Asset picks: Watches

Alternative assets find their way to more and more investors worldwide as the search for above market returns, low correlation and reduced risk make way for such investments. Investing in watches is not only a good way to bring abnormal returns over the years, but also tangible assets that can be worn and enjoyed by the owner. Luxury watches and some grand complication are masterpieces of mechanical art. On this level, watch investing converts into art collecting. There is something special about an intricate mechanical piece that measures time. Time, the most precious commodity we all have equal amounts of each day. Time, that is highly appreciated and valued by investors as the ultimate test of resilience and fortitude. As assets appreciate or depreciate over time, investors and collectors alike can find great solace in measuring it and keeping a note of it at all times on their wrists. Every watch tells a story and is bought to commemorate events or pass down generations. Not every watch is high quality which lasts more than a generation or is worth keeping. This is where certain brands and collectible watches come forward. Some of the most collectible watches currently on the market are almost all by Swiss brands, with a few German and one outstanding Japanese. Below are some of the top collectible brands with potential for great returns:

  • Rolex – Submariner, Daytona, GMT and Explorer – has a very high demand, long heritage and it’s vouched for by a number of celebrities and VIPs. A Rolex also set itself apart in the eye of the general public as a status and cultural symbol.
  • Patek Phillipe – Aquanuat and Nautilus models – accessibility to Patek’s due to their limited productions and higher prices make them and outstanding long term investment and a beauty of design to contemplate.
  • Audemars Piguet – Royal Oak – is an exclusive and expensive time piece that has seen an increased interest and value appreciation in recent years.
  • Grand Seiko – Japanese started fine watch making in the 1800s with Grand Seiko. The quality and craftsmanship for theirs price is outstanding. A fascinating feature of the Grand Seiko is it’s unique movement.

A special note has to be taken into consideration for the brands above that only some models and reference points are a good investment.

If you are just starting on your watch collecting journey a great entry level investment watch with long term value that as appreciated over the years is the Rolex Submariner. It is almost sure that you can’t go wrong with it based on decades of price data. Best value when you buy one you buy deep heritage.

There are many other exceptional brands with turbuillon movement and limited edition grand complications from brands such as F.P. Journe, Jaguer le Coultore, Omega, Cartier and A. Langhe and Sonne. There are certain brands that are currently losing value such as Graham and Panerai while in other cases a particular model that has been oversupplied or new similar model have reduced it’s value. Some time pieces have left their mark in world history, like the Omega Speed master which went on the Apollo 11 mission to the moon on the wrist of the astronauts and the Rolex Explorer which was on the wrist of the Mountaineers who first climbed Everest.

Rarity, complexity and condition are factors that define the value in the watch investment. To determine a good investment from a bad one, one must learn to value those among other factors. A skill not easily acquired for such a niche investment class. Aspects such as brand recognition, heritage, exclusivity, availability, and – perhaps the most influential of all – demand are important when it comes to the development of a watch’s value over time. Only about 20% of luxury watch models are eligible for an investment.

For decades, watches have been symbols of luxury, wealth and personal taste. An appreciation of the craftsmanship and the complicated parts that constitute this piece of mechanical art can bring great pleasure to its owner. Owners such as the Dalai Lama and the Pope Francis which are also avid watch enthusiasts. There is something special and elegant of having a piece of art on your wrist that is powered by your motion and it measures each second of your life going forward. Investing in the right vintage watch is a good bet for troubled financial times. Watch collecting is a journey not a destination. For the smart investor it can not only bring high returns, but also offer an experience like no other measured in time, second by second.

Disclaimer: Opinions are my own and not the views of my employer. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

Asset picks: Wine

There are many different types of alternative assets out there, from watches and jewelry to cars and artwork, but probably none as exciting and as experiential as wine. Wine has a character and it changes with time. It’s origins traced from all around the globe define it’s value while time makes it appreciate culminating in a possible investment or a gratifying tasting of its characteristics. Each wine has character that can be uncovered through tasting and felt with all your senses. Yes, vintage cars can be driven and watches worn, but there is something else to wine that could touch our feelings and those that it is shared with. Fine Wine investment is one of the longest standing alternative asset classes, showing a clear history of very attractive returns, a hedge against inflation and low correlation with other markets. It is an asset that improves with time and its consumption creates a supply and demand that is constantly changing with each generation. It has a finite supply that is controlled by producers which allows for strong price performance. The chart below plots the appreciation of wine as an asset class since 1988 against other popular investment options like gold and major indexes. A track record of bringing double digit returns year on year with lower volatility and susceptibility to large draw-downs alongside other markets. Moreover, high liquidity and flexibility makes it a perfect asset to enjoy and preserve your wealth.

