Uncategorized

The Myth of the Risk-Takers

In a recent piece in one of my favorite mags, the New Yorker titled “The Sure Thing,” Malcolm Gladwell, the king of countering widely held American assumptions, wrote that risk taking is not actually a widespread quality among hugely successful entrepreneurs. In fact, it’s just the opposite. Major entrepreneurs like Ted Turner and John Paulson are in reality so risk averse that they take—or took, when accumulating their massive wealth—all possible precautions to reduce risk. Big-time entrepreneurs, Gladwell suggests, are not the kind of wild gamblers who, because they have the courage to take big risks, eventually make a lot of money. They are more akin to the MIT Blackjack Team, from the book “Bringing Down the House,” or the movie with Kevin Spacey “21,” who discovered the game of blackjack was legally beatable, if you applied certain mathematical principles to it.

Take Ted Turner. At the age of thirty, he inherited his father’s billboard company in Atlanta. But he saw more potential, more excitement, in television. He took an interest in a local TV station, which happened to be losing a ton of money. His family’s lawyers advised him against buying it. But he did, and for almost nothing, by offering them free advertising on his billboards. He then went about courting major TV networks, like NBC, to let him broadcast shows the local affiliates weren’t able to run. Within four years, the station was making a million dollars in profit. Ted Turner is, as Gladwell says, “a cold-blooded bargainer.” After his TV station blew up, he then went about buying the Atlanta Braves. He did so by first finding a million dollars on their books—that is, money the team’s managers didn’t even know they had! He was a clever, wily, rambunctious guy, Turner, but not much of a risk taker. Just like me:)

In making his case, Gladwell draws on a study called “From Predators to Icons,” by the French scholars Michel Villette and Catherine Vuillermot. The scholars chart the careers of successful businessmen around the world, like Sam Walton of Wal-Mart. What they found is that, rather than being risk-takers, these businessmen were predators. And predators try to incur the least risk possible. They are not braver than the rest of us. If anything, they’re more alert, and therefore more analytical. Of course, taking some risks is unavoidable. But being risky, more often than not, entails a lack of preparation and foresight, throwing caution to the wind.

There is more than a little bit of the self-helper in Gladwell. This accounts for the enormous success of his books. (“The Tipping Point” has been on the New York Times bestseller list for 284 weeks.) His essential point in “The Sure Thing” is to remind us that risk-taking is not necessarily a good thing. As he writes: “Would we so revere risk-taking if we realized that the people who are supposedly taking bold risks in the cause of entrepreneurship are actually doing no such thing?”

Then there’s the hedge-fund manager John Paulson, who made billions by shorting the housing market using credit default swaps. How did he do it? First, the guy was thrifty by nature. Gladwell paints a picture of Paulson taking buses into midtown, and trains to the Hamptons, where he got around by bicycle. Second, and more important, he and his employees did backbreaking amounts of research to prove (to themselves) that the housing market was in fact a bubble that eventually had to burst. He bought millions of dollars worth of credit default swaps. People on Wall Street, naturally, thought the guy was nuts. But when the bubble burst in 2007, Paulson & Co came away with over $15 billion in profits. In 2008, they made another $5 billion.

Some, of course, said his credit default bargain was risky. But was it? Gladwell says no. Paulson had not only done enough research to know there was a housing bubble, he also knew when the bubble would burst. This was not luck. This was the kind of foresight that no one else on Wall Street had. Also brilliant and like me:) (Aside from making the BILLIONS of course!)

Jay Kubassek

0