The truism “nothing ventured, nothing gained” is an often heard phrase. But risk-taking must be balanced with prudence. Karen Firestone, chairman, CEO and co-founder of Aureus Asset Management, knows how to strike that balance. She lived it herself — leaving a fund management job at Fidelity Investments after 22 years to co-found a wealth advisory firm in 2005. It worked out: Aureus now has $1.5 billion under management. Firestone wrote about the topic in her book, Even the Odds: Sensible Risk-Taking in Business, Investing and Life. She discussed her book on the Knowledge at Wharton show on Wharton Business Radio’s Knowledge at Wharton show, which airs on SiriusXM Channel 111.
An edited version of that interview appears below.
Knowledge at Wharton: Before we dig into the book, I want to start by pointing out part of the title: the concept of sensible risk-taking. How much of a challenge is that today, whether it be in business or in people’s personal lives?
Karen Firestone: Well, risk-taking is a factor in everybody’s life, all through your day, every single day, and we may be aware of it or not. Being sensible about it is another challenge, and I think that what makes it even harder today is that when people are under increased levels of stress — which we all are — we tend to act more impulsively, and we don’t think things through in a logical or sensible way. Given that I spend most of my work day, and a lot of my time, thinking about risk-taking professionally, it’s sort of a natural outgrowth that I think about risk [more generally –] the way that we deal with it in complicated fashions and ways to be more sensible.
Knowledge at Wharton: It seems like, especially since the recession, we are in a period where the concept of understanding risk-taking and actually taking that risk has been heightened.
Firestone: It’s amazing, if we think about how disturbing the news is. Just think about the last few weeks as we were heading into the period of the political conventions. You think, there’s so much upheaval, there’s violence, there’s distress. How can we possibly, for example, make an investment? How can we possibly put money into the stock market when we see all of this happening around us? Yet what we talk about here at our company lately is that the market seems to be one of the few, in a sense, calm locations for thought and reasonable consideration of what to value. The market has gone up 300% since the bottom in 2009, and it has climbed what we think of as the “Wall of Worry” [or overcoming a host of negative factors.] If people hadn’t sold stocks in 2008, just held on, they would have hit bottom, and then they would have risen steadily for all of these years.
“The market has gone up 300% since the bottom in 2009, and it has climbed what we think of as the ‘Wall of Worry’.”
We’re going on nearly a decade of the market going up, and I would say that economies continue to operate, people continue to need goods and services, and we just calmly think through it. … We’ve added millions of jobs since the bottom of the recession. The U.S. dollar is strong, and this country has become the safe haven for investors all around the world to put their assets in as well. That can be, in a sense, a way to calm people down who are afraid, because it’s very scary when you think about the risks that we are constantly confronted with and bombarded by in the news, which are disturbing and do make us pause. But we have to be more calm and considered about investing and think, “well this might not be so bad.”
… I think it’s a testament to the ability of economies, and underlying commercial endeavors, to keep going through this. We persevere, we continue to go to work, and people have to be aware that risk-taking is part of their experiences. Your experience, mine, everyone around us. We can’t be afraid. We can’t be hiding in a shell, thinking “I don’t know what to do, the market could collapse and I could lose 50% of my money!” This is what keeps people from investing, and so their choice is getting 0.06% on their savings account. That’s the option. Is that good? I mean, I don’t think it’s so good.
Knowledge at Wharton: With the concept of risk-taking, you have to look at it from the business perspective, you have to look at it in your investments, but you also have to look at it in life.
Firestone: What I tried to do in my book is describe these tenets of risk-taking that apply across business and investing in life. There are four tenets: right-sizing the risk; right-timing; relying on knowledge and experience; and remaining skeptical of promises and projections. Those apply to investing tremendously. I think all the time about the right size of the positions that we take in companies; whether it’s the right time, because timing of when you buy or sell is critically important. How much we know about the investment, and then being skeptical about what we hear from Wall Street or what we might hear from the companies.
But if you think about how we apply those in our life, take just some simple examples.
