Risk to Reward
We take risks every day. The risks can be small, such as taking a shower or crossing the street. They can also be average such as rolling through a stop sign, speeding or texting while driving. (I actually hope you see these as more risky than average.) Rarely do we do things that are very risky, such as driving while under the influence, trying to do something physically that we’ve never done before that can hurt us seriously, or taking all our money and putting it on one number of a roulette wheel. So where on this scale of risk is buying new technology that will improve safety, reduce fuel or otherwise save operational costs?
It’s been an interesting couple of weeks. Two weeks ago I presented to the Technology and Maintenance Council of the American Trucking Associations. I lead the Far Horizon effort of the Future Truck Committee in that organization. The goal of the group is to take the lessons learned from the day to day operations and affect the future design of new vehicles. We say Far Horizon because it is more than just the future, with the long development times for new vehicles that are significantly different than today. While most Future Truck activities are looking at 3-5 years out, the Far Horizon group is looking at 7-10 years. That might sound crazy to some, but our government is about to release numerous regulations that will affect new vehicles 5 or more years from now. From the time the government releases an Advanced Notice of Proposed Rule Making (ANPRM) till that rule takes effect, is often more than 5 years. For the upcoming proposed regulations (NPRM Notice of Proposed Rule Making) for emissions, GreenHouse Gas and corporate average fuel economy for trucks, it’s likely to be 5-6 years from now before they take effect. The world of fleet maintenance operators seems to be very much risk averse. The reward seems to be too small to people while the risk of disruption to the business is high. For instance, I heard one executive complaining about the number of trucks out of service one day due to driveline issues resulting from engines that have been down-sped to save fuel, but have a side effect of producing higher torque at low speeds. That executive took a risk, expecting a reward, and is paying too high a price for the effort. That’s why fleets routinely look for short payback periods such as 2 years, discount claims of fuel savings by a factor of 2, and take extended time testing new products at supplier expense before committing.
On the other hand, I spent a day at the Oregon Entrepreneurs Network Upstart Day. Twenty-six companies gave one-minute pitches to try to convince angel investors they have the greatest upside potential. They want accredited investors (that’s those with a significant amount of money and some sense of risk/reward) to put a great deal of money into their idea and company. The angel investors are looking for the one risk that has a potential reward of 10-30 times the investment in 3-10 years. That’s significantly better than putting money into a mutual fund. But, the high return is an attempt to overcome all the bad investments that lose their money in less than 3 years or barely return what was invested.
It was also the end of February and I was checking my family finances. I recorded all our assets and how they have changed since the end of last year, and did the same for our liabilities. Not too surprising, the stock market has been good these last two months and total assets went up and, fortunately, we paid the house mortgage and spent less, so our liabilities went down. But, there were some investments that went down. When we set about putting our financial portfolio together with a financial planner, we were asked our level of risk. My lovely spouse is more conservative than me, being moderate. Were I a bit younger, I’d probably lean toward aggressive. But, I now am happy with moderately aggressive. We are unwilling to risk everything at this stage in our lives. That’s unlike those 26 entrepreneurs, many of which are early in their careers and have, literally, nothing to lose. So our rewards are less than stellar on the upside; and, we hope, less risky on the downside.
Not to belabor this, but what are you willing to risk? And, what reward do you expect to get from it? Are you willing to buy $5 worth of lottery tickets when the jackpot is $10 million? Or do you wait till the jackpot is more than $100 million, or now $300 million at times? The risk is the same; it’s the reward that is changing. Is the reward for texting while driving worth the risk? Is the reward for buying that new truck worth the risk? Does buying a business produce enough reward to overcome the risk? Multiple times a day we take risk to get some small reward. When you are small or young and have little to lose, you’re obviously willing to take more risk. As you get to have more and be bigger, you’ve got lots to lose and you become risk averse. I guess I just need some R&R.