Do you believe in success without risk? I just read The Warren Buffett Way and there’s an interesting passage there about how Warren Buffett considers risk:

    He does not add a risk premium to his formula for the simple reason that he avoids risk…

    “I put a heavy weight on certainty,” he says. “If you do that, the whole idea of a risk factor doesn’t make any sense to me. Risk comes from not knowing what you’re doing.”

Interesting, isn’t it? This is similar to what Malcolm Gladwell wrote in The Sure Thing. Gladwell argues that successful entrepreneurs, contrary to the conventional wisdom, actually don’t take risk. Instead, they are looking for “the sure thing”, the thing that can give them success with the least amount of uncertainty.

Knowing that Buffett has similar idea makes me really interested. Is it true? Is there really such a thing as risk-free success?

Here are five principles of risk-free success that I learn from The Warren Buffett Way:

1. Build your competence

If risk comes from not knowing what you’re doing, then eliminating risk means you must know what you’re doing. So it’s essential that you build your competence in the field you’re interested in. The best way to do that is by finding a mentor (Buffett was a mentee of Benjamin Graham) but you can also learn by reading books or talking with people. The important thing is that you should test your knowledge in the real world. It gives you the feedback necessary to quickly build your competence.

2. Never move out of your circle of competence

Everyone has a circle of competence. You need to know yours and be careful not to move out of it. Buffett, for instance, never invests in technology companies for the simple reason that he doesn’t understand them. Even during the dot-com boom when everyone rushed to buy technology stocks, he remained unaffected. Doing something outside of your circle of competence invites a great deal of risk.

3. Master your emotions

You might wonder: if people don’t know what they are doing, then why do they do it? The answer is that they can’t control their emotions. There are two primary emotions at work here: fear and greed. When they see that other people profit from a trade, greed makes them follow the crowd even though they don’t understand what they’re doing. And when they see that other people avoid something, they also follow the crowd because of fear. Your emotions make you do something that you don’t know. That’s why essential to master them.

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