Hutchison Whampoa purchased

Having looked at my current cash and near cash positions and the expected cash flows between now and retirement in mid-2013, I have concluded that I will have too much of our retirement invested in cash or near cash.

Cash and short term bonds have their place in a portfolio in that they provide a buffer for meeting expenses and a war chest for opportunities, but they currently produce negative real returns.

With our mortgages costing an averaged of around 1% p.a. (tax deductible), paying off the some of our mortgage debt was not an attractive alternative so I have opted to add some more shares in Hutchison Whampoa to the portfolio. The yield of around 2.5% is not particularly attractive in absolute terms, but it is secure and  is certainly better than cash or short term bonds so long as I am prepared to ride out any fluctuations in the price of the shares.

I paid HKD 80.75 for the additional shares.

I will be looking for some more stable dividend shares when I get back from holiday in the New Year.

New camera purchased

Having finally conceded that the Canon EOS 5D that has served me so well for over seven years has reached the end of its useful life I went out and purchased the EOS5D iii as its replacement. I did give serious consideration to the Nikon D800, but decided that it wasn't worth replacing a flash and my lenses to make the switch.

I'm still playing around with it but already notice the improved low light capability. The video function may get a bit of use as well - better quality than videos taken with an iPhone but heavier to hand hold for long periods of time.

Silver purchased

Silver dropped below USD 30.00 per oz overnight. Hoping that this is largely due to a combination of year end position squaring and US investors taking profits before tax rates go up next year, I added a few more ounces to the portfolio.

I paid HKD232.8 per oz (equivalent to USD 30.03).

Paladin purchased

I have spent some time looking at long term forecasts for uranium supply and demand. The conclusions of the reports I read suggest that demand is likely to exceed supply in the not too distant future. While long range forecasting is often an exercise in looking stupid, given that uranium has taken a beating in recent times, I decided to purchase some shares in Paladin (ASX: PDN). Based on today's fundamentals, PDN is not something I would normally look at (I prefer companies that actually make money now), but if the forecasts are correct (or enough people believe them to be correct), then the shares could go for a nice run.

This is all pretty speculative, so I have kept the investment small - basically the dividends that have accumulated from my other Australian shares over the last couple of years.

I paid AUD1.03 per share.

Some new Hong Kong blogs

Hong Kong focused personal finance and investment blogs are few and far between so it was good to see two new additions:

• The Investment Portfolio from Aspiring Investor
• My Investment Portfolio from Bean Counter

I have added them to my blog roll and look forward to following their progress.

No more bank consent letters

For a long time it has been my practice to obtain the consent of the bank holding the mortgage over a property whenever I lease the property out. Sometimes (not always) tenants will ask for a written confirmation from the bank and I have always been happy to obtain it (although it usually takes about two weeks which means it sometimes arrives after the tenancy has commenced).

Today I received a call from one of the banks and was informed that they are now charging HKD1,000 to issue approval letters. My response was that I would not be paying that charge and, going forward, would not be seeking bank consent for any new tenancies. The bank officer confirmed that he would cancel the request and that the bank did not require me to obtain bank consents for new leases.

This is fine from my perspective but it means that if any future tenant wants a bank consent letter, the tenant will have to pay the charge. I will not be.

A small day trade badly executed

I'm not much of a day trader, but on Friday I noticed the high turnover of Radford Capital (HK:901) and did a bit of digging. With its NAV at over HK$0.10 per share and the share price at around HK$0.045 per share I decided to put in an order at HK$0.045.

The order was partly filled before the share price ran away. Given the rate at which the company has lost money over the last few years and having had a look at the larger investments disclosed in its most recent report to shareholders, this was not a company that I wished to hold long term so I did not increase my limit order even though I could have filled it at HK$0.047 (or thereabouts).

I sold yesterday at HK$0.058 making enough money to take Mrs Traineeinvestor out for a modest dinner with a decent bottle of wine. If I had filled the order completely and held for one more day, it would have been a very nice Christmas present indeed.

