Archive for the ‘Investors’ Category

“SEIS makes the tax breaks on ISAs look miserly,” or says Jeff Lynn, co-founder and CEO of Seedrs. “Yet,” he says, “few investors have even heard of it.”

Mr Lynn is not wrong. The Seed Enterprise Investment Scheme offers investors 50 per cent income tax rate, even if they are not paying income tax at that rate. There is also potential for a further 28 per cent tax relief via an exemption on capital gains tax. Click here for more . For encouraging entrepreneurism, it is a bold scheme.

Mr Lynn says: “No other major country offers such significant reliefs to investors in start-ups.”

He continues: “It is ironic that the UK has both the world’s most generous tax incentives to invest in start-ups, and we lead the world in equity crowd funding which opens the door for the small investor to participate, yet so few investors have even heard about SEIS which will at the very least see HMRC giving them back half of what they invest.”

Seedrs, by the way, claims to the UK’s leading online platform for investing in start-ups.

© Investment & Business News 2013

It was the best year since the heady day of the mid-noughties for the venture capital business. At least it was the best year for Venture Capital Trusts (VCTS), which is not necessarily the same thing, although it should be a pretty good guide.

According to the Association of Investment Companies – or AIC if you are in a hurry – the VCT sector raised £402.5m in the 2012/13 tax year.

This compares with £331 million in the previous year, and as little as £158 million in 2009/09. In the year 2005/06, however, the sector raised £779 million, which was its record year. It also did better in 2005/05 and 2000/01.

The year 2003/04 was the worst recorded, (stats go back to 1995/96), when just £50 million was raised.

From an investor’s point of view there are strong tax benefits in investing into VCTs. Of course these days, tax avoidance is considered a bit fly, a bit immoral. But this does not apply to investing in VCTs; the government wants investors to pile their money into this sector.

Actually, this is the kind of news that UK plc needs. In all the criticisms aimed at banks, it is forgotten that truly innovative companies don’t need bank loans. They need investors, who take equity and a share in future profits, rather than charge a fixed interest rate, which is the same regardless of how successful the recipient of the investment is.

Think of it this way. When it comes to measuring the success of innovative companies, say ten years after inception, the curve representing success does not follow a normal distribution pattern. Rather a small number of companies – the likes of Google and Facebook – make it really big, but many others fail altogether. A banking model applying debt is manifestly not the right model for such a scenario.

Just remember, however, that smaller companies and real start-ups are too small to interest the VCTs.

For the UK it is good news that the VCT sector seems to be growing in popularity again. The UK also needs another investment level, relevant to companies that fall outside the VCT radar.

You may or may not think Twitter and Facebook are worth your investment bucks, pennies and cents, but it does appear that investors plugged into certain social media services often enjoy better returns.

Gillian Tett at the ‘FT’ broke the story, but actually, it should not come as a surprise. Ms Tett focused on the work of two MIT academics: Sandy Pentland and Yaniv Altshuler. After analysing a mountain of data, they found that investors who are plugged into a diverse range of investment groups enjoy the better returns.

They found that investors who work on their own often perform least well. Those who follow one or two investment gurus do better, but not as well as those who follow several such gurus. But the best performing group are those that just follow a diverse and large range of other investors covering a wide range of specialities and interests.

Pentland and Altshuler focused on a trading platform called eToro. The service itself describes itself in these terms: “Social Trading is about opening the markets to everyone. At eToro we encourage people to connect with one another to discuss, trade, invest, learn and share knowledge across the network. From now on, you don’t need to be a pro to trade like one.”

But this is not the first research of this ilk. Last year Johan Bollen and Huina Mao of Indiana University and Xiao-Jun Zeng of the University of Manchester found that investors who tap into the public mood often enjoy superior performances. They also found that Twitter is a good gauge of such mood. See: Can Twitter predict the stock market? 

Fashion: it is not a concept many investors like to admit to, particularly those who suggest that investment is a science, but truth be told stocks rise and fall with fashion. Sometimes shares rise because the crowd has decided they are going to. On the back of crowd behaviour we got the dotcom bubble, gold rising and falling and bitcoins – for example.

There is a flaw with the idea of wisdom of crowds. Studies show that crowds can be very smart, BUT when and only when the individuals who make up the crowd work in isolation. The classic study was carried out by Francis Galton in 1906, when he surveyed visitors who entered a competition for guessing the weight of an ox at a livestock fair. Galton found that the average guess was very accurate, and so the concept of the wisdom of the crowd was born.

But the crowd in the Galton study had one characteristic that we rarely see in practice. Each guess was made in isolation and was not subjected to the influences of what others thought. Psychological studies provide overwhelming evidence that we all tend to comply with the crowd.

Ten million.

How tall do you think the author of this article is? Take a guess, go on.

Studies show that if the number ‘ten million’ quoted above had been lower, say four, instead of ten million, your guess as to the writer’s height would have been much lower. It sounds ridiculous, but it is true.

That is the point; we are all influenced by each other in surprising and often quite unintuitive ways.

If you can gauge the mood of the crowd, you would indeed have an advantage in predicting stock market changes. By plugging into social media we become a part of the crowd, but maybe we can understand it better too.

There is a snag. Crowds can get it horrendously wrong. The individuals who make up a crowd copy each other. But there is always a limit. A crowd can persuade itself to back an idea beyond that point when its support is rational.

By plugging into the crowd you may be able to second guess fashion in investment, but you may also get swept along, and when the bubble bursts you will find little comfort in the fact that you share one thing in common with the crowd – a lost fortune.

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To many he is a hero. He is the investor extraordinaire, the man who is now ranked fourth richest in the world, thanks to his all-round savvy. He is, of course, Warren Buffett. But was he lucky?

What about George Soros for that matter? He may have defeated the Bank of England, made a fortune by betting against central banks, and may be attempting – riding on the back of his financial record – to present himself as possessing sound academic credentials, but was he lucky?

Have you ever played that game at a party, when you all stand up, and have to raise either your right or left hand. A judge then tells all those who put, say, their right hand up, to sit down. The rest once again have to choose between right and left hand. The judge decides again which half has to sit down. You keep going until there is only person left. This person is the winner.

With the benefit of hindsight, you can see how that winner made a series of good calls. Let’s say the winner got the call right seven times in a row. What are the odds of that? Well, to be precise they are one in 128.

Of course you know that it was down to luck. If there were 128 people at the party, the odds of any one person wining such a game were one in 128, but the odds that someone might win were 100 per cent.

Now make the game more complex. Involve derivatives and shorting, and leverage and balance sheets. And say the odds of success are one in six billion. In a planet of six billion people those odds will smile on one person, but were they any cleverer than the winner of our party game?

That is harsh. Buffett and Soros are clever. And they are savvy, and there was more to their success than pure luck, but how much was luck, and how much was judgement? How much was down to a particular strategy happening to be the right strategy for the time? In an economy that is steadily growing over time, an investor who believes in a taking long term bets may well be a winner. Supposing instead that your investment strategy involved betting on companies named after a fruit, and you launched your strategy about ten years ago. You would have done pretty well. Does that mean your strategy will always work?

Anyway, whatever you think, Bill Gross – who sits at the upper end of the pantheon of great investors next to Buffett, Soros and Jim Rogers – wrote in an investment outlook he calls ‘man in the mirror’: “All of us, even the old guys like Buffett, Soros, Fuss, yeah – me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience…perhaps it was the epoch that made the man as opposed to the man that made the epoch.”

He said: “There is not a Bond King or a Stock King or an Investor Sovereign alive that can claim title to a throne.”

©2013 Investment and Business News.

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