Risk

No man is worth his salt who is not ready at all times to risk his well-being, to risk his body, to risk his life in a great cause. Theodore Roosevelt

My father-in-law, Herbert Warner, was a very wise man. He ran an oil company for many years and gained a great amount of knowledge in the process. His original career was as an attorney, but he moved into the oil business quickly after passing the bar. He and I often discussed the business world in general and, more specifically the worlds of law and finance and how they worked together within the framework of real businesses operations. One of the subjects we had many discussions about was risk.

As a paraphrase, Mr. Warner used to tell me that gold wasn't in the hearts of men - oil was. In a slight dig at both his profession and mine, he told me that all of the attorneys and all of the accountants would look at the investment in an oil well, perform all of their analysis and recommend against the investment. Yet wells are still drilled and people still make money. 

Risk is an interesting facet to our existence. Whether we are talking about the physical risk of mountain climbing or the financial risk of an oil well, it is something that increases in direct proportion to the perceived value of the reward. 

Many of us thrive on risk. The rush of the free fall in skydiving or the thrill of investing in a business are what we live for. The anticipation of the roll of the dice is an addictive rush.

On the opposite end, many of us are risk-averse. That means we are satisfied with a much lower level of reward in return for not having to worry about losing our investment. But remember, as the line in the classic song by the Eagles goes, "every form of refuge has its price". Many times the price of sitting on the sidelines is that your savings are not earning enough to keep up with inflation. This creates a slow erosion to your wealth that, over time, causes you to decrease your standard of living.

Most of us live somewhere on the spectrum between risk-averse and risk-prone. If we see a great possible reward, we are willing to part with some of our money. The key is the level of reward. I know people who are penny-pinchers in most areas, yet are willing to part with their money for a chance to win the Powerball. 

Now for the big question: How does a CPA help a client in a matter where risk is involved?

If a CPA is good, he will be able to analyze any transaction and not only identify the risks, but give you solid information that will help you to mitigate the risks. If you are buying a business, the CPA will be able to find inconsistencies in the numbers that the seller is providing to you. Then the CPA will point out ways to improve the business once it is purchased in order to help the business to succeed. 

If you currently own a business, the CPA can help you to uncover areas of risk concentration so that you can adequately plan for problems that may arise.

And finally, if you come to a CPA seeking advice on whether you should invest in the drilling of an oil well, he will politely try to steer you into a less risky investment. Yet sometimes, just sometimes, you will invest in it anyway and prove him wrong by making money. 

This week's blog is dedicated to the memory of my friend, mentor and father-in-law, Herbert J. Warner, who passed away five years ago this week. He was a man who helped me tremendously in my life and continues to be missed greatly. I am a better person for having known him.