03 November 2011

Dear Investor,

Risks and Success

What is it that makes an entrepreneur successful? Why do some business people and investors achieve their goals, whilst others fail to get off the ground? Is it, as is commonly thought, a willingness to take the risks from which others shrink? Does the 'gambler's instinct', coupled with good fortune, make the difference? This was one of the questions posed to delegates at the 2011 Australian Chambers Business Conference held at the Gold Coast.

The speaker who took the topic head on was Malcolm Gladwell, the New York-based Canadian writer known for his books The Tipping Point, Blink, Outliers and What the Dog Saw: And Other Adventures. Gladwell has made a name for himself over the years for his fascinating presentations of the unexpected and counter-intuitive implications of social science research.

At the Gold Coast conference, Gladwell turned his considerable powers of presentation to the question of why some entrepreneurs succeed when others fail. In doing so, he drew on his own earlier writings for the New Yorker magazine and the writings of economist Scott Shane, the author of the book The Illusions of Entrepreneurship.

Gladwell's argument was that the conventional wisdom is completely wrong. It is commonly thought that successful entrepreneurs are big risk-takers. They make big stakes gambles and, either through good luck or uncannily good judgment, win more than they lose.

Gladwell argued that this is a myth. It is easy to point to many entrepreneurs who indeed take plenty of risks. However, these are often the failed entrepreneurs, not the success stories. The failures break all normal principles of good business practice. They are undercapitalised; they do not write business plans; they ignore established operations and prefer to start from scratch; they chase the same people as their competitors; they underemphasise marketing; they ignore the importance of financial controls; they try to compete on price.

We can immediately concede that, depending on industries, some of these risks are unavoidable. In such cases, entrepreneurs take them on because they have no choice. But others are the result of plain bad management, failure to prepare or a lack of foresight.

In stark contrast, according to Gladwell, the successful entrepreneurs seek to minimise risks in all situations. They are inherently conservative. They prefer small, certain gains to low chance, high pay-off opportunities. They plan and prepare and are forever seeking to reduce and control the risks that they face.

In some ways, on deeper reflection this insight makes sense. The research on entrepreneurship holds that people who work for themselves are, on average, happier. The average person would have to earn two and a half times as much to be as happy working for someone else as they would be working for themself. And people who like what they do are profoundly conservative. They are not dazzled by the chance of making big money. Instead, they are drawn to getting to do what they love doing.

However, Gladwell points out that this risk aversion has one exception: social risk. Successful entrepreneurs do not care what others think of them. They are doing what they love to do and are prepared to risk the bad opinion of others to do it in the way that they think works.

It was this contradictory approach to risk that led to the success of Professor Emil Freireich, who undertook pioneering research into childhood leukaemia. Freireich was the medical innovator who risked his reputation and future as a doctor by proposing a toxic cocktail of drugs to treat a disease which was at the time (1950s) 100% fatal. Many in the medical professional considered the approach he took to be unethical, so toxic were the drugs. But, noting that childhood leukaemia was 100% fatal, Freireich believed that the greatest risk was to do nothing and so ignored the opinion of his peers. History records that Freireich's approach turned out to be one of the most outstanding treatment innovations in medical history.

So what can we learn from this?

First, that the conventional wisdom is not always right. The greatest innovations frequently occur because someone has seen through the conventional wisdom and risked the social ostracism that this can cause.

Secondly, contrary to their public image, successful entrepreneurs are frequently not big risk takers. They are living the life that they love, doing what they want to do and do not want to risk what they have. They prefer smaller, more certain gains against the roller coaster rides of high stakes gambles.

This sounds a lot like one of La Trobe's immutable laws of investing: getting rich slowly never goes out of fashion.

