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Risk: see it before you take it
The difference between a good investment and a bad one is usually not luck — it is how clearly the risk was seen beforehand.
Every decision to commit capital carries risk. The mistake is not taking risk — it is taking it without knowing what it is. Our working framework for any investment has four questions.
What is the market really doing? Is demand growing, flat or falling? What would change that? Most projections assume the current trend continues; the risk is where it does not.
Who are you dealing with? The counterparty's financial position, track record and incentives matter as much as the business plan. Debtors, partners and promoters all carry their own risk.
What is the downside, honestly? If the plan fails by 30%, what happens to you? Can you absorb it? A decision that looks great in the base case and destroys you in the downside is not a good decision.
Is the return priced for the risk? The final question: given everything above, is the expected return big enough for the risk taken? This is where most deals fall apart — and where a clear-eyed analysis earns its fee.