The journey from grape to wine is one of patience and complexity. Enjoyed by many and appreciated as a commodity and luxury for some, wine has been a central part of daily life since Roman times. The quality of wine starts with its roots. The soil predetermines the minerals that are going to be absorbed that’s why the region of its origination plays such an important part. Additionally, each region has it’s own weather patterns, humidity and the most important sun exposure that determines the character of the wine. When to pick the wine according to the weather and growth stage is one of the key areas to the production of a great wine season. Wine is experiential as it touches on all the Five senses:

  • taste – sweet/dry, acidic, sour, bitter among others outlining its character.
  • smell – smell of a wine – “nose” or “bouquet” – fruit, flowers, earth, leather, wood, chocolate.
  • sight – color & clarity and its appearance as observed when fresh out of the bottle.
  • touch – “mouthful” – full vs light bodied, defined by different thickness and consistency.
  • sound – clinking of glasses. There is a whole industry around creating different shapes and sizes of glasses for particular types of wine and of course the specific cling to them.

The way that wine is consumed plays a role in defining some of its value while the quality is defined by its origination. There is a clear separation of the provenance of wine determining it’s quality, reputation and characteristics. “New World” vs “Old World” is the clash du jour as the two main categories of wine provenance. New World typically lists the variety of the grape on each bottle from North America – California, Washington, Oregon, Canada and Mexico to South America – Chile, Argentina & Peru versus Australia, New Zealand & South Africa. Old World names the wines after the particular region where it was made France, Italy, Spain, Portugal, Germany, Greece, Bulgaria. Some of the most collectible and highly sought after wines come from France in Bordeux and Burgundy as well as Italy Tuscany, Piedmont and Puglia. In Bordeux, red wine is represented by blend of cabernet sauvignon, merlot, cabernet franc, petit verdot, and malbec. Burgundy is famous for it’s Pinot Noir. The wine making tradition in this French region goes back to the Romans while it’s modern standing has been achieved through the Christian monks from the Middle ages who developed the region and tradition of wine making separating single varieties and helping the wine develop its characteristics. Pinot Noir was the variety of grape that greatly benefited from the soil type and weather in this region. Burgundy is relatively small region in France, though what it lacks in size compensates with it’s complexity. Further to the East in Italy, Tuscany’s Sangiovese grapes red wine is favoured as one of the best. Chianti & Brunello di Montalcino and Vino Nobile di Montipulciano are all regions within Tuscany making wine with those grapes with truly outstanding quality and worldwide reputation. Final mention of great quality that is highly collectible is red Piedmont from Nebbiolo grape – Barolo & Barbaresco. This sample of wines is serving only as an example and is no extensive and picked at random to get an idea of regions, varieties and characters that could potentially represent an investment. Moreover, the characteristics of Investment Grade Wine include it’s pedigree or the place it was produced and the reputation it carries, longevity – matured for at least 10 years and the awards that it has won. The reputation of winery is an important aspect that define the price appreciation of the wine as well as how liquid it is in terms of availability of bottles on the market.

The global wine market is projected to grow with a CAGR of 5.8% in the following 5 years. In consideration of the current market conditions, expected economic turmoil and inflation increase in different countries wine is positioning itself for out-performance against other asset classes. The wine market is driven by increasing demand for wine, due to its health benefits and premiumization of wine products, coupled with innovation in flavor and more advanced distribution networks, globally. Changing taste and new preferences among consumers, along with increasing demand for new and exotic flavors, such as Riesling wine and other tropical fruit wine are expected to fuel the growth in the market. Asia-Pacific is expected to witness rapid growth, during the forecast years. This is due to an increase in the number of companies that produce wine in China, India, and Japan. An increase in demand for premium wines and growing westernization also act as factors that drive the growth of the wine market in this region.

