Investing in Stock Exchanges: a novel idea

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The world of investing centres on investing in stocks. However, Jon Markman writing at Forbes offers up a new idea: investing in stock exchanges. How does that work, you may ask. Markman points to the Intercontinental Exchange (ICE), an operator of commodity and stock exchange, which posted exemplary financial results on 1st August and suggests that as its managers plan to disrupt lucrative markets, such as the new digital ones, it is worth looking at it as a potential investment.

ICE “builds, operates and advances global markets through information, technology and expertise,” according to its website. It’s a relatively new set-up that was only founded in 2000. In 1996, Jeffrey Sprecher, a mechanical engineer from Wisconsin, bought Continental Power Exchange, an Atlanta electronic energy trading company for $1,000. He saw an opportunity to take advantage of a move to electronic trading.

The company launched as ICE in 2000 when Sprecher gave up 80% of the business to investment bankers Goldman Sachs and Morgan Stanley, according. It immediately became a competitor to Enron, one of the biggest electronic trading platforms at the time. However, it wasn’t long before the Enron scandal broke and in a very short time ICE became the market leader.

Sprecher had no experience in financial markets, nor had he ever traded stocks and shares, but he “could see how slow, traditional financial markets were about to be disrupted by fast, low-latency software platforms,” Markman says. Sprecher recounted the story of how flying back from London he spotted a story in the Financial Time about credit default swaps (CDS), and while he had no clue about what they were, he intuited that there might be an opportunity for ICE to leverage its platform to build an electronic marketplace. Today,  ICE currently clears 96% of all CDS.

He also used his creative thinking to engineer the $8.2 billion buyout of the New York Stock Exchange in 2012. In a little over a decade, this small Atlanta company went from obscurity to being in the vanguard of financial markets.  Today ICE currently operates 12 regulated exchanges and six clearing houses. The company logged $6.3 billion in revenue in 2018.

Its success is down to a great strategy based on seeing the transformation of financial markets early on. It has continued to make interesting strategic acquisitions, including the Chicago Stock Exchange last year, and as Markman says, “Getting ahead of the digital transformation of the $11 trillion mortgage market is another multibillion-dollar opportunity for ICE.”

Furthermore, as it is based in regulated financial markets, the company is the logical intermediary for this emergent digital ecosystem. It appears ot be firing on all cylinders, and as Markman says, “Growth investors should consider using broad-market weakness to accumulate shares.”

 

Crypto buyers need to take the long view

Are you a crypto investor? Perhaps you bought in during the later part of 2017, or even early 2018, hoping the wave of euphoria around cryptocurrencies would keep carrying on. Unfortunately for those people it didn’t, and even those who bought in earlier will have made some losses.

A number of people thought the downturn in the market was temporary; it would be moving upwards again before Christmas 2018 some market watchers said, with a some of the bulls, like Tom Lee, predicting a bitcoin value of over $20,000. It hasn’t happened, but that doesn’t mean that it is the end of bitcoin or other cryptos. What has happened is that the technology needs to catch up with the enthusiasm for digital assets, but technology is still too new and complicated, most consumers see it as too risky. Plus, there is the not inconsiderable matter of mass adoption being some way down the road.

So, what should crypto investors do, or have done in the past year. Some are holding on, waiting for the return of a bull market, while others are looking for an acceptable moment in which to exit the market.

Crypto investing has been a bit of an education for those people who have never put money into stocks, bonds or securities before. It offered an opportunity for those with a few hundred, or a few thousand, to become involved in a market that up until now has been reserved for approved investors; those with millions and billions in the bank. However, newbie crypto investors didn’t perhaps realise that all markets are a dangerous place to be in unless you do your homework and have certain ‘safety jackets’ in place.

If you look at the established investment markets, they all have a swathe of regulations in place that give the investor specific ownership rights. By contrast, the crypto market is uncharted territory. There have been some moves by regulatory bodies to create a set of regulations and guidelines, but they are still sketchy, and the judicial system has not yet weighed in to give its approval of regulations in a number of jurisdictions.

For that reason, cryptocurrency investors have few, or no, rights until a government and its legislature says so. There are investors who are hoping the price of a crypto can be pumped, which would be a disastrous move, because manipulation will lead regulatory bodies like the SEC to deem a token is a security, and if it is, then the project issuing the token must go through a lengthy and expensive process to register it as a security, at least that is the case in the USA. For many projects that would spell the end.

People buying into crypto need to be patient and think in the long-term, because there are no instant wins now. As Joseph P. DiPasquale writes: “Now more than ever, cryptocurrency purchasers need to support projects with strong fundamentals: competent, capable leadership; a track record of meeting roadmap milestones; unique technical goals and achievements; a broad potential user base; and a relatable vision of the future.”

Stop Focusing On Short-Term Results

Firms get very excited when their half-year results are good, but what does six months of great profits and soaring stocks really mean in the bigger picture. Is there a good reason to feel things are going so well that there is no need to consider a downside? I don’t think so. But, the short-term should not be your focus when markets are buoyant, or when they in a decline.

