This is a guest post on trading from Tusk Trader (check out the newly launched site: www.TuskFund.com), an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader
Paul Desmarais Jr was a participant last week at the International Economic Forum in Montreal. Through the media I heard some of his very pointed comments about the currency situation within his large organization, Power Corp. It got me thinking about how currency swings are a major force in the markets right now as the economic crisis in Europe is playing out. The large economies of the world are in a process of deleveraging and that process is causing large currency fluctuations. This will become even more extreme as it seems likely that at least one country will exit the Euro and that process is not well defined nor experimented with.
I am not a fan of the average, at home investor trading actual currencies to generate a profit. Currency trading is highly complex and requires more daily attention than trading individual stocks. The risks of trading currencies are quite high and there is a lot of economic knowledge necessary to have it be more than a guessing game. There is also a massive amount of economic news to follow and analyze. Most at home investors just do not have the background or time allotment to allocate to just one portion of their portfolio. What I do encourage investors to do is to become more aware of the currency risks that they already have in there own portfolio. Most portfolios already have currency risk in some capacity and it is better to dedicate your time to understanding how currency swings affect companies you have already decided to invest in. Your goal is to understand your currency exposure. Look at what you own, why you own it and how currency shifts can impact a company’s overall earnings. Understanding your currency risk with a stock can take some time to get up to speed on, but not an overwhelming amount of time to stay on top of.
When you look at a large international company that you own, find out what currency most of their revenues comes in. What currency do they have their debt obligations in? You want to be familiar with the currency fluctuations that will benefit your investment and which ones will be detrimental to it. Companies that appear to mainly service a Canadian market are also very vulnerable to currency fluctuations. Our two largest airlines are a great example of this. They get revenue in Canadian dollars but their biggest expense, jet fuel, is tied to the US dollar. Currency relationships like this one can be advantageous in specific economic situations, and not in others. Understanding currency risk in your own portfolio is key to managing your own overall risk as the world continues to deleverage. Sovereign debt levels, banking solvency issues and political uncertainty are all going to keep currencies on the move and as a very active part of the market for the foreseeable future.
Thanks Tusk. Make sure to check out the site: www.TuskFund.com or follow Tusk Trader on twitter: @tusktrader
Your batter is getting a little low, and if you keep up with these pod casts you’ll have a bright future in radio. Just imagine a title something like…”Ladies and gents give it up for…..Today’s Money w/yours truly……Preeeeet Banereeeej”…..
If I am new to this, where would I go to learn the basics of how currencies affect my investments? Like basic concepts, where to look to find information on my investments, etc?
@ChristineWilson well, above all Google is the best source for information, that’s for sure! http://www.cochinechine.com/cropped-ex-boyfriend-jeans-ag-jeans
@ChristineWilson Start doing some research with whom you use to purchase your investments (a brokerage service, a financial planner etc). They will have some currency basics to pass along to you. They might even have some reading material for you. Make sure you tell them you are not looking to trade currencies, you just want to know how they affect the companies you are already invested in. Here is a common basic example: You are Canadian and own 1000 shares of medium sized US stock, trading on the NYSE, that does all it’s business in the US. If that stock rises 10% in one year, but the Cdn dollar rises 8% compared to the US dollar, you will not technically be up 10% if you go to sell the stock and then have to buy Canadian dollars with your US dollar gain. There are a few things you can do to start to be aware of the currency risks you already have. If you own a specific stock stock, go through the annual report and look at the areas that discuss revenue (sales) and the area that lists debts. I will give you some background on what the company is up to and what currencies it does business in. If you have questions, call investor relations at that firm and ask what % of revenue and what % of debt are tied to what currencies. If you hold mutual funds, get the person who sold them to you to do that research work for the fund. Mutual Fund sales people have a very wide range of competencies in Canada. If yours is not able to answer your question, contact the Mutual Fund company itself and ask for a proper list of the fund’s holdings. You also should get a fairly reasonable response from the fund company if you ask them. ETF’s that are very broad based are harder to keep track of so I would look at the big movers in each ETF you hold and do you due diligence on those ones. I hope that helps a little to get you started.
Above all I would try first Google as the best source of information available for free. Yet.. http://www.cochinechine.com/cropped-ex-boyfriend-jeans-ag-jeans
Your aritcle is full of useful information. keep it up. Tusk, What motivated you to call this blog “Currency Risk, Not Currency Trading”, not that the title does not go with the content, I am just wondering. I appreciate you sharing this with the rest of us Tusk.
The title is a reflection of what I think the average investor should be thinking when they hear about currency related issues. Too many people focus straight away on coming up with a plan to trade currencies without using it as an opportunity to do some analysis on the current currency risk they already have in their portfolio. Hence: Currency Risk, Not Currency Trading. I hope that makes sense.Thanks for the positive comments:)