There are certain risks and threads to the whole industry. Firstly, global warming is one of the biggest threads to winegrowers as temperature increase and drought hits the soil. Secondly, large discrepancies in prices between the higher end luxury wines and the lower to mid tier grows widder as the growers struggle to managed their margins. As with any other investment there are risk involved. There has been a steady market movement towards alternative asset classes over recent years. Wine is one of the most accessible and liquid of such alternative assets, with trading spreads now approaching those of traditional financial market-traded assets. Wine made from the same grape can vary drastically in quality and flavor. This depends on a lot of different factors such as geology, geography and climate. The type of soil mix paired with the weather and sun that the grapes take in defines the quality of the wine created from them. Finally, wine is tax efficient investment as the classification of fine wine by H.M. Revenue & Customs as either a ‘wasting asset’ or ‘chattel’ generally means that Capital Gains Tax does not apply. Whether you wish to diversify your portfolio, reap attractive returns or simply enjoy consume it and collecting it, Wine is truly an exciting asset class.

References:

Disclaimer: Opinions are my own and not the views of my employer. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

Risk and uncertainty in investing.

Making decisions, life or financial, bear a certain amount of risk as well as the uncertainty of the variable outcomes inherent to those decisions. The risk of arriving at a negative outcome can be measured while uncertainty is defined by the stretch of the unknown. Decisions are based on forecasts or expectations of different outcomes. All forecasts are subject to uncertainty and the goal of successful forecasts would be for the outcomes to fall within the pre-defined confidence levels. The goal of making financial decisions on your investments and assets is to arrive at positive outcomes where having the ability to properly understand and measure the risks hedging uncertainty is paramount for the appropriate management of Finances.

Risk and uncertainty can be clearly distinguished. Risk is quantifiable while uncertainty is not. The risk applies to random outcomes that an investor can model with known probabilities while uncertainty presents random outcomes with unknown probabilities. An investor may be left paralyzed when faced with significant uncertainty that may have a large impact. Those situations have to be identified early and hedged appropriately. This is very important as tail-risk events of very low probability but very high impact can sometimes wipe out months of gains and bring businesses down to the knees if not hedged and discounted for. The opportunity cost of foregoing one action for another despite its probabilities can arise fear of inaction and it’s a cost that may exceed the costs of taking unknowable risks. This is only one specific example of risk from a pool of many others that depend on the type of assets and investments at risk. Risk & uncertainty are based on the asymmetry of information that an investor has that leads to the probabilities and certainty of the outcomes.

Risk allows the use of mathematical models to aid in the decision making process as the probabilities of different outcomes can be estimated through probabilities analysis by finding the distribution of outcomes and the calculation of the expected values. While statistics can be used to find the appropriate confidence intervals and define probabilities, uncertainty can be modeled through the use of sensitivity analysis and simulations such as Monte Carlo. Sensitivity analysis takes each uncertain factor in turn, and calculates the change that would be necessary in that factor before the original decision is reversed. One limitation of this analysis is that it only identifies how far a variable needs to change; it doesn’t look at the probability of such a change. Monte Carlo simply uses a stochastic numbers to test different scenarios that a particular decision may lead to. Finally, the use of decision trees is useful when we have a clear course of outcomes present.

CAPM Capital Asset Pricing Model Powerpoint Presentation Slide ...
Source:

In the Financial markets, the Capital Asset Pricing Model is used to measure the market risk and uncertainty. As investors take in more risk they expect higher returns. The efficient frontier is the place where investors put in their money for the limited amount of risk gaining optimum return. To shift return out of a portfolio of securities diversification helps to optimize the risk/return profile. To measure the market risk/systemic risk the Greek Beta is used. A risk free security carries no risk and a Beta of zero. Market portfolio beta is 1 where the portfolio of stocks follows the market like the S&P500 to return the optimally. Beta greater/lower than 1 indicates the volatility and risk of the particular portfolio. It is often assumed that the optimal diversification to reach returns at the efficient market frontier is 25 while adding anymore securities doesn’t necessarily reduce the market risk. The unsystematic risk represent the general uncertainty within the markets that can’t be measured. CAPM assumes perfect capital markets, unrestricted borrowing and lending at the risk-free rate of interest. It provides a market based relationship between risk and return. There are some limitations to CAPM as it only concentrates on systemic risk while other aspects of risk are excluded. Moreover, the model only considers only the level of return as important to investors not the way in which that return is received that being through dividends or capital gains. The unsystematic risk represent the general uncertainty within the markets that can’t be measured. Good way to make sure investor protects themselves from that type of risk is through hedging it. There are different financial instruments like options, forwards, swaps, exotics that can be used. Finally, investors need to stay on top of the risk in their portfolios at all times and this can be easily monitored by monitoring the investor’s portfolio Sharpe Ratio and draw-down levels. Investor’s relationship with risk is as important or if not more important than the search for higher returns.