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Let’s say you look back at what was happening a year or two years ago. Perhaps your business was doing well, but did you make any changes as a result of improvements in performance. On the whole, large and small businesses tend not to do anything; they feel content with the status quo. And there is a good reason for this.

The media creates panic

Even political activity that makes the markets jittery is just a lot of noise in the media. The markets react in their own way. As I’m writing this, North Korea has just fired a test missile over Japan and newspapers report that the Dow Jones opened at lower average and buying of physical gold is up. Whatever happens, there will always be a short-term response to the situation. But that is just today’s story. There is another picture to consider.

Currently the markets are pretty strong –the response to North Korea aside –but everyone who invests knows that what goes up can also come down. I’m not sure when the markets might start to be more ‘bear’ than ‘bull’, but one thing is certain – it will happen.

The history of ups and downs

You only have to look at history to know this is true. For example, Capital Research produced an overview of market declines based on the Dow Jones Industrial Average from 1900 to 2016 and they found something interesting:

  • There is a decline of roughly 5% three times every year
  • About once per annum there is a decline of around 10%
  • Approximately every two years, the 10% decline will become a 15% decline
  • Every 3.5 years the market decline will reach 20%+

So, what does this tell us? First, that there are declines every year and that makes them ‘normal. The research also shows that 2015 was the last year in which there was a 5% decline, and this means, based on probability, that there will be one coming soon. And, finally, even though we have declines, things always pick up again.

Focus on the long-term

This is important information to consider when you’re investing for the long-term. Accept that there will always be a downturn and factor that into your investment plan. Don’t panic when a market starts to drop, and don’t suddenly pull out unless you really have to, because as the research shows, sooner rather than later, your investment will be back on track again.

I hope you enjoyed this and found it useful. Please subscribe to my blog if you’d like to receive an alert when I post new content.

 

 

What You Don’t Know About Doing Business In Hong Kong

Interesting facts and finer points of doing business, and living, in the magnificent world city of Hong Kong.

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Hong Kong is vibrant and resilient. Since 1997, when it returned to being a Special Administrative Region of the People’s Republic of China, it has sailed through global economic crises thanks to its key drivers of economic growth, which in the case of Hong Kong are retail, logistics and business services, financial services, real estate development (boosted by public infrastructure works), and tourism. The UK government –and the Wall St. Journal– has designated it the world’s freest economy for 20 consecutive years and it is ranked as the world’s eighth largest trading economy and a leading financial and business centre for Asia.

It is also important to point out that it has a significant degree of autonomy from China and has its own legal system currency and customs jurisdiction; the only area in which it must follow China’s ruling is in foreign affairs and defence.

Another key to its success is the business access it provides to mainland China and to other parts of Asia. Add to this the fact that Hong Kong is a free port that does not levy any customs tariff and has limited excise duties and you have an environment that businesses love. It may be a relatively small territory with a total population of just over seven million, but there are at least 1,362 subsidiaries of American companies based here, and that is just the USA. In the last two years some firms have started bypassing Hong Kong and setting up subsidiaries on the Chinese mainland, however, they have discovered that they face higher costs and longer delays than if they’d established a Hong Kong intermediary.

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5 reasons you should set up a business in Hong Kong

In my experience as an entrepreneur working around the world I strongly recommend doing business in HK and here are my five reasons for doing so:

 

  • China welcomes foreign entrepreneurs and business owners to develop their businesses in Hong Kong and provides them with the tools to grow successfully with little stress in the registry process of the business. The same can’t be said of many other countries.
  • The infrastructure facilities in Hong Kong are what make the city so well-known worldwide. Hong Kong’s air and sea transport facilities provide an excellent service for all customers, so all shipping, logistics and freight forwarding services are first rate. It is perfectly located for reaching other parts of Asia and has excellent telecommunications – a vital element for modern businesses.
  • Hong Kong has some of the lowest tax rates in the world and a simple tax system. Low taxes are a great incentive for businesses.
  • The legal system in Hong Kong tends to favour the business community and it is a transparent and fair system.
  • It is one of the world’s most liberal economic systems due to its free trade policy, no trade barriers and no limit for foreign onshore and offshore investments. Capital just keeps flowing here

 

A fantastic lifestyle

And, on top of a superb business environment, Hong Kong is a fantastic place to live. Its efficiency is on show from the moment you land at its international airport and find yourself in the centre of the city in about 25 minutes. It’s a ‘work hard, play hard’ city, with the same trendy areas that you’ll find in New York or London and you can enjoy weekend breaks in Shanghai, Beijing, Singapore or Thailand. It buzzes with a young, entrepreneurial spirit and it attracts an eclectic mix of fascinating individuals.

If you’re checking out Hong Kong as a place to set up your business, I’d recommend taking the Star Ferry from Kowloon to Hong Kong Island to get a feel for the place. And, lunch on the IFC Terrace will give you a memorable view of The Peak and the harbour. As for restaurants and bars; Hong Kong has everything from fine dining to some of the best street food in Asia.

There are few downsides I can think of to doing business in Hong Kong and there are few places in the world that I’d put in the same class as this place, because it’s a city that just loves business like an entrepreneur.

I hope you enjoyed this and found it useful. Please subscribe to my blog if you’d like to receive an alert when I post new content.