FX Contract rolled over

I have rolled over my NZD/HKD FX contract. The contract amounts to writing a covered call option on the New Zealand dollar. Details are as follows:

1. prevailing spot rate: 6.2665
2. fixing rate: 6.2665
3. fixing date: 27 July, 2011
4. maturity date: 28 July 2011
5. implied annual interest rate: 11.4625%
6. implied conversion rate if option is exercised against me: 6.3263

If the NZD/HKD exchange rate is below the fixing rate determined on the fixing date, then I will keep my NZD and be paid interest at an annualised 11.4625%. If the NZD/HKD is above the fixing rate then I will be paid in HKD converted at the fixing rate. So long as the spot rate on maturity is less than 6.3263 then I make money.

Looking back, I realised that I forgot to post about the previous FX transaction which matured today. Oh well....

World Wealth Report 2011

The 2011 edition of the Capgemini Merrill Lynch World Wealth Report provides an interesting snapshot of the world's high and ultra high net worth populations. While the information in the report is very much in summary form, it is still interesting to see the trends in how the wealthy allocate their assets.

Some highlights:

• globally, HNWIs increased their financial wealth by 9.7% and their numbers by 8.3%



• there are now more HNWIs in Asia-Pacific (3.3 million) than in Europe (3.1 million). North America still has the highest HNWI population at 3.4 million



• the UHNWI population grew more rapidly than the HNWI population. There are now an estimated 103,000 UHNWIs



• HNWIs increased their allocations to equities (to 33% from 29%) and reduced allocations from cash/deposits (to 14% from 17%) and fixed income (to 29% from 31%)



• North American HNWIs increased their exposure to home country investments (to 76%) but are expected to reduce home country allocations going forward. In contrast both European (to 56% from 59%) and Asia-Pacific HNWIs (to 57% from 64%) reduced their home country allocations



• the average age of HNWIs is falling with the percentage who are aged under 45 rising from 13% to 17%. The number of young HNWIs is particularly high in Asia-Pacific (41%)



• the percentage of HNWIs who are women continues to rise strongly (to 27% from 24%). North America continues to lead in this figure with women making up 37% of the HNWI population

The rise in the number of HNWIs and UHNWIs and their average wealth levels is hardly surprising. The numbers merely reflect a rise in asset prices (in particular global equities and Asian real estate) during 2010. An increase in exposure to equities after equity prices has risen is also unsurprising. The more interesting information are the trends within the larger numbers - the growing levels of wealth in developing economies, the increasing fragmentation of wealth accross the globe, within age groups and between genders.

HNWIs are defined as having investable assets of USD1 million or more, excluding primary residence, collectibles, consumables and consumer durables. For UHNWIs the threshold is set at 30 million.

Telling it like it is - becoming "really rich"

This article on MSN Money caught my attention.

The basic premise is that USD1 million in net assets is no longer enough either to be considered genuinely wealthy or to support a moderately affluent retirement - even if you also happen to own your own home mortgage free. This is a simple reflection on the realities of inflation at even moderate levels over a period of time (or, if you prefer, the decline purchasing power of currencies). It's also worth mentioning that inflation in the luxury sector has been outpacing the general rate of inflation for at least the last several years. Sure you can retire with this sort of nest egg, but even if you live in a low cost location, your retirement will hardly be the stuff of aspirational dreams.

The article neatly summarises the difficulties of getting to be "really rich" (defined as net assets of at least USD7.5 million). Earning a middle class income, saving and investing sensibly for a long period of time won't do the job (even with company matches to retirement plans). This is not exactly news and a little basic maths is enough to demonstrate this. As a comparison, a Barclays report in 2008 defined "wealthy" as USD10 million in net assets.

If you want to get "really rich" the key message is that, absent some exceptional talent (sports, writing, singing, acting etc) or winning a lottery (genetic, marital or other), you need either (i) to earn exceptional income (being a top end earner is a field like law, medicine, accounting, banking etc) or (ii) to take a lot of risks (using leverage) or (iii) to start your own business. This is consistent with my own thinking back in 2006 on getting to UHNW status.

While the reality of getting "really rich" is nothing new, its worth a reminder. For most of us, if you want to achieve more than common millionaire financial status and you are not earning an exceptional income, then your choices are largely limited to using leverage or starting your own business (or both). Since it's not going to come to you, the only way its going to happen is if you get out there and do it yourself.

