The imagined rewards that come with timing markets often tempt otherwise risk-adverse individuals with the prospect of easy money. The same psychology that lures humans toward gambling comes into play when making both personal and professional financial decisions. As tempting as timing the market might be, is it truly the right course for you or your business?
Buying low and selling high by timing the market is the proverbial white whale of trading and investing. Institutions spend billions in an effort to get it right just over half the time. Often even they fail.
Some lucky few do beat the odds when gambling and “win,” but many others do not and suffer the consequences. Typically it is the former you hear about, but as Sam “Ace” Rothstein (Robert De Niro) in the film Casino says, “In the casino, the cardinal rule is to keep them playing and to keep them coming back. The longer they play, the more they lose.” Eventually, you will get beat.
Gambling in a casino may seem like a glib comparison to managing financial risk, but then again, consider the definition of the word “gambling.” Dictionary.com defines it as “the act or practice of risking the loss of something important by taking a chance or acting recklessly.”
Picking investments is probably the best expression of this definition in one’s everyday life. The notions of “risk” and “chance” are present in both casino gambling and finance, as is the potential for reckless behavior. There are plenty of stories about day traders reaping windfalls by playing a hunch or hot tip. Unfortunately, the tales of savings lost and lives ruined in pursuit of riches are far more plentiful. The same can be said of those taking high risks in other financial markets.
The greatest gambles by far surround the global foreign exchange (fx) market. More than $5 trillion changes hands daily in a market that has no open, no close, and seemingly never takes a day off. The vast majority of the trading in this leviathan happens “over-the-counter,” not in any heavily, or even lightly regulated location. The market is simply too large for any single party to attempt to control it.
Individuals and firms of all shapes and sizes find themselves participating in the fx market whether willingly or unwittingly. Many have considered the possibility that there is money to be made in fx. One should also consider that there is, more often, money to be lost.
Typical volatility in a liquid currency pair can exceed one percent or so on a given day. As in other areas of finance though, the “typical” is changing. As markets become more interconnected and information flows more freely and quickly, markets react and over-react almost instantly.
For the most extreme recent example in the fx market, one only has to look back to mid-January. For three years, the Swiss National Bank (SNB) had a very public regime in place that allowed the franc to appreciate no further than 1.20 francs per euro. They drew a definite line that they insisted on defending.
The defense of this level, however, simply became too expensive for the SNB. Without warning, they abandoned their regime and markets reacted almost instantly, as evidenced in the adjacent table courtesy of Oanda.com. Anyone who was short Swiss francs was immediately sitting on losses of 20 to 30 percent.
Though rare, events like this demonstrate the unforgiving nature of the fx market and financial markets in general. No matter how familiar a market feels, one can never anticipate the multitude of events that influence them.
John Maynard Keynes famously said, “Markets can remain irrational longer than you can remain solvent.” Several professional fx trading firms were forced into insolvency after the events described above. The fx market does not always behave as it should. There are forces far greater than any single participant at work in the market.
If you or your firm are particularly prescient with respect to fx, by all means add currency trading as a profit center. If you are amongst the near unanimous majority that are not and you are unwilling or unable to make the significant investment that you would need to even attempt to achieve such a regime, it is best to stick with what you know best: running your business.
It is worth your time to learn about some of the tools you can leverage to hedge your fx exposure and better comprehend what global markets are doing. It is even more worth your time to focus on that which you can control. This means being most attentive to the professionally responsible remit that comes with most leadership positions.
It is not worth your time to shun other functions that are central to the operations of your business and lose sleep over the actions of a central bank half the world away. It is not worth your time to try and time the market.
Some are able to find value in timing the risky market. Some have also found tremendous value in swinging a bat, dunking a basketball, saving a life, and, for some, even in the pursuit of illicit activities. That does not mean everyone is suited for these lines of work.
Far more value can be realized for your firm, not by timing your trades, but by mitigating and minimizing the coincidental fx risk that arise from the execution of your core competencies. Gambling with your bottom line is probably not what you do best.
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