As with most people in Canada, and around the world, I have spent some time over the last two weeks watching the Olympics. Not a lot of time; I do have a day job, and I’ve got better things to do during the day than watch someone skiing and shooting a rifle. As a Canadian, I have watched with interest the Olympic hockey tournament. The Canadian women won gold over the Americans, which wasn’t really a surprise, since there are only two nations in the world that really play women’s hockey. The men’s tournament has been much more interesting, with Canada off to a slow start before beating Russia and Slovakia to advance to Sunday’s gold medal final.
A hockey game lasts for an hour, so there are lots of opportunities to make adjustments and recover from mistakes. That’s not the case in the “sliding” sports, where one mistake can cost you the race (and, in the very tragic case on the first day of the games, it cost a Russian luger his life). If you are a ski racer, or a speed skater, or any other “slider”, you have two strategy choices:
- Be cautious. You won’t win if you don’t finish the race, so be in control. Go fast, but not so fast that you risk losing control. The goal is to finish, and hope that you have enough speed to both finish and win.
- Go as fast as you can. Take every chance, because all of your other competitors will be doing the same. The one who goes the fastest and doesn’t crash will win, so go all out and hope for the best. You will either win or place 25th, but if the goal is to win, that’s how to do it.
What’s the correct strategy? That depends. If you are highly skilled, you can probably go fast, and take some chances, and still finish. A good example of this strategy would be Apolo Ohno, the American speed skater. He’s very fast, but he will take chances if necessary. He just doesn’t take a lot of stupid chances.
There are many contrary examples, of racers who perhaps went faster than they should have, and were not completely in control, but they stayed upright just long enough to win the race. A good comparable would be a home run hitter in baseball, who hits a lot of home runs, but also strikes out a lot. In baseball if you hit one home run and strike out three times every game, you are a superstar. The big win is much more important than the big loss.
So what;s the correct strategy in investing? If you have a chance for a “ten bagger” (ten times return on your money), then you can take a very risky approach. If you make ten equal investments, and one of them goes up 1,000%, and the others all go bankrupt, you still break even. Unfortunately, finding a “ten bagger” is not easy, so basing an investment strategy on the hopes of massive wins is probably a stupid plan.
A better approach is to risk less on speculative plays and more on less risky investments, because the most important goal of any investment is capital preservation. Risking everything for a big win is gambling, not investing. Speculative plays are fine, but only for a portion of your portfolio. The rest of the portfolio should go fast, but not so fast that you are out of control. My hope is that as the world continues to deteriorate, I won’t crash.
It would appear that many people were pre-occupied this week, as not much of anything really happened on the markets. The S&P 500 changed by less than half of one percent. I didn’t get filled on any of my stink bids.
One item of note was a company in my portfolio, ADM.V – Andina Minerals Inc., a gold exploration company with a big project in Chile. Given their size they are a potential take over target, so I owned a small number of shares in the speculative section of my portfolio. Alas, this was not a good week for Andina:
On February 24 they issued a press release indicating that, oops, we thought we could cheaply leach the gold out, but now, after further study, not so much. They followed up with a February 25 press release saying hey, it’s not really that bad. So what do I do when a company I own has a major set back, and drops 30% in a two day period? I buy more, of course.
Leaching is a cheap and easy way to process the ore. Of course it has the downside of losing some of the gold, because it leaches away. Now that leaching won’t be possible, more money will need to be spent for milling operations, but while that will cost more, it may also mean that more gold can be recovered. So, it may be good news. Since I’m not sure if it’s good news or bad news, I’ve decided to average down and buy more. You can ask me in a year whether or not that was a good idea. So much for the cautious approach.
There are more things to discuss today, but having to stay up late watching Canada win at hockey has made me tired, so I will end with three links for your further consideration:
First, here’s a link to onlooker’s post on precious metals where he links to the McAlvany Weekly Podcast. I subscribed to this particular podcast through iTunes, so I can listen on my iPod. Well worth it (and it’s free).
Second, here’s a link to Sidewinder’s new blog. His post on Alexander Haig is brilliant. I’ll be watching with interest to see sidewinder’s future posts. Again, it’s free, and it’s better than anything you’ll read in the newspaper.
Finally, I’ve decided to try posting quick updates on Twitter. If during the week I see an interesting article, or something else of interest, I’ll post it on Twitter. You can also read my Twitter stream at the top right of this page.
Thanks, and have a good week.
