Wednesday, June 11, 2008

Assessing Risks of Projects

One of the most effective mediums I have found to identify and then mitigate risk in a project is to have a Master Mind meeting about it. Over the years, I’ve gotten better at assessing risks associated with investments by using this tool described by Napoleon Hill in ‘Master Key to Riches.’ This tool is called the Master Mind Principle. Usually those who will be involved in the project or investment are in the master mind, along with one or more of my advisors such as my attorney or my CPA.

Assessing risk is much easier if you break it down by categories. What we do then is get together and go through each category one by one and try and find as many potential risks that we can think of in that category. Once we feel like we’ve identified all of them, we then try and think of ways to mitigate the risks if possible. Using the master mind in this way has been so helpful for me to be able to see if something is even going to work and if so, how it will work. Doing master minds has saved me a ton of time and money because usually other people are better at spotting things that you may have overlooked. This is what the master mind principle is all about. Here are a few examples of categories of risk that we pick through:
• Financial Risks-funding delays, each partner has own financial situation, cash flow situation, capital reserve
• Market-related Risks-seasonal sales cycles, competition, our recent sub prime crash is perfect example
• Political Risks-imminent domain, nationalization of industry, stock market affected by elections, tax law changes indirectly from newly elected leader or anticipated changes in the future
• Economic Risks-currency, recession, availability of commodities, price changes of commodities
• Social Risks-social trends and changes
• Environmental Risks-natural disasters, fire, flood
• Security Risks-crime, theft, vandalism, negligence
• Legal Risks-liability, lack of contracts, insurance-related

What else am I missing here?

By Corey Curwick


  1. Are all your categories applicable to businesses as my investments?

    How does the availability of commodities and price of commodities affect a business?

    How are businesses and investments related?

  2. If you were wondering about examples of projects that were nationalized around the world, check out this link.

  3. Each project has literally millions of risks.

    Once you acquire/purchase/invest in a project, that is just the beginning. There are a million things that can and do happen daily to each project.

    Caution is required, and creating a spreadsheet that extrapolates cashflow into the future is a very dangerous game that a lot of beginning investors repeatedly make.

    Even the most mundane of investments, like mutual funds/ira's etc. It is quite foolish to extrapolate 10%/yr for 30 yrs and 4% inflation etc... That is a recipe for disaster. A million things can happen between now and then. So, don't bank on the exact science of mathematics, to the inexact science of investing.



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