Forex strategies: How I Shorted the Naira

[Disclaimer: This post is just a case study. I am not writing it to claim that I got rich from some currency short or to encourage any aspiring short sellers on how to make trades or deals that will affect the value of the currency of our beloved country].

It was early 2015, around January, February to be precise. The value of the Naira had just taken a beating against the greenback and our Elections were nearing. Few anticipated that oil prices would keep falling all through the year.

In 2007 and 08 I thought the oil price of around $100 per barrel was just a temporary high but it stayed up there longer than we most anticipated. Then the world became used to high oil prices. It was a lost opportunity to a country like Nigeria I believe as the government went an unnecessary spending spree while the foundations of the economy were still shaky. Fast forward to 2015, there I was, a self-proclaimed student of world economic trends with a chance to play real life "short selling" with the little that I had or didn’t have.

I first read about short selling in 2008, I was just beginning to take an interest in the stock market and I tried to buy around 300,000 Naira worth of stocks. I got just a few bucks out of that as the stock market in Nigeria collapsed the following year. I wondered if someone read a little more and analyzed a little more of the capital market situation in the country back then and found a way to short most of the overvalued stocks (most stock prices were supported with credit from sometimes the banks that are issuing the stocks). I never found a way to short the stock market, so I gave up.

Early 2015 I had a trip planned. I was terribly worried about the fall of the Naira and I was scared the Naira could fall even further. Then it hit me, this is a situation I could short and make a profit. But before I attempted a short I realized with nervousness of the coming elections, the Naira could fall more and if oil prices keep falling, it could fall even further. So I used the excuse of the trip I was going on to collect a Naira loan which I then changed into Dollars at a rate of around N185 to the dollar and I kept the money.

After I came back from my trip and it was time to pay back my loan, I sold the Dollars at the rate of 220 each. I made a profit of N35 on every dollar I bought at N185. I paid back the loan and kept the N35 profit on every N185 I borrowed.

At today’s rate, a day after the U.S Fed raised interest rates, I would have doubled my profits if only I kept the loan long enough. I would have kept it till next year as I anticipate an oil price fall to follow the U.S. Fed rate hike.

 

"We just wanted to build the market, so we burned through our money," Unknown.

Many high flyers are flying straight into a banner with the words of the headline above written on it. It's not totally dumb for a startup to try to burn through a pile of cash and create a new market that it will turn into a future cash cow. It takes though, a lot of vision to achieve, and, of course, very patient investors.

Jet.com is the highest of these flyers, it is trying to take "some" of Amazon's business by spending it's way to growth in a span of a few years. As crazy as it sounds, these guys have vision. I must say. But there is a difference between vision and desperation, and the smaller "wanna be' flyers that I am seeing are more of the latter.

Selling stuff so cheap that a company shifts it's losses to it's investors is just the tip of the "losses for growth startup" icebergs we've been sailing through lately. Now startups give away money to users to have them sign up. You read that correct. You sign up with them, you get paid!

Not to pass any naive judgments here, many believe this is now the secret to building big startups fast, by losing money very fast in order to have growth. Uber, Airbnb, and many more are all doing this. My gut tells me this is not the right way, the Facebooks and the Googles where not built this way.

The main reason for this is probably the cheap money that is about to dry up in the coming months as credit is tightened with the coming rising interest rates. Then the market will get a reality check and we'll see if this strategy has worked or if it will backfire and then we'll see the ones saying - "We just wanted to build the market, so we burned through our money,"