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be a long term investor, holding through ups and downs, or be prepared to sell out when you have made a reasonable profit, even if you subsequently find you could have done better by holding on. A short term investor is a gambler, so he or she should be ready to leave something on the table when they leave.

      2. Market gurus repeat themselves, but history never does.

      The past often seems to provide hints about the future, but usually the hints are unreliable signposts. So exchange rates may always have risen when the central bank raised interest rates, but that doesn’t mean it’ll be the same this time around. Like the weather, there are always new records being set, and that means precedents are no help.

      3. “Ripeness is all” (Shakespeare).

      The fruit falls when it’s ripe. Any later and it goes rotten. Timing is everything, in the markets as elsewhere - something economists often forget. For example, it didn’t take a genius to figure out that tech stocks were overvalued long before the peak of the boom. But you could have lost a lot of money going short on the way up, and several fund managers lost their jobs because they kept out of the market bonanza. Another example is the overvaluation of the US dollar in the first half of the 1980’s. So figuring out which stocks or currencies are mispriced is no help. The key to making money is knowing when the mispricing is going to be corrected (or, as is usually the case, overcorrected).

      4. The more extreme the conditions, the more efficient the market.

      The higher the inflation rate, the more rationally the money and currency markets behave, perhaps because the cost of getting it wrong is simply too high. So, in the extreme cases of hyperinflation, every 1% rise in the inflation rate leads almost immediately to an increase in interest rates and fall in the value of the currency.

      5. Fixed exchange rates: the triumph of hope over experience.

      No fixed exchange rate ever stayed fixed forever. At some point, the system offers speculators a one-way bet. Why not take it?

      6. The predictive power of forward rates is more or less nil.

      Forward rates simply track spot rates. The forward premium or discount is no guide to whether a currency is going to appreciate or depreciate.

      7. Long calm spells, punctuated by stormy periods.

      Even with a floating exchange rate, a currency market will often seem to have gone to sleep, with nothing much happening for months or years. Invariably a storm will blow up sooner or later, with a sudden sequence of high volatility days, often with no obvious news to trigger the activity.

      8. The Anglo-Saxon Block.

      The English-speaking currencies (Pound, US and Canadian Dollars) move together most of the time, in the Northern hemisphere at least. In particular, the Pound and the Dollar are highly correlated, and membership of the EU and the single market (and the foundation of NAFTA) seems to have made little difference to this pattern.

      9. Don’t bet against the dollar . . .

      It’s not that it will never again fall from its pedestal. It’s simply that we don’t know when. So, as long as the US was booming, all the pundits said the strong economy was pushing up the dollar’s value. When the US economy took a dive in Winter 2000-1, what happened? You guessed right, the dollar was even stronger. A safe haven in a world threatened by an impending US recession, many pundits said. Hence, the final piece of advice . . .

      10. . . . get a job as a currency guru.

      The great thing about mission impossible is that nobody expects you to be successful. Failing to work miracles is not adequate ground for dismissal. The pay is good too.

      Richard Cragg

      Richard Cragg has over 30 years' experience in investment, spanning financial centres in three continents, and has consistently been at the forefront of opening up new and emerging markets to investors.

      Books

      The Demographic Investor, FT Prentice Hall, 1998

      Demographic investment

      1. Crisis equals opportunity.

      Almost forty years of falling birth rates coupled with rising life expectancy have created ageing populations throughout the developed world. Economists predict serious consequences in the decades ahead:

      - Declining workforces, leading to slower output growth and wealth creation.

      - Fewer workers supporting more pensioners, leading to steep rises in taxes and National Insurance to pay for rising state pensions and health provisions - or a decline in expenditure on them.

      Demographic investment techniques provide the tools to turn this emerging crisis into an investment opportunity, enabling investors to devise long term pension strategies that actually benefit from ageing populations. In conjunction with other screening tools, it can help select which countries and sectors offer the best growth.

      2. Manners maketh man, but money moveth markets.

      Only buying and selling move share prices. Whether money is invested directly or via mutual funds and pension schemes, it has first to be generated in the form of discretionary income - what’s left after paying for the house, the car and family outlays on food, clothing etc. - and this depends on your age.

      3. Some age groups can save more than others.

      As individuals move through life, their earnings and consumption patterns change markedly over the years. Until their first job, they are significant net consumers, and while earning capacity might then rise substantially until their mid-40s, their savings generally do not, since they have acquired partners, children and mortgages in the meantime. By their mid-50s however, despite a marked slowdown in wage growth, their discretionary income takes a Great Leap Forward, as the mortgage is paid off, school fees finish and the kids leave home. This age group is also likely to receive sizeable legacies from their parents. It is the growth of the 45-55 age group relative to the young and elderly dependents that determines changes in a population’s discretionary income.

      4. Goldilocks demographics - not too young, not too old.

      What constitutes an ideal age profile? A country where both the workforce and the proportion of 45-55 year-olds is growing rapidly but the proportion of retirees is small relative to the workforce and not growing rapidly. Choose your countries carefully, because your pension depends on it. If you choose Japan, you’ll be working until you’re 100.

      5. Surfing the demographic waves.

      Demographics allows us to project population breakdowns for 20 years into the future with a fair degree of accuracy, enabling investors to switch from a country where savings growth is slowing into one where the savings wave that will power the next market boom is building.

      6. A demographic road map.

      Japan’s demographic wave crested a decade ago and is still in decline. Germany and Italy become similarly dangerous after 2005, the UK and France after 2010, and the US after 2015. But the big bet from now to 2020 is China, where collapsing birth rates will create a huge bulge in the proportion of 45-55 year-olds.

      7. Selecting the sectors.

      In a world where annual births are static,

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