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When does investing become speculation? – Morningstar.ca

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Book learning
Last week, The Wall Street Journal documented how cryptocurrency owners were defrauded of $4 billion in 2019. My initial reaction was, “Well, that’s what they get for speculating.” My second thought was to retract the first, because my criticism had begged the question. What, exactly, is “speculation”? 

Some sources treat all investments as speculation. For example, Cambridge Dictionary defines speculation as “buying something hoping that its value will increase and then selling at this higher price in order to make a profit.” By that measure, buying Treasury bills is speculative. That uses the term so broadly as to deplete its meaning

Most, however, maintain that speculation occurs when assuming high risk. One meaning that Merriam-Webster gives speculation is assuming “unusual business risk in hopes of obtaining commensurate gain.” Collins Dictionary considers that act as “making very risky investments in the hope of large gains.” For Investopedia, speculation involves “conducting a financial transaction that has substantial risk of losing value but also holds the expectation of a significant gain.” 

Expected returns
Better, but incomplete. What’s missing is the nature of the payoff. A wager that has an 80% chance of losing $100 and a 20% chance of gaining $1000 is very different from a wager that has an 80% chance of losing $100 and gaining $400, because the former has a positive expected return, while the latter does not. Yet both gambles are speculation, according to Merriam-Webster, Collins, and Investopedia, because each involves high risk, with the possibility of a large gain. 

Those two wagers don’t belong in the same bucket. The first is an investment. To be sure, it is almost absurdly risky, losing the entire $100 stake four times out of five. However, its average expected return is outstanding, being double the outlay. In contrast, the second wager rates as speculation, because its expected payoff is less than the expenditure. Making that bet is akin to purchasing a lottery ticket; the buyer succeeds by being lucky rather than smart. 

In practice, of course, expected returns cannot be so precisely calculated, even for government bonds. (It is possible, if unlikely, that the promise of the U.S. Treasury will prove false.) Therefore, they must be estimated. Which leads to my definition of an investment: An expenditure that can reasonably be determined to have a positive expected return. In contrast, speculation occurs when the return is too uncertain to be estimated, or if the estimate can be made, but is negative. 

This definition, I confess, is greatly oversimplified. For one, it ignores wealth effects. Despite its positive expected payoff, the first wager must be downgraded to speculation for the person who only has $100 to lose. It also overlooks the benefits of diversification, as repetition makes the first gamble increasingly safer (and the second gamble increasingly more dangerous). 

Nor does it address the risk-return relationship. Securities with barely positive expected returns and extremely high volatility are speculative–unless their performance is negatively correlated with the rest of one’s portfolio, in which case the investment may be warranted. Further complications! 

However, for assessing whether my initial characterization of cybercurrency purchases was accurate, the shorthand version will suffice. 

Cash (and cash equivalents)
The surest investment is that which pays cash. The distributions may be explicit, as with bond coupons, stock dividends, or rental receipts; or they may be implicit, as with the discounts that are built into Treasury bill prices. Either way, they generate cash payments that may reliably be estimated and summed, while accounting for the likelihood of defaults. 

Next come items that could pay cash, but do not. Examples include the equities of profitable firms that do not declare dividends, and properties that are used by their owners, rather than leased to others. Valuing these securities is little different than valuing those that already generate cash. The one additional wrinkle is the possibility that management will never make distributions. That prospect must be considered in the analysis. 

Potentially cash
One step further down the investment ladder are assets that cannot yield cash in their current form–for example, undeveloped land. Clearly, such properties can be speculative. Buying Florida swampland on the vague belief that someday, in some way, that real estate will become valuable is the essence of speculation. However, they also can be investments. By my book, acquiring the land near railway stations, as commonly done during the 19th century, was not speculation. Those were investments, based on shrewd calculations of incipient demand. 

One could also buy cashless land based on the insight that it may contain something of value that has escaped others’ attention. If a particularly skilled geologist realizes from examining geographic features that a tract has a higher chance of possessing minerals than their peers believe, and purchases it for that reason, that transaction rates as an investment. It’s not speculation when you know the numbers and others do not. 

