In the game of blackjack, you can ‘double down’ on a hand by doubling your bet for one more card from the dealer.  (When playing blackjack, your goal is to create a hand that is as close as possible to 21 without going over)  This action allows you to take additional risk for an immediate payoff.  Within the community of people who enjoy the game of blackjack, most will tell you that it is advantageous to double down on an eleven, or possibly a ten.  The principal reason for this is because cards with a value of ten have a higher concentration than other cards.  Because of this, it is advantageous for players to increase their risk in certain situations because of an increased probability for a higher payoff.

In the world of investing, there are both times to increase your exposure to risk for a higher payoff, and appropriate situations.  The problem which arises is that many people end up taking excessive risk to chase returns.  In this situation, it is rarely the optimal time to take more risk in the hopes of earning a higher return.

Currently, there are many people from the baby boom generation who are currently ‘doubling down’ with their retirement accounts by over-weighting their portfolios in high-risk ventures such as emerging market stocks and speculative real-estate in an attempt to pump-up the value of their nest egg before retirement.  The risk of this strategy is that your nest egg could crack just before it hatches.

The hidden danger of highly volatile investments is that the risk of loss generally stays hidden until market disruptions push the value of multiple asset classes down simultaneously.  In this case, there is not enough time to adjust your portfolio before it has been significantly burned.  These types of situations are especially dangerous, because the market tends to change very abruptly as relevant news and information develop.  For people who are approaching retirement, volatility can be especially dangerous.

This is not to say that investors shouldn’t take risks . . . it is very difficult to generate returns in excess of bond or money market yields without taking risks.  The caution is that you should be aware of the risks that you are taking, and not allow yourself to fall into a false sense of security because the market hasn’t had a significant downward movement lately.  Large returns generally require that you take large risks.  If you are currently earning large returns, chances are that you are at risk for a large adjustment.  It is very important to make sure that a significant downward adjustment in value of your risky investments will not place you in a situation that you can’t recover from.

Thus, when deciding whether to ‘double down’ on your investment strategy, it is critically important to understand whether you are in a situation where such a decision is optimal.  Are your personal emotions constructed in such a way that a dramatic shift in market valuation will cause excessive nervous tension?  In most cases, investors are their own worst enemy … we allow our emotions over the movements of our portfolio value to influence our actions in a way that frequently moves contrary to our rational thoughts.

Thus, investing becomes a battle of reason vs. emotion.  Our reason frequently tells us to make decisions that would appear to be quite smart by most objective standards.  Reason typically evaluates decisions based on their inherent merits.  However, not all of our decisions are made rationally.  Instead of making our investing decisions based simply on the merits of a particular investment, we allow ourselves to be influenced by the other people we have seen being successful in making money.  When the market is going up, our emotions want to double-down on what we have seen as being successful.  When the market is going down, our emotions want to run for the hills and retreat from the perceived danger of the investing world.

As it turns out, the movement in market perception of a particular investment does not necessarily change the underlying fundamentals.  Many investments that are fundamentally sound experience negative market news, and other investments that lack solid fundamentals will experience upward escalations in market valuation that defy reason.  In the former case, it is important to avoid the emotional pull to bail-out on an otherwise solid investment strategy.  In the latter example, it is important to avoid the temptation to increase our investment, simply because the price has gone up and we hope that it will go up some more.

In the end, it is important for each of us to understand the extent to which our emotions compel us to ‘double down’ on what may turn out to be a highly risky strategy.  All of our decision should be made because of what we judge to be best for our well-being.  Achieving our desires will require that we take risks of some manner along the way.  However, it is important to ensure that all of our decisions are being made consciously instead of re-actively … rationally instead of emotionally.  This will help us to make sure that we don’t double-down on risky situations that we are not emotionally prepared to deal with.

 

For both individuals and business owners, negotiations can prove to be one of the most difficult and most important things that we do.  The largest purchases that most people make frequently involve very intense negotiations.  The ability to gain employment, and earn promotions is also frequently influenced by your ability to negotiate.  Negotiation has a very significant impact on personal, professional, and financial success.  Because of this, it is very important to understand the parts of negotiations that are the most important, along with the parts that are frequently misunderstood.

To many people, the idea of negotiating brings up images of aggressive arguments where both sides attempt to prevail against the other in a pitched battle for power where one side wins and the other side loses.  Another paradigm of negotiation is one where a “win-win” paradigm requires that no deal be made unless both sides realize significant benefits.  The truth of negotiation exists in-between these opposite visions.

