Blog: Pavan Muzumdar

Post 1: Don't Lose Money

I am not much of a blogger. In fact, I barely tweet.  So putting together paragraphs of cogent prose for the consumption of nobody in particular is out of character for me.  When Metromode asked me to blog again after a few years, I wasn't sure of what to say.  The good thing is that after reviewing my earlier blog, I still believe in everything I said then, if not more so.  As a sidebar, "" would probably not make it today.  Spam filters are so effective, I barely get any.

Anyway, you're reading this, so I feel obligated that it be worth your time.  I thought I would present some ideas and thinking that I have found compelling and have shaped some of my thoughts and actions particularly as they relate to entrepreneurship.

The last time I blogged I said entrepreneurship is a mindset.  I am not the only one who thinks so.  In fact, my position as the Entrepreneur in Residence at Lawrence Technological University in Southfield is all about fostering this mindset among students, faculty, and pretty much anyone I come across.

Lawrence Tech (LTU) is one of the most entrepreneurial universities that I have encountered.  It makes perfect sense then that the forward thinking Kern Family Foundation decided to support LTU in promoting entrepreneurship via a very generous grant that also made my position possible.

Two specific initiatives supporting the entrepreneurial mindset are particularly pertinent to the topic of my post today:

  • Entrepreneurial Internships:  Eligible companies can hire talented students to work as interns for half the price.
  • Industry Sponsored Projects Lab:  Companies can hire students guided by faculty to work on a specific project or product for a very low administrative fee.

But first some background…

A couple of years ago as I was wrapping up the final level of the CFA exam, I read a book by Nassim Taleb called The Black Swan.  I found it particularly interesting within the context of my then academic pursuits of asset valuation and portfolio management.  There are many elements of this book that are so fascinating that you could write a book about them.  Wait... it is a book.  

Well, the term "Black Swan", refers to an unexpected event. The name was inspired by the restating of years of conventional knowledge – that all swans were white – until a black swan was discovered in Australia.  The take-away is that unpredictable events result in unforeseeable consequences in unpredictable places.  The current BP oil spill, for example, has resulted in somewhat of a boom in kitty litter scooper sales.

The practical element that stuck with me is his notion of taking option-like risks in investment decisions.  Options are derivative instruments that give you the right but not the obligation to purchase or sell an underlying security at a certain price.  The characteristics of options are that you can usually buy them for a small price, they are only valid for a specific period of time, and either they expire worthless or you break even or make a profit.  

The cool thing about options is that the profit may be modest, but in some cases can give the investor a return that is several times their original investment.  Yeah, these belong to the same class of derivative assets that it is fashionable to bash these days.  But saying options are dangerous is like saying guns are dangerous.  Sure they are. That's why you have to be careful when you use them.

Be that as it may, the investment philosophy has resulted in much success for Taleb, mostly making money for his investors, but almost never losing it.

Warren Buffet also has several rules for investment.  The following have a similar philosophy:  

  • Never lose money
  • I don't try to jump over 7-ft bars, I look for a 1-ft bar that I can step over

The way I look at it, you will succeed in entrepreneurship if you always stay in the game. Taking option-like risks often allows you to get enough exposure to the upside without risking the foundations, both financial and emotional, that keep you in the game.  

The two LTU programs that I mentioned specifically make this possible for Michigan companies.  Hire an intern for a low cost and investigate a new business initiative.  If it works, great!  If not, it's a learning experience.

Better yet, hire a bunch of students and give them a project that you have had in mind, but may not have the bandwidth to pursue.

Both are relatively modest investments – option like risks - that won't put your company out of business. But either one could potentially give it the upside that could change it forever!

* As an entrepreneur, Pavan is always looking for a sale.  If you want any more info on the LTU programs he has mentioned here, please feel free to contact him at:  pmuzumdar AT (replace AT with @)

Tomorrow:  Does the Internet make you smarter or dumber?