Rich Grad, Poor Grad: Gaining Financial Foothold in a Millennial Economy

Reviewing millennial investment ideas and sharing my thoughts on the growing importance of accumulating capital.

Disclaimer: This post covers some of my observations relating to financial trends and asset allocation. The views and opinions expressed in this post are wholly mine and do not necessarily reflect the views of my employer. Assumptions made in the analysis are not reflective of the position of any entity other than my own – and, since we are critically-thinking human beings, these views are always subject to change, revision, and rethinking at any time. Please do not hold me to them in perpetuity. While every caution has been taken to provide readers with most accurate information and honest analysis, please use your discretion before making any decisions based on the information on this blog.

The roots of capitalism can be traced back to the Agrarian Age.

From the moment our distant ancestors cultivated the first patch of agricultural land, every civilization that followed was built on top of disposable capital. The ownership of arable land spawned enterprise giving rise to trade, employment, and collateral. Those with access to the resources were able to rent out the asset or provide loans to the borrowers in exchange for income and taxes. A domino effect followed as wealth was passed along generations creating factions within society across the entire history of mankind. Hence capital founded the platform for the evolution of barons, dukes, resource magnates and industrial age bankers at different points across the industrial revolution.

Capital creates capital. Through the hoarding of wealth across the ages a division was formed between the elite (owners of capital) and the middle and working classes (Those who rely on the elite’s capital for income to supplement livelihood).  With the highly affluent having prominent political influence and control over resources, years of favorable government policy has led to the wealth gap widening with the rich getting richer at the expense of the majority.

With that bit of exposition out of the way (Apologies for starting off with an introduction that sets up an Illuminati conspiracy theory ), I am of the opinion that even with its flaws, capitalism and enterprise have led to the betterment of society as a whole. Entrepreneurs have innovated and the desire to create has produced the two biggest achievements of our time in the form of globalization and the internet. Even if we consider the intentions of the innovators to be primarily selfish, the by-product of such ventures seeks to cater to our changing needs as a fledgling society. We need pioneers to guide our future.

As a new generation enters the workforce in the information age with enviable opportunity and access to more information than ever before, they stand at risk to suffer the consequences of economic mistakes of the previous generation that (without financial education) could see them experience a significantly lower quality of life and the gaps between social classes to grow even wider.

As mentioned in my previous blog, I highlighted that it was important for individuals to consider investing and saving from a younger age to acquire capital and avoid the potholes of a fractured economy. This post expresses my opinions on asset classes and investment ideas suitable for millennials.

Here are my thoughts on the following investment options-

Cash (Savings)
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Accumulating wealth through cash is a savings technique that has lived through the ages. In a world that seems to have less trust in it’s leaders than ever before, cash is widely considered as the safest haven for wealth accumulation.

The temptation to seek returns through making a deposit in a savings account would seem more appealing in countries which have a higher interest rate (the 6.5% rate in India seems far more appetizing than the 0.5-2% return one would receive having put away cash in the United Kingdom). Since compound interest is a force of nature, an initial investment would continuously compound across several years and eventually accumulate into a healthy sum in later years.

Local Governments may also provide incentives and schemes to encourage cash savings. For example, in the UK, the government provides the ISA (Individual Savings Account) which allows individuals an avenue to obtain cash growth which is exempt from tax.

As mentioned in my previous blog the impact of quantitative easing (government-led money printing) is not trivial. Cash tomorrow will be worth a lot less than cash today due to inflation. Frightening levels of consumer debt in Europe and Northern America prevents the respective governments making any brash interest rate policy changes which are likely to lead to more QE to stimulate demand in the future.

My personal opinion for someone who is relatively early in their career, and hence earning a low salary would be to use cash savings towards a deposit for real estate rather than a company pension scheme. Your money could be used in securing an asset that is almost guaranteed to appreciate in value over the long term regardless of the market situation (when observed historically, more on that later). A pension contribution would be more worthwhile when earning a higher salary in later years of career development.

With cash, it is easy to get the basics right. Learn to Budget. Limit credit card spending. Study the tax laws. Try to have other sources of income rather than placing reliance on salary alone. Living well within your means is obviously a key element in achieving financial freedom.

