October was a very good month for financial progress. Just about everything moved my way and, in in the case of equities, the gains were impressive. Even the currency movements were mildly favourable as the USD depreciated further. Cash flow on the properties was negative(although still a positive contribution to net worth) due to a combination of repair bills and a single vacancy. The cash outflows will increase next month as we will have two vacancies and one of the vacant properties will be getting a minor makeover (repainting, new kitchen bench, resealed floor etc etc etc). Savings were low.
Here are the details:
1. my Hong Kong equity portfolio appreciated quite strongly. I purchased shares in AUPU and some other small caps and sold some call warrants on HWL;
2. my ETFs appreciated in line with their respective markets (Hong Kong, Russia, Taiwan, India and China) ;
3. my commodities appreciated for a modest gain (with gains in the basket ETF, silver and NICK offsetting a fall in HOGS);
4. one of my properties is vacant but the portfolio is still making a positive contribution to my net worth. However, I have been hit hard with multiple repairs which were either paid in October or will be paid in November. This means that we had a negative cash flow in October. That said, as the biggest component of the monthly payments is principal on the mortgages, the properties remained profitable even with a vacancy and the bills. That may change next month;
5. currency movements were mildly favourable, as the AUD, NZD and RMB appreciated against the USD;
6. savings were positive in spite of income being low and expenses being slightly high. Net savings were modest;
7. I transferred some money to mrs traineeinvestor for tax planning purposes. As this is an outright transfer it represents a reduction in the net worth of the private portfolio
My cash position was reduced after purchasing some equities, a transfer to mrs traineeinvestor, repaying a tenant's bond, paying for a short holiday in Japan and setting aside a reserve for the property related expenses. Cash on hand now represents about six month's worth of expenses.
For the month, net worth increased 3.8%. The year to date increase is 23.0%.
My target retirement window remains sometime between early 2012 and the end of 2013.
Saturday, October 30, 2010
Thursday, October 14, 2010
iShares A50 purchased
Yesterday I added the iShares A50 tracker ETF (2823) to the private portfolio, paying HK$13.56 per unit. With China's stock markets having lagged the current (near) world wide rally, several A shares now selling at discounts to their H share counterparts and increasing confidence in both China's domestic economy and the ability of the developed world to avoid a double dip, it appears to be a reasonable investment. It is also an indirect play on the RMB.
Monday, October 11, 2010
Small cap purchases
Over the last few weeks I have purchased shares in six small cap companies. In all cases, the shares have been selected based on meeting all or most of the following criteria:
1. low PE ratio
2. strong free cash flow
3. good dividend yield
4. no debt
5. little or no dilution of shareholders over the last three years
6. insiders holding meaningful interests in the company
7. no selling by insiders in the last two years
In all cases, I have read the most recent annual report and (if more recent) interim report as well as any other recent announcements.
In some cases, the liquidity is very limited so I have only purchased small parcels - in all cases less than my usual allocation (probably violating the principle that one should always play for meaningful stakes).
The six companies and the average price paid are:
1. Tai Sang Land (89) - HK$3.23
2. Kenford (464) - HK$0.63
3. AUPU Group (477) - HK$0.99
4. Allan International (684) - HK$3.24
5. Varitronix (710) - 2.72
6. Perenial (725) - HK$0.84
1. low PE ratio
2. strong free cash flow
3. good dividend yield
4. no debt
5. little or no dilution of shareholders over the last three years
6. insiders holding meaningful interests in the company
7. no selling by insiders in the last two years
In all cases, I have read the most recent annual report and (if more recent) interim report as well as any other recent announcements.
In some cases, the liquidity is very limited so I have only purchased small parcels - in all cases less than my usual allocation (probably violating the principle that one should always play for meaningful stakes).
The six companies and the average price paid are:
1. Tai Sang Land (89) - HK$3.23
2. Kenford (464) - HK$0.63
3. AUPU Group (477) - HK$0.99
4. Allan International (684) - HK$3.24
5. Varitronix (710) - 2.72
6. Perenial (725) - HK$0.84
Tuesday, October 05, 2010
Taxing dividends is illogical and wrong
In the course of the debates over tax rates a point which those advocating higher taxes for the rich often make is that the average tax rate paid by the rich is lower than that paid by less wealthy high income earners. These claims are nonsense at best and disingenuous untruths at worst.