Best regards,
Chris Andrews

1 2 3 4

> Home
> About Us
> PDS - Want to invest?
> FAQs
> Subscribe Free
> Independent Ratings
> Mortgage Shopping List

Chris Andrews
Head of Funds Management

t  +61 3 8610 2811
e  candrews@latrobefinancial.com.au

Daryl Hill
0408 566 524
National Relationship Manager
Eren Myers
0409 419 039
Business Development Manager
Hamish Nott
03 8610 2868
Head of Operations
Cheree Cain
03 8610 2810
Operations Manager
Jason Gidman
03 8610 2818
Richard Anstey
03 8610 2809
Helmuth Ewinger
03 8610 2833
Investor Liaison
Tiffany Davies
03 8610 2814
Investor Liaison
Terrie Simpson
02 9238 2065
Luke Kendall
03 8610 2805
Investor Liaison
Peter Polemikos
03 8610 2834
Investor Liaison
Nadia Chriestian
03 8610 2865
Investor Liaison

La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 145 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.

Copyright 2010 La Trobe Financial. All rights reserved. No portion of this may be reproduced, copied, or in any way reused without written permission from La Trobe Financial. Disclaimer

La Trobe Financial Asset Management Limited ABN: 27 007 332 363 and AFSL No: 222213 is the issuer and manager of the La Trobe Australian Mortgage Fund. It is important for you to read the Product Disclosure Statement for the Fund before you make any investment decision. The PDS is available on our website www.latrobefinancial.com.au or by calling 1800 818 818. You should consider carefully whether or not investing in the Fund is appropriate for you.
* The rates of return from the Fund are not guaranteed and are determined by future revenue of the Fund, and may achieve lower than expected returns. Past performance is no guarantee of future performance. Investors risk losing some or all of their principal investment.
- Withdrawal rights are subject to liquidity and may be delayed or suspended.
- The award and ratings were given to the Pooled Mortgages Option within the La Trobe Australian Mortgage Fund.
The rating is only one factor to be taken into account in deciding to invest.
1. Zenith's "recommended" rating indicates that it has high confidence in the manager meeting its objectives. The Zenith. Investment Partners ("Zenith") ABN 60 332 047 314 rating referred to in this document is limited to "General Advice" (as defined by section 766B of Corporations Act 2001) and based solely on the assessment of the investment merits of the financial product on this basis. It is not a specific recommendation to purchase, sell or hold the relevant product (S), and Zenith advises that individual investors should seek their own independent financial advice before investing in this product. To view the relevant research information, please visit www.latrobefinancial.com.au The rating is subject to change without notice and Zenith has no obligation to update this document following publication. Zenith usually receives a fee for rating the fund manager and product against accepted criteria considered comprehensive and objective.
2. Standard and Poor's (4 Stars - Research Rating) "The S&P rating of 4 out of a possible 5 stars indicates that Standard & Poor's has high conviction that the manager will consistently generate risk-adjusted fund returns in excess of its relevant investment objectives and relative to its peers. Ratings are subject to change. To view the latest research information please visit www.standardandpoors.com.au. Ratings issued by Standard & Poor's Information Services (Australia) Pty Ltd AFS Licence No. 258896 are solely statements of opinion and not statements of fact or recommendations to purchase, hold or sell any securities or make any other investment decisions. Research houses receive a fee from La Trobe Financial for rating the product."
3. SQM Research - 4 stars to 4.25 stars - superior, suitable for inclusion on most Approved Product Lists. To view the relevant research information, please visit www.latrobefinancial.com.au This rating will not take into account your, or your clients' objectives, financial situation or needs. It is up to investors to consider whether specific financial products are suitable for your objectives, financial situation or needs. Research houses receive a fee from La Trobe Financial for rating the product.
4. Lipper Leaders Rating Total Return (Score – 5) Lipper Ratings for Total Return reflect funds’ historical return performance relative to peers. The ratings are subject to change every month. The highest 20% of funds in each peer group are named Lipper Leader or a score of 5 for Total Return. Lipper Leader ratings are not intended to predict future results and does not guarantee the accuracy of this information. More information is available at www.lipperweb.com. Thomson Reuters Copyright, All Rights Reserved.