Two additional thoughts:

• the longer you leave it the harder it is to break away from the seemingly comfortable and secure middle class lifestyle. As your career progresses and you start to accumulate at some assets, possible start a family, the opportunity cost of taking a risk (the cost of failure) increases. In some respects I regard the failure to get off my butt and start a business as one of life's failures;
  


• if you are going with the leverage route, the best time to do is is when "there is blood on the street" (attributed to Nathan Rothschild). Buying real estate (or any asset for that matter) on leverage with positive cash flow at a time when the world thinks it will never stop falling has, time and again, been a wonderful way to generate wealth. I give myself more credit here than I do on the entrepreneurial front.

Longevity and early retirement - revisited

I last posted on this subject back in 2009

Longevity is pretty fundamental so it's worth revisiting the question of whether or not there a link between early retirement and longevity and, if so, is the link a positive one or a negative one? It's a subject that comes up on internet forums from time to time and is clearly an important issue to many people. With my own plans for early retirement well advanced, it is one that is certainly important to me.

There have been at least some studies done on the subject, including:

1. this paper summarising the correlation between life expectancy and retirement age at Boeing - and finding a strong positive degree of correlation between early retirement and longevity;

2. this study of retirees from Shell which found that the earlier retirees (aged 55) included in the studies had shorter life expectancies than those who retired later (aged 60 or 65);

3. there is also the more comprehensive study done by the UK Economic and Social Research Council which was the basis for my earlier post.

Both the Boeing and the Shell studies have been subject to comments that they fail to properly take into account factors such as the health of the individuals involved, whether the retirement was voluntary or compulsory, diet, attitude etc. This suggests that neither study can be regarded as conclusive. The UK Economic and Social Research Council's study did address a number of these issues.

My own take, after reviewing not only the materials cited above, but also a selection of the extensive commentary available on the internet is that early retirement is likely to be positively correlated with longevity if, following retirement

1. retirees experience reduced stress levels;

2. retirees remain physically active;

3. retirees remain mentally active;

4. retirees remain socially active;

5. retirees have the financial resources to support their chosen lifestyle;

6. retirees live a reasonably disciplined lifestyle;

7. retirees get sufficient good quality sleep;

8. retirees contribute to either their families or society.

This is not exactly rocket science. Most people who can follow 1-8 will be in pretty good physical and mental health regardless of whether they are retired or working. The issue for retirees is that you have to create or achieve all of these things on your own - the discipline of turning up to work each morning will be gone - no one is going to do it for you (although Mrs Traineeinvestor would probably have some thoughts on this subject).

For my part:

1. work is a cause of stress. I expect that retiring will reduce stress (although it is possible that other causes of stress may emerge post-retirement);

2. retirement will enable me to spend more time in the gym;

3. I have a number of bucket list items and hobbies which will keep me mentally active and challenged. If all else fails, I will do some studying;

4. remaining socially connected is likely to be my biggest challenge. By nature I am an introvert and have a very limited social circle. Right now I prefer it that way, but I have to recognise that I may need to start interacting with people more;

5. finance should be fine. Building a bigger cash/near cash reserve and (possibly) paying off the home mortgage should give additonal peace of mind once the pay cheques stop arriving each month;

6. I don't anticipate too much difficulty in maintaining self discipline. Getting out of bed in the morning has never been a problem. I initially thought that maintaining a healthy diet might be an issue, but since most of my dietary sins occur during office hours, I'm not too concerned;

7. sleep is an issue. I am a chronic insomniac. I have no idea whether I will sleep better after retiring or not - I only know that it's very unlikely that I will sleep any less;

8. I already have a couple of volunteer activities and can expand on these easily enough.

It's also worth bearing in mind that I will be retiring by choice - I am not retiring early due to job loss, ill health, technical obsolescence or other adverse reasons. Also, for me retirement is not only about leaving my job, it's also about moving on to embrace a different phase of my life.

Looking forward to it.