Right-sizing: If you’re going to buy a house, you want to make sure that you’ve got a house that’s the right size, not too big, not too small. Otherwise, it will be a mistake. It’s getting a mortgage that’s of a size you can handle; the size of your investment in that property is really important. So that’s something that everybody deals with involving size, whether you’re buying a house or you’re renting a place.
Right-timing: You definitely don’t want to open an ice cream shop in November, if you have a choice. If you’re living in the Northeast, or you’re living in Philadelphia, you would rather open it in April or May. Timing affects many decisions, no matter what they are. When you’re getting married, when you’re getting engaged, when you’re having children, timing is just a factor. Sometimes it’s more important or less, but it’s definitely a risk factor.
“There are four tenets: right-sizing the risk; right-timing; relying on knowledge and experience; and remaining skeptical of promises and projections.”
Relying on knowledge and experience: You don’t want to, for example, take on an intern at your show if that person has only worked in an art gallery, and they say, “Oh, but I’m really, really interested in broadcasting and radio” but they’ve shown no interest before. Is that something you should know about or not? I would say yes, because it’s a risk that you hire somebody who isn’t capable and doesn’t show any aptitude. So you’re relying on knowledge and experience.
Remaining skeptical: If you’ve got a buddy and you’re out to dinner with him, and he says, “I’ve got a great new idea for a restaurant and bar that I would like to open downtown, and I would like you to invest this many thousands of dollars.” If you don’t ask a few questions about that, it would be pretty illogical. You better not be too credulous and say, “Hey, Jason’s a great guy, I really think that he’ll be a great bar owner.” That would be silly — and it would be a lot of risk. That’s exposure to danger and uncertainty; that’s what risk is. You do need to be exposed to uncertainty to make any money or to make the right decision, but if you don’t think through why it might go wrong, you would be pretty gullible.
Knowledge at Wharton: One of the areas of risk that is brought up a lot now, especially in the last decade, is the risk of leaving a job and either going to another or starting your own business. And you had that decision to make. You were working at Fidelity Investments, and then you went out on your own. What was that process like for you, in terms of factoring in all of the risks that potentially could be there in terms of starting your own firm?
Firestone: There’s definitely risk every time you start a business or take a new job. The first thing that I had to decide – as everybody does – was, can I handle it financially? If you leave a job and you have a better paying job, well, you’ve solved that problem. If you leave a really good job — I had a great job at Fidelity, I managed the Destiny Fund and the Large Cap Fund, and I had been there for 22 years, I was a shareholder, it was really a wonderful, wonderful position, and I loved Fidelity and still do. But I was starting a business with a partner, and we weren’t going to take any salary for at least a year, he and I. But I saved money, and Fidelity was going to buy back my stock. I was in a pretty good position financially to do it. But sometimes people aren’t, and you have to consider that.
For me, that wasn’t the biggest problem. I think in the case of somebody who has an established career, reputational risk is a big factor. That was something we had to think through: Could we handle it if our new company just bombed, if we had a terrible performance? What if we were able to attract some clients, and then we did a very bad job for them? And that was where we had to have some confidence in our abilities in the past. My partner, David, had been a partner at Wellington, he had managed the MIT Endowment. I had managed billions of dollars. The two of us had many years of experience, and we hired a couple of younger partners to help us who had experience as well, and we were pretty confident. We had to give it a chance. But we were confident and it did work.
“We can’t be afraid … thinking ‘I don’t know what to do, the market could collapse and I could lose 50% of my money!’
You have to rely on the skills and experiences that you’ve had to see: Have I been able to achieve this in the past? And is anybody going to pay me to do it? They pay other people to do it; why are they going to pay me? And we decided: We have a track record, people are going to give us a chance, and they might like us and not be so happy with their investment advisors that they had. That’s true in many businesses. People are willing to say, “I’ve had an experience that isn’t so great — with a lawyer, an accountant, an investment professional — and I think now is the time I’m going to seek somebody else.”
What turned out to be an amazing but hidden benefit to us was that 2008 and 2009, when people lost a lot of money, shook up the industry, so there were many people who had been very happy in 2005, 2006, and 2007 looking for new investment managers. That actually helped us in a strange way. We got a lot of business as a result, because we had a very good performance our first few years, and people would say, “these people have been in business for a few years, done well, and they have strong backgrounds.” So that helped.
