Via Instapundit I’m led to this graph by a Richard Lees. Scroll down a little and you’ll see that apparently, in euro terms (pounds as well) the S&P 500 stock index has outperformed that same index in dollars.
Now this Richard Lees is a Capital Management firm and I would be very very wary of investing any of my money with them if this is what they truly believe. Here’s why.
Let’s start by assuming that the S&P stays flat, doesn’t move at all. Yes, I know that’s not true but what we want to do is look only at the currency effect, not the movement of the market. For that’s what’s being claimed, right? That in some way currency movements have made the S&P a better investment for some than others. So, operating entirely from memory, back in mid-2002 the euro was some 90 cents US equals a euro. Nowadays it’s above $1.30 per euro. Think this through a moment.
Imagine that I, 2 1/2 years back, buy $100 worth of stock (or index, matters not) by exchanging euros for $. I have to spend 111 euros to buy this $100 worth of dollars to buy my stocks. I now think I’d like to sell my stock and change the money back into euros. We have assumed that the stock hasn’t changed in value in dollars, so I get $100. I change this into euros and at today’s rate that gets me 76 euros or so.
Investing 111 to get back 76 of anything really doesn’t look like a very good idea.
Now, if we look at the movements in the prices of stocks, we can see that in $ terms only, people have made money over the past 2.5 years. Great. But it is impossible for us to take a whacking great currency loss on that same rise in stocks and state that, in euro terms, the return has been better than in dollar. The performance of the stocks might help to mitigate our currency losses, but the currency movements are most certainly not going to increase our profits.
Now, I’m not the world’s greatest economist, and I have been known to get my statistics wrong, but I do hope, for the sake of Richard Lees’ customers, that this is a blooper, not what they really believe. For they seem to have inverted the effect of currency movements. Investing euros in dollar denominated assets has been a great way to lose money over the past few years, not a great way to make it.