There was a lot of speculation about currency trading early today and it prompted me to write this blog. First a clarification, the goal of “trading” is to make money on short-term trends. It’s completely different from investing. Trading is short-term; investing is long-term. The former is speculative and the latter is logical. As such, traders are not investors – they’re gamblers.
Always consider the source of the information you use.
Investors can actively trade, of course – but those aren’t traders. Investors that trade often usually do so with “Vegas Money,” a small portion of their total assets, which besides making money, are looking for the thrill one derives from the act of gambling.
Traders are those who trade all the time to earn their daily bread. These people, regardless of education pedigree, are gamblers through-and-through and no different than the crap shooter living his life in front of a table at the Bellagio.
This is not to say that gambling is a bad thing. How to make money is a personal choice. However, gambling is not the Lose Your Broker perspective. These blogs are from the view of a long-term investor providing information to like-minded independent investors. To us, short-term movements are for informational purposes only. Placing bets on their direction is not in our deck of cards.
Instead, I use the speculation surrounding recent currency movements as an illustration of the difference between trading and investing, and to provide caution to investors currently under the thumb of slick Wall Street brokers.
Today a falling Euro and a rising U.S. dollar got currency traders microphones and bright lights. Traders (those betting on where the next blip on the radar screen might appear) tried to transform recent currency movements into important new news, that recent market moves point to changes in long-term condition, and that now may be a time to bet on currencies – whether to buy the Euro low, short the Euro lower, or to bet the U.S. dollar higher because of the Euro-Zone’s weakness. Regardless of the position, none is better than pure speculation and a gamble at best.
What traders fail to realize or convey in their position is the significant role central governance has in the currency markets. Currency markets are far from free-markets, as central governments control money supply and rarely disclose what they are actually doing to affect the currency Markets. For instance, the U.S. Federal Reserve continually trades currency with the European central bank. Why?
To purposely affect the direction of their currency markets. They do so to stabilize currencies between allies, and therefore, to stabilize international trade among friendly trading partners. And to the contrary, the Fed will also engage in actions intended to impair other central banks with hostile positions toward the U.S., European allies, and other friendly trading partners.
Bottom line: central banks rarely tell “the market” half of anything that they’re doing to affect the currency market – including the U.S. Federal Reserve, which has no Congressional oversight and cannot be audited. This alone makes currency trading more of a gamble than anything else.
This, of course, is not to mention that betting on currencies during a worldwide currency crisis is like running into a burning building with clothes drenched in gasoline. This makes the gambler nothing short of high-risk high-stakes player.
Why do I bring this up?
Because the reason most investors entertain trading accounts or high-risk mutual funds that trade currencies and the like is because their overall portfolio performance stinks. It’s poorly constructed and consistently fails to produce “market returns” (even in substantially upward moving markets like this one) and so Wall Street uses its lackluster performance record to convince investors that more risk is required – perhaps in currencies – for which they have “great products” run by “great fund managers.”
Don’t fall into this trap.
Mistaking short-term trading opinions as long-term investment opportunities – for any asset class – is like taking medical advice from a pill junky. You better get lucky.
Successful investment requires no such risk and no such luck. So why trade into it?
Stay tuned…