Sinolink Holdings Limited pruchased

Yesterday I purchased a few more Sinolink Holdings (HK:1168). Notwithstanding the recent price rise, the shares remain at a substantial discount to both bock value and net cash (as at the last interim report). I paid HK$0.70 for the additional shares and my average cost is now HK$0.653 (including transaction costs).

Asset allocation?

Aspiring Investor asked me about my asset allocation. It's a good question given that the asset allocation process has been shown to be a material factor in portfolio returns.

For better or for worse, I do not follow a traditional asset allocation model such as (X% in stocks, Y% in bonds or the well debated permanent portfolio.

Prefer cash flow producing risk assets: I am primarily a value investor with a tolerance for market volatility and a belief that continued inflation is more likely than deflation over the longer term. To that end, I prefer to have most of my savings invested in risk assets (real estate and stocks) that produce cash flows (rents and dividends) that have at least the potential to increase over time to more or less compensate for the effects of inflation. Relying on cash flows to pay our living expenses also reduces our need to time the sale of assets to maintain our lifestyle.

Currency matching: Further, I would prefer to have a significant part of those cash flows denominated in the same currencies as our expenses: mostly HKD and NZD with others depending on where we go for holidays. As a result, most of our assets are either Hong Kong property or securities listed on the Hong Kong Stock Exchange.

Cash reserves: Cash flows can get disrupted. Dividends can get cut. Properties can remain vacant (which is a real pain as outgoings like rates and mortgage payments don't stop). History tells us that such disruptions are more likely to occur at times when asset prices are low. I don't want to be forced to sell assets at unfavourable prices - especially after I have retired and no longer have employment income to fall back on. Accordingly, I intend to maintain at least two years worth of living expenses in cash or short term bonds that I can draw on if needed.

Some diversification: Lastly, I also recognise that having the biggest part of our assets weighted towards HK/China is a risk factor in itself. With this in mind, we are allocating some more of our savings to investments which are either (i) outside HK/China and (ii) in different asset classes. As an example, I recently unsuccessfully bid on another property in New Zealand, we have some exposure to gold and silver, we have invested in some ETFs which invest outside HK/China and allocated a small amount of money with Walton. Since I do not want to work for another five years or more, the allocation to these non-core assets is, of necessity, quite small

Estate planning: As a final point, we have avoided accumulating significant assets in countries which impose estate duties. Our investments in the US and the UK are limited as a result. Hong Kong and New Zealand do not impose estate duty.

Summary: In summary:

(i) mostly Hong Kong real estate and listed securities held for cash flow to fund daily living expenses;
(ii) a material allocation to New Zealand real estate and listed securities held for cash flow to cover daily living expenses while in New Zealand;
(iii) smaller allocations to other assets including ETFs, gold, wine and other investments to provide a degree of diversification; and
(iv) at least two years worth of expenses in cash or near cash to cover any disruptions to cash flow (and a willingness to hold considerably more in cash/near cash if suitable investments cannot be identified).

Sinolink Holdings purchased

I have added some more shares to my position in Sinolink Holdings (HK:1168). As noted previously, this is simply and investment in a company whose shares are trading at below the asset backing (in fact, below net cash backing) shown in the most recent interim report.

I have paid up to HK$0.69 per share and my average price is now HK$0.636.

And yes, I am kicking myself for not loading up when the shares were around HK$0.60.

New lease signed

The tenant for one of my properties elected not to renew the lease when the term expired in November. In some ways, this was something of an important first test of how the rental market was holding up in the face of the government's cooling measures (primarily directed at sale and purchase transactions) and the redundancies which have hit the financial sector quite heavily this year. It didn't help that a brand new building in very close proximity had recently come on the market providing a good supply of brand new units with which I had to compete.

In the end, two similar offers came in at about the same time and I was able to sign a new provisional agreement at the same rent as the previous tenant was paying. The vacancy period is five weeks (which is about average) and after five years since the last substantive redecoration, the cosmetic tidy up work was about what I expected - some repainting, minor repairs etc.

