Forex Trading Tips: Price Versus Value

Price Versus Value

What is a cynic? A man who knows the price of everything and the value of nothing.

Oscar Wilde.

In the latest book I am reading “Fooling Some of the People all of the Time,” hedge fund manager David Einhorn makes a great case for value investing. Einhorn who runs Greenlight Capital is an investor who can not only find deep value in an overlooked stock but can also uncover fraud and hype in massively overbought securities. In fact, the centerpiece of the book is his Herculean battle with Allied Capital that spans over nearly six years, involves scores of government regulators, threats of lawsuits and unwarranted investigations all of which would turn even Ayn Rand into a skeptic of the crony capitalism system we live in today.

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Politics aside however, Einhorn’s investment methodology is superb. Using an accountant’s mindset and a businessman’s nose for a bargain Einhorn approaches every idea with a dispassionate look at its economic prospects and makes sure that the management ‘s interests are always aligned with those of the shareholders. It’s old fashioned bottoms up investing that has made Einhorn and his hedge fund partners very rich over the past and if I was to have my savings invested I wouldn’t hesitate for a minute in giving Einhorn my funds.

Unfortunately Einhorn’s approach is totally useless to us as traders. Why? Because he spends most of his time fighting the tape. Einhorn will be the first person to admit that he may hold a short position for weeks, months and sometimes years as it moves against him only to capture most of his profits in one single day of collapse. Since Einhorn never knows when the market will finally come to his point of view, he must often endure massive adverse price movements against his position before ultimately reaping the benefits of his analysis. In fact the only time he will close out the position is if he believes that his original investment thesis has been proven wrong. The reason equity investors can maintain such Job-like patience is because they generally trade with very little leverage.

As currency traders we simply do not have this luxury. Even on a very modest 10:1 lever factor a mere 10% move against us will wipe out our entire account. That’s why as speculators we have to trade price not value. Holding on to your convictions in the face of rapidly mounting losses will almost always result in a blown up. Occasionally you may ride out the storm, surviving a margin call, but that will only set you up for a much bigger loss down the line.

As speculators we must always use stops and that approach can result in a maddening series of painful losses as price moves up and down without rhyme or reason. Being a spec can often feel like being a sucker at a poker table, as market fakes us out one way and then the other. But no matter how frustrating it may be a times we cannot deviate from our mission of trading price not value. Just like athletes, traders hit cold streaks all the time, but what differentiates the winners from the losers in both arenas is their ability to understand what the game is really about. In last night’s NBA finals Kevin Garnett missed eight shots in a row, but that didn’t stop him from making the winning basket that gave Celtics an insurmountable lead over the Lakers. Next time you are being chopped mercilessly by the market remember that all cold streaks end as long as you maintain your discipline.

Boris Schlossberg

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