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losses from currency changes even if making good investments?


scorpioncapital
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has anyone experienced losses from currency even if you make a pretty good investment or protect your money with a decent fixed income return since it can get obliterated by large currency chance ? (e.g. cad/usd). If so, how do you protect yourself? Or do you assume it will reverse? I mean for a retail investor, is there some asset that would protect him/her from this devastating scenario?

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Something I struggled myself with, but a currency will always bounce over longer periods. That's why I don't pay a lot of attention to it and just try to make good investments.

 

Only I am attentive to broken currencies like the one from the Turks. I found some nice opportunities over there but it's very questionable what such a weak currency is going to do. You could also see this as a opportunity if you believe the Turks will get a stronger economy etc., but I don't have enough knowledge in that area.

 

So my advice is that you invest in strong economies like the US, Canada, Europe and their currencies will be quite stable in the long-term and in comparison to each other.

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I have occasionally used margin in the foreign currency to buy the position. Ie, borrow the Turkish Lira (or whatever) from Interactive Brokers and use that to buy the position. You pay interest on the margin loan, which can be significant in the case of weak currencies, but if it depreciates the depreciation in the value of the margin loan offsets the depreciation in the position.

 

 

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To a retail investor FX change is your friend - not your enemy.

FX change over your expected investment horizon is part of the decision, and it forces you to explicitly recognize the risk in what you are doing. Great return + material devaluation = sh1te investment. If you don't like FX risk, don't invest abroad - it's that simple. 

 

FX overlay is a long-term strategy, that rewards patience. It is essentially long term gains (FX rolls) that pay off long term obligations (mortgages)

FX rates between major currencies (USD, CAD, GBP, EURO) routinely change significantly, but the time between changes is typically years. At times the CAD/US FX rate is at parity, or better (1.03/1.00), versus the more normal 0.72/1.00.

 

Assume a IM CAD investment (2nd mortgage) in USD, earning 5%/yr, and that it takes 2 years for the CAD/USD FX rate to return to normal. 

At the end of Yr2, you will have 1,135,575 USD (1,000,000 x 1.03 x 1.05^2), worth CAD 1,577,188 (1,135,575/.72). Assume you are terrible at tax, and pay 55% tax on the 50% of the CAD 577,188 that became taxable income - or CAD 158,727. Your net proceeds are CAD 1,418,481 - you apply 1.4M against the mortgage, and spend the rest on vacation/xmas.

 

Per 100K of mortgage you repaid 140K, and this CAD/USD roll might occur once every 8-10 years.

If you can tolerate the risk, CAD/BTC ... and repeat every 6 months!

 

FX is your friend, but you have to know how to apply it  ;)

Good luck.

 

SD

 

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has anyone experienced losses from currency even if you make a pretty good investment or protect your money with a decent fixed income return since it can get obliterated by large currency chance ? (e.g. cad/usd). If so, how do you protect yourself? Or do you assume it will reverse? I mean for a retail investor, is there some asset that would protect him/her from this devastating scenario?

 

I started investing in 2000. The US seemed like the place to be due to its dominant tech industry and entrepreneurship culture. Switched into USD first few years at 1.4 to 1.5 exchange rate.  Investments did great but huge headwind as exchange collapsed down to parity.    Now it's back to 1.3x and with investment gains im doing great.  Glad I didn't invest in socialist Canada any more than I have. 

 

I have to tell you, and you were likely investing then too, back in 2010 you were such an idiot if you invested in US.  Trade deficit, budget deficit, stagnant economy, bleh.  SO so foolish to put your money there. Never mind the huge issues facing Canada and other countries.  Look how it turned out with usd up 30% and s&p the soul destroyer of so many aspiring commodity and emerging market fans. Absolutely crushed it.  Lol.

 

I now just focus on the best investments and try to diversify across countries when possible.  However the best companies is more important than currency.

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Something I struggled myself with, but a currency will always bounce over longer periods. That's why I don't pay a lot of attention to it and just try to make good investments.

 

 

You note this isn't true for the Turkish lira.  The Mexican peso is another example:  https://www.macrotrends.net/2559/us-dollar-mexican-peso-exchange-rate-historical-chart

 

Based on that chart, over the last 26 years, the peso has devalued 7% annually against the dollar.  Think about the performance you'd need in nominal pesos to overcome this 700 bps annual "fee". 

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Something I struggled myself with, but a currency will always bounce over longer periods. That's why I don't pay a lot of attention to it and just try to make good investments.

 

 

You note this isn't true for the Turkish lira.  The Mexican peso is another example:  https://www.macrotrends.net/2559/us-dollar-mexican-peso-exchange-rate-historical-chart

 

Based on that chart, over the last 26 years, the peso has devalued 7% annually against the dollar.  Think about the performance you'd need in nominal pesos to overcome this 700 bps annual "fee".

 

Same with Brazilian real.

 

Sometimes cheap currencies get cheaper. And sometimes they go up 20-30% in a year.

 

Just know that currency exposure CAN impact your thesis and ruin investment returns. They can also be a massive tailwind. Like all things, a diversified approach reduces idiosyncratic risk.

 

Just make sure the currency risk you're accepting is currencies that trade historically cheap and try to do so with several of them.

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The devaluation is because the economy is doing poorly - if you sell an essential service you will do higher volume but at lower margins, & essentially wash. Just  to keep even, growth in margin after tax/bribes has to equal at least the most recent devaluation. Not impossible, but a very tough slog.

 

To work - one either has be a domestic investor, or willing to take the gains in goods that can be exported (minerals, food, carpets, services, etc.). Your goods piggy back on the export permit of someone else, for a 'fee'. Alternatively, dump local goods in the local market for whatever you can get, and immediately convert the proceeds into crypto. Preferably for everyone, to use export goods ;)

 

SD

 

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