Real  Estate

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The immediate default wealth accumulation option for the traditional investor. After the hassle of assessing locations, sifting through online ads, arranging viewings, dealing with estate agents and paying intermediary fees, a house or a commercial property has the potential to provide a rental yield in the form of passive income over the course of several years and gain capital appreciation at the same time.(This process would vastly vary per country and the individual real estate and inheritance tax  laws involved)

Even though it may take a few years (depending on spending habit), acquiring a house gives the opportunity to attain equity and access to rental income. Larger properties provide the prospect to rent out rooms and attain income which can aid in paying off your property mortgage. Buy-to-let laws in certain countries would allow the individual to acquire entire properties which can be rented out to tenants (albeit at a higher interest rate). Rental properties periodically generate cash flow which is the fundamental trait of an asset while appreciating in value over the holding period.

Location is key. The key indicators of success for a  property would be it’s proximity to value drivers. These include large employer hubs, industrial centers, schools and access to major transport links e.g train/bus stations which would create a demand for tenancy and cause property value to appreciate. From a simple cash flow perspective, it is essential to have a constant demand from tenants to rent to.

Depending on the country of residence, it may be a wise move for young people to rent where they live and own a property in a region where they would like to invest (preferably with high rental yields and expected capital appreciation). The burden of home ownership has the potential to impact career choices in an age where millennials desire the flexibility to exploit job opportunities or spontaneous enterprise ventures. Such an option enables wealth creation and autonomy for the individual.

Additionally, there are property crowdfunding platforms available in certain countries which allow Investors to jointly own housing equity in the form of shares. This allows investors to gain exposure to property appreciation and the associated rental income through a smaller sized investment without committing large deposits or having to deal with intermediary costs. Due to the novelty of these financial products, the yield and risk trends relating to ownership over time are yet to be documented.

Equities

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Although current markets have a tendency to overvalue equity, there is still very good value to be found in stocks particularly within the small and mid-cap markets. These markets comprise of smaller companies seeking growth and investment. However with what we observed during the financial crisis, It is easy to understand why people would be hesitant to invest in an asset that is exposed to volatility ( In years gone by I have had my fair share of demo accounts. Watching in horror, mortified as my imaginary $1000 fell drastically to $930 over the course of a week).

To start off, thorough research would need to be performed on the sector that you are interested in investing. My research method, in line with the strategy mentioned in Star Principle by Richard Koch, would be to focus and study high growth future industries rather than studying a particular stock with high growth potential. High growth industries/niches have the power to leverage and sustain itself over a longer time frame. Whereas the high potential stock could have the future potential priced in (reflecting a higher share purchase price) and the risk of the company being exposed to one-off adverse extraordinary events. (Think back to Volkswagen in September 2015)

The research would initially summarize by analyzing the industry (specifically the particular trends that would lead the industry to grow). Ways to achieve this knowledge include reading financial news, reviewing financial statements to assess future growth prospects and reviewing online discussion platforms in the industry to observe community sentiment. For individuals who are foreign to financial statements, I recommend reading /familiarizing the following key sections for a company ;

  • Director’s report- This section highlight’s the management’s commentary on the year’s progress and discusses key drivers for the events pertaining to the entity in the current year and mentions future developments & important events since the end of the Financial Year.
  • Statement of Cash Flows – For a company, generating a positive cash flow and generating a profit for the year are two fundamentally different things. Even in dire financial straits, a company has the ability to soften the bleak financial outlook for investors by tailoring accounting standards and manipulating the profit figure.The cash flow statement is immune to tinkering. Assessing the cash position is the litmus test for identifying a company with astute trade practices and robust financial strategy. Years of negative cash flow for a mature company (early-stage companies are expected to hemorrhage cash during its initial years) should be a red flag that should alert investor’s to question management’s practices.
  • Notes to the financial statements- These sections describe the drivers of progress/failure in further detail by exploring Balance sheet and Income Statement components on a line by line basis. The Revenue & Cost of Sales notes within the PL help assess the factors for financial performance. Reviewing the Assets and Liabilities notes on the balance sheet would help assess the companies financial position and investment strategies.

This should give a brief insight into company valuations. I  will examine stock valuation methods for beginners in a future blog post.

Implementing some of these investment suggestions can be tricky in a globalized world where consumption is encouraged relentlessly through social media and Instagram culture. The process of building wealth takes time. Continuous learning is key to keep pace with new emerging opportunities.

On a positive note, capital does not solely refer to financial resources. With the rise of the internet, there is more opportunity than ever before to build social capital through personal branding and taking advantage of the growing influencer economy, an opportunity for millennials which I would like to share an opinion on sometime in the future.

