Financial and business professionals often reference KYC compliance as an “annoyance”, but it serves a very important role in gauging risk tolerance. As the well-known acronym for “Know Your Customer”, it is mostly applied towards ensuring that a customer is not engaged in money laundering or illegal activities. However, requiring a financial pro to be familiar with the amount of risk a customer can handle is also for the protection of the customer.

Dealing With Big Losses

A recent Reddit article post came from someone who is very comfortable with risk and losses of as much as a half million dollars, but found himself out of his depth when a sudden $2 million hit landed. The details he disclosed are as follows:

• He is a 28-year old high roller residing in the Philippines who has shrugged off past losses of $400-500K and recovered it in months.
• He frequently invests on the China and Hong Kong stock exchange, as well as in the private equity arena.
• A Chinese stock he invested in ran to a profit of $800K, but illiquidity left him with a $300K loss at the end of the day, from which he was able to move forward.
• A successful business he had for the past 3 years with a partner has suddenly left him with a $900k loss. The partner had concealed a series of bad investments and a gambling addiction which led to some embezzlement. He has no recourse with the $900K loss and the partner has already left the Philippines and disappeared.
• The combined net worth loss of $2 million over a very short time has left the post writer shell shocked and depressed. He feels cheated and unmotivated to start another business or to try to try to trade his way back to profitability. 

The Psychological Factor

Just like with stage fright, getting the “yips” in competitive sports, or with surgeons who start to second guess themselves in the operating room, the writer’s psychological reaction to a 7-figure  net worth financial loss surpassed his threshold, and has left him hesitant to make decisions. There are certainly practical steps that he can take (see below), but getting over the shock and shock and psychological block are his most immediate obstacles to financial recovery.

A Personal Assessment

Although presently self-absorbed with the shock of the financial losses, an objective assessment of the writer implies or discloses a panoply of positive attributes that will enable him to stage a comeback:

• At age 28, he still has a long life ahead of him. To have been able to score success at an early age has already given him experience and tools to go further in a career with some knowledge of landmines to avoid in the future.
• Someone who can shrug off a $500K loss with the confidence of being able to make it back in a few months can certainly do it again, even if it takes longer. The skills and knowledge to be able to recover from any kind of loss of a significant amount are essentially the same, as long as the parameters (i.e., the Chinese stock market in this case) remains the constant. 
• The sense of betrayal from his partner’s concealment of her gambling addiction and bad investments probably hit him harder than the financial losses. While unstated, perhaps there had been a romantic relationship or attraction that led him to unilaterally trust her with the company’s finances.
• Founding a successful company at a young age can make him someone to possibly be recruited by a large private equity firm or other player looking for young, cutting edge talent. This is a potential route to take if he is not ready to continue as an entrepreneur. 

Some Practical Remedies

• If the writer does not wish to continue the business, he should get a true accounting of his company’s balance sheet and P&L to determine if it can be sold or at least if the assets have sufficient liquidation value to avoid any debt overhangs for which he might be held personally liable.
• If the writer wishes to stay with the business so it can recover, then he may need to determine whether it can continue as a standalone entity or if it needs a new investment finance assistance from an outside source or perhaps a joint venture with a strategic institutional partner or competitor. 
• While trying to decide what to do, the writer should assess his portfolio and sell off any holdings that are highly volatile or illiquid, and replace them with income based investments so that he will have passive income while he analyzes his future business and investment options.

The above comments and observations are opinions, and not meant to be construed as business or financial advice. It is advisable to speak with a business and/or financial professional if such counseling is being sought.  

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