The Investor's New Clothes

ETFs (exchange traded funds) are currently one of the most popular instruments among investors of all kind. Most ETFs are built in a way to follow a certain index as closely as possible. That's why ETFs are often referred as passively-managed funds. Traditional funds that the local bank has tried to sell you thousands of times are actively-managed funds, which don't follow the index, but try to beat it. However, history shows that actively-managed funds have mostly failed to beat the index, due to which many investors have started to prefer passively-managed funds.

ETFs offer great diversification in terms of industries, geography and assets.Through ETFs you can invest in equity, track an index, invest in debt, invest in various industries and sectors (including the US Aerospace & Defence ETF, for instance) and of course invest in certain commodities such as oil, copper and gold. ETFs offer also significantly lower management fees than actively managed funds. Typical annual management fee of an actively-managed fund is around 1-2 %, when typical annual management fees of a passively-managed ETF is lower than 1 %. It is clear why especially small investments tend to gather nowadays from traditional funds to ETFs.

ETFs have become so popular, that financial institutions such as Nordea and Nordnet offer their trading without any commissions. Especially this increases the popularity of ETFs even more among small investments. More and more money is pouring into the ETFs, which in terms means less money in the primary market. When investors start trading more in the secondary market with ETFs than with the assets that the ETFs are based on, we will face a huge risk in liquidity. And I mean huge.

Heisenberg Report described a good example of the situation. I recommend to check out this site, it's pretty hilarious. Imagine you have played the piano well for a couple of years. Because you're busy with your new job, you don't have the time to play the piano as much as before. Then after time goes by, you try to impress your friends by playing the piano after a night out. Because you are intoxicated, you play very badly, people laugh at you and you end up vomiting into an expensive Hermés-bag. You are the ETF, your piano-skills are the primary market and vomiting into the bag is a fire sale.

Consider this. If one wants to sell 1,000,000$ worth of iShares Core MSCI World UCITS ETF and another one is willing to buy the same ETF with 1,000,000$, the trade can be executed without touch to the actual stock market. This imposes a decrease in liquidity in the primary market.

What if there would be a financial crisis? In some kind of a financial crisis a significant amount of investors would probably be selling most of their ETFs at the same time in panic. For these purposes the issuer of the ETF has ordered measures in providing liquidity to the primary market of its ETF. In practice this means buying or selling the underlying assets of the ETF to make the market liquid and to make the trades possible for the investors selling or buying the ETF. If there's no liquidity in the primary market, the issuer can't sell the asset because no-one's there buying it! The issuer has to make a fire sale and sign the cost of the transaction into its balance sheet.

However, because of the Volcker rule and Basel III-directives which were introduced after the 2008 financial crisis, this kind of fire sale is some what restricted and there is a possibility that the issuer can't just sell the underlying asset in any means. When more and more people are selling the ETF, the value of the ETF crashes because the liquidity of the underlying asset cannot meet the liquidity and the excess supply and decreasing demand of the ETF.

This introduces yet again risk for the financial markets. Even the issuers of the ETFs have stated that the ETF cannot be more liquid than the underlying market. Thus, the decreased liquidity of the primary market due to the growing amounts of ETF-investments, reflects to the liquidity of the ETFs themselves. This is rather disturbing.

Statistics show that passive investments are already practically in parity with the active investments and ETFs are way more popular nowadays than active funds. A good example comes from the high-yield bond-market, which according to research is steadily falling on the critical level in its liquidity. What makes the situation even worse is the growing popularity of high-yeld bond ETFs during the past years.

I would say so far so good, the piano is still playing its tune and investors are currently enjoying the rides offered by the indexes and stock-markets all over the world. I'm not saying that ETF is the new CDO, but ETF's impose some "hiding potential" to create disturbance in the financial markets in the future. At least I'm questioning my current ETF-investments little by little.

Text: SW
Picture's don't belong to me

How To Increase Your Net Worth

I've come to a conclusion that there exists exactly 3 ways on how to become an high net worth individual. The 3 alternative ways in getting rich are the following (excluding the so called "Gold-diggers"):

1. Play the Eurojackpot.
2. Invest
3. Become an entrepreneur

Since the first way is bollocks and I've already discussed the second way, in this blog we are aiming our focus on entrepreneurship. What it takes to become an entrepreneur and what it has to offer you? Why we all should consider that?

The first thing I want to address you is the point that the wealthiest men and women alive have gotten their fortune through entrepreneurship: Microsoft and Bill Gates, Facebook and Mark Zuckerberg, Zara and Amancio Ortega, Oprah Winfrey... you name it! Even the greatest men in the American history made their fortune and wrote history through entrepreneurship: John D. Rockefeller, Andrew Carnegie, Cornelius Vanderbilt and Henry Ford. Even the richest men in your hometown are entrepreneurs!