Never cash
Which brings us, at last, to cryptocurrencies. They belong with gold bullion, diamonds, wine bottles, and oil paintings as items that will never generate cash. They will not pay coupons, declare dividends, or receive rents. They do not possess hidden resources. Their value lies solely in how they are perceived. They are worth what others will pay for them, no more and no less. 

If owned in moderation, as part of a larger portfolio, such assets can be investments. Their expected returns often struggle to be barely positive–the real return on gold over the past several centuries is deeply unimpressive–but they do offer significant diversification. In addition, cryptocurrencies do have a purpose, being a method of payment. 

My judgment: If somebody was defrauded while using cryptocurrency as one portion of a highly diversified portfolio, bad luck. That was an investment loss. I also will not judge those who were bilked while using cryptocurrencies for transactions, as they were designed to function. Perhaps their faith in the new currency was misplaced, but they were not speculating. 

However, those who bought their cryptocurrencies believing that they would reap profits because somebody would pay them more, and then were cheated from their assets, were speculators. Plain and simple. They had no way of knowing if their purchases had positive expected returns, nor (obviously) did they possess any special insights. They were the suckers at the table. 

But I still take back my initial reaction. Speculators don’t deserve to become rich, but neither do they deserve to be duped. May the perpetrators be apprehended and jailed.

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Short Term vs Long Term Investments: Gauging the saving spectrum – Economic Times

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Quick wealth creation is what financial markets consider; however, investing as a practice is a long-term process. While an investor’s capital can be invested in the short-term and long-term, both forms of investment have their merits and demerits.

Typically, short-term investments involve less risk than long-term investments. Long-term investments give the investor’s money a substantial period to grow and recover from major dips in the market.

Having clear and crisp financial goals can help the investor decide whether to choose short or long-term investments and which vehicles within those categories aim towards personalized investment gains.

Before choosing any investment strategy, the investor ideally needs to do proper research on which asset types suits their need.

What is suitable for one investor might not be in sync with another’s financial objectives, so one must consider their overall goals along with the risks one is willing to take.

Short-term investments have a validity period typically up to three years – high liquidity instruments, generally involving lesser market risks.

Also, these temporary investments are mostly used for parking excess funds for a short period. Short-term investments are highly liquid and hence are used by investors to meet expected near-future expenses.

Less risky in nature, these short-term investment products have a short tenure and give predictable returns as compared to long-term investments be it –

Treasury bills which can be redeemed within 91 days and is a high liquidity instrument.

● Gilt Funds which invest only in government securities and owing to zero credit risk, are safe investment funds.

● Ultra-short-term debt funds wherein the maturity period ranges between three to six months and provides comparatively higher returns.

● Low duration debt funds whose maturity period ranges between six and 12 months, these funds invest in debt and money market instruments.

● Money market funds that invest in money market instruments and have a redemption period of up to one year.

● Bank fixed deposits that can be renewed on maturity and their tenure can range from 14 days to 10 years. Also, liquidity can be a concern here as some banks don’t allow premature withdrawals.

● Company fixed deposits can have a tenure of more than one year

● Post office time deposits have tenures ranging from one to five years and similarly Recurring deposits can open an RD for a duration as low as six months. Sweep-in-Fixed Deposits as against low returns on savings accounts, these offer comparatively higher returns, with a minimum tenure of around 12 months.

On the other hand, long-term investments are investments that can offer high returns after several years, typically five years or more – involving more market risks.

Be it via stocks, ETFs, mutual funds, etc. Investments in stocks earn quite high returns if patience is kept high (Of course, this cannot be guaranteed but you should assess your risk-taking capacity before thinking of investing in stocks).

Having a deeper understanding of the market movements so that the investor makes wiser financial decisions and when to sell the stocks, investing in stocks and securities requires a trusted financial partner, who can provide hassle-free features to open an online Demat and Trading Account.

Another long-term investment avenue for receiving higher returns is Equity Mutual Funds where the investor gets to pick from small, mid-cap, and large-cap equity mutual funds for the long term to achieve greater financial goals.

Ultimately, the short-term investment gives levy to the investor to achieve their financial goals within a short span and with lower risk (depending on which asset you pick), if the investor has a greater risk appetite, and wants higher returns, they can select a long-term investment avenue.

