Australian dollars. Canadian dollars. American dollars. Euros. Pesos. Yuan. There are so many currencies that affect our speculative investments, and their values are constantly changing.
How do we deal with this?
Some people speculate directly on changes in currency values, of course. One can buy the euro if one thinks the US dollar is going down, or the reverse, and so forth. It’s an interesting way to speculate, but I’ve never seen the kind of gains in it that a terrific mineral discovery can deliver, so it’s never been a focus of mine.
But foreign exchange (forex) is not just a concern for currency traders.
Suppose I’m an American buying a stock on the London Stock Exchange, and the company I’m speculating on is building a mine in Argentina. That exposes my investment to changes in the US dollar, the British pound, and the Argentine peso, at the very least. Vendors, contractors, smelters, and other buyers could bring other currencies to bear.
Now let’s suppose I was a mainstream investor, hoping for a nice, safe 5% annual return on a large multinational company. I have to exchange my dollars for pounds to invest, so I could make more if the pound rises compared to the dollar, but I risk making less if the pound drops. If I got everything else right and the stock gained 5% as expected, but the pound dropped 10% at the same time, I’d lose a lot of money despite the stock going up.
Plus, I’d have paid fees to exchange my dollars to pounds—and would have to pay them again to get my money back into dollars. And don’t forget that the mine is in Argentina. If the peso falls, operations could cost less, boosting profits. But the opposite could happen as well.
Clearly, I’d have to dig in and thoroughly research each currency that could affect my investment. I’d have to make projections for each of the moving parts to see if it all makes sense. Sorting all this out can take a lot of research and modeling and money. Even with that, it still only produces an educated guess.
Fortunately, I’m not a mainstream investor.
A 5% return would be a failed speculation in my book. I’m swinging for the bleachers. I not interested if I don’t see the potential to at least double my money on a speculation. I usually expect much more.
When looking for 100% gains or more, a 10% loss on foreign exchange is marginal.
That doesn’t mean I don’t care about or don’t pay attention to foreign exchange issues. It means those issues are generally marginal in the context I work in. They are not make-or-break factors in my decision to invest.
Let’s use the same countries in my example above, but let’s say it’s a junior exploration company. Getting the speculation right on a junior that makes a major discovery would not result in a 5% gain—more like 500%. Maybe even 1,000%. But let’s say the company makes a significant new discovery, but it isn’t easy to figure out just how big the deposit is. The stock shoots up on the discovery, slumps back as reality sets in, and ends up about 100% higher a year after I bought.
Now suppose the pound dropped 10% compared to the dollar. That would take 10% plus fees out of my gain. Odds are that the peso would be down as well, but this is an exploration play, not a production story, so saving on operating costs doesn’t really contribute to the win, nor does it offset my forex loss on the lower pound. It does enable the company to explore more while spending fewer dollars, however, and that’s a good thing. Regardless, I’m still up around 90%—let’s say it’s 85%, net of brokerage, forex, and any other fees—and that’s a big win.
Of course, if the pound had risen, it would have boosted my win significantly. The natural question then becomes…
Should I try to time my speculations to benefit from forex moves?
No.
Oh, if I think the dollar is going down, I might try a little harder to find good stocks denominated in other currencies. But I’m always looking for the best opportunities all around the world, so not much would change. I suppose if I had two opportunities that I liked equally, and one seemed like it could benefit from probable changes in forex, that might tip the scales. I can’t remember this ever happening in my career.
On the other hand, I do try to time movements of my own capital.
Obviously, we all want to pay as little as possible on forex fees. One way to do this is to exchange money as infrequently as possible. If I don’t urgently need the cash for something else, I tend to leave money in whatever currencies I’ve bought and try to let it grow in that currency.
For example, let’s say the stock that was up 100% in the example above looked to have peaked. I might sell my position—and leave the proceeds in the UK in pounds, waiting for the next London-listed opportunity. I might take some of that profit and repatriate it to the US if I thought the pound was about to fall hard, thus timing that market. But otherwise, I’d leave it in place and seek to make it grow. Even if I thought I was done buying London-listed stocks for a long while, I’d rather buy a house or a productive real asset in the UK than bring the money back to America.
This is exactly what I did with the Canadian brokerage account I had set up before my former employers required me to sell my stocks. Once I exchanged US dollars for Canadian dollars, I left them in Canada. I might have timed the forex fluctuations in terms of when to add to that Canadian account, but I never paid fees simply to repatriate dollars. That money stayed in Canada until rule changes regarding US investors caused the brokerage to close my account. That turned out to be about the time I needed cash to start The Independent Speculator.
I wouldn’t leave money in a currency experiencing high inflation, of course, but I don’t expose myself to a lot of those to begin with. But increasing my wealth worldwide is a worthy goal on its own. Not keeping all my eggs in one country-basket is a wise precaution… and moving money across borders can attract unwanted attention. So I’m happy to make as many of my currency exchanges one-way transactions as I can.
Other forex considerations:
- Changes in the value of currencies in countries where a producer has operations can have a large impact on profitability—pro or con. If a US company pays employees in pesos and the peso drops by 50% compared to the dollar, labor costs will go down. (Of course, those employees are likely to ask for higher pay, but still.)
- Such forex changes can impact asset and derivative valuation as well as contract terms, and hence the balance sheet and operating costs of multinational companies large and small, even explorers.
- If I had a stock I wanted to buy but didn’t think it was about to take off, I could see waiting if I thought this would allow me to buy more, due to forex changes. If the reverse were true, that might prompt me to buy now, while forex was in my favor. In practice, I don’t think forex has ever been the deciding factor in a speculative investment decision on my part.
- I’ve never flown to a country with a suitcase full of paper money, then exchanged it locally, then used it to open a brokerage account. I’ve wired US dollars to brokerages that charged me a fee for depositing them as foreign funds for use in that country. Remember to ask about these fees, and not just trading fees, whenever you open a foreign brokerage account.
- A note to romantic adventurers: It used to be that one could cross borders with substantial sums in the form of gold bullion and raise few questions. Today, customs forms in the US and other countries ask if one is carrying $10,000 or more in cash or gold. The tacit admission that gold is money is interesting, but the point is that gold no longer flies under the radar of those who seek to control capital flows.
Sound messy? Perhaps it is—thanks to myopic governments.
One could simplify life by trading only on the markets in one’s own country (or the one where one does most of one’s banking, if that’s not the same as one’s country of residence, etc.), but that limits one’s opportunities.
A speculation that could double or triple your money in short order is worth a little extra effort. One that could deliver 1,000% gains—a 10-bagger—or better makes questions of timing forex fluctuations a distraction. Even saving money on fees pales in comparison to the gains. If I had a great speculation in mind that I was convinced had excellent odds of delivering along these lines, I wouldn’t let these details get in the way.
In fact, of the 10 stocks in my current portfolio, only three have US listings (I am a resident of the USA).
At the end of the day, forex fees are just a cost for me as a speculator. The price of admission. Knowing this, I’ve arranged things to minimize this cost. I’m ready to buy when I’m sure I’m on to the next great speculation.
That’s my take.