We’ve been very lucky and fortunate for having a core group of people who have stuck with Aureus, and we’ve added partners and grown. We started with our money. I couldn’t take my clients from Fidelity; I had a non-compete, I wasn’t going to do it. You just grow, and we are up to $1.5 billion, so I’m knocking on my desk here that it’s worked out OK.
Knowledge at Wharton: One of the things that you advise in the book is to always have a healthy skepticism. You just can’t buy in to everything 100% of the time.
Firestone: You can’t buy into everything [even] 10% of the time. I mean, if someone says to you, “Isn’t it a beautiful day?” Well, you look outside and you see a blue sky, I guess the answer is yes, I can agree with that. But there aren’t too many situations like that, and I happen to be a pretty cynical person. I’m cynical and happy. A lot of cynical people are unhappy, but I find it interesting — I guess it is part of my nature to say, “Really? Is that true?”
“You do need to be exposed to uncertainty to make any money or to make the right decision, but if you don’t think through why it might go wrong, you would be pretty gullible.”
I try not to be too negative about it, but having witnessed cases, both with myself and my family and friends, where people have gone into investments, relationships, exposures in business – gone into those not being skeptical, just being gullible, and thinking for sure that it’s going to work, and it has been a terrible mistake. And the repercussions can be just so much worse than anticipated. It’s just not so hard to spend a couple of hours asking questions and doing some research on your own. Everybody does it when they buy a car. Think about it: Nobody buys a car without looking at Consumer Reports, or going through the Internet, and asking a lot of their friends about a car they just bought, or what they think about this or that car. People spend the amount of time and effort on buying a car that they should for sure spend if they are taking on a partner in a business, buying a business, starting a new job — but they just don’t do it.
Knowledge at Wharton: You talk about a variety of companies in the book that you’ve dealt with. Halliburton is one, and it’s interesting because of how Halliburton gained a reputation within the oil industry, and then that reputation got quite sullied. We’re talking about an industry that has gone through an amazing downturn because of the price of oil falling so quickly; it’s built up back up a little bit, but it’s not even close to the levels it was. Talk a little bit about that relationship you have with Halliburton, and the process of assessing the risk that you had to deal with in terms of Halliburton as an investment possibility.
Firestone: Halliburton has been a very interesting case in volatility. Volatility as it relates to the price of oil, since it is one of the largest oil service companies in the world. So its clients are oil companies, oil and gas companies, drilling companies, integrated oil companies. And also, volatility as it relates to the risks about its environmental treatment, and concerns that have manifested through lawsuits and congressional hearings. And [former vice president] Dick Cheney as the leader of Halliburton was controversial. So it has faced volatility related to investigations and injunctions, etc.
Halliburton’s story was one in which we had bought the stock at a very good price. The price of oil was going up, Halliburton’s stock was going up, we were making money with it, and then we had a client who was very environmentally conservative. It was a nonprofit that owned conservation land. Because of that mission — preserving land and the environment — they didn’t want to own any oil and gas stocks. We had bought Halliburton before they told us, “Oh, sorry we don’t want to own any of these,” and we discussed internally whether we should sell it or not. The stock had been going up, and my partners and I decided, well, they are giving us a year. They said, “You can own it until the end of the year,” and it was the spring. So we had plenty of time.
But here’s the way we analyzed it: We would get no credit from this group for owning Halliburton if the stock went up and then we sold it at the end of the year because they just didn’t want it. They would have hated it if we didn’t sell it and the stock went down. We would have lost that account, because that was more important to them than the price of the stock. What mattered was the environment, and that Halliburton had been accused of polluting the environment, had to pay a big fine. That was something that could not exist within the framework of their mission as a conservation-land owner. We had to sell it.
Now, we got very lucky. We sold it, and for a while the stock went up, and then it started to go down, and, as you know the price of oil collapsed. So when we sold Halliburton, we had a very big gain on the stock, and then it, as I said, went up a little higher to $73 a share. I’m going to just give you the price, it’s interesting. In July 2014, the stock was $73, and it hit a bottom of $29 in February of this year. So it was really lucky we sold it.