Seven pay days to go

With only seven pay days to go, I'd like to report that a feeling of anticipation is building. It's not and I can't figure out why? Possibly being extremely busy at work has something do to with it (and the work is actually quite interesting) - but that will not get me to change my mind.

I have decided to cancel my term life policy when it comes up for renewal in January. By definition, if there is enough money to support myself and my family then there is enough money to support the family without me being around. That there is no estate duty in Hong Kong is obviously helpful. The annual premium is not a huge expense, but it's still a nice saving that can be applied elsewhere. One consequence is that I will need to revise my will to achieve the desired testamentary distributions.

No other major pre-retirement issues or developments to report.

Monthly Review - November 2012

November was a month of  excellent financial progress with gains in my equities being supplemented by favourable commodity and FX movements and supported by savings. Cash flow from the properties was about break even as I had a vacancy. The result was a solid increase in net worth.

Here are the details:

1. my Hong Kong equity portfolio appreciated sharply. This was the source of most of the gains this month. I opened a position in Sinolink Holdings and added to my existing position in China VTM. I sold my shares in Yanzhou Coal;

2. my AU/NZ equities appreciated slightly;

3.my ETFs appreciated in line with the local markets. The exception was Vietnam where a combination of domestic market movements and FX losses caused the ETF to fall again;

4. my commodities rose with most of the gain being in silver. I added to my silver position;

5. all but one of my properties were occupied with all tenants paying on time. There was one vacancy. There were no repair bills;

6. currency movements were positive, as the NZD and AUD rose against the HKD/USD;

7. my position in bonds remains small;

8. there were no open derivative contracts;

9. savings were average with good income being matched by high expenses. Not only did I have to pay for the air tickets and hotels for our Christmas holiday but I added a few more cases of wine to the "cellar" I have built up in the UK.

My cash position fell slightly with more money going out than coming in. I currently hold 40 months of expenses in HKD cash or equivalents. This is above my target floor of 24 months.

For the month, my net worth increased by an impressive 3.6%. The year to date increase is 27.2%. My retirement date has been fixed for the middle of next year for reasons that have nothing to do with finance - financially, I am past the point where I can afford to retire.

Book Review: You Say Tomayto ...

"You Say Tomayto ..." (Contrarian Investing in Bitesize Pieces) is written is a similar style to Anthony Bolton's "Against the Tide", a series of short summaries on various matters which a fund manager considers relevant to the business of making stock selections for an actively managed fund. In this case the author is Alistair Mundy who heads Investec Asset Management's Contrarian Equity Team who has reproduced a series of his monthly commentaries from the last four years.

While there were only a relatively small number of points which I had not previously encountered or concluded on my own, on the whole there was enough material to make reading a worthwhile exercise. Especially now when equity markets have been relatively kind, it is worth remembering that good times are generally followed by bad and departing from the principles of being a value investor can be damaging to your wealth.

I particularly liked the sections dealing with breaking down market commentary (mostly useless), sales pitches (ditto) and the momentum investing (a bad idea).

Book review: Investing Against the Tide

Anthony Bolton earned a stellar reputation as the manager of Fidelity's Special Situations Fund. Against the Tide is Bolton's recount of his investment approach and some of the techniques used in managing investments.

The material covers basic principles in assessing the merits of a company's shares and the techniques for selecting individual investments (both to buy and to sell). As a general statement, the principles were well stated but did not offer anything new. Everything contained in the book (apart from Bolton's personal observations and experiences) has been well flagged by others. As an example, the benefits of investing in companies which have strong franchises,  the risks of owning companies with high gearing and the preference for buying shares at "valuation anomalies" to obtain a margin of safety. These are all mantras that have been repeated by others.

What I did find interesting was the addition of technical analysis to fundamental analysis and the behavioral aspects of "Twelve qualities that make a good portfolio manager".

