https://www.youtube.com/watch?v=A9qHKjFPJ-E

1 00:00:00.000 --\> 00:01:00.000 there are two big risks that exist in
business the first is the execution risk the second is the idea risk now
you could maybe make an argument for a third being you know
environmental risk regulatory risk things like that but i would say big
picture is does the idea fundamentally work you know is dr having
strangers drive kids around in cars is going to be a really good idea
uber right or creating lockers for cats is that going to be a good idea
i don't know right or am i going to be able to execute the idea itself
and if you don't know who i am my name is doctor mosey i own
acquisition.com it's a portfolio of companies that over a hundred
million dollars a year and i have nothing to sell you i like talking
about business stuff and hopefully making fewer people broke in the
world makes me die happy okay so i was having a really good conversation
with a friend of mine uh who's a software entrepreneur he's had three or
four software companies none of them have really hit um and he's about
the same age as me and he and i sit in very different financial
positions at this point in our life and we were having a really in-depth
conversation around this topic which is appropriately measuring risk and
so one of the issues that i see with a lot of newer entrepreneurs is
that they overestimate the payoff for a risk and underestimate

2 00:01:00.000 --\> 00:02:00.000 the cost number one and second is they
overestimate the likelihood of success they're going to have and they
underestimate the risk in terms of the likelihood that they fail and i
think this is really interesting because he and i were discussing the
first quote that i have it's kind of it's in the intro of my book uh by
jeff basis i'll read it to you right now outside returns often come from
betting against conventional wisdom and conventional wisdom is usually
right given a 10 chance of 100 times payoff you should take that bet
every time but you're still going to be wrong nine times out of 10. we
all know that if you swing for the fences you're going to strike out a
lot but if you're also going to hit some home runs the difference
between baseball and business however is that baseball has a truncated
outcome distribution when you swing no matter how well you connect with
the ball the most runs you can get is four in business every once in a
while when you step up to the plate you can score a thousand runs this
long tail distribution of returns that's why it's important to be bold
big winners pay for so many experiments jeff bezos and so the thing is
is that there are two big costs when you're making these risks one is
you've got the money and things like that but i think the biggest cost
is time and so if you think about portfolio theory which is uh for
example like

3 00:02:00.000 --\> 00:03:00.000 venture capital vcs though let's say
they take 50 companies on and they're betting the fact that one of those
50 companies is going to you know 100x and pretty much carry the return
to the entire portfolio and for the vast majority of the other ones they
will either go out of business or basically not really do anything
spectacular and so for the vc for the venture capital the investor it
makes sense to take this approach because they're going to get very good
returns uh using you know you know using this this method whereas if you
are one of the 49 you know founders who has pretty much all of their net
worth invest in this thing and it takes five years of your life away to
only fail it can be harder to swallow and so he and i have had very
different careers and lives and it's because we we value risk
differently now he would say that he is not interested in making money
and he just wants to do something really big and really cool i tend to
be more money focused uh or money money driven whatever you want to say
uh because i think that the accumulation of money will allow me to do
really cool things later on in my life and when i say later i mean like
you know give me 20 30 years um of doing this and i think we can do that
now the reason that i want to bring up this topic is because picking the

4 00:03:00.000 --\> 00:04:00.000 business that you're going to go after
i think is a very important question that you're going to ask yourself
and you have to understand that you're probably going to fail many times
before you are successful and one of the hardest questions in
entrepreneurship and this is also one of the things that come up in the
conversation is when do i push or when do i pivot right when do i keep
pushing when do i keep persevering on this idea that's not quite working
uh and when do i pivot and it's one of the hardest questions in
entrepreneurship because you don't know whether it's you or the idea and
that's what's hard because sometimes it's like how many great business
ideas have the founders have abandoned six inches from gold where they
just needed to push a little bit harder and they were going to have the
breakthrough and i hesitate to talk about the subjects i think most
people just don't know how to push at all and so you know i put that as
a big caveat now when we're talking about business in general i and this
is my difference from my friend i prefer to only go after ideas that i
think have virtually no risk of not being ideas that people want which
then leaves only me as the variable the execution risk that it can be
done well it can be well businessed right and so i think in a lot of
ways this is just alex's two cents most newer entrepreneurs i think
would be better served going after boring businesses

5 00:04:00.000 --\> 00:05:00.000 that have established needs right so
people want to have you know businesses want more customers people want
to make more money people want higher paying jobs people want to have
skills that are valuable people want you know to lose weight people want
entertainment like these are all things that are not going to change
over time and so what that allows you to do is hone your skills at
business because you know if it doesn't work it's only you it's only
your fault if it doesn't work right and so because the problem is that
having the perspective from which to make a judgment on whether you have
product market fit can be i think a much harder decision of when to push
and when to pivot right and as a total side note because i think this is
really interesting i think there's three big questions that are really
dichotomies that um you have to manage as an entrepreneur right one is
one to push in one to pivot the second is how much do i consume versus
how much do i invest right because you're going to be living your whole
life if you always forego the immediate satisfaction you may reach the
end of your life and never have enjoyed anything right so there's a
little bit of a balance there that you have to strike right and it
probably shifts over time but there still means that there's some level
of consumption even early on in your life and at the same time you also
don't know if you're gonna live tomorrow right and that's where it gets

