The Winter Olympics are one of the greatest examples of what people can accomplish when they dedicate their lives to achieving perfection. They also offer one of the finest opportunities for stupid sports analogies this side of the Super Bowl. So, when I watch the Olympic games, I don't see the stunning achievements, the glory and the tears, but rather different investment strategies. When someone lands that quadruple axel, I think, "Wow, that's a great example of how increased risk can lead to higher returns." (No, I don't have many friends.)
In fact, every sport in the games is analogous to a different investment strategy. Consider the following possibilities.
Luge
Luge is a sport where the clinically insane hurtle down an icy tube at speeds above 80 mph, screaming around corners, switching directions in an instant, on tiny sleds made of toothpicks. The typical stock trader has a similarly fast-paced life, thinking nothing of buying a stock now and selling it a few days or even hours later. Opinions last as long as the next corner -- if this trade goes bad, there's always the next one. Cramer is a luger.
Pros: Great for those with attention deficit disorder. Can make money quickly.
Cons: Few traders do well over the long term. Tricky for part-time investors. Can lose money quickly.
Typical investment: Long Google
Skeleton
Skeleton, a sport named after the part of the body that becomes visible when the athlete makes a mistake, is similar to luge. The main difference is that these athletes have sustained enough brain damage that they're willing to slide head-first, just like an options trader.
Pros: Massive leverage with short time frames means you can quickly make wads of cash. A 300% gain in a day is possible.
Cons: Massive leverage combined with short time frames is very risky. 100% losses are commonplace.
Typical investment: Long a short-term straddle before earnings.
Ice dancing
Ice dancers display considerable poise while performing an exquisite waltz on skates. Just as with technical analysis, the key is coordinating and interpreting the important elements. Both fields are as much art as they are technique. And while some practitioners take these disciplines seriously, most of the world recognizes that ice dancing isn't a sport, just as technical analysis is questionable investment strategy.
Pros: It would be nice to believe that charts can predict where a stock will be.
Cons: But they can't. Outside of short-term trades, TA doesn't seem to really work.
Typical investment: Long Time Warner
Cross-country skiing
Cross-country skiing is an endurance sport. Competitors ski up to 50 kilometers. It's also arguably the most tedious winter sport to watch. It's more interesting speculating about who will fail the subsequent doping test than actually watching the event. Nevertheless, these athletes get to the podium and share glory. The sport is a lot like index investing -- it's not exciting to watch, but for anyone not interested in doing better, it's a sure way to ensure your performance matches the overall market.
Pros: Very low-maintenance. Low expenses. Will not underperform the market.
Cons: Boring. Will not outperform the market.
Typical investment: SPDR
Aerials
In aerial freestyle skiing, competitors coast down a short hill, jump off a near-vertical ramp, and flip three or four times in the air before landing gracefully on their feet -- or occasionally their heads, which is somewhat less graceful. Aerials are a lot like growth investing -- buying companies that are growing their earnings quickly. The best growth stocks can skyrocket over the course of a few years -- check out the near-vertical chart for Motley Fool Inside Value pick Dell
Pros: Potentially spectacular returns.
Cons: Results can be extremely volatile.
Typical investment: Sirius Satellite Radio
Biathlon
Biathlon is a combination of cross-country skiing and target shooting. It requires both endurance to ski the course and accuracy to take out the target. This is similar to value investing -- buying stocks for less than they're worth, then waiting for them to return to fair value. Value investors need to be sharpshooters, accurately picking out the cheapest stocks from the multitude of potential investments. Then they need to have the endurance to wait for those bargains to return to fair value.
Pros: Great long-term returns. Low volatility. Most extremely successful investors practice some variant of this approach.
Cons: Doesn't suit all personalities. Generally, people either understand why buying a stock worth $20 for $10 is a great idea, or they don't.
Typical investment: Citigroup
To sum up
Investors have had significant success using each of these styles. But I'd argue that for individual investors, value investing is a particularly appropriate strategy. A value portfolio can easily be implemented on a part-time basis, is lower in risk relative to the other techniques, and it still boasts outstanding long-term returns.
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Time Warner is a Motley Fool Stock Advisor pick.
Fool contributor Richard Gibbons has tried his hand at about a third of the Olympic sports but has never achieved greatness. He does not have a position in any of the stocks mentioned in this article.