One thing that struck me as odd was the heavy emphasis on direct meetings with company management. Obviously, these are not available to retail investors like myself and it is somewhat irksome to have the utility of such meetings to professionals regarded as being of high importance. While there is nothing illegal in such meetings (no insider information should be passed), it would make for a more level playing field if such meetings were either banned or done my conference call where all interested persons could join.

Succinctly written but no new insights.

Oxfam Trailwalker 2012

I took part in this year's Hong Kong Oxfam Trailwalker - a 100 km hike accross Hong Kong's rather hilly New Territories. We started with very pleasant hiking conditions during the day. The night was a different story. Being caught on some of Hong Kong's more exposed hills (Needle Hill, Grassy Hill and Tai Mo Shan) for much of the night with only a t-shirt and a disposable plastic raincoat was a very unfun way to learn about windchill. Still, we finished within half an hour of our (not very quick) target time and I'm already thinking of how to get around the course a bit quicker next year. With retirement on the horizon, I should have time to train a bit harder.

Getting down to the last time for some tasks

With less than seven months to go until I retire, I am starting to experience a few things for the last time (I hope!).

Today I submitted my last ever self assessment. Since I have concluded that I won't be bonus eligible this year and will be officially handing in my notice shortly after the actual assessments have been done, it ended up being a lot shorter than usual. Shorter is better - less work for me and less work for the people who read it. Somehow, it seemed like a major milestone on the countdown to retirement - in  fact the first such "last" that has actually struck me as being in some ways meaningful.

Looking forward, I can see a succession of other "lasts" approaching. Next up is my last office Christmas party.

Sinolink Holdings purchased

This morning I added a few shares in Sinolink Holdings (HK:1168) to the portfolio. The company is a small scale PRC property developer and investor whose shares are currently selling a large discount to the net cash position (40%+) and an even larger discount to the book value of the assets (around 70%). Even by the standards of the discounts applying to peer group companies, this would appear to excessive to me - especially given the very high net cash position.

The company does not pay a dividend.

I paid an average of HK$0.61 per share.

Silver purchased

I tried to purchase some physical silver and was told that the bank was "out of stock" so I added a little more notional silver to the portfolio instead.

I paid HKD251.60 per ounce (approximately USD32.36).

China VTM purchased

I have held shares in China VTM (HK:893) for some time. They were originally acquired during the boom in iron ore prices and I have been sitting on a loss almost from the day I purchased them.

Earlier this week, the company announced that it had received a letter from it's controlling shareholder that it was interested in a possible privatisation of the company. The possible privatisation would be subject to a number of conditions, of which the most significant is the provision of finance for the offer. Given that the offeror (and concert parties) already owns around 50 percent and that the company is cash flow positive and sitting on a reasonable amount of cash (both as per most recent interim report) and assuming that the offeror puts at least some of its own money on the table (a point on which the announcement is silent), I'd like to believe that financing would be available.

If it proceeds, the indicated offer price is HK$1.72.

I have added some additional shares to the portfolio in the belief that the offer will proceed. If I am right, then there is about 8% upside from current levels. If the offer does not proceed, then the share price will probably head materially lower in at least the short term.

I paid HK$1.59 for the additional shares.

Yanzhou Coal sold

Yesterday I sold my shares in Yanzhou Coal (HK:1171).  A combination of high gearing, high capex and broker downgrades prompted the decision. And yes, I am kicking myself for not selling when the shares were close to HKD30.

The sale price was HKD12.28 per share representing a profit of approximately 21% (taking into account transaction costs and dividends).

In need of a new camera

It looks like my trusty but aging EOS 5D may be nearing the end of its useful life. I've had the camera for about seven years now and it is starting to malfunction with auto focus and flash sync both failing to work properly. I'll take it over to the Canon shop to see if it can be repaired, but strongly suspect that it will not be worth the cost.

If I do need a new camera, I am inclined to stick with a Canon full frame sensor - either the ID X or 5D III. While the Nikon D800 looks wonderful (and the built in flash has its attractions), given my existing Canon lenses and flash, I don't think it is worth shifting to another brand. Put differently, if I am happy with the 5D, then the 5D III will still be a meaningful step up.

