Why currency trading is a bad idea: Keynes

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There are a myriad of ways to build wealth in this world, but perhaps one of the worst is currency trading. You could ask economist John Maynard Keynes about his rotten currency transactions in the 1920s if he was still alive (he died in 1946).

The father of the International Monetary Fund, the World Bank, and Keynesian economics was quite the currency player right after WWI. Managing funds for himself and his friends at Bloomsbury, including author Virginia Woolf, Keynes believed he could make a big splash by trading on major trends in European currencies.

Before the arrival of the euro, each European country had its own currency, which traded like a commodity. Keynes bet against Germany and a few other countries and was eliminated. After apologizing profusely to his friends, he returned to the market to recover the money he had lost. Although he aligned himself with his investors, he switched to other forms of investing. Currency speculation proved too unpredictable for the great economist, who has done extremely well in almost everything else.

In recent research, Olivier Accominotti of the London School of Economics and David Chambers of the Judge School of Business, Cambridge, have taken an in-depth look at Keynes’ currency exchange records, which are held in the archives of King’s College. / Cambridge.

Keynes was doing badly with currencies because his method of trying to discern when currencies would move against each other did not work. Then, like today, you couldn’t trade on the basis of the headlines. The main players are the global banks, which look at a number of factors in deciding what to buy and what to sell. Will the Chinese currency be stronger or weaker than the euro? How will the dollar behave against the yen? Only a computer can sort through the factors that change every day.

For example, let’s say you bet against the dollar by buying the euro, which has generally been valued higher in relative terms in the post-2008 environment. Unless you could time some days, you would have wasted money on this trade as billions of dollars poured in in dollar denominated investments as Europe battled its economic woes.

Yet the dollar only strengthened as other currencies weakened. This defied the prediction of many experts and economists.

Today, currencies are even more volatile, especially with China’s entry into the world market as a reserve currency along with the euro and the dollar. It is impossible to guess what is going on in the economy of the most populous country in the world. The People’s Republic is not transparent about its debt, real estate and stock market bubbles.

In the 1920s, Keynes had as much information as any private investor, but that did not help him predict currency movements. The study found that:

“The period in which he traded was marked by considerable volatility in exchange rates and large deviations of exchange rates from their core values ​​which now seem obvious to investors. However, trading these spreads in real time was dangerous. Implementing a currency trading strategy based on the analysis of macroeconomic fundamentals was a challenge (even) for John Maynard Keynes, ”the authors concluded.

The study also showed that Keynes “experienced periods of considerable losses in the 1920s and 1930s. Indeed, he was on the verge of being technically bankrupt in 1920 and could only continue to trade because of his ability. to borrow funds from their social circle.

I cite Chambers’ research in my book “Keynes’s Way to Wealth,” which examined how the economist flourished as a private investor and pioneered several investment techniques used today.

With Keynes, we have to separate his iconic image of one of the most famous economists of the 20th century from his role as an investor. Keynes managed the money of two British insurance companies; his family and friends; Cambridge University and has launched several high-risk hedge funds.

Keynes, you should know, recovered from his currency losses to develop a strategy of buying high dividend stocks. He bought and owned these companies at bargain prices after the crash of 1929 and until the end of World War II. The portfolios he created generated millions for the University of Cambridge, insurance companies, his friends and family. Keynes is perhaps the richest economist of all time.

While you don’t want to emulate Keynes’ forex strategy, his trading techniques are solid. Buy sustainable, profitable businesses from boring businesses. And hold on for decades. It’s not Keynesian economics, but it’s Keynesian investing at its best.

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