Taxing dividends is double taxation
Here's why:
1. in simple terms, a company is a pooling of the investments of its shareholders. Apart from some legal distinctions which are not relevant, it is little different from a partnership for present purposes (although the tax treatment is vastly different). If the company makes a profit, it does so with the shareholders' money and does so for the shareholders;
2. if a company makes a profit, it will pay tax on that profit;
3. the company may decide to hand some or all of the tax paid profits over to its shareholders by way of a dividend - the critical point is that what is given to shareholders already represents the profits which have been earned using the shareholders' money and on which tax has already been paid. No additional economic activity takes place and no additional income or profit is earned by anyone;
4. this means that tax has already been paid on the profits before they are distributed to shareholders. Taxing those distributions again is double taxation - taxing the same income twice. This is plainly wrong.
Some countries have recognised the issue
Some countries recognise that taxing dividends as income is a form of double taxation and have addressed the issue. Australia and New Zealand have an imputation regime under which dividends are deemed to be net of the amount of tax which the company has already paid on the underlying earnings. The main effect of these regimes is to capture the differences between the company's tax rate and the marginal tax rate of the recipients of the dividends and avoid the penalty effect of double taxation. Hong Kong goes further and mostly ignores dividends for tax purposes.
Inconsistent to treat partnerships and companies differently
Further support for treating dividends as income and double taxing them can be found by comparing the treatment of income earned from investing in a partnership (no double taxation) and a company (which is subject to double taxation). Differences in the form of legal vehicle should have no material bearing on the amount of tax to be paid.
Contradiction in double tax regimes
The final point to be made on this issue is the contradiction of treating dividends as taxable income in the hands of the recipient but not as a tax deductible expense on the part of the company. As a general principle, what is assessable revenue for a recipient should be a deductible expense for the payer.
Arguing from a false premise
Assertions that those who receive dividends (and capital gains) do not pay a "fair" share of taxes, fail to recognise the fact that tax has not only been paid on the underlying earnings already but is being paid again when the dividend is treated as taxable income. The net result is that the actual tax rates being paid on the relevant earnings are actually significantly higher than is claimed.
Consequences
History has shown that this double tax issue has consequences - companies are less likely to pay, and shareholders are less likely to want, dividends if the effect of the dividend is to transfer some of the tax paid profits of the company to the tax collectors without any actual income being generated. It is little wonder that dividend yields are so much higher in countries (like Australia) which treat dividends appropriately, than in countries which impose punitive double tax regimes. It is also at least a partial explanation for the massive amounts of unproductive cash sitting on the books of many companies. While I am not an expert in assessing the cost of capital to a company, it seems fairly reasonable to also expect that a double tax regime increases the cost of capital to the company with the usual consequences following.
And capital gains?
The same principle also applies to taxation of capital gains (although other factors involved make the analysis more complicated).
Taxing dividends is double taxation
Here's why:
1. in simple terms, a company is a pooling of the investments of its shareholders. Apart from some legal distinctions which are not relevant, it is little different from a partnership for present purposes (although the tax treatment is vastly different). If the company makes a profit, it does so with the shareholders' money and does so for the shareholders;
2. if a company makes a profit, it will pay tax on that profit;
3. the company may decide to hand some or all of the tax paid profits over to its shareholders by way of a dividend - the critical point is that what is given to shareholders already represents the profits which have been earned using the shareholders' money and on which tax has already been paid. No additional economic activity takes place and no additional income or profit is earned by anyone;
4. this means that tax has already been paid on the profits before they are distributed to shareholders. Taxing those distributions again is double taxation - taxing the same income twice. This is plainly wrong.
Some countries have recognised the issue
Some countries recognise that taxing dividends as income is a form of double taxation and have addressed the issue. Australia and New Zealand have an imputation regime under which dividends are deemed to be net of the amount of tax which the company has already paid on the underlying earnings. The main effect of these regimes is to capture the differences between the company's tax rate and the marginal tax rate of the recipients of the dividends and avoid the penalty effect of double taxation. Hong Kong goes further and mostly ignores dividends for tax purposes.
Inconsistent to treat partnerships and companies differently
Further support for treating dividends as income and double taxing them can be found by comparing the treatment of income earned from investing in a partnership (no double taxation) and a company (which is subject to double taxation). Differences in the form of legal vehicle should have no material bearing on the amount of tax to be paid.
Contradiction in double tax regimes
The final point to be made on this issue is the contradiction of treating dividends as taxable income in the hands of the recipient but not as a tax deductible expense on the part of the company. As a general principle, what is assessable revenue for a recipient should be a deductible expense for the payer.
Arguing from a false premise
Assertions that those who receive dividends (and capital gains) do not pay a "fair" share of taxes, fail to recognise the fact that tax has not only been paid on the underlying earnings already but is being paid again when the dividend is treated as taxable income. The net result is that the actual tax rates being paid on the relevant earnings are actually significantly higher than is claimed.
