Firestone - Even the odds: sensible risk-taking in business, investing, and life

I am a practitioner in the risk trade. You are too. Every day we face challenges that deal with exposure to uncertainties that range from benign to highly dangerous, from immaterial to very costly. We might nudge our car too aggressively into traffic at a busy intersection, interrupt a colleague in a meeting to make a controversial point, impulsively invest in a friends start-up against our own better judgment, or decide to eat a loaded cheeseburger and secretly delight in the fact that we werent offered a salad rather than fries.

The possible outcomes following these actions vary enormously, from a car accident and heartburn to financial debacle or a pleasant drive home, yet they illustrate the range of our daily risk-related experiences. Very often, we barely register the potential downside, and even when we should evaluate the situation carefully, our effort can be hopelessly inadequate.

My day job involves constant encounters with the unpredictable. My company invests money and manages the financial welfare of clients who trust us enough to pay for our expertise in making tough investment choices for them. We make our living by successfully analyzing risk and subverting the many factors that may bring our clientele tremendous financial pain. The practical focus of this book is directed toward constantly pursuing strategies of sensible risk-taking, to improve the outcomes of decisions and to add real value.

Other than a break to attend business school, I have spent my entire adult life in the investment business assessing risk. The stock market fascinated me from the time I was in fifth grade, when Mrs. Culhane had our class create a model portfolio that we followed and charted through the course of the year, keeping track of our gains and losses. IBM, Xerox, Kerr McGee, United Aircraft (now Technologies), and Eastman Kodak made up that 1967 portfolio. I sold United Aircraft and bought Flying Tiger and replaced Eastman Kodak with Avon. Those were the go-go years and we all made a killingon paper. I suspect that Mrs. Culhane was playing the market actively herself.

I attended the Commonwealth School, a private high school in Boston, where I had a substantial scholarship thanks to the largesse of the schools founder and headmaster. His name was Charles Merrill, and his father, Charles E. Merrill Sr., had cofounded Merrill Lynch. I asked Mr. Merrill to help me get a job at Merrill Lynchs office in Copley Square, close to the school. A devout liberal, Mr. Merrill put his head in his hands and shook it so vigorously that I was worried he was having a seizure. Finally, he looked up at me and said yes, he would arrange an interview with the branch manager, Bill Strott, with one important condition: I must promise never to become a capitalist. Given that I didnt really understand the term at age sixteen, I agreed. (I have since apologized to Mr. Merrill for breaking the promise I made all those years ago.) The next day, there was a note for me on our bulletin board from Charlie Merrill. It said, See Bill Strott at 3:30 p.m. tomorrow. WEAR A SKIRT!!! I did, and Mr. Strott, who doubtless had little choice, hired me to do whatever menial tasks they needed done around the office. That was my first paid job in the investment business. I was in heaven.