I found a good example. I'm currently reading the biography of the eccentric billionaire Elon Musk by Ashlee Vance. We talk about a guy who has had a couple of business ideas. Zip2, his and his brother's first idea back in the 1990's was an early predecessor of a combination of Google Maps and Yelp. The purpose of the webpage was to gather basically The Yellow Pages accessible to the early internet. The result? Acquisition by Compaq Computers and profit for the Musk brothers by over 20 million dollars each. After that, ventures of Elon Musk with PayPal, SpaceX, Tesla, SolarCity, Neuralink and Boring Company are trying to make history and affect the mankind.

So we managed to establish two ultimate goals you can reach as an entrepreneur. In the best-case scenario it introduces you lots of cash and probably your name on the history books for the mankind to read and dream. Personally I can't figure out a more flamboyant achievement in life than to be remembered by history.

But let's start small. Many of you are probably thinking at this point that "What is this nonsense? It's cool that Mark Zuckerberg made millions with entrepreneurship but that doesn't mean that I'm going to make it". That's where you're wrong. None of the greatest billionaires in the planet saw their success coming. What was common for them were the ideas, the dreams and the passion towards their own business (and they probably were freemasons). That is what put them in their current place. If you've already accepted the mindset that your ideas are worth nothing, you have no point to even try to establish your own business. If you can't believe in yourself, who else will?

The first step is to believe in yourself. Believe in you and to your ideas. Believe that you are the greatest motherf*cker in the planet. After that it is possible to sell those ideas profitably to others as well, when you've performed the hard sell to yourself. Recognize your passion and dreams and see how you could achieve them. That's what life is all about in my opinion! Following your passion and reaching for the dreams. Some people achieve these similar things through art and music, for instance, but entrepreneurship is also a good long-term option.

But then again, how to develop the killer idea that would suit for your business and hopefully make you money? There's a concept called creative loitering. It describes that perhaps all loitering, chilling and being unemployed isn't unnecessary. In fact, the theory suggests that when people have more time with their hands to be and think, innovations and business ideas are more propable to come up for people. This suggests that unemployment and loitering might in some cases be even economically efficient. Just see what the young coders in Silicon Valley are doing with their lives....

As Brooks Halden put it in Shawshank Redemption, "The world went and got itself in a big damn hurry." Nowadays seems that people can't find the time for themselves, their ideas and not to mention their loved ones. You are always online and everybody is assuming you to be reachable 24/7.

Everyone should try to unplug themselves for a while, do absolutely nothing for a couple of days and ask themselves: "What is my passion? What I want to do with my life?". Go to a summer cottage, a beach or to your leather sofa to ask these things.  In more extreme scenarios, the employers could help with this. Not necessarily weeks, but days or hours off just to give the smart people of our society time to innovate and be with themselves. That not only stimulates business ideas, but allows everyone of us to learn from ourselves.

If you decide to start a business, that must be something that you have a passion for. Your own business and entrepreneurship are going to take quite a bit of your time in life, so you must be sure that it is exactly what you want. Establish the business to your passion and to the matters that give you as a person the advantage over the competitors. As long as you believe in your business and passion more than everyone else, it is possible to pass on that passion for your peer groups, thus making your business successful.

The competition in the business world is fierce and sometimes you may fail. You may fail big time and it may become costly in terms of time and money and you have to accept that. If it fails, you need to develop your ideas perhaps a bit more so the success would be guaranteed later. But still remember that the advantages of being successful mostly cancel the risks of failure. If you have the possibility of creating your dream through your own business, why should you be constantly fearing the risks? You just have to think how much you want it. As Steve Jobs said once: "Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose."

The goal of any business is to produce value for its shareholders. If you are the shareholder of a company through investments or ownership, the business is going to produce value and wealth for you. Working for yourself gives you the opportunity to get all the revenue and profits you have created for yourself.

And it doesn't have to be anything radical or life-changing. My dad established his own car-shop because that was one of his greatest dreams. To work for himself and for no-one else. The revenue wasn't astronomical but at least he know what he wanted from his life. And that's what it's all about.

A brief motivational blog for all of you who are considering entrepreneurship. Me, couple of my friends and my girlfriend have all been thinking possible business ideas of our own already and developing them constantly. Why shouldn't you? In the best case you are going to make a fortune and writing history. In the worst case you fail and you have to try again.

Text: SW
Pictures don't belong to me