There’s a lot to be said for watching other investors’ mistakes to learn what you should avoid in your own personal portfolio. I mean, why lose money on mistakes when someone else already did it for you?

And in the case of currencies, there’s no bigger cautionary tale than the Cuban peso.

Now, I realize you may not ever dream of investing in Cuba (I personally cross-off such unstable areas), but you can still learn a lot from watching this train wreck of a currency.

A Revaluation Rollercoaster

For starters, the Cuban peso has been on a revaluation rollercoaster for nearly 20 years. Back in 1989, the peso was valued at seven pesos to the U.S. dollar. Then just five years later, it was 95 pesos to a dollar.

In 2005, it was changed again. Now a dollar bought you 25 pesos. In March of 2005, Cuban President Fidel Castro announced he would decrease the value of the Cuban peso 7% in a single day.

In other words, Fidel Castro was debasing his country’s currency – on purpose.

Two Completely Disastrous Currencies for the Same Train Wreck Economy

So roll the clock forward to today and Cuba uses two currencies.

One is the national currency, the regular Cuban peso, which is used for salaries and most government goods and services. Then there’s the convertible Cuban peso which is the “tourist currency.” This tourist currency is pegged to the dollar (except with a nice Castro 10% conversion fee tagged onto it).

Even though the latter one is the “tourist currency,” some locals have to use it because many of the local shops only accept it for a lot of consumer goods. So if you need things like beef, soap, cooking oil, etc. you have to use the “tourist currency.”

Now, Fidel’s brother Raul is Cuba’s President. It’s no secret that neither Fidel nor Raul like the two currency system.

So on February 26th Raul hinted that the dual system would soon disappear. Upon this news, Cubans swamped the currency exchange offices to swap their tourist pesos for the regular currency…otherwise, they would be left “holding nothing” if they held onto their “tourist currency.” The lines were so long and the money changing was so intense that the offices ran out of the local currency.

So in response to this run on the banks, the government aired a report the next day to assure citizens that the change would be gradual. However, can you see how upset they got…and can you blame them?

Turmoil and Unrest = Worthless Paper Money

I live in America and my dollars are sitting at their lowest levels in history. But at least I know that the dollar won’t disappear tomorrow or be instantly revalued the next day. The greenback floats freely against all other currencies.

Turmoil and unrest like this causes a currency to be unstable. A country’s currency really is the “voting machine” of what people think collectively about a country. And in the case of Cuban pesos, even the locals consider their own currency a huge gamble.

This same instability happened in Thailand with their currency, the bhat, due to a recent coup when the military ousted the government. Venezuela, Cuba’s best buddies, is another basket case.

The “Makings” of a Good Investment Worthy Currency

So what do you want ideally in a currency? For starters, little to no involvement in wars. Since 2003, the U.S. has been entrenched in the War on Terror, and the dollar has sunk 28% since then. Besides military involvement, these are other factors that build a strong currency:

• Trade surpluses instead of deficits
• Rising interest rates
• A positive feeling surrounding the country’s stock markets, other investments
• A central bank that doesn’t debase the local currency

The Opposite of a Train Wreck Currency

You’ll find one shining example of currency virtue in Switzerland. This tiny Alpine nation is financially and economically stable. Switzerland doesn’t get involved in wars. Investor sentiment is extremely positive. And when you think of Switzerland, you think stability.

The more stable a country is financially, politically, economically (and the one that has the least amount of enemies!) are the ones that shine the best. Right now, that would be a currency like the Swiss franc.

SEAN HYMAN, Currency Director

EDITOR’S NOTE: Sean Hyman tracks the currencies that are worthy of your dollar every single trading day. Sean uses this currency information to make short-term, easy-to-place trades in the trillion dollar foreign-exchange market, with his service, The Money Trader. Learn more about one of the oldest FX-trading services in existence – that’s designed for individual investors like you. Click here.