Commentary on financial markets – September 2017
- DPRK: H-bomb test and retaliatory UN sanctions
- Germany: Bundestag elections – Merkel to remain chancellor
Investor School: regular long-term savings, annuity or rather investing in a project with Venture Club?
September was very eventful in terms of exchange rates. Tensions on the Korean peninsula peaked at the beginning of the month when the DPRK conducted a hydrogen bomb test. This was followed by the approval of sanctions against North Korea at the UN, but gaining the support of Russia and China to retaliate was not easy. In any case, the agreement between the powers at the UN has significantly reduced the risk of a real military conflict breaking out. Despite the sanctions imposed, the North Korean regime continued to provoke and launched another ballistic missile, which flew over Japan. The US has therefore announced further new sanctions against individuals and companies doing business with North Korea, which has again been supported by both China and Russia. The situation is calming down, which has had a positive effect on the growth of stock markets. However, the question remains unanswered as to how bad the situation is inside the DPRK. The worse the North Korean regime is, the more it risks provoking external counter-conflicts in order to divert attention from the country’s internal problems.
This year’s hurricane season has brought two strong hurricanes, Harvey and Irma, to the Caribbean and the US. While the first hurricane caused enormous damage in the Caribbean, Irma was expected to have devastating effects on US territory. In the end, however, Hurricane Irma did not cause the damage that experts had predicted. Damages of up to USD 150 billion were reported, but later the property damage was quantified at a much lower USD 58 billion. By comparison, Hurricane Katrina in 2005, the strongest in modern US history, caused USD 160 billion in damage.
In the second half of September, the central bankers of the US Federal Reserve held a two-day meeting. As expected, they left the key rate unchanged in the range of 1-1.25%. Governor Yellen indicated a likely increase in the key rate at the December meeting, with plans for three more increases next year. In her view, the recent hurricanes will have only a short-term negative impact on the economy and will not have a major long-term impact.
The German parliamentary elections closed an eventful September. Angela Merkel’s Christian Democratic Union won the Bundestag election with 33% of the vote. Martin Schulz’s Social Democrats finished second by a wide margin (20.5% of the vote). The party has already announced its departure to the opposition. A surprising success was celebrated by the far-right Alternative for Germany, which became the third strongest party (12.6% of the vote). Three other parties – the Free Democrats (10.7% of the vote), the Left Party (9.2% of the vote) and the Greens (8.9% of the vote) – entered parliament. This is the worst result for the Christian Democratic Union since 1949, yet Angela Merkel is happy with it. Although the post-election negotiations to form a government will be difficult, Merkel will most likely remain as Chancellor and Germany’s policy will follow the same direction, but probably less pro-immigration. The markets did not react dramatically to the election result as the outcome was more or less expected.
This time we will focus on generating passive income through long-term regular investing. The biggest strength of regular investing is the amount of time I am willing to put money aside. Time always plays into my hands because it reduces risk while increasing returns through compounding (similar to compound interest on bank deposits). Let’s illustrate with an example…
Using financial mathematics, we can model a simple example to show the power of time in regular investment. If I put away 4,000 CZK per month from the age of 23 to 45 (about 15% of my average salary), then at 45 I have 2 million CZK at 5% annual appreciation. CZK. Let’s move on. From the age of 45, I stop saving and take a 5% annual return, which means receiving a monthly passive income of CZK 8,000 (about 30% of average salary). This means that I don’t further appreciate the funds, I pay myself the return, but at the same time I don’t consume the saved amount of money. At 85 years old, I still have 2 mil. I can still draw a regular annuity.
What would the situation look like if my parents had started investing for me since I was born? So that at 45 I would have 2 million saved. CZK and be able to draw the same annuity, it would be enough for them to put aside (from the age of 18) only CZK 800 per month (about 3% of the average salary) since my birth! The example clearly shows that passive income is achievable for a large part of the population. However, it is necessary for an investor to start investing as early as possible, to invest regularly over a long period of time, to not stop investing in times of crisis (when, paradoxically, it is the ideal time to invest) and to have as diversified a portfolio as possible.
Investing in a startup?
Venture capital is venture capital. And when we say startup, we usually think of a software project and the fact that only one in a hundred will succeed. This type of investing is usually seen as only suitable for qualified investors. Usually yes, it can be a little different here at Venture Club.
In the club, we look for specific investment projects suitable for two to five year inputs. We invest in companies with a clear business plan and potential. If the project convinces us, the club members invest together in the project, following the model of Anglo-Saxon clubs. There is a choice of classic acquisition of a share in a company, usually suitable for qualified investors from CZK 1 million upwards, as well as smaller entries in the order of tens to hundreds of thousands of CZK. An example of such an investment is the construction of one hundred apartments in the Byty Klíčanka project – where both larger and smaller investors joined together and which was launched in September 2017.
If you are interested in finding out about other opportunities, come and join us at the Club to start with and see one of our events (you can choose from the Calendar). We are developing projects for members on an ongoing basis. For example, currently available for investment is a project on dog and cat insurance, a project on a smart car box that transfers some of its functions to a smart mobile phone, or a unique Czech toy manufacturer. If you like the project, you can join, either by buying a separate share, a smaller entry or a fixed-interest loan.
Of course, any investment of this kind inherently comes with some risk and a corresponding return. It is our intention to manage the risk properly to minimise it. And if you combine the above principle with personal knowledge of the people involved and diversify appropriately into multiple projects, it can be suitable for any club member.