Forex Words of Wisdom from Warren Buffett

Warren Buffett is known as the Sage of Omaha for good reason. One of the wealthiest men in the world, he has built a fortune for himself and his investors. However, Buffett’s approach to investing is famously different from many other lesser mortals – he focuses on identifying businesses that have significant long-term growth potential and that are well run. He doesn’t focus on the short term or technical analysis – he successfully partners with businesses for the long term. He will divest positions that he feels no longer have potential, but he is a value investor, not a speculator.

However, his approach to currencies is very different.

Buffett and the forex market

In 2002, the Sage of Omaha did something completely new for him – he started to trade actively in the forex market. The reason he did this was straightforward – he was concerned about US trade deficits. Prior to 2002, he knew that US trade deficits were growing, but reached the decision in 2002 that global sentiment on US trade deficits hand reached a negative tipping point.

Throughout 2002 and into 2003, Buffett continued to grow his foreign currency holdings, ending up with approximately $12 billion in currency contracts. He also acquired approximately $1 billion in high-yield bonds that were denominated in euros. Needless to say, this proved to be a highly lucrative strategy, one which only cemented his reputation further.

Trading, not value investing

Buffett’s foray into the currency markets was completely at odds with his normal approach. He did not look for long-term value – instead, he saw a specific opportunity and took advantage of it. He was not investing – he was acting as a speculative trader exploiting market fundamentals. He was uncomfortable doing this at times, noting that macro forecasting was one of the easiest ways to end up in the financial cemetery. Nonetheless, he did what any trading genius would do, and backed a winner for the relatively short term.

What Buffett did illustrates a very clear point. The Sage of Omaha built his kingdom through hard-core value investing, but he was not above speculating on currencies to create profits and hedge risks in his portfolio. This is a man who has made many billions through well-conceived investments, but he still knows enough to take a trading opportunity when he sees one.

You should too. No one can afford to ignore high-percentage trading opportunities, even if their primary focus is “buy and hold”. In fact, this is even more true in the forex markets, where mid-term trends can yield enormous profits. Unlike stock markets, currency markets are a “zero sum” game – winners and losers balance out. This means that profits may come from spotting opportunities, rather than buying and holding on as the entire market moves upwards over time.

Of course, that does not mean that you should throw caution to the wind and take excessive risks – forex trading is about maximizing your wins while minimizing the impact of losses. What it does show, however, is that currency trading – not investing – is perfectly legitimate.

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