As always, thank you for reading.

Until next time.

Yours truly,

Sree

 

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The Future of Financing: Dawn of the Coin Offering

My observations on the financial markets in 2017 and how cryptocurrency investments could generate value in a low yield environment.

Artificial.Overvalued.Unsustainable.

As an ardent football fan who has had to endure multiple Premier League transfer windows across a decade, these are very familiar terms. Fans are no strangers to witnessing obscenely high valuations thrown about for unwarranted potential and limited substance. However this summer, I can draw eerie comparisons between football and modern day financial markets.

The Bull Run

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The past few years have seen the accumulation of an unprecedented amount of global debt primarily driven by low interest rates set across the western world to counter the impact of the 2008 Financial Crisis.

The access to cheaper debt capital has also seen merger activities boom with large corporations opting to acquire the competition at inflated prices rather than seeking organic growth measures through reinvestment of profits.

Often seen as a positive signal to investors, acquisitions are expected to improve company earnings in the long term due to the creation of synergies. This trend had led to an artificial surge in company share valuations with the FTSE and NASDAQ being home to entities which currently trade at exceptionally high P/E (Share Price to Earnings) multiples. The price reflects the growth potential with the expectation that the claimed synergies will materialize (although this may not be the case several years down the line)

Many believe that the equity bull run (continuous growth in share price over the course of multiple financial quarters) that commenced in 2013 has entered its final phase. Donald Trump’s presidential victory may have temporarily allayed the fears of a bubble with the promise of looser regulations across the US private sector supporting claims for market optimism.

However, there are reasons for investors to be concerned. Worsening geopolitical ties and the rise of populism continue to put a strain on globalization and global trade. Such conditions present economic triggers that could lead to a correction which has the potential to wipe off billions from current valuations hurting economies in the process.

On a related note, it is very tough for investors to find value in this type of environment. As a value investor, I and others within the community get cold feet when assessing a stock with high growth potential, wary of the fact that the entry price is artificially higher in a financial climate still rallying on the effect of the “Trump Pump” and unprecedented M&A activity.

The anticipation of an imminent correction has led Investors to place their temptations to one side and patiently wait for a price drop that never seems to arrive. Hence we are currently observing a lull in the summer markets with prices remaining relatively steady with subdued transaction activities.

Investors are now forced to search for new avenues to seek value. While some are seeking refuge in traditional markets such as real estate, others opt for alternative ventures such as crowdfunding and digital currency.

“The stock market is filled with individuals who know the price of everything, but the value of nothing.”
Phillip Fisher

Digital Dollars

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Satoshi Nakamoto (may or may not be the individual’s real name) envisaged the world in which transactions were settled by a peer to peer electronic cash system. In January 2009 as Barack Obama was sworn in as President of the United States, a quiet revolution was set in motion in Japan with the release of the first ever Bitcoin software. The digital currency now claims to be a substitute for gold with both asset classes now widely deemed similar concerning value retention. (Traditionally, gold acts as an “insurance” against global uncertainty and volatility).

With a tumultuous 2016 giving rise to populism, Brexit, and Trump, investors plowed money into their new found haven of Bitcoin seemingly under the impression that the digital currency was immune to the shocks affecting traditional capital markets. Bitcoin soared in value, a dramatic rise which did not go unnoticed by media outlets across the world. (As I write, Bitcoin is trading at  £1,500 per coin, for comparison purposes, on July 16th, 2015, each coin was sold at a value of £186. Lift off)

Bitcoin is reliant on its underlying blockchain technology.  For those unfamiliar with the concept, blockchain is a digital ledger that allows Bitcoin transactions to flow between parties within a network that enables efficiency, speed, and transparency. (perhaps something to discuss in another blog post). The full potential of blockchain is steadily recognized by facets of the technology community with the concept touted to revolutionize society, eyeing a range of industries from food to finance.

I stumbled upon blockchain in 2015 while I was mentoring a Fintech startup through an accelerator program. I came across what I thought was quite an unusual process. Blockchain start-ups were raising funds through issuing cryptocurrency (tradable digital coins/tokens directly related to the start-up project)   to investors across a network, a scheme known as Initial Coin Offering.

