The Case for Making Bold Bets in Uncertain Times

Extractive Summary of the Article | Listen

In the investment world, taking risks during volatile periods can result in a windfall. During his 60 years at the helm of Berkshire Hathaway, Warren Buffett delivered compounded annual returns of nearly 20% — double what the S&P 500 achieved — guided by the rule “Be fearful when others are greedy and be greedy when others are fearful.”

But company leaders have been more hesitant to embrace this principle when it comes to corporate strategy. The authors assessed a sample of nearly 6,000 companies over the past 15 years, identifying times when their respective industries faced elevated uncertainty. Only 10% of companies chose to make big bets during such periods; the lion’s share instead decided to cut back on exposure. But their subset of risk-takers were rewarded: They achieved stronger growth and higher shareholder returns and did so without facing a greater chance of negative outcomes. These findings raise a question: What’s holding the majority of companies back from being bold?

The authors identified 10 high-uncertainty events that unfolded between 2010 and 2020 — major macroeconomic, geopolitical, technological, or societal disruptions that materially reduced predictability for a given sector. They then assessed how boldly the nearly 6,000 companies in our sample that were affected by those events acted. They used M&A spending as a proxy, classifying companies as bold risk-takers if they at least doubled their deal spending during the high-uncertainty period (compared with their average for the prior five years).

They found that during these high-uncertainty events, 90% of the businesses pulled back, cutting M&A spending by about 25%, on average. However, a still-sizable minority of around 600 companies chose the opposite path: They (literally) doubled down, increasing M&A spending by 100% or more. During the three years following the high-uncertainty event, revenues among this group grew nearly twice as fast (6.9% versus 3.5% annually) as those of their cautious peers, while their total shareholder returns (TSRs) were 50% higher (3.6% versus 2.4% annually).

Perhaps more surprisingly, the downside of bold risk-taking was limited: the authors’ observed no greater number of these bold risk-takers slipping into negative TSR territory or even experiencing catastrophic failure, such as delisting, in this three-year period. Moreover, volatility in both returns and revenue growth was nearly unchanged compared with the rest of the sample in the three years following the bold bet.

What Common Risk-Taking Myths Hold Leaders Back?  In our conversations with company leaders, we have repeatedly heard a number of reasonable arguments for holding back — for example, that risk-taking works only when a company is entering an uncertain period with strong momentum or when a company has a cushion to fall back on. A deeper dive into our data reveals that three common myths do not hold up to scrutiny.  Myth 1: You can take risks only from a position of strength.  Myth 2: You need a proven track record of risk-taking to pull it off.  Myth 3: You can take risks only if you have a cushion to fall back on.

How You Can Execute Bold Bets.  Having a license to make bold bets is one thing; executing them well is another, especially when elevated uncertainty may cloud decision-making. The authors’ analysis of successful risk-takers shows that they do three things differently: They foster a risk-taking mindset, resist herd behavior, and are prepared to act the moment a shock creates opportunity. Here are a few practical ways leaders can put these principles into action.  They foster a risk-taking mindset.  They resist herd behavior.  And they prepare to seize opportunities.

show less