Asset picks: Gold

Gold and silver are the only substances, which have been, and continue to be, the universal currency of civilized nations.

Albert Gallatin

Gold is an element atomic number 79 to be precise which is found in ore and nuggets. Scare quantities deep into the earth’s crust. Gold is the same everywhere because of its purity, uniformity, scarcity, and malleability. Those qualities give it its unique characteristics and are one of the reasons making it so valuable. Gold is not a commodity as it is not really consumed or converted into anything else. It has almost no industrial uses and it’s used within the jewelry industry but it is not a consumption item as it is a wealth ornament, form of money that can be worn. Gold is not an investment either as it doesn’t entail risk and return. Once gold is in your possession it bears no risk related to clearing and settlement. Banks may fail and exchange may close but the physical possession and intrinsic value of the golden ore won’t be incumberet.

The gold bug is back in vogue propelled by fundamentals, sentiment, and technical indicators. The commodity has always been infused with an emotional charge among investors who participate and follow this market thoug there is quite a few things going for it to push the prices higher through solid resistance levels.

Looking at the price action, gold is reaching the resistance levels from 2011 through 2013 at $1,700-$1,800 which were tested twice already and the volume spikes lead us to the third retest of those levels after more than 7 years of lower levels observed on the market. RSI is overbought and volume is falling down so we won’t be expecting the level to give up easily. Although triple tops setup with strong fundamentals going for a break out in gold this year.

Analyst around the investment community forecast gold price targets of $2,200-$2,500 even as high as $3,000 for an ounce of gold. There are a number of fundamental drivers sitting behind such forecasts. One of those is the current monetary policy of quantitative easing undertaken by many central banks around the world. Printing money against balance sheet debt to flush the economy with liquidity and foster positive economic activity in the face of the current health and geopolitical turmoil can result in high inflation. Currently, there is no inflation hikes in sight with the US rate at 2.24% and EU 1.2% which is extremely low. The re-emergence of inflation after decades of price stability is not only likely to continue to add to stock and bond market volatility; it will also focus investor attention on assets that are resistant to inflation and gold is a hedge against it.

Another factor that plays a role is the high risk of tail events around the globe. From the global pandemic and health crisis to physical conflict and trade wars. Gold is usually a safe haven asset that has seen spikes in previous decades during the turbulent first half of the 20th century.

We are also currently entering a USD crisis and gold is a hedge against that which is one of the reasons why Central banks are selling USD and acquiring gold as much as they can get their hands on. For central banks gold is money. Nowadays every central bank around the world is buying gold as a reserve asset at an unprecedented pace. Increasingly gold is moving from mines to central bank vaults and from the West to the East. China & Russia are one of the biggest acquirers at the moment as they fight for obtaining more stability and dependence on using the greenback. There are many factors involved in pushing the gold prices higher so we are observing the markets to see if this becomes a reality.

Gold Reserves by Country - Top 10 Largest Gold Reserves ...

References:

  • Rickards, James – The Death of Money, April 2014, Publisher: Portfolio, First Edition.
  • Charts – Trading Economics, Trading View & St.Loius Fed.

Disclaimer: Opinions are my own and not the views of my employer. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

Crypto Analysis: Polkadot

SUMMARY

  • Project name: Polkadot
  • Ticker symbol: DOT
  • Token type: Protocol Layer
  • Consensus mechanism: PoA to NPOS
  • Key exchanges: BitForex, HotBit, BigOne
  • Exchange volume: $6,649,355 USD
  • Total Supply: 10,000,000 DOT
  • ROI: -13.83%