To further simplify, if the investor wants to preserve their capital and is happy with moderate returns then they may choose short-term investments but, with the expectation of a higher return, the investor may invest in long-term investment avenues.

(The author is Senior Vice President, at mastertrust)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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Hong Kong Investment Bank’s 2,325% Surge Baffles Local Investors – BNN

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(Bloomberg) — Another little-known Hong Kong-based financial services firm is mystifying investors with a dramatic price surge following its US listing. 

Magic Empire Global Ltd., which provides underwriting and advisory services and has helped just one company go public since 2020, surged 2,325% in its debut session Friday in New York to a market capitalization larger than football club Manchester United Plc. Magic Empire is the seventh firm this year from Hong Kong or China to experience similarly surprising moves. 

“This price level has clearly shown it is not sustainable,” said Ken Shih, head of wealth management in Greater China at Saxo Capital Markets HK Ltd., adding that without knowing who is doing the buying, it is hard to be definitive. “At this point, downside risk for investors clearly outweighs upside.”  

Last week, Hong Kong financial services provider AMTD Digital Inc. briefly became bigger than Goldman Sachs Group Inc. after a 14,000% gain in less than a month. The moves are particularly notable at a time of otherwise muted IPO activity and with Chinese companies Alibaba Group Holding Ltd. and JD.com Inc. threatened with delisting if they fail to comply with American auditing standards.

Magic Empire reported revenue of $2.2 million in 2021, a 17% drop from a year earlier. The company’s operating entity, Giraffe Capital Ltd., completed just one IPO in 2020 and none last year “due to COVID-19 and volatile outlook of the Hong Kong capital market,” according to the prospectus. Friday’s price surge brought Magic Empire’s market capitalization to $1.9 billion.

“The wild swings are likely due to the concentrated ownership, which certainly raises red flags,” said Kakei Lam, fund investment officer at Metaverse Securities Ltd. “I don’t see a resemblance to the meme-stock mania, given the thin trading volume.”

Magic Empire’s chairman Gilbert Chan Wai-ho and chief executive officer Johnson Chen Sze-hon co-lead Giraffe Capital, which obtained a license to provide corporate finance services in 2017. The firm mostly works on IPOs on GEM, the small-cap exchange, and often engages other small local brokerages as underwriters, including KOALA Securities Ltd., HKMonkey.com and Yellow River Securities Ltd. Chan and Chen own most of Magic Empire, with a combined stake of about 63%. The firm had just nine employees as of December 2021, according to its prospectus.

Hong Kong’s Scandal-Plagued Small-Cap Exchange Left for Dead

About half of the companies Giraffe Capital has taken public jumped on the first day, some by as much as 125%. Seven are now trading 30% to 92% lower than IPO price and another has been delisted.

Magic Empire didn’t respond to an email request for comment and calls to the phone number listed on its website weren’t answered.

In the first half of this year, fundraising in the Hong Kong IPO market dropped 92%. With the tiny companies that make up their customer base under close regulatory watch, small- and mid-sized financial advisory firms like Giraffe Capital have had a particularly tough time.

In 2017 and 2021, the Securities and Futures Commission and the Hong Kong stock exchange issued two rounds of warnings about so-called ramp-and-dump schemes tied to small-cap IPOs. These schemes manipulate very thin trading volume to inflate prices, luring unwary investors before shares collapse. 

The SFC declined to comment for this article, but has previously identified four typical features of problematic IPOs: 

  • Market capitalization barely meets the minimum threshold
  • Price-to-earnings (P/E) ratio is very high given the firm’s fundamentals and the valuations of its peers
  • Underwriting commissions or other listing expenses are unusually high
  • Shareholding is highly concentrated in a limited number of shareholders

Magic Empire’s relatively modest revenue means it qualifies as an “emerging growth company” under American legislation, according to its prospectus. These firms enjoy reduced reporting requirements compared to larger US-listed public companies, with only two years of audited financial statements required and disclosure obligations regarding executive compensation pared back. 

(Updates with Kakei Lam’s comments.)

©2022 Bloomberg L.P.

