Thursday, April 14, 2011

The Currency Casino

Gain Capital Holdings (GCAP) and FXCM (FXCM) are providers of retail foreign-exchange services and completed initial public offerings late last year. Check out this Barron's article on the lightly regulated world of foreign-exchange trading. Apparently, 50-to-1 leverage is allowed for some participants.

The article makes the point that those who open one of these trading accounts...

...don't be surprised if you depart from it with a lighter wallet.

Roughly three-quarters of individual investors who trade through forex firms like Gain Capital Holdings lose money, resulting in an estimated client-attrition rate of 15% to 25% a year, versus less than 5% at online stockbrokers.

How about using leverage to gain more leverage? Apparently some customer deposits are funded with credit cards.

Hey, at least the CFTC (Commodities Futures Trading Commission) lowered the leverage limit. They actually lowered the leverage limit from 100-to-1. 

So 50-to-1 is somehow supposed to represent low leverage? If something is being bought with leverage in the form of a credit card to begin with I'm not sure how lowering the leverage limit from 100-to-1 to 50-to-1 has any real meaning. Maybe it does.

In any case, sure makes attempting to buy shares in boring but stable businesses at the right price, and for the longer haul, look pretty tame.*

Personally, if I couldn't find a plane and needed to get across the ocean I'd take a ship. The above seems the equivalent of attempting to get across on the back of a sailfish.**

To any regular reader of this blog, it's obvious that the primary focus here has been to find and own shares of good businesses* (that happen to be public companies for convenience) with an indefinite but ideally "forever" holding period. If you get it right, the core economics of each business itself does the heavy lifting over time when it comes to producing returns. No leverage.

None.

I'm guessing anyone intrigued by highly leveraged forex trading will find the main focus of this blog, well, boring.

Find good businesses; buy shares at a discount to value; minimize...

Uh, never mind.

Adam

No position in stocks mentioned

* Tame, but not necessarily easy. The tough part is figuring out things like: What's the estimated per share intrinsic value? Is there a sufficient enough discount to that value available at prevailing market prices? How durable are today's competitive advantages? Not exactly stuff that's always clear.
** Apparently, the sailfish can hit 68 mph for shorter periods of time. That is quicker than any other fish. So someone could, at least theoretically, get to their destination more quickly than on a ship. Obviously, that doesn't make it a brilliant alternative means of transport.
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