Best Alternative To a Negotiated Agreement

The term BATNA, meaning “Best Alternative to a Negotiated Agreement” was coined by Roger Fisher and William Ury of Harvard University, and incorporates many of the ideas published by John Nash in his work on Game Theory.  The idea incorporated in BATNA is that our ability to negotiate is heavily influenced by our alternatives if the negotiated agreement does not occur.

One way to think about BATNA is to imagine that you’re looking to sell a car.  If you have one buyer lined-up who will pay $2,000 for the car, then you will be very unlikely to accept less than $2,000 from anybody else unless you have doubts about the original offer.  Your best alternative is selling the car for $2,000 and that places you in a position of power to confidently list the car for sale at a higher price. Alternatively, if you need to raise cash very quickly and have no buyers lined-up, then you may need to accept $500 or less from the first able buyer whom you come into contact with.  Thus, your best alternative exerts a tremendous degree of influence over your decisions.

How BATNA Influences Our Idea of Fairness

One of the enduring ideas of humanity is the notion of fairness.  The situations that most people perceive as being unfair are those where one side has a significantly better BATNA than the other.  An example of this is if you are walking across a desert, parched of desperate thirst, and run across a truck who offers to sell you a 20 ounce bottle of water for $5,000.  The natural response to this scenario is that the transaction is supremely unfair since the cost of that bottle to the seller is approximately one dollar.  In this situation, the BATNA of the person walking through the desert is a painful death of dehydration.  Alternatively, the BATNA of the seller is their lost time and the expense of driving across the desert to find somebody walking whom they can sell water.

The reason why this feels so unfair is because the alternative of the person walking is death, while the alternative of the person selling the water is simply wasted time.  However, this transaction still makes both parties better off, even though it feels patently unfair.  If the truck were not present to sell the high-priced water, the person walking across the desert would suffer a painful death.  Even when the person driving the truck engages in what is frequently called “price gouging,” he still delivers a valuable service that is critically important to the person in the desert.  Thus, in what seems to be a blinding paradox, some of the transactions that appear to be the most unfair to the “little guy” are actually the most beneficial.  The reason for this is because when the best alternative for the “little guy” is worse that the seemingly unfair exchange, then they are far better off with the deal that feels severely slanted against them.  Thus, by using legislative power to prevent exchanges that feel unfair, it is possible that we are actually condemning the people whom we think we are helping to suffer an even worse outcome.

How BATNA Influences our Negotiations

Another important thing to consider in regards to BATNA is its impact on our personal, career, business, and investing decisions.  Within this insight is two levels of distinction.  The first is that our alternatives influence our decisions.  The second is that our perceptions may differ from reality, and result in decisions that are sub-optimal.  In short, it is very easy to both over-estimate and under-estimate our best alternative.

• Why our Alternatives Matter

  • The simple reason why alternatives matter so much is because we can be more confident in refusing low-quality outcomes when we have a better alternative.  If you are highly educated and experienced in a field that is in demand, you do not need to take the first job offer that comes your way.  If you are able to re-locate with ease, you can be more flexible in finding a new job that allows you to advance more quickly.  If you are a business owner who already has a key customer that generates sufficient revenue to cover your costs, you can negotiate pricing with new customers from a stronger position.  If you are able to assemble investment deals that generate a high rate of return, it will allow you to walk past the traditional financial instruments that are sold for retirement planning.
  • In short, the decisions that you make are bracketed by the alternatives that you possess.  By increasing the quality of your alternatives, you increase the strength of your decisions.  Thus, the ‘real’ way that people achieve success is not just through the decisions that they make, but through developing the alternatives that allow them to make high-impact decisions in the first place.  Most of the best investments require some degree of capital.  If you are unable to pay the monthly rent, high-impact investing is not an option.  Regardless of how educated you are in decision making, those decisions will not become available until you influence the underlying alternatives through preceding actions and decisions.

• Over-Estimating the Alternatives

  • One of the thing that frequently happens in high-stakes negotiations is that one or both sides will over-estimate their alternatives.  This typically results in the adoption of “tough-guy” negotiation techniques, and can create very large problems if the deal falls apart and the assumed alternative do not materialize.  Typically this situation occurs when negotiators fail to invest sufficient research into their realistic options.  The most frequent occurrences of this effect are when one side focuses on the other side’s lack of options more than their own situation.
  • For example, the union frequently notes that management will be in a pinch without labor.  Similarly, management frequently notes that the union members will be in trouble without their wages.  The truth is that both labor and management suffer from a prolonged work stoppage.  It is important to avoid taking your eye away from your own alternatives by excessively focusing on other people’s alternatives.