Eight pay days to go

Another month has been and gone. As far as retirement planning is concerned, nothing of substance has changed: there have been no changes to my proposed allocation of the remaining pay cheques and I have not increased the number of people who are aware that I will retire next year.

At the moment, it is still far enough away that the it hasn't really sunk in yet and I still worry that something may happen to cause the date to be shifted again. Possibly a case of the price of freedom being eternal vigilance. Once I am past New Year, I expect that the impending retirement will start to feel a bit more real.

Financially, everything remains on track (in spite of the best efforts of the Hong Kong government to keep me in the work force by cracking down on property investors) and our household expenses continuing to rise as the inflationary effects of QEternity continue to affect Hong Kong.

As far as the non-financial aspects are concerned, I would like to start picking up some of my intended retirement hobbies and interests - I really don't see the point in waiting - to the extent that they do not unduly impact on my work or family.

I've signed up for the Hong Kong marathon in February 2013 (which took over three hours dealing with a "busy" on-line application portal) and should start doing some training for that. If nothing else, I have a bit more motivation to keep up the exercise regime.

Monthly Review - October 2012

October was a month of  moderate financial progress with gains in my equities being partly offset by falls in commodities and unfavourable FX movements but supported by positive cash flow from the properties and positive savings. The result was an modest increase in net worth.

Here are the details:

1. my Hong Kong equity portfolio appreciated modestly. There were no additions to the portfolio this month (although a few extra shares in Xtep purchased at the end of last month were credited to the portfolio this month and I took some dividends in scrip). The biggest event this month was the cooling measures introduced last week which hit my property heavy portfolio hard towards the end of the month (Henderson, HKR, K Wah and Tai Cheung all falling steeply) but not enough to outweigh the gains earlier in the month and in other positions;

2. my AU/NZ equities appreciated;

3.my ETFs appreciated slightly in line with the local markets. The exception was Vietnam where a combination of domestic market movements and FX losses caused the ETF to fall;

4. my commodities fell with most of the loss being in silver;

5. all of my properties were occupied with all tenants paying on time. There were no repair bills and one property will become vacant in November;

6. currency movements were positive, as the NZD and AUD rose against the HKD/USD;

7. my position in bonds remains small;

8. there were no open derivative contracts;

9. savings were average with good income being matched by high expenses. I purchased a small amount of physical silver (which has been treated as an expense) and transferred some money to Mrs Traineeinvestor (also treated as an expense). I also restocked my supply of wines for drinking which did some damage.

My cash position was more or less static; savings, cash flow from properties and dividends received were positive, but closely offset by the transfer to Mrs Traineeinvestor and the physical silver which were both treated as expenses. I currently hold 41 months of expenses in HKD cash or equivalents. This is above my target floor of 24 months.

For the month, my net worth increased by an impressive 1,2%. The year to date increase is 22.6%. My retirement date has been fixed for the middle of next year for reasons that have nothing to do with finance - financially, I am past the point where I can afford to retire

Extreme cooling measures

As countries which have lived beyond their means through excessive spending attempt to print their way out of economic trouble, they have created a huge supply liquidity in global markets. Higher asset prices and inflation have been predictable consequences. In the case of some property markets, we have also seen a relentless surge in demand for real assets from the growing number of PRC HNWIs. Hong Kong's property market has surged as a result, making housing less affordable for local residents.

The government's previous attempts to cool the market through tighter borrowing restrictions and a special stamp duty on owners who resold within two years of purchase failed to stop prices from increasing (and may have actually contributed to subsequent increases). Higher deposit requirements certainly made housing less affordable for locals seeking to get on to the property ladder.

The latest measures increase and extend the special stamp duty to cover sales made within three years from the date of purchase. This will achieve nothing except reducing the supply in the secondary market. Given that the effect of the original special stamp duty was much the same and has been widely commented on, the government must know this which leaves figuring out why they did something which is widely known to have the opposite effect from what the government claim as an exercise for conspiracy theorists.