6 00:05:00.000 --\> 00:06:00.000 really interesting and uh it's a
personal question right and the third is is kind of the balance between
like how much do i you know delegate uh to other people versus how much
do i do right because you got to do something and you can delegate
everything right like and so there's there's balances here and so today
it's just about the push and the pivot uh and idea risk versus execution
risk and so for the newer entrepreneurs you probably suck at business
and that's okay and that's because you're new which is totally
reasonable totally acceptable and of course you should suck because it's
hard and a lot of people do it right if you want to be in the top one
percent it's one percent of people that means you have to beat 99 other
people out of 100 in order to be the top one percent which is only 400
thousand a year right not only it's a lot of money right and so the
thing is is that instagram makes everyone feel like if you're not making
money or you're poor which is not true you can save 400 000 a year for
not that long and uh and have a lot of money you know what i mean and so
anyways back to the point if you're picking businesses the difference
that he and i had is that his mentors always went super super big they
wanted to go change the world and whatnot but what i don't think we see
or appropriately risk or value is the graveyard full of people who went
big and struck out and i think is an interesting caveat to this jeff

7 00:06:00.000 --\> 00:07:00.000 bezos gives this example and i want to
dive into it in a little bit more detail let's let's zoom out for a
second let's eliminate jeff bezos elon musk warren buffett from the
names that you have in your head if we were to think what would be
required to be number one in the world at a thing right you'd have to
have the natural proclivity right because if you're competing against
everybody the people who are gonna have natural advantages based on
genetic code upbringing whatever are going to they're gonna win more
right so that'd be the first thing we'd want if we wanted to create this
person who's gonna be likely to win number two is they'd have to have a
tremendous amount of skill right so they'd have the natural proclivity
the the nurture that created an environment where they had work ethic to
pursue the skill right so they have to be very very good and then third
they'd have to be lucky right because if you think about a whole bunch
of people like imagine everybody who's born really you know has natural
tendencies or proclivities towards these activities right and then does
a ton of it in terms of volume so they get very good what then separates
them luck right the people at the very very very top have all the all of
the things aligned comma and luck and so it's interesting that he has
this quote around risk um because one of the things that's unique about
um bezos and even

8 00:07:00.000 --\> 00:08:00.000 elon right and this is probably a
further discussion on business strategy overall is that they've had
virtually limitless access to capital right like as in they can
basically raise money endlessly to fund these risks right and so the
equation that he said which is imagine you go to vegas casino there's a
there's a table that has a 10 chance of winning but you get 100 times
pay out when you do right if you can play the game on an unlimited time
horizon then you absolutely should just play as played as many times as
humanly possible right but most of us do not have unlimited spins right
and that's where this gets more interesting and so if you were to
imagine a dollar as a year of life okay that you have in your
entrepreneurial career and let's say to build something really epic
would take 10 years and that's like minimum you know what i mean like
facebook was 20 is 20 years old now right which is kind of insane to
think about i think it's 20 years old is it 20 years old i feel like
it's 20 years old it's pretty old 15 years old it's pretty old right
let's just say 15 right if you want to build something epic which means
and how long does it take to test the idea before moving on right that's
another big question like how how long does it take

9 00:08:00.000 --\> 00:09:00.000 to really give it your all on a thing
and so we were having the discussion and he said i think we should say
35 would be you know you have 35 years of life and uh you know how long
do we do we chunk and we agreed on five years as a mid ground because it
takes 15 to really you know see something all the way through if we said
15 was the chunk that didn't seem realistic because it doesn't take you
15 years to find out something doesn't work right um and so it's that
about so we said five was that was the number you can come up with your
own right and so a more realistic way to see this right would be uh you
know you've got a one out of 10 shot at 100 times payout but the minimum
bet is five and you've got 35 bucks interesting right the conversation
changes now let's say that you're now 15 years in let's say you bet
three times you lost all three times which would be reasonable that
would be expected that you'd lose three times you could even lose all
three of the first times but now you're 15 years in and you have still
no money huh how do you feel about yourself right how do you feel about
your skill what's your reputation all these things kind of weigh in you
know what i mean this is why i think this is a really interesting
discussion and so i will give you my two cents because he and i disagree
on these things because i have the perspective that all the people that
i know are the wealthiest in the world eliminate risk

10 00:09:00.000 --\> 00:10:00.000 so that's what they do they control
risk they they virtually eliminate they figure out ways to play the game
in new ways where they cannot lose right i'll give you an example if the
rock came out with a i'm trying to think of something he hasn't come out
with because he came out with apparel and whatever let's say he came out
with uh let's say he came out with a book right let's say let's see the
rock writes a book maybe he already has written a book i don't know and
he writes a book what's the likelihood that it's not a bestseller
virtually zero right it's virtually zero so he's basically limiting the
risk because he controls another variable which has a massive audience
right and you can build that deliberately and so when we think about
these things the richest people that i know control risk and only play
games where if they wait they win and my friend has not taken that
approach and he's like hey i just want to go big or go home and the
thing is is that he's gone home more than he's gone big and so i uh i
will give you alex's two cents and you can choose to do what you want
with it and i'll just explain my views on risk i tend to go with the
highest likelihood bet and i tend to if i have two bets let's say one
where i have a 10x payoff for a you know one out of two shots right
which would be a two to one risk adjusted return all

