What the Olympics have taught us about capital preservation

by JDH on February 27, 2010

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:

  1. 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.
  2. 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.

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