In Writing & Letters | Written by Daniel Scrivner
Over the years, we’ve been profoundly influenced by the ideas of Tony Deden, Founder and Chairman of the long-term investment holding company Edelweiss Holdings. Tony is a rigorous and original thinker who looks at investing through the lens of the entrepreneur which he describes as “the doer with his own capital, not just the talker and player with that of others.”
The entrepreneur lives in the same world of uncertainty, risk, and competition as the investor, but because the entrepreneur has skin in the game and cares most about the long-term survival of their business, they have a very different set of values which lead to a very different set of conclusions.
In Tony Deden’s wonderful “In defence of having reserves and hoarding gold,” he lays out a framework for thinking about risk and uncertainty, the role of capital reserves, and why Edelweiss Holdings chooses to hold their reserves in gold over fiat currency. We’ve chosen to follow a very similar approach.
Below we share the ideas in this essay that resonate with us and form the basis for how we think about risk, reserves, and capital preservation.
Risk & Uncertainty
One definitive feature of life is that it’s full of ever-present risk and uncertainty. Life is full of chaos, noise, randomness, and fat-tailed outcomes.
Risk is the fear, and the very real probability, that something will go wrong. While uncertainty is the inescapable reality that risk, in the grandest of senses, are hardly neat or quantifiable.
Unlike financial professionals, who have been trained to think that risks are neat and tidy. That they can be quantified, hedged, and offset. That the goal is to put every last dollar to work to maximize returns. Entrepreneurs see risk more clearly: as the existential threat it can be. And they act accordingly.
Entrepreneurs see risk three-dimensionally, in a much more real and nuanced way that most of us, in part because they understand that there are too many risks to mitigate. Consider this example of a baker as Guido Hülsmann illustrates him in The Myth of the Risk Premium:
Source: Jörg Guido Hülsmann, “The Myth of the Risk Premium” in The Economic Theory of Costs: Foundations and New Directions, ed. M. McCaffrey (London: Routledge, 2018), 133-146.
Entrepreneurs have to speculate, or bet in Mises’ words, about the changes to make in their business to retain their customers and grow revenue over time. They constantly play both offense and defense out of necessity. Because you need both to win.
All of which is why having the resources to invest when investing makes sense, or simply to endure and persevere when times are tough, is so important.
Capital Preservation
The preservation of wealth, just like the operation of our bakery, is an entrepreneurial activity requiring one to distinguish those options of investment that are economically sound from those which are temporary, transient, fragile and baseless.
This may mean focusing on a narrow, profitable niche and eschewing tangential opportunities. It may mean investing more into a current location that’s proven over opening up a new location in an unproven area.
This simplest way to preserve capital is to ensure we have enough capital in reserves to weather any storm, maximize our optionality, and operate from a position of strength. Once you’ve done this, you’ll be able to go on offense when others are focused on defense and survival.
Much like our baker, the first step toward growing the value of our business is ensuring it’s survival. First by building up capital reserves and then by deploying those reserves extremely strategically and opportunistically.
He knows that, whatever the case, if he wants his business to survive and thrive, he will need reserves. These shield him through difficult times as well as give him the means, when the time is right, to increase the value of his business, its capacity, efficiency, sales and so forth. Having reserves provides him greater independence and hence a greater propensity to survive no matter what the future may hold. By giving him the means to act, reserves reduce his uncertainty.
In the case of our investor entrepreneur, his long-term savings may be in the form of equity participations that have real and lasting economic value. Yet, as is with our baker, he does not have all the information and there is natural uncertainty in what he ought to do.
Holding Reserves
But what kind of reserves should one hold? And what are the qualities that make an asset suitable to be held as reserves?
While not appropriate for everyone, the best store of values possess scarcity, permanence, and independence. For Tony Deden and Edelweiss Holdings, only gold possesses all of these qualities. Because only gold is a medium of exchange that’s an asset and not a liability — like cash sitting in a bank account when the bank possess only fractional reserves and lends out the vast majority of assets to earn additional yield. Cash in the bank is a liability on the bank’s balance sheet and in the worst of times it’s treated as such.
Gold is a globally traded, liquid commodity. If our goal is to maximize optionality while ensuring capital preservation what we really need is liquidity.
The real goal of holding reserves is to provide safety and liquidity. Not to earn yield.
To be comfortable holding gold, we must also focus on the durable value of the asset we own and not it’s daily price fluctuations.
Because we live in the world of the owner and entrepreneur, our capital reserves are an existential thing. They ensure our ability to survive and thrive long-term, which is the true enabler of smart compounding over time.
Survival is always the first prerequisite. So first mitigate the existential threat of not surviving by building up your reserves. Only then have you earned the right to go on offense, strategically and opportunistically, from a position of strength.
In Closing
A few simple rules of thumb on having reserves, mitigating risks, and operating from a position of strength:
Recognize that there are too many risks to mitigate and that you always have to speculate, in Mises’ words, on the relative importance of all the risks and opportunities you see.
Above all else, our primary goal is capital preservation. We define that as preventing the permanent impairment of our capital due to mistakes and errors.
Avoid the mirages of temporary, transient, and fragile opportunities; focusing instead on those that deliver durable value over long periods of time.
To reduce uncertainty, shield yourself in difficult times, and give yourself the means to increase the value of your business, you must first build and keep a reserve of capital.
Having reserves provides us with greater independence, hence a greater propensity to survive no matter what the future may hold. They also give us the means to act on opportunities.
There's nothing more important than liquidity when it comes to capital reserves. Understanding what is truly liquid and what isn't might lead you to hold your reserves in gold over fiat.
Further Reading

Edelweiss Journal (Issue 17)
Tony Deden

The Myth of Risk Premium
Jörg Guido Hülsmann
"In defence of having reserves and hoarding gold” was originally published on April 6, 2018 in Edelweiss Journal.
Arcade Group and its directors may personally hold assets discussed in this essay. This essay is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.
This is not an offer to sell or a solicitation to invest. Under no circumstances does the information contained within represent a recommendation to buy, hold or sell any security, and it should not be assumed that the securities transactions or holdings discussed were or will prove to be profitable.
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