The 15% tax on buyers who are not Hong Kong permanent residents is one of the few times that  Hong Kong has openly discriminated againts foreign buyers (investments in broadcasting telecommunications and the loyalty bonus for subscribers in the Tracker (HK:2800) IPO being others). It is clearly targeted at PRC buyers who have made their presence felt in the local market although it also catches local buyers who buy through a company.

Logic tells me that the 15% foreign buyer tax will deter at least some of the PRC buyers which will be negative both for property prices in general and for developers. On the other hand, they have created a situation were foreign buyers will be less willing to sell their properties. My HK$0.02 worth is that the combined effect of less demand and increased supply (more flats are being built) will, at the very least, take the heat out of the market and may actually result in a dip in prices.

A couple of further thoughts. The first is that the comercial and industrial sectors are running red hot as investors turn to these markets because they are not subject to special stamp duty or foreign ownership taxes. There has already been some bleating about locals being priced out of these markets and how higher rentals make it hard for local businesses (although it is not at all clear how the two are connected). The second is that local buyers will have to buy in their own names instead of through a company - because companies and individuals are taxed on a different basis, this amounts to a tax increase on property investors.

What if the USD:HKD currency peg broke?

The Hong Kong Monetary Authority has intervened at least four times since 19th October to defend Hong Kong's 29 year old peg to the United States dollar. In total it has sold approximately HKD14.4 billion (USD1.8 billion) in an effort to keep the HKD at the upper end of its official pegged exchange rate to the USD (USD1.00 = HKD7.75).  The HKMA has publicly stated that it has seen no signs of any speculative attack on the peg (even though at least one high profile fund manager has come out and said he is betting on the peg going).

In the context of Hong Kong's total reserves (about USD296 billion in foreign currency reserves plus  other fiscal reserves held by the HKSAR government for various purposes), USD1.8 billion is not a lot of money. It's also worth remembering that Hong Kong is part of China and Beijing has been consistently supportive of Hong Kong from an economic perspective at least. If there were a speculative attack on the peg, Hong Kong is well placed to defend it (just as it did during the Asian financial crisis).

If the peg goes or is reset at a higher level, I would expect it to be by choice rather than because speculators force the HKMA's hand.

What would happen if the peg was removed or reset? If it happened today, then the HKD would almost certainly rise although it is by no means clear how high it would go. In any event, a rise in the HKD would be largely bad news for for me (and, I suspect, many people in Hong Kong):

1. I am paid in USD - a rise in HKD would act as an immediate pay cut

2. many Hong Kong listed companies have underlying assets or earnings that are denominated in foreign currencies. A rise in the HKD makes these worth less so I would expect locally listed shares  to decline in value. Worst hit will be the companies which have non-HKD revenue streams but HKD expenses (e.g. a Hong Kong head office)

3. the value of over seas assets and local assets priced in non-HKD would fall (e.g. overseas property, gold)

4. interest rates would rise - the cost of servicing my mortgages would go up

5. Hong Kong would be a less attractive (i.e. more expensive) place for international companies to operate from (more expensive). I would expect there to be downward pressure on both rents and prices in the property sector (and salaries)

In the good news department, my Hong Kong dollars would be worth more so buying assets outside Hong Kong would be cheaper.

I'm not planning on betting on the peg going - that has been an exercise in futility for many over the last 29 years - but I have to wonder what would happen and how to protect myself if it did.

Are things really as bad as we think they are?

The Internet is chock full of doom and gloom stories about how the world economy is heading for an inevitable and extreme deterioration. Articles and Internet chat site postings point to all the economic problems which the world is currently grappling with as to support the claims of imminent economic armageddon.

Of course the problems are immense and the solutions are often seen a politically unpalatable: uncontrolled government spending, out-of-control entitlement programmes, bank failures, housing bubbles, rising unemployment, student loans, increased taxes, ever expanding regulatory burdens. peak oil etc etc etc.  Mostly true and all things to seriously worry about.

