THE ancient game of backgammon is one of skill, strategy and a bit of luck; and the art of making sound investment choices essentially embodies these same elements. For many years players of backgammon have been using time-honoured strategies to outwit their opponents and walk off with the prestigious trophies and medals vied for in the sophisticated game.

Investors can certainly recount the many nail-biting victories they had in the turbulent years of the subprime meltdown at the dawn of the 21st century and beyond. Certainly, an investor could not have left this arena unscathed without acute skills and sound investment strategies. It was at those times that many of the strategies employed by backgammon players became very useful to the sophisticated investor: logical thinking, forward planning, strategic moves, discipline and patience, to name a few.

In backgammon, in order to win, a player must constantly seek to fortify his points (a point is similar to a square on a chess board) by placing at least two of his men on a point, thus protecting his men from being “swallowed up” by the opponent. Likewise, an investor holding a good investment will seek to fortify that position if he intends to enjoy higher returns. For example, this may be done through buying more of a security which has declined in price. The logical thinking investor knows that the security is a sound investment and is, therefore, not perturbed by market volatility. Some refer to this as “averaging down” and is a powerful investment strategy, as it allows investors to take advantage of price appreciation.

Another useful strategy in the game of backgammon is the use of the doubling cube, which is a strategy used for speeding up the game and to double one’s stakes. The parallel investment strategy is the use of leverage which allows the investor to borrow against his investment and use the proceeds to finance the purchase. In some cases, the investor could end up significantly increasing the returns on his investment by this seemingly simple strategy. For example, if an investor bought, say, $100,000 face value of a bond at par (100) with a coupon of, say, 10 per cent per annum and he was to use a 70 per cent level of financing. This means that he would borrow US$70,000 and then use US$30,000 of his own money to purchase the bond. Assuming that the cost of this financing is 2.5 per cent per annum, and we are borrowing the money for 90 days, the interest that we will have to pay is US$437.50. When the bond pays the coupon of 10 per cent ($10), we repay the interest of US$437.50 and keep the remaining $9,562.50. This $9,562.50 represents a return on our original principal ($30,000) of 32 per cent. We repay the loan of $70,000 when we sell the bond. (see table below)

Today’s financial advisor is excited about what he does; just like the backgammon player, when he knows he has a winning shot, there is a “swag” that goes with it; he throws his dice, he hits his desired throw, he steps away from the board with an almost defiant stance signalling that another game has just been decisively ended and he has won! So too when the savvy financial advisor, through strong intellectual capacity, diligent assessment of the market, careful planning and patience has pulled off for his client an important financial coup; you hear the elation in his voice on his next phone call to you or you see the victory in his body language on his next visit to you.

Though not essentially a game of chance, winning at investing could sometimes mean being at the right place at the right time… being at a meeting where the Investment Minister is speaking of plans to make it easier for manufacturers to finance their new manufacturing plants and how that will impact the prices of existing securities/stocks of similar businesses. Or driving out in the countryside and seeing the beginnings of an expansion of a dominant player in the telecommunications industry and assessing the prospects of an increase in the price of that stock due to the expansion. These are all worthy aspects of an investment strategy which help investors and their advisors to carefully assess the investment climate and make sound decisions.

Pamela Lewis is Vice-President, Investments and Client Services at Sterling Asset Management Ltd. Sterling provides financial and advisory services to the corporate, individual and institutional investor. Feedback: If you wish to have Sterling address your investment questions in upcoming articles, please e-mail us at: info@sterlingasset.net.jm or visit our website at https://www.sterling.com.jm