Hong Kong imposes additional property curbs

The Hong Kong government has introduced it's fourth round of measures intended to curb rising prices in Hong Kong's over heated property market. The latest measures are:

- increasing the minimum deposit for properties costing more than HK$10 million to 50% and those between HK$6 - 10 million to 60% (with a cap of HK$5 million)

- requiring buyers who are not ordinarily resident in Hong Kong to put up an additional 10% deposit. This represents the first time that Hong Kong has discriminated against overseas buyers of Hong Kong properties. Commentators have been quick to claim (probably correctly) that this is primarily directed at buyers from the PRC mainland

- putting additional development sites up for auction. Most of the additional sites are relatively small sites suited for luxury properties

With interest rates on new mortgages having been increased to levels which are materially higher than those which many (if not most) borrowers ares paying on existing mortgages, one of the effects of the various cooling measures is to give incentives to people not to sell properties and make it harder for people to trade up - sellers will face higher stamp duty, higher borrowing costs and reduced availability of mortgage finance.

So far the only effect of the cooling measures is to reduce liquidity in the market.

In the longer term, one of the effects of the cooling measures is to materially reduce the risk to both the banks and investors of a decline in property prices or an increase in interest rates (mortgage interest rates are generally floating in Hong Kong). In very simple terms, with such low levels of leverage being used, the risk of default or negative equity is substantially reduced.

The other factor to bear in mind is that if the market starts declining, the government will have the ability to support the market simply by reversing some or all or the cooling measures.

China Blue Chemical purchased

The markets have now been drifting downwards for several weeks. While it is never enjoyable watching the prices of the shares I hold (and my net worth) decline, it has to be remembered that I am still a net buyer of investments and lower prices represent both lower risk and higher expected returns. Accordingly, I have been looking at adding either new positions or incremental purchases of existing positions to the private portfolio.

This morning I made a small incremental addition to my existing investment in China Blue Chemical (HK:3983) paying HK$5.60 per share. This compares my my original purchase price of HK$4.71. Average cost is now HK$4.93 per share (including transaction costs but not allowing for dividends received).

Whether this proves to be an astute piece of bargain hunting or a case of catching the falling knife remains to be seen. On the subject of falling knives, both of my last two purchases (Sino Oil & Gas (HK:702) and China VTM Mining (HK: 893) have fallen sharply since I purchased them (12% and 25% respectively) which is far more than the market decline over the relevant holding periods. A search has shown no announcements or other market developments which would explain the decline. Nor have I been able to identify any broker downgrades. Accordingly, I will continue to hold the positions.

Outrage over unjustified civil servant pay rises

As both a taxpayer and a Hong Kong resident generally, I find the proposed backdated 6.16 - 7.24 per cent pay rises for Hong Kong's bloated and overpaid civil service employees outrageous and insulting. Specifically:

1.Hong Kong's civil servants already earn far more than equivalent private sector employees to begin with and are regarded by many as the highest paid in the world;

2. the criteria for reviewing civil servants' pay are ridiculous and include wholly irrelevant matters such as the government's fiscal position and staff pay claims. The former amounts to a statement that if the taxpayers have been over taxed, the civil servants should get a cut of the excess taxation. The latter just defies all rational comprehension;

3. civil servants work shorter hours than private sector employees and, for all practical purposes, are immune from the risk of job loss - in a rational world these realities would require civil servants to be paid less than private sector equivalents;

4. the increases are much higher than the increases currently being earned in the private sector.
Just to really rub it in, our Legislative Council has decided to give the lower ranked staff pay rises above and beyond the already inflated initial proposals.

Some days it is really hard to understand the way the Hong Kong Government wastes the taxpayers' hard earned money - overpaid civil servants, a completely unnecessary new government office at Tamar, destroying our country parks with concrete and, in all likelihood, robbing the taxpayers to fund a third runway at Chek Lap Kok (which should be paid for by users alone). All this while so many families and individuals are struggling to get by in a time of rising inflation, there is a shortage of hospital facilities, doctors and nurses and nothing is being done to address the appalling quality of the air we breathe and the harbour we play in.

Somewhere along the way the Hong Kong government just lost the plot.

Book Review: What Investors Really Want

What Investors Really Want is Meir Statman's look at the world of personal investment from a behavioural finance perspective. The book is well written and waffle free making it easy to digest. Topics covered include:


- the desire for a free lunch of investments with profits higher than risks
- some of the more common cognitive errors
- the often adverse impact of emotions on investment decisions
- mental accounting
- how we react to profits and losses
- the desire for high status and respect
- the desire for fairness
- the role of financial advisers

While most of the subjects covered were ones that I was already familiar with, the book was still a worthwhile read. Had I been less familiar with behavioural finance, it would have made for a great introduction to the subject.

Recommended.

Sino Oil & Gas Purchased

This is a late post.

