FX Lesson 4 : The Road To Riches In The Zero Sum Game

I have been meaning to write about this for a while now with thoughts fermenting in that dusty old brain for years as I procrastinate on grounds that it would serve little purpose or, the heaven’s forbid, perhaps even cause economic harm.

In this week of national mourning in Singapore, I have decided put those thoughts down to free up some of that database, as a distraction and in the name of good spirit and fun.

Qualifiers first.

By no means should this article be used as a basis for an investment strategy. The activities mentioned would be considered high risk and unsuitable for most investors without proper risk management, and that includes accredited investors as well.

The article is written to provoke thought on the subject for the purpose of debate and contains controversial views that are the author’s own. Information provided should not be relied upon as accurate or up to date.

How To Get Rich ?

We get financially rich when we make money, and that is MORE MONEY THAN OTHERS, for there are several ways to define riches. Some people choose to benchmark riches by their own standards, to have more than they need materially or the other definition which is to have relatively more than the average.

It is no wonder that many of my rich friends complain incessantly about being poor because all of us are poorer than the richest man on earth.

Let’s suppose that Singaporeans are all richer these days than 1. what they were before and 2. than global average. It is a sweeping assumption of course, but a good enough generalisation for our purpose today.

But relative to each other, I suppose we can say that it is status quo. Yet we know that Singapore’s GINI coefficient of inequality is higher here than most of the developed world, standing at 46.3 as of 2013, according to the CIA’s World Factbook.

There are many roads to riches but not all doors are open to all of us.

  • Earned income through work by creating value
  • Asset appreciation – land, real estate, bonds, stocks, gold etc
  • Intellectual assets – eg. intellectual property, software etc
  • Goods production using the 2 assets mentioned above

All items above except for Earned Income, depend on access to capital, just as earned income depends on the individual capital – if you are strong enough to build houses or smart enough to write complex codes etc.

The other methods to riches are in the form of wealth transfers.

  • Inheritance
  • Lottery
  • Casino
  • Robbery and Theft (illegal)

and the final one that we seldom think about – foreign exchange trading, which requires capital, yes, but we shall talk about it in detail later.

Wealth transfer or redistribution is the latest fad that is noticeable in the number of articles and books (Thomas Picketty’s Capital In The Twenty First Century) written on end on the matter. Social inequality has become the moot point in global politics as populist leaders are voted in around the world, all dedicated to the task of improving the lots of the middle class.

Sadly, the efforts of the central banks around the world, while noble in spirit, to improve employment, minimum wages and inflation, have results in widening inequality because of unequal access to capital.

Why is FX wealth transfer ?

Because FX is a ZERO SUM GAME, unlike bonds, stocks, commodities and the rest whose values can be inflated.

Foreign exchange is the value of one currency against another which means it is a relative value.  We can say bonds are relative too because bond prices go up when interest rates fall making the bond holders richer and the issuer suffers an opportunity loss that, luckily, is not accounted for and is not a genuine loss as far as most issuers are concerned because you cannot issue bonds by the minute.

Given that 99% of the 4.3 trillion dollars changing hands each day in foreign exchange transactions are purely speculative, one person must win while the other must lose.

Now let us address the capital bit.

You do need capital to trade FX. But we are talking about up to 50 times leverage on that.

Buying a house these days requires a 20-30% down payment. That means you are only leveraging between 2 to 4 times.

A thousand dollars deposit into an fx account, allows you to trade up to 50 thousand in notional although that leverage number varies between platforms.

High risk = high returns.

Thus all that remains is that one must find the “intellectual” capital for the job.

I think intellectual is potentially a misnomer because it really does not take a lot of math to trade FX for starters, although it does get complicated when you start moving into different methods of analyses which really depends on the individual.

I have heard of people using astrology, astronomy, tide patterns and such to help in their trading decisions. Others prefer to read the news and the rest use math to varying degrees, discerning patterns and imagining new ones.

Food for Thought

If we know that FX is a zero sum game, we should also know that it does not pay to reveal successful methods for the obvious reason of jeopardising personal profits.

Not unless revealing methods will net you a bigger profit which means that your method is perhaps not worth revealing ?

Predictability comes when many expect the same outcome that sometimes translate into a vulnerability. Yet we are lucky that there are so many factors out there to make that much more difficult than it sounds.

Skeptics Prevail

Yes. You are absolutely right to be skeptical high risks = high returns or high losses and many of us have read about the number of hedge funds that folded in January, some losing their entire capitals just on Swiss Franc bets.

I am not disputing any of that and think that FX is not something you want to throw your entire lot in for I know of very few successful traders. It makes sense that there are FEW because FEW become VERY RICH when MANY BECOME VERY POOR. That is the world of the zero sum game for you.

I am just iterating that this is probably the only financial product with decent odds (50-50  odds because price goes UP or DOWN) compared to the casino or the lottery, ruling out the illegal forms of wealth transfer.

And it is NOT EASY too !

Do note that I am NOT ADVOCATING to anyone out there that this is one of the cheapest ways to get rich without much capital or having to work for your wealth especially if you had your grandmother’s secret laksa sauce to sell or have invented a replacement for the iPhone or Facebook in our lives.

It is a collection of my random thoughts on ways for the common man to get rich, ignoring the risk elements and assuming, like we all have, wrongly that we have a perfect marketplace given that the latest is that the authorities are lining banks for the next big round of fines for FX manipulation (note that victims are not compensated).

I have a hare-brained idea to experiment on whether I can make 1 thousand into 50 thousand within 6 months, just for kicks.

Look out for my follow up post on my prep work.