Monthly Review - December 2009

December was another positive month for financial progress with both my investments and my savings rate contributing to a gain in net worth.

Here are the details"

1. my Hong Kong equity portfolio appreciated, in spite of a minor pull back in the overall market towards the end of the month. The only changes this month were the sale of Pacific Basin and the purchase of Shenzhen Expressway

2. my ETFs appreciated modestly with Russia, India and Taiwan advancing by more than a slight decline in Hong Kong

3. commodities appreciated

4. all but one of my properties was let and all tenants were paying on time. The renovation work on the last project has been completed and the agent is looking for a tenant for me (which is unlikely at this time of the year). Even with one vacancy I am close to break even on a cash flow basis and well ahead on an income basis

5. currency movements were neutral

6. I did not roll over my ELDs

7. savings were positive with income at the high end of expectations and expenses more or less in line. I had over provided for the cost of our holiday - a reversal of the excess accrual added to the bottom line.

For the month, net worth increased by 2.5%. For the year, net worth is up a staggering 75.3%.

I will do a separate post reviewing 2009 as a whole.

Money Lessons of a Lost Decade

The Wall Street Journal carried this piece listing some
lessons from the "lost" decade.

I very strongly disagree with the notion that the first decade of the current millennium was in any way "lost" from a financial perspective. In spite of all the volatility (SARS in 2003 and the credit crisis in 2007 /8), it was a good decade financially for the traineeinvestor household. Most of my peers also did well during the decade. In part this was because we were all at the stages in our careers where promotions and rising incomes produced higher savings levels and in part because those rising savings levels arrived at times when the markets (real estate, equities) were either rising or had been weak (i.e. cheap).

One thing I would take away from the last ten years is a repeat of the same lessons I took from the 1980s and the 1990s (and from reading plenty of books on financial history). Market volatility is normal. Extreme volatility is not as uncommon as you would expect. Bubbles and the subsequent burstings can be expected from time to time. Learning to live with volatility and uncertainty is fundamental to being a successful investor.

As to the items listed in the article, these are almost all useful points to remember. I particularly like the statement that value is an absolute not a relative concept. While this is not strictly true (comparatives are important), I always hesitate when I see an analyst claim that a company deserves to trade at a premium to its peers.

The one point which I consider to be dangerous is to have the courage of your convictions - while this is fine if it means a willingness to take risks in order to generate returns, it is a very dangerous position to take when things start moving against you. Sometimes it is better to admit that you are wrong, deal with the consequences and to move on.

Ten reasons to retire

Yahoo Finance carried this article : 10 reasons you shouldn't retire.

Five of the ten reasons are essentially a statement of the obvious - if you can't afford an acceptable standard of living on a sustainable basis then retirement is not an option.

As far as the five non-financial issues are concerned, these are all points to consider. However, their validity will depend on individual cases and your mileage may vary.

To put a different perspective on the table, here are some reasons why we should retire:

#1 You can afford it. If you have worked hard for a number of years, enjoy it. You've earned it. Why wait?

#2 You're not getting any younger. Your life span is a finite sum. Each day is a resource you can only spend once. Do you want to spend more of your finite days in the office or on the beach? Let's face it - no one ever died regretting not spending more time in the office

#3 You don't need more. Enough is enough. Seriously - if you need more money, fine keep working. If you have enough stop. If you can never have enough, get some therapy. Get a life

#4 You will get old. Your health will deteriorate. There are some things which most of us can only do while we are young and in good health. The longer you delay retirement the greater the risk that physical or mental deterioration will mean that you will never get around to them

#5 Priorities. People matter. Family. Friends. Others. Very few people can legitimately claim that their job is a priority item. Give priority to the things (people) that matter

#6 Personal interest. Most of have a list of things we want to do. Whether we make up a list and whether we call it a bucket list or not, it's there and maximising the part of your life spent in the cube farm has no place on the list. Why not get on with it?

#7 Physical health. Quitting the rat race means you have more time. Time to spend getting in shape. Go biking. Hiking. Swimming. Get out and smell the daisies before you start pushing them

#8 Stress. Some people thrive on it. Personally, I could survive very well without it. If the office is a stress generator, it's time to move on

#9 Mental health. There's no argument that the office can provide mental stimulation. But there are lots of other places you can find the mental equivalent of daily brain exercises - and get some refreshing variety into the bargain

# 10 Giving back. Call it the quest for meaning if your like. Retiring gives you more time to give something back. It's hard to spend your days volunteering at the SPCA if you're chained to a workstation

Of course, I could say that retiring early is good for the economy - by stepping down you open up a job opportunity for someone else - but I have taken the selfish approach and confined my list to personal reasons.

A quick search of the internet talks about the benefits of working part time to bridge the transition from working full time to living full time. This is something I support and intend to do myself.

Equally, if retirement means spending your days sitting in front of the TV or wandering aimlessly through the mall, it is hardly surprising that health issues will follow. Making sure you are in a position to address the potential for boredom, physical inactivity, mental inactivity and social isolation before you retire (preferably years before) is a fundamental part of retirement planning.

Shenzhen Expressway purchased

This morning I added Shenzhen Expressway (548) to the private portfolio, paying HK$3.73 per share. When I started buying individual stocks in May 2009, I initially preferred other toll road operators which had lower gearing and less exposure to the export sector. Recent results and data suggest that the company is seeing meaningful revenue increases on a number of roads. Given the leverage on the balance sheet and the continued low interest rate environment, this gives me a basis for expecting profits to increase and, possibly, for the current yield of 3.6% to be enhanced.

