Soaring in value, the Swiss franc wiped out a number of individual and institutional speculators who held contrary positions. Citigroup (NYSE: C) alone is estimated to have lost $150 million. While the Swiss National Bank had several points to drive home, the main one to be garnered from this costly episode for many is that long-term investors do not have to worry about such short-term maneuvers.
Switzerland did an admirable job in shielding its move from the investment community.
For that reason, there were epic losses for many. The final tally of the carnage will never be known. Neither will the complete rationale for the lifting of the lid by the Swiss National Bank. It could have been to preempt another round of quantitative easing by another central bank, such as the ECB. Crushing those using the Swiss franc as part of a carry trade was probably another goal: no entity likes its currency being deployed in speculative measures as it mutates the value. No matter if it is a company or a country, it wants investment from those in it for the long term.
Deterring Future Speculators
Part of the motivation could have been a show of force by Bern.
Legendary investor Jim Rogers is fond of saying that a weak currency is a sign of a weak economy, which is the sign of a weak government. The Swiss franc has surged in value since the move by the Swiss government. That hurts many Swiss companies that export as a stronger currency makes the product more expensive to foreign buyers. No one will ever associate the Swiss government with weakness after the recent move to allow the Swiss franc to float.
By doing that, the Swiss government should deter future speculators too with a sense of history.
Little Impact for Long-Term Investors
For long-term investors, though, the rise in the value of the Swiss franc will have little impact when the situation sorts itself out eventually . . . which it will.
Benjamin Graham, the founder behind the value school of investing and mentor for Warren Buffett, described speculators as those who seek to profit from the conditions of the market. Those seeking to gain from the low market price for the Swiss franc before the Swiss National Bank action did not, plain and simple.
Investors, by contrast, seek to profit from the conditions of the company, according to Graham.
That means the assets were undervalued as reflected by the price in the stock market, for a publicly traded company. Over the long term, though — based on the Efficient Market Theory, which postulates that the price of a security in financial markets reflects all the information available to the investment community — the price will rise to its fair value.
Currency fluctuations, like the recent rise of the Swiss franc, have no impact on that price level, for the long term, isolating investors from the machinations of the foreign exchange markets.
Jonathan Yates does not have any positions in any of the securities mentioned in this article.
This article is brought to you courtesy of Jonathan Yates from Wyatt Research.