Lessons to Be Learned From My Iceland Mistake

A reader asked me about Iceland. On first thought, I wanted to wait until the story was further developed, but on second thought, I decided to post this update.

As investments go, the result was poor. However, it was not devastating, nor does it mean I have to work longer or save more than I planned to.

There are a couple of components to this. First is the Stockholm listing of Kaupthing stock (KAUP.ST). I have traded this several times over the last few years.

The first trade it went up a little. The second trade it went up a lot, and this last trade which I exited a little while ago it almost, but not quite, cut in half. Netting out the three, it was close to a push. The last sale was clearly very late, but the stock went down a bunch more, has been working back up and, after a huge Wednesday, is at about where I sold it.

My often disclosed account at Kaupthing was not as bad. In two years, I have lost about 15% on my ICEX 15 ETF which was about half of the account, made a little over 10% annualized for two years in interest on the money market portion, but lost a little over 20% on the currency. So the money market was about a push and so overall I lost about 7.5%.

The maximum allocation between the two was 4%.

Clearly I got something wrong. And for all I know, unwinding the exposure may turn out to be the biggest mistake. That I got something wrong is not necessarily the most instructive part of this, because if you go narrower than SPY, EFA, TLT for your portfolio, you will get certain things wrong.

I am still fully on board with everything I wrote before about the country and its prospects for the future, in terms of being more economically relevant on a global scale - and in a way maybe that has already happened - the potential for geothermal to become a bonanza for things like data centers, and the very capitalistic nature of the country. Still, I got it wrong.

Despite how favorably disposed I was to the investment, I never got too heavy. People find themes that resonate with them all the time, and then commit capital. Some of these work out and some do not. Iceland was no different.

In the future when you find themes that appeal to you, hopefully this point of moderation will have an impact on how heavy you go in. If Kaupthing had failed with my money still there, that would have been a bummer. But let's put it in some perspective; my 2009 SEP contribution will be much more than my total investment there.

One thing that makes the blog format useful is that anyone interested can do a search of the blog to see the various posts on Iceland. (I also wrote about it for TSCM too). So you can see the evolution of the idea, the caution about the entire theme, and some of the financial sector issues that I may have not assessed correctly. I say may because what's to say from here it doesn't go straight up 50% in six months and the threats work themselves out?

Being wrong doesn't matter as much as managing the risk you take. This could have been better, and it could have been worse, but it was never going to be ruinous. A while back, I remember one reader sharing that he had 25% of his portfolio in a lottery ticket biotech that blew up. That is ruinous. I think that 20-30% in commodities or emerging markets, while not ruinous, could set a portfolio back for a year or two in the face of a nasty correction. This is not a prediction, just a rule of thumb statement.

Comments

[LJ]

I read your article recommending Iceland before, but I did not invest in Iceland -- not even government bonds or its currency. For me, the Icelandic currency is overvalued by any standard. Another problem is: the country is surviving on livestock-related businesses. Livestock is believed to be a major threat to environment.

[RWS]

Good money can be made in Iceland but you have to be careful. It's not for Nervous Nellies.