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Survival of the flexible – Hedge the US dollar or DIE!

To date my investment strategy has been to find high quality US value stocks.  Not because I believe that US equities are necessarily of higher quality that those of other countries, but because I am a part-time investor, and to find stocks that meet my strict value criteria I need to be able to sift through thousands of stocks quickly in order to find the two or three that I will purchase.  Enter the MSN Stock Screener.  It is by far the most useful screener that I have found in searching for the specific criteria that I look for in a stock, but unfortunately if focuses strictly on American equities. 

I am a big believer that one should stick to their strengths, but I also believe that only the flexible survive.  Up until a few years ago my MSN screener-value strategy worked well enough not to warrant a second thought, but recently the severe weakening of the US dollar has taken a noticeable bite out of my would-be profits.  If I believe that the US dollar will continue to weaken over the long term (and I do) then being a Canadian investor I stand to extend my sub-potential performance if I continue to invest in US stocks and do not adjust myself to the situation in some way. 

I have been looking for ways to hedge my dollar exposure, or to avoid US stocks all together, and here are the ideas I’ve come up with thus far. 

  1. Invest in foreign markets (Canada included) – As I mentioned before, I do not have the time or the tools to sift through all the available stocks.
  2. A systematic hedge via currency futures or options – Given the size of my portfolio, this is not a realistic option.
  3. Invest a portion of my portfolio in gold – This could be an option given the historical relationship between gold and the dollar, but I would have to use the expertise of someone who specializes in precious metals investing to accomplish this strategy. 
  4. Expand my skill set and develop a new investment style – A long-term project would not help me with my current situation.  (But not a bad idea!)
  5. Invest in US equities that generate profits in currencies that will remain strong against the US dollar.

Based on these five ideas, I believe that strategies #3 and #5 are the two best suited to my portfolio size and investment style.  I will be using Canadian mutual funds (most likely AGF and Sprott precious metals funds) to increase my gold exposure, and I will add one more layer to my current screen of US stocks to find the companies that are generating profits from outside the United States.

If you have additional ideas on how an individual investor can hedge a US dollar position, or know of a comprehensive screener for Canadian or other foreign stocks, please add a comment or post a blog of your own.

By sharpsicle at 2006-02-08 01:53 | Stocks | sharpsicle's blog


Hedging as Insurance

Nicely said Sharpsicle! There's been a lot written about the inherent fragility of the American dollar and by extension the financial system as a whole. Many think of gold as a type of insurance  against such a debacle. Here is an interesting article that looks at the rise of moral hazard in the US and the importance of gold as insurance against the risk of recklessness on the part of other market participants.

Moral hazard is an economic term to describe the situation where a market participant assumes more risk than prudent under the assumption that if they fail, there will be no adverse consequences. A useful analogy would be a recent lottery winner who just bought a sports car. They can drive recklessly because they believe if they crash, the airbag will save them and they can buy another car. Maybe that's all well and good for them, but the other people sharing the road should have insurance in case the lottery winner crashes into them!

I believe gold's recent rise is an indication that some market participants are buying insurance. It used to be considered prudent to have 10% of a portfolio in gold. How many people do this nowadays?
By Suntzu at Wed, 2006-02-08 21:11 | login or register to post comments

US Markets

Nice work Sharp.  I have the same problem: I love investing in US stock markets because of the readily available information and great tools like MSN Screener.  Canadian markets have a lot of catching up to do.  But this is also a good opportunity for an entrepreneur to develop software.  If any readers out there are software developers and serious about exploring this possibility, please contact me.

Also, I like investing in the US because of the SEC.  As much as the media likes to focus on American corporate scandals, I think the SEC does a great job.  Foreign markets have little regulation and are filled with landmines.

About hedging and the USD, my personal strategy also is to buy the Sprott PM Fund and more energy/resource stocks.  Indeed it is not looking good for the USD, especially if the new Fed chairman decides to print money like there's no tomorrow.

-theo
By Theo at Thu, 2006-02-09 00:29 | login or register to post comments