Warren Buffett is a legend in investing circles, mostly for his highly successful strategy of buying and holding stocks. However, although he purchases huge numbers of stocks, it is probably a mistake to say that he is a stock trader. The Sage of Omaha does not buy stocks looking for short-term returns or technical moves – he’s actually buying businesses that are well run and have significant growth potential. In other words, he invests in businesses, not in stocks. This is the secret behind the success of Berkshire Hathaway – Buffett knows how to recognize a good business and become a partner with it for the long run.
Except, perhaps, when it comes to currencies.
Buffett grew the positions that he took in 2002 further in 2003 as his view of the US dollar became increasingly bearish. In fact, the dollar did start to slide at the end of 2002, leaving Berkshire Hathaway in the relatively enviable position of owning about $12 billion of foreign currency contracts, spread across a number of different currencies. At the same time, Buffett also held about $1 billion in euro-denominated bonds with high yields.
So, despite having built his empire based on buying into high-value, well-run businesses, the Sage of Omaha has shown that he is definitely not above betting on currencies to hedge risk and drive profits. Clearly, this is a lesson that we can all benefit from – Buffett did not become one of the richest men in the world by ignoring opportunities or failing to manage downside. In fact, Buffett’s moves in the currency markets clearly show that trading – not investing – in the currency market is a perfectly valid strategy, even for hard-core value investors.
Does Buffett ever trade, rather than acquire?
From time to time, Buffett has made changes in his portfolio – including divesting assets such as Union Pacific when he no longer felt that the value was there. However, for the most part, no one has ever accused Buffett of speculative trading – he has the reputation of being the ultimate value investor.Except, perhaps, when it comes to currencies.
Buffett and the foreign currency market
Back in 2002, Buffett did something he never did before – he started to take positions in the foreign currency market. This was because he became increasingly concerned about the growing trade deficit in the United States. He was aware of the issue before hand, but by 2002 felt that global appetite for continued US trade deficits was starting to falter badly.Buffett grew the positions that he took in 2002 further in 2003 as his view of the US dollar became increasingly bearish. In fact, the dollar did start to slide at the end of 2002, leaving Berkshire Hathaway in the relatively enviable position of owning about $12 billion of foreign currency contracts, spread across a number of different currencies. At the same time, Buffett also held about $1 billion in euro-denominated bonds with high yields.
So, despite having built his empire based on buying into high-value, well-run businesses, the Sage of Omaha has shown that he is definitely not above betting on currencies to hedge risk and drive profits. Clearly, this is a lesson that we can all benefit from – Buffett did not become one of the richest men in the world by ignoring opportunities or failing to manage downside. In fact, Buffett’s moves in the currency markets clearly show that trading – not investing – in the currency market is a perfectly valid strategy, even for hard-core value investors.
Editors’ Picks
EUR/USD tumbles below 1.1800 as Middle East turmoil drives US Dollar demand
The EUR/USD pair falls to near 1.1770 during the early Asian session on Monday, pressured by a renewed US Dollar demand. The Greenback gathers strength against the Euro as the conflict across the Middle East is heightening traders' anxiety, boosting the safe-haven currencies.
GBP/USD trims losses, retests 1.3460
After briefly challenging its key 200-day SMA near 1.3440, GBP/USD now manages to regain some balance and revisit the 1.3460 zone on Friday. Cable’s pullback comes as the selling pressure on the Greenback gathers traction, reigniting some recovery in the risk-linked space.
USD/JPY: Japanese Yen fights for control amid US-Iran war-led intense flight to safety
The Japanese Yen is trying hard to regain control against the US Dollar in a fight to emerge as the traditional safety bet as the war between the United States, Israel and Iran enters its third day. The USD/JPY pair is holding modest gains, divided between broad USD strength and increased safe-haven flows into the JPY, as markets run for cover in times of escalating Middle East conflict.
Editors’ Picks
Oil at a critical breakpoint: Will geopolitics trigger the next major move?
The week ahead blends two powerful forces: moderating economic momentum and increasing geopolitical tension. While US and Eurozone data suggest steady but unspectacular growth, rising friction between the US and Iran is injecting a fresh risk premium into energy markets.
Gold jumps over 2% toward $5,400 after US, Israel attack Iran
Gold is on fire at the start of the week, a widely expected move, as investors seek harbor in the traditional store of value, following the continued US and Israel attacks on Iran. The bright metal opened with a bullish gap of about $17 and rallied toward the $5,400 level as Asian traders hit their desks and reacted negatively to the weekend news of the Middle East conflict, rushing for cover in Gold.
AUD/USD dives 1% as US-Iran conflict spooks markets
AUD/USD has opened with a 1% bearish opening gap, heading toward 0.7000 in a dramatic start to a new week. Risk-aversion remains at full steam after the US and Israel attacked Iran in a coordinated move over the weekend and Tehran retaliated to the attack with force. The higher-yielding Australian Dollar is heavily sold off in Asia.
Iran escalation: Quick thoughts on markets
Markets are likely to open the week with risk-off, with declines led by airlines, cyclicals and trade-exposed names, while energy, defense and “strategic” sectors may be relatively steadier.
Crisis in the Middle East: The market reaction
A primer on how markets will open on Monday, and why geopolitical risk may not be easily absorbed by financial markets this time around. Geopolitics and events between Iran, the US and the wider Middle East will dominate financial markets on Monday. The situation has continued to escalate as we move through Sunday.
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