Crowd funding and Peer to peer lending

I remember the euphoria which surrounded our capital markets before ‘The correction’ in 1987. Everyone you bumped into had a tip for the next share market winner. Stock Brokers congregated in bars and their wide eyed toadies enjoyed the spin from the amazing growth enjoyed by NZ’s overheated share market. Shelf-companies and property companies of zero value and over hyped price grew out of control. Greed usurped all reality and Kiwis became afflicted with ‘making money’ via direct equity investing. It has taken 20 years for the majority of people to either forgive or forget what happened financially to them or to someone they knew. 20 years on a new generation is stepping up to the plate. To invest, to lend, to learn.

The euphoria of the mid 80’s was driven by the incredibly disruptive political and economic environment created through high inflation (oil shocks) and Keynesian economics of the 70’s. The Lange/Douglas labour government of the 80’s drove dramatic economic change and was afflicted by one of NZ’s most dramatic share market crashes – that experienced in 1987.That labour government never really recovered, and Jim Bolger with Ruth Richardson became the next party political team primed to continue the worldwide trend of fiscal responsibility with central banking delivering monetary control. The focus, to curb inflation.

How recent that seems and yet how dramatic both the similarity and the difference to today’s economic and political climate. The emergence of capital market expansion in NZ follows a global financial crisis of epic proportions. The GFC. The timing of KiwiSaver has created such a wind fall that we see the re-emergence of ‘the market’ poseurs, new IPO’s, angel investors, venture capitalists, and special ‘new’ funding driven by online capabilities. Crowd funding and peer to peer lending becoming a new and exciting investment vehicle – a direct investment option for wide eyed speculators. Something new to talk about in the bars.

Equity crowd funding, which became possible in NZ last year allows companies to issue shares to the public through online platforms. Since August last year more than $7 million has been raised by three equity crowd funding providers. Like venture capital, equity crowd funding provides early stage funding for small firms, which would help them grow to the point where a listing on NXT would become feasible.

The biggest player in the new world of crowd funding is Harmony with plans to lend $100 million in its first year on peer to peer lending. Harmony is initially targeting personal loans of between $1,000 and $35,000 per borrower and investors are lending around $5,000 each on the online platform. Returns for investors for three to five years of around 17% per annum. Money is locked in for the term.

Since the demise of Lehman Brothers in 2008, blind Freddie could have been feted as an investment adviser. The markets have recaptured their losses and boomed to greater record highs. Like the Auckland property market, Australian resources boom, and Technology stocks of the 90’s – what goes up will inevitably come down. The secret to managing this volatility of overpricing and over correcting is to understand its inevitability and the diversification of security selection.

The problem in ’87 and in the 90’s was over exposure to single sectors and focus to performance – thinking a rising price necessarily reflects value and thereby becoming bewitched by a false dawn.

                Whilst ‘crowd in the cloud’ funding captures imaginations, remember: all successful investing is goal focused and planning driven, and all unsuccessful investing is performance focused and market driven.

Nothing wrong with some ‘speculating’ on new ventures – consider the exercise for what it is – a small part of an overall strategy to achieve an investment goal, just don’t convince yourself that investing has become easy. Times change and markets with them.

And on that subject – we have an International Day Trading Academy Workshop (all day) coming up on Sunday the 28^th of June. Register interest through our website. www.foxplan.nz