Too Little Risk

Weekly Thoughts from Chenmark is back. This week they’ve published another fantastic piece, part three in their four part series Managing Uncertainty.

While Chenmark’s ruminations revolves around investing, and we’ve said more than once that collecting isn’t investing, everything in this series does pertain to collecting, directly or at least, philosophically. This week we were taken by this quote:

If you don’t have any defaults, you’re taking too little risk.”

The quote is about buying debt as an investment. Managing the risk in this kind of investment involves trying to make sure that there are never any defaults on the debts – or in more general terms, that everyone who has a loan that you own pays on that loan. Minimize the non-payments, minimize the risk. Simple.

How does this relate to collecting? Myriad ways. How do we manage risk with our collecting? We research, we study, we know our sources, we only buy from trusted sources, we read and we read and we read. We never pull the trigger until we’re absolutely certain.

Which often means…we never pull the trigger. And we miss out.

This is what this quote is getting at. In a debt portfolio, a “default” represents a mistake. If we never make a mistake, it means we’re taking too little risk. When we take too little risk, we can miss tremendous upside opportunities, but we also miss learning opportunities.

How much risk is too little and how much is too much? That’s going to be somewhat personal. Too much means one doesn’t survive to trade another day. Too little? Well, that’s hard to say. But if we find that we’re kicking ourselves for “the one that got away” more than we’re not, it could be a good time to reconsider how much we really need to know before we dive in.

Have a great week!



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