CRISIS MANAGEMENT

Think About Any Risk Like an

Investor
by Karen Firestone
MAY 03, 2016

Risk is unavoidable. Whether were driving in fast-moving trac, arguing with a

colleague in a meeting, or investing our hard-earned money, we are engaging in risk
taking. As an investor, I think about nancial risk a lot, and Ive become interested in
using the tools of the investors trade in managing the large and small risks we face
regularly. Those are:

Right-sizing
Right-timing
Relying on knowledge and experience
Maintaining skepticism about predictions and promises

Lets see how the tenets might apply to three very dierent cases, each containing
substantial risk.

Sara Campbell, a talented dress designer, sold the majority of her apparel as a private
label supplier to national chains. When both Talbots and Laura Ashley collapsed in
the nancial crisis of 2008, Sara suddenly lost the vast majority of her revenues.
Making matters worse, she was bound to fulll contracts with manufacturers and
suppliers despite the drop-o in client orders.

Steve Starr, the owner of Starr Real Estate in Austin, Texas, was worried that Eve, his
commercial leasing manager, was becoming a problem. Evewas causing conict
with colleagues, taking excessively long lunches (from which she returned tipsy),
and missing client appointments. When Stevetook her to lunch near the oce to
discuss how things were going, he found out it was even worse than he thought: The
restaurant manager called him into a back room to tell him he had good reason to
believe Eve was selling cocaine out of his restaurant.

Christine, one of our clients at my asset management rm, wrote to Nicole, our
director of customer service, saying that she was overseas and hadfoundsome
fantastic antiques for which she needed us to wire a fairly large sum of money.
Nicole assured her over email that we would transfer the funds immediately. Two

minutes later Nicole received a new email from Christine, asking for an even larger
amount to be transferred for other purchases. Nicole realized with horror that she
had been duped. Christines Gmail account had been hacked and we had been
conned by a pro.

I interviewed Sara, Steve, and Nicole for my book, Even the Odds: Sensible Risk
Taking in Business, Investing, and Life. How they responded to these risk-lled
situations shows the power of right-sizing, right-timing, relying on knowledge and
experience, and staying skeptical. Even if you cant control all four of these
variables, controlling a couple of them can sometimes be enough.

For example, Sara had not recognized that she was violating the tenet of right-sizing
by depending mostly on two customers. In addition, Sara and her partner, Peter
Wheeler, had no control over the timing the economy was terrible, but there was
no way they could wait for a better macro environment. They needed to act
immediately to counter the triple threat of plunging sales, commitment to
production capacity they didnt need, and very limited liquidity.

Relying on their knowledge and experience, they came up with a brilliant idea:
Given the economic crash, commercial space could be leased relatively cheaply.
Theyd lease inexpensive space for Sara Campbellbranded boutiques to sell the
clothing they were committed to producing. Althoughtheir advisers were
suggesting bankruptcy, Sara and Peterborrowed from family and friends to fund the
expansion. Their bet paid o. Today they have 13Sara Campbell LTD stores up and

down the East Coast and the business is more protable than when they were
primarily third-party providers. They used knowledge and experience to turn the
terrible economic timing into a benet.

Steves case was a bit dierent. Sara and Peter had no control over the timing and no
choice but to risk their whole business not ideal conditions but Steve had a
ourishing business to protect. He used right-sizing and right-timing to mitigate the
risk Eve posed.

When it sunk in that he had a big problem on his hands a dysfunctional and
combative employee who was selling cocaine on the side he moved quickly. He
told his attorney about the situation, and they agreed that Steve needed to dismiss
Eve immediately. But there was potentially signicant risk to Steves reputation and
his relationship with his clients if the whole messy story emerged.

They decided that because Steve could quantify several lapses in her work the
combativeness, the missed appointments, and the absenteeism he could re her
without mentioning anything about her outside activities. Still, there was a risk she
would try to sue. Steve and his lawyer decided itwas a risk worth taking, since it was
a smaller risk than either continuing to employ Eve or exposing the messy truth
about her involvement with illegal drugs. And, indeed, when Stevered her, Eve did
sue for dismissal without cause and gender discrimination, but the attorneys settled
the case quietly and without much pain.

In the case of my own business, there was no way to recoup the money. We
contacted the FBI just in case, but they conrmed our fears: The money was gone.
After I fully grasped that the money sent from Christines account was gone,
probably forever, it only took me a minute to decide what we should do. The
reputational risk to our rm was very high. We knew we had to tell Christine right
away and reimburse her the money, which was a meaningful amount. Despite that
cost, it would have been both unethical and bad business policy to follow any other
path.

I called Christine, lled her in, told her we were making her account whole, and
apologized. She was extremely grateful that we acted so quickly, and shes
continued to recommend us to other people. Weve since changed our nancial
transfer policy to reect a healthy amount of skepticism:We require a phone
conrmation of any unusual transfer over $5,000, which is now typical across the
nancial services industry.

The tenets of sensible risk taking, right-sizing, right-timing, relying on knowledge,

and remaining skeptical are useful as tools we can apply across business, investing,
and life. Applying them mindfully will improve our risk-taking ability and lead to
better outcomes, no matter what kind of mess we nd ourselves facing.

Karen Firestone is the President and CEO of Aureus Asset Management, an asset
management rm which serves as the primary nancial advisor to families, individuals, and nonprot
institutions. She cofounded Aureus after 22 years as a fund manager and research analyst at Fidelity
Investments. Shes the author of Even the Odds: Sensible Risk-Taking in Business, Investing, and Life
(Bibliomotion, forthcoming April 2016).

This article is about CRISIS MANAGEMENT

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