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Investment in Alberta's tech sector soars – CBC.ca

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Several Calgary-based tech companies are planning to hire more people and expand their office space as hundreds of millions of dollars flow into the sector.

Through the first half of the year, Alberta has attracted nearly $500 million in investment, according to briefed.in.

“We’re growing very, very quickly,” said Nic Beique, the founder of Calgary-based Helcim, which offers online payment services for small businesses across Canada and the United States.

The company recently received $16 million in venture capital funding from investors in Toronto and New York.

“We’ve doubled our business in the past six months alone, so our investors are already quite happy with that progress,” Beique said from the company’s headquarters in Eau Claire. 

Nic Beique is the founder and CEO of Helcim, a Calgary-based fintech company that offers payment solutions for businesses. The company recently received $16 million in venture capital funding. (Bryan Labby/CBC)

Beique says the company has grown by 400 per cent in the past year. It’s gone from 80 employees late last year to 145 today. He plans to hire 100 more people by the end of next year.

“My long-term goal is to build an anchor tenant in the Calgary tech scene. So when people think about Calgary, they think about Helcim … the way Shopify was able to do that with Ottawa, where they really kind of put them on the map for tech. I want to do that in Calgary as well.”

According to briefed.in, Alberta’s tech sector recorded $268.6 million in venture funding in the second quarter alone — in the same quarter a year ago, only $16 million was raised. 

Hirings, office expansion

Another rising star in the city’s tech scene is Virtual Gurus, which provides companies with virtual assistants to carry out a range of administrative duties for businesses in Canada and the States. 

Two years ago, the company had five employees. It now has 40 and plans to double that number by the end of the year, which will require more office space.

“We’re looking at expanding upstairs in order to facilitate that growth,” said Margaret Glover-Campbell, the company’s chief operating officer.

Margaret Glover-Campbell, chief operating officer of Virtual Gurus, is looking to more than double its number of employees in downtown Calgary by the end of the year. (Bryan Labby/CBC)

Virtual Gurus, which aims to hire more people from minority groups, including people with disabilities and members of the LGBTQ community, recently received $10 million in funding from several venture funds. The money will be used to help the company grow and launch a new app in the coming months.

New funding sources

Calgary-based startup ZayZoon, which previously relied on individual, private investors, recently raised $25.5 million in funding to help it expand. ZayZoon offers people early access to their earned wages and has partnered with approximately 3,000 businesses in the U.S. The company has 70 employees but plans to hire 15 more by the end of the year. 

One of its investors is Alberta government-owned ATB Financial, which is providing a $13-million debt pool for the company to use when clients seek an advance on their earnings.

Darcy Tuer, left, Tate Hackert, middle, and Jamie Ha are the founders of Calgary-based startup ZayZoon, which provides clients with early access to their earned wages. (Tate Hackert/ZayZoon)

Tate Hackert, one of the company’s founders, says ATB’s support is a boost for his company and the city.

“It’s just such a great story for Calgary,” he said.

“It just shows that there is more to invest in here than oil and gas, and we’re really looking forward to being part of that success story, right?”

Finding employees a challenge

An ongoing challenge for most tech firms is finding employees to support their expansion plans.

“We’re absolutely hiring as many people as we can. It’s a really tough market in Calgary because we do have so many tech companies here that are trying to hire people,” said Glover-Campbell.

Helcim says it takes a unique approach to hiring and provides greater opportunities for recent graduates of post-secondary schools. It aims to hire young professionals right out of school and provide on-the-job training and mentorship. 

Employees of Helcim in downtown Calgary. The company plans to add 100 more employees by the end of 2023. (Bryan Labby/CBC)

“Our focus is on giving these young professionals the ability to start their career at Helcim instead of fighting for senior talent,” said Beique.

He also says recent cooling off in the sector could help level out the demand for talent and help his company attract and retain staff.

Calgary has a lot going for it, Beique says, including an affordable cost of living and a good quality of life. He says 20 per cent of the companies’ recent hires are coming from outside the city.


Bryan Labby is an enterprise reporter with CBC Calgary. If you have a good story idea or tip, you can reach him at bryan.labby@cbc.ca or on Twitter at @CBCBryan.

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