11 00:10:00.000 --\> 00:11:00.000 right if you're curious you just
multiply the payoff by the the by the likelihood all right that's a 5x
sorry i've messed that up but you get the idea you multiply the payoff
by the percentage likelihood and if i had an equivalent risk adjuster
return in another one but i had a higher likelihood of achieving it so
if i had a 5x that i or a 6x that i thought i had a 4 out of 5 chance of
getting versus a 10x that i had out of the math on it but whatever a one
out of two shot at getting i would pick the the four out of five shot
that had a lower upside that's me and i think part of that is because
the games that are set up that way are usually going to be just
execution risk businesses and i feel like i can i can pay that down in
other ways right i can pay down that risk so i can virtually nothing's
guaranteed but i can virtually guarantee the outcome and so my goal is
to string as many of these virtually guaranteed upsides in my favor for
a long enough period of time that i let compounding work because
compounding on a long enough time horizon creates the outsize return and
so the idea is how can i play how can i get as many w's in a row and as
few ls as possible for a long enough time horizon so that i

12 00:11:00.000 --\> 00:12:00.000 create the outside's return comma and
get delivered pretty cool and and stress-free you're not stress-free but
like a pretty cool life along the way right now if we played the game
the way that we talked about earlier where you have the 35 years that
you can bet and your three bets in you're 15 years in and you don't have
anything that can be pretty hard hard on your ego harder reputation
maybe you learn bad habits like there's a lot of things cause you won't
know especially if there's an idea risk that's at hand like is it me or
was it the idea right and so for that reason i'm in favor of the
significantly lower risk and he and i were you know talking back and
forth he's like you know what i've observed from you is that you just
you go for the sure thing and that's a hundred percent what i do that is
i've always gone for the sure thing and then i just continue to try and
trade up the upside of my sure things right so the first short thing you
can have is a very high paying you know income job and then the next
sure thing would be like if i were to quit a job i would make sure that
i had more income from my side hustle probably where i believed it would
be very reasonable for me to get that you know within a very short
period of time so then i would you know make maybe that switch and then
i would look at you know all the opportunities that existed and think
okay what are these things uh on a risk adjusted basis and

13 00:12:00.000 --\> 00:13:00.000 this is again where people make it you
know errors like just assume like you have to take the negative
assumptions and i would say like the the better i get at this at
thinking this way the more i i continue to make which is i'm gonna
assume everything goes wrong what then do i make right and so if you can
just say like assuming none of the good things that you think are
reasonable are going to happen happen can you still win and i think when
you think that way what happens is you give yourself room to be
pleasantly surprised and exceed expectations but what happens is when
you set up the game that way where you're like i'm assuming these are
the five things that i think will happen and will go right but i'm
assuming none of them are gonna go right do i still win and if you can
still win then that is an opportunity worth pursuing in my opinion and
so that's um that has been the approach that i have taken which is how
can i virtually eliminate downside risk how can i eliminate idea risk
and how can i and when i say virtue eliminate downside i meant to say
the execution risk so how can i eliminate idea risk by only going after
things that people i already know want and then how can i stack the
chips in my favor like the rock where if i want to write a book i

14 00:13:00.000 --\> 00:14:00.000 want to make sure it's a bestseller no
matter what right how do i do that and then think about all the things
that can go wrong assume they go wrong and then think what would i do in
order to still succeed even with all these things going wrong and then i
think when you take those actions you may not hit the 1000x return but
let's paint a different game that you could play so let's say you could
play there's the two games one was the one that jeff bezos outlined
right which you got uh you know one out of ten shot at getting 100 times
payoff the game that i prefer to play is how can i get a 3x payoff with
a 95 chance of certainty and i still have the same 35 right minimum bet
well i'll bet 5 and get my three and then i'll bet my 15 i'll get it now
be at 45 and then i'll bet my 45 and i'll be at up there we go i'm
already at 120 or whatever sorry got my 100 times payoff by thinking
about it from a risk-adjusted basis now it's not going to be sexy it's
not but if you double or triple or 5x things enough times you get to the
100x very quickly and you can do it with limited downside knowing that
you've controlled for the idea risk and have only focused on the
execution risk which is yourself and so that's how i've

15 00:14:00.000 --\> 00:15:00.000 thought about risk with opportunity
that i thought i would share with you because it was a really cool
conversation um i hope i hope it gave you some light in terms of uh at
least how i think of things um and maybe some of those ideas uh could
serve you so mostly nation love you guys i don't deserve you but i love
you for being as awesome as you are leave questions in the comments for
uh for future vids they're really helpful for me um and i'll see you in
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