• Under-Estimating the Alternatives

  • Another way that people can run into trouble is by under-estimating their alternatives.  When this happens, people will be likely to take “the first thing that comes along” instead of searching for their best option.  Typically, this situation occurs when people have a low opinion of themselves and their abilities.  This is not to say that ego and arrogance are in order, but that an honest assessment is critical.

In the end, understanding our alternatives is a critical part of optimal decision making.  It is important to make an honest assessment of what our options look like so that we can avoid the errors of both over-estimating and under-estimating the quality of our alternatives.  This is one of the fundamental keys to negotiating success in our personal, professional, and financial life.

 

Few small businesses have escaped fallout from the economic downturn of the past few years. However, as many indicators begin to show signs of improvement, entrepreneurs need to position themselves to benefit from the recovery, says Jim Muehlhausen, CPA and author of The 51 Fatal Business Errors and How to Avoid Them.

“The default mode is that we’re all very scared,” he says. “Business owners don’t want to spend when they’re in doubt, but it’s important to make smart investments in your business as the economy begins to rebound.”

Muehlhausen offers five crucial steps to recovery that business owners need to take now:

1. Review your business model
It’s time to ask some important questions: Is your business model working for you? Are your sales actually coming from where you think they’re coming from? Is it time to adjust your focus or the way you do business? Take a top-to-bottom look at your best sources of revenue and figure out how you can pursue more of that type of business.

• How the Recession Saved One Company
• How to Stage a Small-Business Comeback
• Famous ‘Trep Failures — and Comebacks

2. Avoid the Hail Mary
If you’re holding your breath for one big deal or event, you’re putting too many eggs in one basket. Too many business owners are hanging their hopes on events that might never happen. Instead, look at ways to grow your business incrementally and make smaller investments in areas that will generate a return, such as expanding into new sales channels or increasing effective marketing tactics.

3. Buy back your time
You may have worked with a skeleton crew to survive a drop-off in business. Yet as the recovery takes hold, it’s important that you aren’t busy wearing too many hats to recognize growth opportunities. Hire a part-time assistant to invest in automation. For instance, create a web-based ordering tool or find a more effective CRM program to help identify and deliver on customer needs more quickly.

4. Get bigger
As so many companies are struggling, there could be opportunities to acquire or merge with a complementary business that has a solid customer base. By doing so, you can expand your offerings and capture more market share. In other words, grow your business now, in anticipation of the upswing that’s on the way.

5. Forget fear
Most important, it’s time to stop fretting. Fear-based decisions are rarely effective and will keep you from seeing your next move clearly. Now is a terrific time to tune up your systems and put effort into developing new products or services.  Rather than lamenting the bad times or trying to make things better right away, Muehlhausen says, direct your attention to two years from now. You’ll be a step ahead of everyone who’s only focused on the short-term.

Article source: Entrepreneur.com

 

Most of us have been in a situation where there were lots of things to do, but not much time to do them it.  In these situations, the natural response is to ask what items are the most important . . . and a disturbingly large number of managers and bosses will frequently reply: “It’s all important.”

The subtle insanity of the statement: “It’s all important” is that if everything is considered to be ‘important’ then there is no way to prioritize which activities to do first.  Thus, saying that everything is important really means that nothing is important.

Conversely, if we want to really ‘focus’ on something, we must implicitly decide to eliminate other activities so that we can develop mastery in a specific area instead of consistently dabbling, without building any depth.  This insight is especially important in our current era of marketing bombardment and ubiquitous connectivity, since it is very easy to get distracted by instant messages, emails, and phone calls.

Unfortunately, general knowledge and dabbling doesn’t tend to produce very desirable results.  The rewards available to people who are only ‘average’ have been declining for quite some time, and will continue to decline for quite some time.  The reason for this is because there are a lot of people with ‘average’ skills and abilities.  Because of this, clients and employers do not have an incentive to deliver a high amount of compensation since average talent is very easy to replace at a reasonable cost.

Increasingly, it is only the top performers in most professions that are highly successful.  In order to reach the top of your profession, it requires intensive determination focused on specific goals.  Achieving this focus necessarily requires us to delay or eliminate other activities that we are currently engaged in.  The fundamental question each of us must answer is whether I am willing to make the choice?

 

Many people are familiar with the sentiment that “the end justifies the means” when pursuing goals and ambitions.  However, in the realm of business and life, ends and means are quite important.  In many cases, ‘how’ you go about doing something is equally (if not more) important than what you are doing in the first place.  Many times, it is easy to pursue short-term results by bending or breaking rules.  However, long-term success requires attention to both the goal and the methods used to reach it.