Consequences
History has shown that this double tax issue has consequences - companies are less likely to pay, and shareholders are less likely to want, dividends if the effect of the dividend is to transfer some of the tax paid profits of the company to the tax collectors without any actual income being generated. It is little wonder that dividend yields are so much higher in countries (like Australia) which treat dividends appropriately, than in countries which impose punitive double tax regimes. It is also at least a partial explanation for the massive amounts of unproductive cash sitting on the books of many companies. While I am not an expert in assessing the cost of capital to a company, it seems fairly reasonable to also expect that a double tax regime increases the cost of capital to the company with the usual consequences following.
And capital gains?
The same principle also applies to taxation of capital gains (although other factors involved make the analysis more complicated).
Hutchison Warrants Sold
Hutchison Whampoa (13) has had a great run. While I purchased the shares too early and was sitting on an uncomfortably large loss for while, the shares are now solidly in the black.....which is a good thing because at current market prices they are my largest investment in the shares of a single company.
I also have some Hutchison warrants that were purchased back in July 2009 at HK10.4 cents. For a long time I was seriously underwater with paper losses in excess of 80%. The recent appreciation of the underlying share price has not only put me back in the money but has had the effect of making me seriously overweight Hutchison. Accordingly I sold the warrants this morning at HK14.4 cents for a gain of about 37% after transaction costs.
Now if only I had purchased the warrants when they were trading at less than 2 cents.....
I also have some Hutchison warrants that were purchased back in July 2009 at HK10.4 cents. For a long time I was seriously underwater with paper losses in excess of 80%. The recent appreciation of the underlying share price has not only put me back in the money but has had the effect of making me seriously overweight Hutchison. Accordingly I sold the warrants this morning at HK14.4 cents for a gain of about 37% after transaction costs.
Now if only I had purchased the warrants when they were trading at less than 2 cents.....
Friday, October 01, 2010
Monthly Review - September 2010
September was an outstanding month for financial progress. Just about everything moved my way and, in some cases, the gains were impressive. Even the currency movements were favourable as the USD depreciated. Portfolio gains were supplemented by positive cash flow on my properties and a good savings rate. Also, I transferred some more money to mrs traineeinvestor which had no material impact on the monthly result.
Here are the details:
1. my Hong Kong equity portfolio appreciated....a lot. I purchased shares in Vodone and some small caps (details to follow in a separate post)
2. my ETFs appreciated in line with their respective markets (Hong Kong, Russia, Taiwan and India)
3. my commodities appreciated for a modest gain (ETF, silver, HOGS, NICK)
4. all of my properties were let and are making a positive contribution to my net worth. However, I have been hit hard with multiple repairs which were either paid in September or will be paid in October. Also, one property became vacant at the end of September. This means that a small negative cash flow in September will be come a much larger cash flow in October. That said, as the biggest component of the monthly payments is principal on the mortgages, the properties will remain profitable even with a vacancy
5. currency movements were favourable, as the AUD and NZD appreciated against the USD
6. savings were positive with income being average and expenses also being below average. Net savings were good
7. I transferred some money to mrs traineeinvestor for tax planning purposes. As this is an outright transfer it represents a reduction in the net worth of the private portfolio
My cash position was slightly increased after purchasing some equities and the transfer to mrs traineeinvestor and now represents about 10 month's worth of expenses.
For the month, net worth increased 6.63%. The year to date increase is 18.4%.
My target retirement window remains sometime between early 2012 and the end of 2013
Here are the details:
1. my Hong Kong equity portfolio appreciated....a lot. I purchased shares in Vodone and some small caps (details to follow in a separate post)
2. my ETFs appreciated in line with their respective markets (Hong Kong, Russia, Taiwan and India)
3. my commodities appreciated for a modest gain (ETF, silver, HOGS, NICK)
4. all of my properties were let and are making a positive contribution to my net worth. However, I have been hit hard with multiple repairs which were either paid in September or will be paid in October. Also, one property became vacant at the end of September. This means that a small negative cash flow in September will be come a much larger cash flow in October. That said, as the biggest component of the monthly payments is principal on the mortgages, the properties will remain profitable even with a vacancy
5. currency movements were favourable, as the AUD and NZD appreciated against the USD
6. savings were positive with income being average and expenses also being below average. Net savings were good
7. I transferred some money to mrs traineeinvestor for tax planning purposes. As this is an outright transfer it represents a reduction in the net worth of the private portfolio
My cash position was slightly increased after purchasing some equities and the transfer to mrs traineeinvestor and now represents about 10 month's worth of expenses.
For the month, net worth increased 6.63%. The year to date increase is 18.4%.
My target retirement window remains sometime between early 2012 and the end of 2013
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