Optimism abounds

In the space of a few short weeks, we have been bombarded with a tidal wave of optimism:

• GDP forecasts being revised upwards. Hong Kong is now forecasting 4%+ GDP growth for 2010 (depending on whose forecast you are looking at)
• Hong Kong residential property prices are forecast to increase by 10%, 20% or 30% next year on the back of continued tight supply (this is actually debatable), renewed confidence and a continued supply of cheap and plentiful mortgages (ditto)
• stocks will continue to appreciate, although at a slower pace - valuations based on fundamentals like P/B and PE are mid-range
• monetary tightening will not happen until 2010 Q3 - 2011 Q3 (ditto)
• unemployment is expected to start falling in Hong Kong and elsewhere in Asia (or may have already done so) (although still rising elsewhere)
• corporate earnings are rising again (or at least recovering)

Sure, there are plenty of doomsayers out there, but their voices are starting to be drowned out by the optimists. Anecdotally, the air quality in Hong Kong is visibly deteriorating, taxi queues and road congestion have got worse and restaurants are getting full again.

Bubbles? There is a lot of talk about bubbles in the local/PRC stock market and the local property market. While stocks and property have rallied a long way off their lows, by historical standards:

• mass market residential property in Hong Kong is still much more affordable and lower in absolute terms than in the period leading up to the Asian crisis in 1997
• stock valuations based on P/B are close to their long term average of 2x. PE looks more elevated - to the point were value is getting hard to find - but this does not indicate a bubble

While there are calls from the IMF among others to pre-empt a bubble in asset values, I see no need for such action at this point. Valuations are not stretched. The economy is still recovering from the impact of the crisis (relatively limited here compared to the US) and confidence is returning. More to the point, as long as the HK$ is pegged to the US$ and the US refrains from raising interest rates, the Hong Kong Monetary Authority has little choice but to keep the supply of money in Hong Kong at high levels.

All in all, things are looking a lot better than at this time last year.

Book Review: Strategy for the Wealthy Family

"Strategy for the Wealthy Family" by Mark Haynes Daniell is a thick door stopper of a book (478 pages + index etc) which addresses the needs of a a wealthy family seeking to preserve their wealth across generations.

While parts of the book are clearly more appropriate for very wealthy families with family offices or high end private bankers to take care of their needs, there is a great deal which could be adopted by lesser families (such as my own).

The author suggests that wealthy families adopt a formal strategy which amounts to treating the family in a similar manner as a business. Among other topics discussed:

• adopting a family constitution
• wealth preservation
• wealth management
• managing family business
• effective philanthropy
• living a truly wealthy life
• succession planning

There were sample documents for (among others) a family strategy document, an investment policy statement and an ethical will. There were two versions of the family strategy document, one for a US$5 million family and one for a US$50 million family. (Needless to say, I have no need of the latter.)

At the moment I am still in the process of accumulating sufficient funds to retire (target 2012/age 46). However, given our age difference, whatever we save may have to last my wife for 50 years. Accordingly, the wealth preservation sections where extremely useful and I will be looking to adopt some (but not all) of them.

Recomended (even for not so wealthy families).

A small day trade successfully executed

This afternoon I executed a small day trade buying Hang Seng Index put warrants (17863) at HK$0.058 and selling them back at HK$0.060. As always, I only use very small amounts of money for these speculations. If I lost the lot, it would not affect my retirement plans (only my ego). It also means that the profits will be correspondingly minuscule. The net profit on the trade was about 1.6% and will be enough to buy a decent bottle of wine.

Fairwood Holdings topped up

After reading Fairwood's (52) results announcement, I decided to top up my holding this morning. Unfortunately, other investors also reacted positively to the results announcement and a broker upgrade and the stock jumped past my limit leaving my order only partially filled at $7.68 - $7.71. I elected not to chase the stock further.

Monthly Review - November 2009

November was yet another positive month for my investments. How much longer can this go on for? Absent a serious step backwards in December it will be a record breaking year for my finances.

Here are the details:

1. my Hong Kong equity portfolio recorded solid gains. I sold Pacific Basin at a small profit and partially reinvested in VTech (the share price overran my limit and I elected not to chase the price). I also did a small profitable day trade in HSI warrants. The bad news of getting hit on a Hutchison Whampoa put warrant at an effective cost of HK$57.95 (current market is below HK$53) was not enough to outweigh the gains elsewhere in the portfolio.

2. my ETF's all marched upwards with India and Hong Kong leading the way.

3. my Australia and New Zealand equities and managed portfolio were down by a small amount.

4. my commodities recorded small gains.

5. one of my two outstanding ELD positions was exercised against me, resulting in me having holding a large position in Hutchison Whampoa which I am holding at a loss. The other position remains out of the money.

6. my rental properties remain fully let (except for the new purchase undergoing renovation) and all tenants are paying on time. Positive cash flow combined with P+I mortgages are a nice thing.

7. FX movements were very slightly adverse this month.

8. income was at the high end of expectations. Unfortunately, I had a lot of expenses this month - I paid the second installment of our Christmas holiday, I started paying for medical insurance for the first time, expenses for my Trailwalker and a few lesser items. I also received the tax bill for the company which holds some of my Hong Kong properties. Although not due until early January, I elected to pay it now. I still managed to achieve net savings (one of the benefits of having a high savings rate), although at a lower level than usual.

The end result was a net gain of 1.8%. The gain for the year to date is 70.9%. Absolutely unbelievable.

Note: this month's numbers were calculated at close of business on 1 December rather than at the end of the month as usual.