Several years ago, my friend Trena walked into a Singapore Bank.
She had a few hundred thousand dollars to invest.
The bank’s representative offered Trena something special...He could use that money to trade currencies on her behalf.
It sounded like a great deal.
But several years later, Trena hadn’t made a penny.
The bank was the only winner.
The promise of Forex trading’s supposedly easy spoils also suck in plenty of DIY investors.
Marketers often gush, “For just $99 a month, we’ll show you how to make a fortune, starting today!”
But here’s what I would do if a genie granted me three wishes:
- End world hunger.
- Ensure permanent global peace
- Drop every “easy money” marketer into a frozen lake.
Even currency trading professionals, like the one Trena hired, often sink.
That’s because Forex trading is a zero-sum game.
Winners win in direct proportion to what losers lose.
No favourable current pushes global currencies up.
In contrast, the stock market and property investing are positive sum games.
For example, if you split $100 million into a diversified basket of properties and held them for 20 years, they would (as a group) almost certainly rise in price.
That makes property investing a positive sum game.
The aggregate return is positive because properties, over time, rise in price.
Now imagine if you didn’t just hold those properties.
Instead, you traded them amongst a group of friends.
The skilled and the luckier ones among you would make more than the others.
But because property values rise over time, you would all have favourable currents beneath your boats.
In other words, over 20 years, you would all likely turn a profit.
Investing in stocks is much the same.
As a group, stocks rise in value over time.
That’s what also makes stocks a positive sum game.
Compare that to Forex trading.
Unlike properties and stocks, there’s no aggregate gain.
For example, if you split $100 million into every one of the world’s currencies and held them 20 years, you would end up with about the same amount of money.
That’s why it’s called a zero-sum game.
The only way to make money with currencies is to trade them.
When the traders at Trena’s bank used their fancy algorithms and methods to exchange one currency for another, they faced (in most cases) another institutional banker at the other end of that trade.
If Trena’s guy made a winning trade, another trader would lose in direct proportion to her win.
If Trena’s guy made a losing trade, another trader would have won in direct proportion to her loss.
On aggregate, traders, as a whole, can’t win because it’s a zero-sum game.
In Trena’s case, the bank was the only winner.
They sifted money from her holdings from bid/ask spreads and fees.
I’m not saying nobody makes long-term profits trading currencies.
Like professional gamblers in casinos, some will win.
But if you look at the Forbes list of richest people, they all earned their fortunes through businesses, properties or inheritances.
Stock market investing, like Warren Buffett does, is an investment in businesses.
Diversified portfolios of index funds comprise businesses, too.
None of the world’s richest people built their fortunes trading currencies.
It’s tough to gain ground with a zero-sum game.
If, however, you want to grab a tennis racket and paddle upstream, I’ll applaud the effort.
I love, after all, watching really tough sports.
But it’s easier (and typically much more profitable) to paddle with a current.
That’s why your odds of success will always be better with stocks and properties.
Positive sum games.
Andrew Hallam is the best-selling author of Millionaire Expat (3rd edition), Balance, and Millionaire Teacher.
