Nowadays, probably the most overrated financial market for the investor (gambler) is the United States equity market. Conversely, perhaps the most underrated venue when it comes to making an investment is the worldwide currency market. I’m not referring to the perspective of fundamental analysis, technical analysis, or any of a half-dozen other tools that financial folks utilize in order to determine valuation, I’m merely examining the situation from the lowly eye of the retail customer.
Every day, pundits are writing and talking about the so-called equity bubble that has formed worldwide. Discounting the fact that bullishness in the United States, which is currently greater than at any other time in history (including 1929), and that normally this kind of euphoria would dictate a top in the markets (discounting is difficult to do), it would appear that all financial advisors think that trees grow to the sky forever. Indeed, the clarion call continues to be “buy, buy, buy.”
From an odds standpoint, retail customers should realize that being “long” in a market gives them a one-in-three chance of winning. That’s because equity markets can do one of three things: they can go up, they can go down, or they can stay the same. Thus, for the typical buy-and-hold investor (heaven knows that no advisor would ever recommend going “short” because that would be very anti-FINRA), they can only win if the market continues going up. Consequently, the likelihood of success is 33%.
On the other hand, currency trading is a little different. In fact, when playing one currency against another, the odds of winning greatly improve. Currently, the central banks of the world are in a race to devalue to zero. Every day, one currency will be stronger than another, which also means that one currency will be weaker than another. As long as the bankers continue on the Keynesian path, there will definitely be daily fluctuations of currencies. Moreover, when it comes to the euro, the Swiss franc, or even the dollar, no one is declaring a bubble. As Draghi, Bernanke, Yellen, or even Greenspan continue to comment on worldwide growth, and countries across the whole world adjust their currencies accordingly, the opportunity for profit continues unabated. Playing one country’s currency against another provides the opportunity for being right 100% of the time. Of course, it’s not that you will be right 100% of the time, but just consider the opportunity of 100% success versus the opportunity of only a 33% chance of being correct. Hmmm.
It certainly doesn’t take a financial genius in order to realize that three times the opportunity to win is a much better deal for the gambler...um, I mean investor.