Getting to grips with investment concepts

Published Feb 2, 2019 at 8:00 am
(Updated Feb 2, 2019 at 12:06 am)

This is the part one of the 2019 Bermuda Investment Series.

Capital trading markets are not the same as they used to be. For example, over the last century alone, the dominant United States investment industry has seen and experienced monumental change as well as enormous growth from:

• the rise and almost obsolescence of physically situated stock markets where original paper transactions, runner deliveries with brokers on an exchange floor have gradually been replaced by multi-millisecond high-speed anonymous trades;

• artificial intelligence has overtaken human interaction, but as Market Watch stated: “AI will change stock-market trading, but when a trade is complex, there is no substitute for human judgment”;

• computer-generated mathematical algorithms in quantitative analyses triggering specific set point trades;

• from traditional business day trading hours to after-hours market trading, literally, 24-hours a day interchanges across the globe;

• virtual interaction between world trading markets where significant events can trigger cascading similar results in different time zone markets;

• investor research via internet search engines generating almost instantaneous results means less obscurity for investment decisions, but greater care must be taken to weed out “fake news/reports” and unscrupulous schemes such as pump and dump-type websites before any credence can be given;

• changes in numbers and kinds of investors from the share buyback phenomenon that has dominated investment sentiment for a number of years;

• economies other than the US have grown, taking examples from and emulating the US investment success story. The power race is on to effect more diversification choices in worldwide trading markets, foreign exchange, the empirical decision as to who will remain or become the head of the world’s reserve currency;

• the ever-shifting interplay of oil commodities on capital markets, trade, war, and country economic dominance;

• blockchain and its derivatives, an innovative force to clearly define complete, irrefutable transactions, such as smart contracts between consenting parties;

• the impressive regulatory enforcement of Know Your Client, transparency and international tax compliance in co-operation among almost all OECD countries participating and those beyond.

The number of investment products has grown exponentially as well. Where the ordinary stock, bond, mutual fund, or option trade is still a basic staple for many investors, new, or more complex investment products, some more esoteric than others, abound:

• exchange-traded funds, structured notes

• synthetic (or what I call real versus ethereal) investment products built upon or dependent upon values of other underlying products, or indices, eg leveraged loan funds, CDOs, CMOs, even risk itself is an investment product, eg volatility (Vix) funds

• mortgage-backed securities, commodities, indexed-annuities, initial coin offerings, cryptocurrencies, securities futures

• alternative investments: hedge funds, reverse convertibles, leveraged inverse ETFs, event-linked securities; viatical settlement funds and catastrophe bonds.

How did we ever end up with the entire concept of investing in intangible assets that today — for the overwhelming part — cannot be realised by touch, sight, or stored on a personal basis. We are focused here on digital investments, not physical assets such as property, precious earth-derived elements: land and properties, diamonds, other stones, metals, oil, shale, crops, livestock, the munificent sea (and salt) and the like. We know these physical properties; we’ve been surrounded by them, in one form or another, all of our lives.

It is a daunting concept to be investing via a virtual world in intangible investments, now almost completely processed by modern technology — less hands on, stored in electronically remote server custodians, heavily-reliant upon reputationally-compliant financial institutions, with the only real evidence of ownership composed of front-facing numbers on a smart phone, a computer screen or downloaded documents.

Think about it, owning digital assets in our social media age represents a strong belief in the fiduciary oversight of financial institutions, because that is where your invested assets are held.

Your financial confidence is a demonstrated belief that any time that you care to review your cash, investments, loans etc at your local bank, you can call up your protected account online.

But it is well to remember, that the basics of investing are still there, still very relevant, and still can achieve great results for the small investor.

This series will do the best to explain and break down our modern-day investment concepts into understandable pieces as relevant to Bermuda. Readers, even if you do not own investments personally, you need this knowledge, because otherwise how will you know that your retirement pension statement or any investment, cash or otherwise, on a piece of paper is actually real.

Let’s start at the beginning.

The medium of exchange — trading items between a willing buyer and a willing seller — has been around since humans walked upright, probably incipient in a barter system of sorts, but even then each item to be exchanged needed an assigned value.

It became problematic for nomadic tribes and those domestically settled to carry or store livestock on the hoof (or even a decomposing item), given that the only preservative was salt, until a market position cleared for the transaction settlement.

Over time, more formal and formal structures for handling investing transactions evolved: monetary substitutes, shells, and then coin currencies.

And we leave it there.

This Bermuda investing series will continue once a month, culminating in a downloadable book for Bermuda resident investors that is relevant to our environment.

Yes, I’ve promised this before, but could never find enough time. Readers, know that I wound up my cross-border financial planning practice a year ago, to devote full-time to financial writing for The Royal Gazette audience. I am happy to provide general information relative to a reader’s questions, but cannot provide specific individual financial planning advice.

Sources:

• MarketWatch. AI will change stock market trading, but it can’t wipe out the human touch. Link: https://tinyurl.com/yb3a85hb

• Business Insider. The simplest explanation of how stock trading has changed that we’ve ever heard. Link: https://tinyurl.com/yctj29ec

• Investopedia contains a wonderful detailed section on various aspects of the origins of our investment climate, banking, economics and the like. Link: https://tinyurl.com/ycps8hsd

• Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Dual citizen: Bermudian/US. Pondstraddler Life, financial perspectives for Bermuda islanders and their globally mobile connections on the Great Atlantic Pond. Finance columnist to The Royal Gazette, Bermuda. All proceeds earned from this column go to The Reading Clinic. Contact: martha.myron@gmail.com