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Monthly Archives: April 2015

Currency Wars Fiat Currencies Uncategorized

New war in town – currency war

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Currency wars was something unheard of as a term in the mass media just 5 years ago. Now if you search through news paper , you will find that the most usages of the word war is related to currency.

Things are getting really serious recently as all parties are trying to outsmart the others and s most things in finance this is a zero sum game and somebody has to lose for you to win. When playing parties are countries and law makers it gets serious to make others lose for you to win.

This game is really simple – you (as a country) don’t want your currency to be very strong as costs for domestic businesses will be high compared to other countries and that brings a whole lot of problems – no foreign investors (they will go to China right?) , weak domestic companies, low exports, high unemployment etc. That brings in a lot of discontent and you don’t get elected at the next poll – simple as that. So strong currency is bad, looked at country level. Here comes the printing press – countries print money to debase currency and thus give a hand to business (make domestic costs lower). But who suffers here? The savers. If you hold money in the bank – that’s bad news. Current monetary policy favors borrowing and not saving. That’s why Germans are against running the printing press and Italians and Spaniards are in favor.

I don’t know if a little monetary policy is good here and there but one thing i know for sure that is very bad – when monetary policy substitutes reforms.

Our policy makers have run out of ideas (or don’t want to push them as our world as we know it needs very painful restart of the financial system and that’s bad for ratings) so bad since the start of the crisis that they have substituted all sound (but painful) policies with one thing and that is known under many names: monetary policy, QE or simply money printing. However, that always ends bad. 100%, no exceptions here in human history. If you are a net borrower, you don’t need to worry to much – you can only benefit. If you are net saver, start looking at the time as your worst enemy as money in the bank will eventually end up bad.

That is valid for all major currencies – dollar, yen. euro, etc. US printed three times the money supply for 5 years, Japan has never stopped to print large amounts of money, ECB just announced very ambitious plans for printing. On the other hand, all these parties are stuck in their financial reforms and that can be seen easily – GDP growth is hardly hitting 2%, unemployment stays high (especially youth figures), bureaucracy is high, taxes are high etc. So even though they try to solve all heir problems with the printing press results are not there because printing can help but can’t substitute sound policies.

As a conclusion, remember that history repeats itself. Every non gold backed currency (fiat currency) has failed in human history.No exceptions. Time span is usually 40 years. All world currencies are fiat since Nixon made them such in 1971. It may not be in the next year or two but if it happens in your life span and you are not prepared, 10-20-30 years of your labor may just disappear in a matter of days.


Investment advice that turned out to be most valuable for me

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A lot of people consider trading or investing as a game and you can hear a lot of people say “I play on the stock market”. That’s so wrong. Investing with real money (moreover your money)  is serious stuff and that’s why it should be taken with great consideration and discipline. What is more important on the stock market than knowledge in my opinion, is discipline. I would split the discipline-knowledge skill set as 80%-20%. Discipline requires to abide by some rules and advice (by people that you trust). These are the ones that i consider most important:

1. Always invest the amount that you are ready to lose. Investing in stocks, bonds, commodities etc is a highly risky business. If someone tells you that this stock is sure thing – walk away. Each company, currency etc can go to zero in 1 day. When things get nasty, you can’t even sell – they stop the trading and eventually tell you something like “We don’t know how we allowed that to happen.” Remember Enron?

2. Don’t look at your investments every day – big distraction. If you need to see how much money you made or lost yesterday, you could not do it more wrong.

3. Set goals and follow them. If you did your homework and are looking for a 20% return on an investment, sell it when it gets to 20% – don’t wait for it to make you 30%. Same with losses- set stop losses.

4. You compete with one of the smartest people and the best technology on the planet. Face it – you can’t beat them with knowledge or algorithms that you found. You can beat them with patience and discipline. Most people trade super-often and try to catch the trend. You can’t do that in the long run. It is a lose game for you. However, if you did your homework and keep your investments long enough, that will pay out. If your holding period is shorter than 3-5 years, you are not an investor but a speculator.

5. Technical analysis is good only in two moments of time – when to enter and when to exit an investment. Technical analysis can’t predict prices and trends in the long run, no matter what they tell you.

6. Don’t trust analysts. As i said above, you compete alone against one of the smartest people on the planet and all of them want you to lose. It is zero sum game – if one loses, another one wins. So it is mathematically impossible for everyone to win. If anybody out there knows that  stock X is going up, he wont share it with the public but make all the money in the world. Don’t be fooled by shiny hedge fund managers – 99% of them lose money for their clients.

7. Investing is super simple – don’t bother study long formulas etc. Most of the time, what you have to figure out are fundamentals, demand-supply balance, management/leadership (if you invest in stocks) skills, politics (forex and bonds), common trends. Those things drive prices in the long run and no, you don’t need special education to figure them out.

8. If you make 20% return over 10 years, that’s huge success – you are doing better than 99% of the crowd. Most people think that to be super investor, you have to make 100% an year. Wrong, nobody on this planet does that over the long run.

9. Stay in your area of competence. Don’t invest in insurance stocks if you don’t know anything about insurance business, if you are not super smart in politics – stay away from forex. Simple as that.

10. If you win, you attribute it to yourself , if you lose – you blame other factors. Avoid that. It is all your fault. One more point here – don’t look back and blame yourself that you didn’t spot the next killer stock earlier. Early investors in killer stocks didn’t know that the stock will skyrocket. They just invest in a 1000 stocks and 2 of them turn out to be so successful that pay out for the others.

11. If you are not prepared for at least 30% drop in the price, don’t use margins. Otherwise, you will learn what a margin call is faster than you think.

12. As with everything, history repeats itself. Study the financial balloons and crisis for the last 200-300 years (what caused them, what happened etc.) and you will know better what is going to happen than 99% of the ivy league educated folks out there.

13. Last but not least – be a contrarian – only then you have a chance to win (even though not for sure, but at least you have a chance). Be greedy when others are fearful and fearful when others are greedy. And if you don’t trust me – remember who said that. A rule of thumb here is – if you hear your waiter advise you on stocks, it is probably a good time to sell. Sounds simple but that is probably the hardest of all.