Investing in foreign currencies

jon3001

Blah99 wrote: »

You're missing my point. Yes, you can calculate probability as a mathematical exercise, but on any given night in a casino you cannot identify whether you will make a profit or a loss, nor how much either margin will be. The surrounding variables are too opaque and indeterminable for this.

You can however calculate the standard deviation of results (profits/losses) and, given the odds, make a decision to proceed or not. The actual outcome is secondary to making the best decision that yields the highest expectation.

Blah99 wrote: »

Thus, you gamble - you hope that by taking a guess (regardless of how you arrive at that guess) you will make some money. This of course only applies to games of chance, and not games of skill.

Like I say - I prefer to crunch the numbers before I decide to bet. Consider this gambling game of pure chance:

I toss a fair coin. If it's heads you give me £1. If it's tails I give you £2. (Or make it £10/20, £100/£200, etc if you prefer). We'll keep going for 100 tosses. Do you play? You could end up losing money...

The mathematical basis for poker is very much about deciding to fold when the odds are poor (e.g. don't play roulette) and continue when the odds are good (like the coin toss). No - you don't know how much you'll win; you only know a decision's average expectation over time.

Blah99 wrote: »

Conversely, when investing, you use specific known facts to reach a reasoned conclusion - company performance data, economic outlook and so forth.

Conversely? So you're telling me that so far you don't have enough facts yet to make decisions about participate in games of chance?

Blah99 wrote: »

I have a very clear understanding of probability, reversion to mean and all the related principles relevant to various types of gambling.

Good - because the same principles are used in financial modeling e.g. for constructing risk-adjusted portfolios. You don't know the short-term outcome but you make the best decision to put the odds in your favour for the long-run.

Blah99 wrote: »

I'm a blackjack player as well as an investor. And I also know the most important thing of all - gambling is a fun game with an inconsequential outcome.

However, others participate professionally and see it as a serious business.

Blah99

You mention poker and talk about professional gamblers, but I specifically referred to games of chance. I've yet to hear of a professional roulette player...

Conversely? So you're telling me that so far you don't have enough facts yet to make decisions about participate in games of chance?

I think you're picking over terminology. In the simplest terms, a company is valuable because of its assets and its output. You can use clearly defined information to reach a reasoned conclusion as to whether or not to invest. You absolutely cannot do the same with a game of chance.

As a simple example, consider a pharma company awaiting results of drug trials. You can use all the mathematical theory you like to decide whether or not to buy in, but your results are meaningless. Probability has absolutely no impact in this situation. Instead you can review previous approvals, research progress, company information etc etc to reach an informed conclusion. If the drug is approved by regulatory authorities, the share price of the company will rise. If it's rejected the price will stay static or fall. That risk is absolutely not quantifiable via statistical theory.

Clearly that approach can't be applied to a game of chance.

sabretoothtigger

A warning on the L&G website led me to believe that their foreign index funds rely on those currencies.
I think shares might be the best way to hedge against a pound drop because they will give a dividend, you dont have to be absolutely right today.
Also if you only invest in one currency you are still liable to that currency falling in line with yours vs every other currency.

The best bets would normally be considered to be dollar and euro due to the size and variation in those economies. I understand the Yen is strong because of all their foreign investments (vs the uk's or americas net debt)

Both capital and income values may fall as well as rise and are not guaranteed. You may not get back the money you invested. If you choose an index-tracking ISA which invests overseas, changes in exchange rates between currencies may cause the value of your investment and the level of income to rise or fall.

jon3001

Blah99 wrote: »

You mention poker and talk about professional gamblers, but I specifically referred to games of chance. I've yet to hear of a professional roulette player...

I think you're picking over terminology. In the simplest terms, a company is valuable because of its assets and its output. You can use clearly defined information to reach a reasoned conclusion as to whether or not to invest. You absolutely cannot do the same with a game of chance.

You didn't tell me if you would play the coin toss game I offered.

Blah99

jon3001 wrote: »

You didn't tell me if you would play the coin toss game I offered.

Would I play you for a laugh? Sure. Would I take £x and, instead of investing it, play you? No.

The point of discussion here is whether gambling and investing are the same. You've obfuscated the issue somewhat by bringing in statistical theory, but the underlying essence remains the same - the two are fundamentally different.

Happy to continue kicking this around for a while though

tradetime

Reaper wrote: »

Let's be clear - you are not "investing" in foreign currencies you are gambling on them, or at best hedging.

There is an option (d) which does actually involve investment - buy overseas stocks or, much simpler, buy into a fund that invests overseas.

Or currency ETF's

Reaper

O dear. I hadn't looked at this thread since posting and I seem to have started a big debate about gambling. Too late to stop it now I think but here is what I meant by my original comment...

If you give a company a sum of money they will take it and (hopefully) turn it into more money. For example they buy raw materials with it and use them to build a TV which they then sell for more than the cost of the materials and labour.

So while there are no guarantees you can invest in a company with the hope of getting back more in the future.

However if you buy foreign currency you have a 50-50 chance it will go up or down because all the known risk factors ought to have already been included in the current price. There is no inherent growth assosiated with buying foreign currency and holding it as cash.

OK, so if you are a very knowlegable forex trader or smart economist you may be able to spot currencies which are incorrectly priced but I know I'm not, and I don't think the OP is either. That's why I said it was no better than gambling.

jon3001

Blah99 wrote: »

Would I play you for a laugh? Sure. Would I take £x and, instead of investing it, play you? No.

The point of discussion here is whether gambling and investing are the same. You've obfuscated the issue somewhat by bringing in statistical theory, but the underlying essence remains the same - the two are fundamentally different.

My point is that that gambling isn't just emotional hope at trying to win money. It can be analysed, like investments.

You make it sound like choosing to invest in an individual stock is just a matter of doing your homework and then the results are guaranteed. Many professional fund managers, with great resources, make losing investments all the time. However they use diversification and expect that a good enough proportion of the investments will show a profit to generate an overall return.

This is similar to how a professional gambler would analyse a bet. They know there is a luck element, so don't expect to win every bet. However, by spreading their money over a series of bets that have favourable odds they expect to generate an overall return.

It is interesting that you wouldn't choose the coin toss game as an alternative to investing, despite your stated understanding of probability. It has an extremely attractive risk/reward profile. Each bet has a healthy positive expectation and, because you get to play 100 times, the standard deviation of the returns is low. And yet it is a game of pure chance; despite your assertions it can be analysed and it would be rational to play it.

trenchwars

Well i'm looking for a short-term (1 - 2 years) way of protecting my savings against possible inflation.

I think gold is a bit overpriced at the moment, not to mention volatile.

Stocks are a possibility but probably not for the timescale I am looking at.

nrsql

Umm. If you invest in a company you will get back more or less than you invest - same as if you buy currency.
If you think that is a 50-50 chance then I don't see a difference.

You are assuming a perfect market for currency but not for shares which is why you perceive a difference. In both cases you are trying to spot (gamble on) market imbalances.

With a company you are hoping that company will do better than other companies. With a currency you are hoping the country that supports it does better than others (actually it's more about perception than reality).