I made a small investment in Sino Oil & Gas (HK:702) on 31 May paying HK$0.52 per share. The company's market cap is relatively small compared to the potential resource value but is speculative given the risks in extracting value from those resources. If they can succeed in bringing the resource to commercial production then there is likely to be considerable upside (at least one broker has a HK$0.78 price target). If they fail, then the loss of value is likely to be significant.

So far it's looking like a bad investment with the shares currently trading at HK$0.48, for an unrealised loss of almost 10% in only a few days.

Monthly Review - May 2011

May was a poor month for investments, but still saw a small amount of net progress towards the financial aspects of my retirement goals.

May was essentially a story of cash flows outweighing adverse market fluctuations. Equities, ETFs and commodities all declined during the month with a very small positive contribution from currency fluctuations, positive cash flow from the properties and a high savings rate being collectively sufficient to provide a small gain in net worth.

Here are the details:

1. my Hong Kong equity portfolio declined. There were no new investments in May;

2.my ETFs were down marginally in line with the local markets;

3. my commodities declined, led by a big drop in silver;

4. all of my properties are occupied, the tenants are paying on time. One overseas property has reached the point where a number of long term maintenance issues need to be dealt with. Fortunately the tenant (who has been there for over 7 years) is happy to stay while the work is being done. I have a small repair bill for one Hong Kong property due next month and I will have a much larger repair bill at some stage on a Hong Kong property suffering from a persistent leak;
5. currency movements were slightly positive, as both the NZD appreciated against the HKD/USD;

6. my position in bonds remains small. There were no purchases this month;

7. there were no outstanding derivatives;

8. savings were good with high income and moderate expenses. Fluctuations in income is inherent in the nature of my remuneration package. There were no major expenses;

My cash position was unchanged. Although I made no equity purchases this month, I had to settle a purchase made at the end of April. I currently hold 19.6 months of expenses in HKD cash or equivalents (compared to 26 months at the end of February).

For the month, my net worth increased 0.52%. The year to date increase is 11.75%.

Something a little bit different...

...for me at any rate. Ashley Ambirge at The Middle Finger Project (I really love that blog name), had a link to the Seth Godin's The Domino Project . The latter is is running something called Trust 30.

Trust 30 is "an online initiative and 30-day writing challenge that encourages you to look within and trust yourself" . The basic idea is that if you sign up you will receive a daily e-mail for 30 days each of which will set you a writing task. I'm not much of a believer in these sorts of exercises (I usually don't show up for team building type time wasters at work and seldom participate when I'm forced to put in an appearance). However, with the goal of transiting from my highly structured life (where I have relatively little need to actively find things to keep me occupied) to early retirement where the potential for boredom and sloth is a serious concern, I decided that this might, just might, be (a) interesting and (b) useful.

Having signed up, the first exercise was something of a disappointment, being both predictable and unoriginal - you have just discovered that you have 15 minutes to live etc. The "you only have x time left, what are you going to do with it" exercise is a staple of motivational speakers and writers. Steve Chandler's 100 Ways to Motivate Yourself included such an exercise (although with a longer time frame).

Notwithstanding the absence of novelty, I still went ahead and did the exercise. I'd read about and listened to people describing the exercise and their (or someone else's) experience with it - but I'd never done it myself.

In summary, if I was down to my last 15 minutes:

1. I would not be wasting time on regrets, apologies or cleaning out my sock draw. 15 minutes isn't long enough, there will be no benefit to either myself or anyone else and items #2-4 are more important;

2. I would spend all of my 15 minutes with my wife and children (multitasking on Skype to the rest of my family);

3. I would open one of the bottles of Chateaux Mouton Rothschild 2000 sitting in my wine fridge. It's way too soon and there's no time to properly decant, but what the hell, it was brought to be drunk;

4. I would provide my wife with updated passwords to my on line accounts and transfer enough money to carry the family through the probate process. Fortunately, I have a current will and my wife knows where everything is.

What else is there to say? While this is what I would do, it's neither original nor inspirational. Perhaps I just failed this project? Or maybe not. I did spend some time thinking about regrets and the thing I regret most was not finishing the fantasy novel I started writing in the late 1990s (work was a bit slow during the Asian crisis). I started picking this up last year but haven't really made much progress. The novel is on my retirement "to do" list and, if not finishing it was my biggest regret, should be prioritised.

So I did get something useful out of the exercise after all - a new feeling for my priorities and (possibly) a little motivation.