Most people recognize this fact in the natural world.  It is not difficult to see what happens if you attempt to plant and harvest wheat without following the right steps.  No matter how hard you try, it is not possible to ‘wing it’ to success in the natural world.  However, many people are gripped with a desire to fast-talk their way to success in the world of business and relationships.

The truth is that ends and means are a matter of natural law that hold equally true in the physical world as they do in the world of relationships.  The fundamental difference is that when dealing with people, it takes longer to see the impact.  However, the impact is always in effect regardless of whether it is immediately apparent.  The hard work must be done if ‘real’ success is every to be achieved.  It may be possible to temporarily gain the appearance of success through slick dealing and clever tricks, but there is no way to fool nature.

Ultimately, the way that each person chooses to pursue their goals is important.  Relentless pursuit of excellence sounds great in commercials, but if it causes you to sacrifice everything else in your life for the sake of one goal, is it really a worthy endeavor?  This is not to say that people should not have goals and ambitions . . . quite to the contrary.  However, it is imperative that the pursuit of those goals be done in such a way that it is part of a complete life and not an unbalanced obsession.  This will likely result in many goals that take longer to accomplish than some of us would like, but it will also result in greater happiness, contentment, and completeness in our lives.

 

Recent news about the 8.9 magnitude earthquake and subsequent tsunami in Japan has caused many people to pause in consideration and prayer for those affected by this natural disaster.  As the news and images of the disaster comes in, they make the perceived difficulties of our lives pale in comparison to the real turmoil faced by those who are on the front lines of responding to the earthquake and tsunami.

When events such as this unfold, they draw a sharp line between the things that we spend time getting worked up over and the things that are really important.  In response to this, it would be wise for many of us to “get over ourselves” and put the so-called problems of our life in context.

Most of us remember the drama-filled days of high school when the tenner of our life revolved around what one person was saying about another person, and the furthest we looked ahead was the upcoming weekend.  The depth of self centered obsession in our youth only becomes apparent when the wisdom of age and experience has had an opportunity to emerge.  Upon deeper analysis of our lives in the context of a larger and more complex world, it becomes more and more apparent that the drama of our lives, which seems so important in the moment shades pale when compared against the larger world in which we live.  When mired in the depths of self-centered obsession, this is extremely difficult to see.  However, when one steps back from the gritty details of their own life, it becomes quite clear very quickly.

When thinking about the concerned of our personal world, it is important to understand that each of us are only a small piece of the larger scheme.  It is important to simultaneously avoid over-estimating the extent of our impact and take personal responsibility for the results of our own life.  Situations like a natural disaster frequently leave people with a feeling of powerlessness, as there is nobody to blame for the circumstances.  (Not that this fact stops people in power from attempting to assign blame or take credit)

It is most certainly true that none of us can cause, nor prevent a natural disaster.  It is also true that none of us can cause nor prevent a humanitarian crisis or economic recession.  What we can do is take specific actions to create specific results.  We cannot stop an earthquake in Japan, but we can contribute to the response.  We cannot stop an economic recession, but we can act to ensure that the financial well being of our family is secure.  We cannot stop people from being self-destructive in their personal decisions, but we can teach our children to make wise decisions in their own lives.

In the end, “getting over ourselves” ultimately comes down to a frank realization of what we can and can’t do.  This understanding allows us to focus on the things that we can do, the decisions we can influence, and the goals we can achieve.  In this way, each person can help to create a better world at large by creating a better world within their own sphere of influence.

 

Life can frequently feel out of control with a myriad of commitments, deadlines, and things that need to be done immediately.  Each of us have a list of things we would like to accomplish that exceeds our available time, effort and energy by a considerable margin.  In this situation, it frequently feels like we cannot afford to stop moving, because every minute gone by is one less minute to accomplish our goals and ambitions.

 

During business and economic discussions, it seems that distinctions are rarely made between income and wealth when it comes to personal and professional well being.  Income represents the amount of resources that are accumulated annually, and Wealth represents the total amount of resources that have been accumulated throughout the tenure of your life.  One very important distinction between these two resource categories is that income must be earned by you year after year, and wealth can be used to generate income year after year, without any direct input from you.

The key question that most people ask at this point is how to accumulate wealth.  At a basic level, wealth comes from one of two sources.  The first source is spending less than you earn . . . aka savings.  The second method for accumulating wealth is by having investments that increase in value.  These two concepts are linked, because savings can be invested into assets that increase over value.  Over time, the appreciation will compound upon itself and build wealth.