{ 0 comments }
This is clearly not a normal recovery – the implications for deflation and gold
by JDH on March 6, 2010
Note to Readers: Read this next section using the voice of Andy Rooney (that old guy who comes on at the end of 60 Minutes):
To quote Edward Crotty, Chief Investment Officer at Davidson Investment Advisors, speaking about the better than expected U.S. jobs report on Friday:
The Dow was up over 2% on the week, and all is well because the economy, only lost 36,000 jobs. Happy days are here again, and any month we could see a creation of jobs.
Am I the only one who is stunned by the fact that we are talking about almost being at the job creation phase? Here’s the way it usually works: a recession ends, and then jobs start to be created. I’m not an economist, but if you look at where the bottoming of output was, it was around eight months ago (which makes sense, since the stock market bottomed exactly one year ago today, on March 6, 2009 where the S&P 500 was at 683; it’s up 67% since then). Normally eight months into a “recovery” the U.S. economy has created about a million new jobs. In the last eight or so months we have lost around a million jobs.
In a normal recovery we should be creating between 100,000 and 150,000 new jobs per month.
This is clearly not a normal recovery.
The latest GDP data showed the U.S. economy growing at an annual rate of 5.9 per cent in the last quarter of 2009. So, normally in the two months after a quarter where the GDP grows by almost 6% you would see at least 200,000 new jobs created. Instead, we’ve lost over 30,000 jobs. Two months of declines have never happened after a quarter of strong GDP growth.
It’s obvious to see why. If the economy is growing, that means more products are being produced, and more services are being consumed, so more workers are needed to produce those products and provide those services, so more workers are hired, so employment increases. Makes sense. But that’s the opposite of what we have just seen.
This is clearly not a normal recovery.
Again, I’m no economist (and I’m thankful for that), but it appears obvious that companies have cut staff, and are making whomever is working work harder. The economy is more productive (higher GDP output, done by fewer people), but higher productivity does not create jobs. It creates profits, which presumably is why the stock market is up, but doesn’t create jobs, which is why unemployment remains high.
(If we were all replaced by machines, GDP would go up, but theoretically we would have 100% unemployment. Would that be bad? Presumably if we could produce everything we want without working for it, that would be great. But I digress).
Here’s another viewpoint: The average business owner realizes that the growth in GDP was not accomplished with real demand, but instead is a result of government “stimulus”. Obviously printing money is not sustainable forever, so businesses are not hiring, or if they are, they only hire temporary or contract workers. At the first sign of weakness, those temporary workers are gone, and there goes the recovery. In these uncertain times the average business also won’t invest in new capital equipment; it’s too risky. If you want to grow you may use your cash to buy a competitor to gain market share, but again, that’s not creating jobs, that’s just eliminating redundancies. Or, as the Wall Street Journal puts it, a lack of capital spending will end the productivity surge.
Cut staff. Be more productive. Merge. Acquire. Profit goes up. Don’t bother hiring or investing. Cut more staff. Be even more productive. Lather. Rinse. Repeat.
And did I mention wage deflation? High unemployment drives down wages. Which leaves less money to spend, which doesn’t stimulate demand and jobs. The good news is that wage deflation leads to general deflation, or at least very moderate inflation. Unit labor costs — a key inflationary gauge — fell sharply in the third and fourth quarters, according to the Bureau of Labor Statistics. For all of 2009, unit labor costs fell 1.7%, the most since the records were first kept in 1948.
Message: for the next few months, worry about deflation, not inflation. (Don’t worry, hyper inflation will get here eventually; it’s inevitable given the massive government spending, but it’s not imminent).
The conventional wisdom is that inflation is good for the price of gold (since it’s a store of value), but deflation is bad for gold (since if prices are dropping, you don’t need protection against inflation). That would not appear to be true, based on past history. For example, during the deflationary period from 1920 to 1933 operational wealth would have increased 2½ times if you held gold. Here’s a good summary of gold and deflation theories.
So what’s my theory?
This is clearly not a normal recovery.
However, gold does well in deflationary periods, so if you want a guess, I’d be betting on gold (click for a larger image).
It would appear that the short term correction that started at the beginning of December has ended, and $1,000 gold may be not be seen again, perhaps forever.
Longer term, golds uptrend since the start of 2009 remains intact, which is also good for medium term price support.
There still remains a very real risk of a general market correction. In fact, it’s almost a certainty at some point. When? I have no idea. So, this week, I gradually added to my gold holdings on dips, and I continue to leave my stink bids in place to buy more on any weakness. If the price is going up, it makes sense to be invested. However, I am still maintaining a large cash position, as protection against market weakness.
Time will tell. And I will continue to post quick updates on Twitter, including links to any interesting articles that cross my desk.
Thanks, and have a good week.
{ 1 comment }