The contrarian in me was certainly intrigued. No dividends,  no voting rights and perhaps most importantly, no equity. (You can almost feel the shivers flowing down the spine of  a Silicon Valley venture capitalist)

Coin holders from across the globe can spend their Bitcoin on purchasing these tokens through an exchange with the hope that the value of the asset will rise as the project progresses. The ultimate objective is that the final viable product can add value as a blockchain interface and hence adopted across systems/networks that relate to its industry (Generating a high level of demand for its tokens, subsequently leading to its price increase).

“Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard.”
Warren Buffett

Risk and Reward

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It’s easy to feel skeptical. Given the general averseness to risk in the economic climate, it’s easy to dismiss this new crowd funding craze as a fad that leverages on the momentum built by the surge in Bitcoin over the last 12 months.

The sheer range of applications and industries to which blockchain is relevant is something which warrants the attention of the financial ecosystem. These are no measly sums. The top 10 ICOs of 2017 raised approximately $563m (!) with Bancor (A blockchain project that seeks to set up an effective exchange rate system for cryptocurrencies) alone accounting for $150m (!!) in funding.

Similar to the dot com boom (and bust) that defined an era, the feasibility of such projects are likely to be exposed with only viable cryptocurrencies possessing concrete business cases and sustainable value creation standing the test of time.

Risk seeking investors who believe in the long term potential of the technology look to acquire cryptocurrency tokens at a low price hoping that the price of the tokens rise as the project begins to yield measurable value and gains traction.

Ethereum, a platform that enables developers to build and run decentralized apps (smart contracts) is the most successful ICO to date. The pioneering technology currently has a market cap of $15Bn with growth driven by its viable use case and accelerating adoption rate.

After Bitcoin had rallied in value during the early part of this year, holders chose to diversify by investing their bitcoins across multiple cryptocurrencies. Right now, millions in funds are raised on projects for which no viable prototype has yet been created. The hype surrounding such startups has led to inflated prices across the market, and if the trend continues, we could soon see this market mirroring current financial markets. Valuations which are Artificial.Overvalued. Unsustainable.

“The most dangerous thing is to buy something at the peak of its popularity. At that point, all favourable facts and opinions are already factored into its price and no new buyers are left to emerge.”
Howard Marks, The Most Important Thing: Uncommon Sense for the Thoughtful Investor

The Fourth Industrial Revolution

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The potential  of digital currencies cannot be overlooked. The technology will create speed and cost efficiencies which will ultimately channel previously lost effort and time into creating better products and value for the end user. Money and employee hours which were previously spent on maintaining existing systems can now be reinvested. The key feature of a blockchain network is that one block of transactions is time stamped and linked to the previous block. This feature could eliminate common fraud altogether.

With the technology having the power to improve society, the ICO funding process enables entrepreneurs across the globe to access capital and fund projects which could bring about far-reaching social changes. Substantial seed funds would now be available in locations where venture capital culture is yet to establish itself.  For instance, an entrepreneur based in India does not need to fly over to Silicon Valley or London to raise funding for their Chennai based Real Estate smart contract start-up. He/She could simply issue a whitepaper and demonstrate a functioning API prototype through his/her website. Within a matter of minutes, they could have access to the funding and intellectual capital they require to grow and scale a business which encourages ethical dealing and minimizes the risk of real estate corruption.

It promises to be one of the most exciting economic experiments in history. Obvious barriers and road blocks include the rate of adoption of blockchain through society, the scalability of these individual projects and the impact of future regulatory interference.

I  believe that there is value to be found within this new landscape for those investors who are willing to accept its inherent risk. I am excited by the opportunities presented by Blockchain. I firmly believe that Bitcoin is here to stay. We will see a whole host of start-ups enter the cryptocurrency sphere in the next few years and from the plethora of new companies funded by ICOs there will be a select few that survive, scale and eventually go onto revolutionize our everyday lives.

“Know what you own, and know why you own it.”
-Peter Lynch, One Up On Wall Street: How To Use What You Already Know To Make Money In The Market

In future blogs, I plan to expand on some of the key themes discussed in this post.

I hope you were all able to endure my ramblings on some of the things which I have observed as a capitalist millennial seeking growth in an environment where a 1.5% annual savings return is considered acceptable.

I  sincerely thank you all for spending a few minutes of your day reading my post (This is my first ever blog). If you have made it this far, I believe the chances are that you (like me) are interested in learning more about current trends and emerging concepts within finance. Therefore, I  would appreciate and value all your thoughts and comments.

Till next time. Over and out.

Yours truly,

Sree Nair