them.

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How?

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By minimizing downside risk.

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If these successful types make it virtually impossible to fall off of a cliff or hit a major pitfall...

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They’re exclusively left with asymmetric opportunities skewed in their favor.

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They take THOSE opportunities and either say no to the rest... or they modify the rest, turning them into a bet with asymmetric upside and little-to-no downside risk.

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Now I know what you’re thinking...

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“Sounds great Dan. But how do I actually DO this consistently in my business and life?”

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First, you must pay attention to this major, but nearly always overlooked, key ingredient:

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The potential downside risk in any situation must be so low that if the worst case scenario occurs, it won’t stop you from playing the game.

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In other words: you won’t be blown up and forced to withdraw yourself.

Here’s a tax related example:

Recently, I learned of an entrepreneur who spent $1M to avoid paying $200K in taxes…

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And while initially, that sounds great because he got his tax burden down to zero…

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There is LARGE downside risk that may even “take him out of the game” if things go south.

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Now, it’s important that I be fair in my assessment and look at the upside, so let’s start there: assuming this business continues growing and the $1M in investments work out - this entrepreneur will see a good outcome.

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But it doesn’t change the reality and the math of asymmetry.

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We’re talking about $1M risked or tied up/illiquid to save $200,000. The math shows that’s asymmetry to the downside, and it’s what we want to avoid.

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What this means practically?

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If this entrepreneur has majorly depleted his cash reserves to reduce his tax burden...

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And the business doesn’t continue to grow or sustain the same level of take-home-profit for this entrepreneur...

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(Say there’s ‘concentration risk’ where they serve one major client and that client goes bye bye for whatever reason).

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What happens when payroll hits?

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Or some unexpected expense comes around?

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It could be devastating.

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And if this seems like an extreme example, the hard reality is that it’s not.

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82% of small businesses fail because of cash flow issues just like this.

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So it’s way more prevalent a problem than it is a rare occurrence.

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Not to mention that this entrepreneur has now put their company in a spot where he may not have the resources on hand to invest in a great opportunity if it comes his way.

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If he did the proper tax planning throughout the year like we do at Nth Degree CPAs, he could have had the SAME tax advantages...

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WITHOUT taking on all of that downside risk.

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This is the game. Eliminate downside risk.

Here’s another example you're probably familiar with: instead of putting an entire $100K investment into a single crypto currency or a stock…

You split it up into 10 different investments with the understanding that many of these may fail.

But you’re playing for 1, maybe 2 out of the 10 to have a 10X, 100X, even 1000X return… making the investment as a whole worthwhile.

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This has lower downside risk than YOLOing all $100K into one place -- which would yield you a single point of potential failure.

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But here’s the catch with this example that most people don’t talk about: human nature is a tricky thing. Should we see 1 of our 10 plays skyrocket, it’s easy to fall into the trap of thinking “I should have put it all into that one!”

This is called hindsight bias.

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And it’s the siren song of greed - leading us straight into the rocks of downside asymmetry.

The smart play is to understand that you may feel hindsight bias, but not become prey to it. Dare I say, instead feel grateful that you’ve hit a winner.

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And like the best business people and investors in the game, stick to your strategy of minimizing downside risk.

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Start focusing on building a solid foundation that eliminates all the downside.

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By doing so, we open ourselves up to the ultimate upside potential…

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Which, not shockingly, can naturally lead to more, more, more profit.

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Just a little insight for you to start the weekend. :)  

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Here’s to your success and financial certainty,

Warm regards,

Dan Nicholson

Founder, Nth Degree CPAs
Author of “Rigging the Game”

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