Overview

Blockchain and cryptocurrencies were first started with the Protocol time period and Bitcoin the original cryptocurrency following the 2008 Financial crisis. It dealt with the creation of an alternative currency that can transfer value independently of financial instutions protected by cryptography and novel technology. The second period within the cyber space was marked by the creation of Ethereum and the Ethereum Virtual Machine (EVM), its programmable smart contracts and the ability to built applications on top of the blockchain opened a space of opportunities and use cases. The third period within the blockchain space is about to begin in 2020 as the period of interoperability within the cyber space aiming at getting protocols to be openly communicating and transferring information between each other. Protocols that are open to transacting between one another creating an open space for all blockchains. An open space where mutual connectivity and transaction throughput is massively accelerated but still offering the same security and access. Polkadot is one of the first protocols that has the technology and capacity to work towards the achievement of interoperable Web 3.0 decentralized world. A world where each blockchain operates in the same network as others rather than a closed circuit within its current protocol. Polkadot is a sharded multichain network. It consists of a main chain called the relay chain and multiple sharded chains called parachains. The network advances its design from Ethereum 2.0 by implementing interoperability as a heterogeneous multi-chain rather than as a homogeneous multi-chain. It can process many transactions on several chains in parallel, eliminating the bottlenecks that occurred on legacy networks that processed transactions one-by-one. In addition, the higher level of abstraction and allows interoperability between more classes of cyberspace economies. Interoperability is one of the main strengths of the project but so is the speed of transactions that could be achieved. Improved scalability means the solidified pathway towards general adoption and future growth. One of the final foundational pillars around blockchains is governance. Polkadot will have a democratized structure of managing the protocol. Its governance will include a Council, a Technical Committee, and public referendum.

Key features:

  • Nominated Proof of Stake (NPOS) – network is secured by the economic stake that is bonded to the validators. Initially, Polkadot will operate as a Proof-of-Authority (PoA) chain that is maintained by six validators belonging to Web3 Foundation. Once Web3 Foundation is confident in the stability of the network and there are a sufficient number of validators the intention of the network will be to switch to the fully fledged NPOS.
  • Parachains – the project uses multiple sharded blockchains connected together as well as having the ability to connect to other blockchains into one network. As each blockchain protocol like Cardano or Zilliqa is created to serve particular use cases and having particular features the data and value can pass between them through the use of Polkadot.
The Polkadota blochchain schematic.

Management

Polkadot is the flagship product that the Web3 foundation is seeking to excel forward. The organisation deals with building and investing in novel technologies within the blockchain and cryptographic space. It is incorporated in Switzerland and is lead by team of researches and developers from ETH Zurich and Parity Technologies. It was founded by the Ethereum co-founder Dr. Gavin Wood who also spearheads Polkadot project. The project has raised more than $140m through it’s ICO and private investment rounds that include contributors such as IOSG, Polychain Capital and Fabric Ventures.

Development

The project is still in its very early stages so there is a lot of plans outlined ahead. There are Polkadot implementations developed in Rust, C++, Go, and JavaScript. For example, Kosame and Gassomer are all dealing with solving issues on digital identity and security. The protocol specification are being considered under a Creative Commons license and the code being placed under a FLOSS license. There has been a significant increase in commits in 2020 within the project’s github repository. Polkadot repo has more than 800 commits where Gavin’s putting serous work into the development with 200+ commits and 10,000s lines of code.

The Polkadot network will have a phased roll-out plan, with important milestones toward decentralization marking each phase.

SWOT

Strengths

  • Polkadot allows any type of data to be sent between any type of blockchain
  • Scallability can be greatly increased as multiple channels run together increased the amount of transactions that can be processed within the network.
  • No forks of any type required as the blockchain can update itself enacted by the open governance process on the network.

Weaknesses

  • Late development of the project compared to Cosmos and the fact that Ethereum is already working on a scalability solution that may help reduce market share.

Opportunities

  • Web3 Foundation has a grants programs offered for developers wishing to build and contribute to the network.
  • Solving the interoperability bottleneck and the ability to co-operate between other blockchains may present significant economic benefits to the network.

Threats

  • Polkadot has not fully launched yet and it will require a lot of impetus to gain traction and become competitive with the other protocol which have already got a significant community and developers universe established.
  • Technical difficulties in applying the key interoperability feature may undermine one of the main goals of the project.

Finally, Polkadot offers interoperability and cross-chain communication that can set the scene for the third stage of development of blockchain technology. Significant backing as well as technical expertise from the greatest minds of the blockchains space working on the project give confidence of the high probability of it’s success. The clear and action-packed road map is in full swing where the only thing left to see is the delivery upon it.

References:

Disclaimer: Opinions are my own and not the views of my employer. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.