Many people regularly use the term ‘financial independence’ to describe a state where the amount of wealth that you have accumulated is sufficiently large to generate income that will support your lifestyle throughout retirement.  It is important to note that “retirement” is not a matter of time, but a matter of wealth.  It is also important to note that the amount of wealth you must accumulate to reach financial independence will vary; based on how expensive it is to support your lifestyle.  If your lifestyle is modest, the amount of wealth you need to reach financial independence will be relatively low.  In order to support a more affluent lifestyle in retirement, it will require the accumulation of a significantly larger amount of wealth.

Each person must make their own assessment of the lifestyle that they consider acceptable, and the value of working longer to accumulate enough wealth for retirement vs. retiring early with a more modest lifestyle.  There is no right answer to this question, and no wrong answer . . . but it is a question that needs to be answered.

 

There is a popular french proverb that states “penny wise is often pound foolish.”  The idea behind this cliche is to communicate how some people focus excessively on small things, insisting on consistent perfection but miss larger items that are more important.  In response to this observation, we advance the recommendation that people should seek to be pound wise and penny foolish.

There is a very specific reason that we advocate “pound wise and penny foolish” instead of simply being wise.  The reason is because each of us have a limited span of time and attention that we can invest into actions, decisions, or research.  Thus, if we want to make the best decisions, it requires that we focus on the consequential and allow the rest to slip through the cracks.  This is the part where people who have a “perfectionist” tendency can run into difficulty.  A desire to make sure everything is done properly and correctly can very easily become an obsession with details that occupy so much of your time that none is left for the big things.

The notion of being “pound wise and penny foolish” is really about setting priorities for your personal, professional, and financial life, then obeying those priorities mercilessly.  Another way of articulating this principal is through Pareto’s Law that 80% of the outputs result from 20% of the inputs.  (also called the 80-20 principal)  What both of these principals are getting at is that we should focus on the things we do that generate the greatest results.  Since a decision to emphasize or focus on one thing is implicitly a decision to de-emphasize something else, it necessarily follows that the other half of the Pareto principal is to let go of things that do not produce optimal results.

In practice, this frequently means that a focus on the big decisions and important things in life will mean letting some small things go.  Somebody who owns an investment property may need to let some of the small charges from their property manager go in order to free their focus for higher impact items.  A person working for their employer may need to overlook some missed commitments or loose ends from co-workers in favor of focusing on the major projects and key tasks that produce business results.  A person who has a spouse and small children may decide that the time commitments required for rapid advancement at work are a secondary priority behind spending time with their family.

In the end, each of us must decide what is most important, what is least important, and where we draw the line on what is allowed to slip between the cracks.  It is important to consciously decide what will be allowed to slide past our attention, since the sentiment that “everything is important” ultimately results in nothing being important because no priorities are established to direct our focus.  As we can see, becoming “pound wise and penny foolish” involves a significant degree of introspection.  However, for those who are successful in setting their focus and establishing their priorities, the rewards are truly great.

 

It is easy to become distracted by the long-term plans and strategic visions that dominate popular sentiment.  This is especially true in the midst of ’100-year business plans’ that were made popular during the 1980′s as companies rushed to emulate competitors from Japan that were realizing success.  This isn’t to say that strategy, vision, and long term plans aren’t important, but rather to say that their importance is held within the extent to which they guide decisions and actions in the present tense, and stay focused on the next step.

In both the realms of government and corporations, long-term plans are the cause de-jour that is the favorite topic of leaders and intellectuals.  In these situations, the most frequent use of a long term strategic vision is to distract attention away from the current deficiencies in performance that are plaguing the business or government institution.

Another way that planning problems can manifest themselves is when there are so many plans going on simultaneously that nothing can be done with any degree of focus.  In this situation, the important part is less about figuring out what needs to be done now, but deciding what does NOT need to be done now.  In many cases, defining what will be left undone or delayed until later is the link that brings priorities into focus so that they are not drowned out by other things that are urgent, but not necessarily important   Steven Covey made the observation that people’s effectiveness is destroyed by the ‘tyranny of the urgent’ where things that are important but not urgent are dismissed in favor of things that happen to be urgent, but not important.  This leads to an unfortunate situation where people become extremely busy, but never seem to get anything accomplished.

In order to span the achievement of both long-term strategies and short-term effectiveness, it requires that we tune our thinking in terms of what needs to be done in the short-term that is supportive of both long-term strategies, and representative of your most important priorities.