But in spite of all these problems, the financial world has not ended, most people are still working and there are indeed plenty of positive signs.  Here's a few to consider:

1. US trade: the United States is the biggest single trading nation on earth. You would think that if the global economy were truly contracting and claims of falling demand for Chinese made products were right, US trade numbers would be contracting. They're not. In spite of a small dip so far in 2012, they have been expanding and both imports and exports are well up since the beginning of 2010;

2. PRC imports and exports: reports of the death of China's exports appear to be exaggerated and premature. In fact China's exports and imports have both risen this year;

3. India: industrial production may be slowing but the most recent numbers came in better than expected;

4. US housing: looking good in many areas (not all) and new home building is on the rise. Recent Case-Shiller data would suggest that the market has either bottomed or is recovering;

5. Japan's fading economic miracle: Japan may have all sorts of issues (adverse demographics among them) but GDP per capita on a PPP basis is holding up very well in spite of Japan's deflationary macro backdrop (and no doubt helped by the strong yen);

6. US unemployment: whether the attacks on the most recent US unemployment numbers prove to be correct or merely political spin remains to be seen, but for now it appears to be clear that the US is probably managing to at least absorb the net new entrants to the labour force and may even be doing a bit better than that;

7. poverty is falling: in spite of all the hand wringing about the number of Americans on food stamps, people being unable to afford private housing in Hong Kong,on a global basis the number of people living in absolute poverty continues to fall;

8. US retail sales: it's too early to say whether or not the US consumer is back to doing what they do best but the surprisingly good numbers which came out this month at least put the question on the table.

There are plenty of other stories I could have used to illustrate the point.

Okay, so there is still plenty to worry about. In fact, my inflation depreciated HK$0.02 worth is that there is more to worry about than to celebrate, but it's worth remembering that not all economic and financial news is bad news. Either that or it's time to cut back on the medications.

IMF - No housing bubble in Hong Kong

This link from AA Stocks quotes the IMF's Hong Kong representative saying that "Hong Kong has not seen any bubble yet despite stubbornly high property prices.  While I'm happy to see support for the position I took back in March, I still regard the market as being expensive and poor value. I have no plans to add to the portfolio at current prices. Nor do I have any plans to sell - I'm quite happy to collect the rent and see the mortgages get paid down each month. Part of me says that a nice big correction would be a welcome opportunity to buy again although whether the banks would lend to someone with no income from employment may be something of an issue.

Nine pay days to go

As I count down towards retirement, there are a number of things to focus on - either things that need to get done or "last" actions on the career front.

Last month I focused on where and how to invest the last ten pay cheques. I am currently looking at a property in New Zealand that comes up for auction later this month. It would not be the best investment in the world, but I would regard it as a good long term store of value.

I had previously told some close relatives about my intention to retire soon and was met with the "you'll be bored" response. If I am bored, I will be extremely disappointed with myself - quite frankly I am more worried about running out of life before I run out of things to do.

I have now told three of my closest work colleagues. The general reaction was along the lines of "you'll miss the income". And they are right - I will miss the security of a regular pay cheque hitting the bank account each month. It's reassuring to know that there is more money coming in each month than is going out. But the bottom line is I don't need it and I really really do not want to spend any more of my limited lifespan accumulating money that I do not need. Put differently, so long as I do not end up sleeping on the street, I would regret spending more time at my desk far far more than I would ever regret missing out on some more money. And it's definitely an "either-or" choice. I can't have both.

In any case, while there have been some attempts to dissuade me, people have accepted that I will be moving on. A wider announcement will not be made until much nearer the time.

A shortage of safe deposit boxes

You would think that in a city like Hong Kong which is a significant financial centre it would be easy to rent a safe deposit box?

It's not.

The small safe deposit box we currently have is getting close to full so we made inquires about changing to a larger box. No chance. None at all. Plan B was to rent a second small box. No chance there either. Apparently there is a shortage of safe deposit boxes in Hong Kong. The banks are not really interested in providing them because the rental they can charge on the boxes is low compared to the cost of renting or owning the property in which the safe deposit boxes are held.

So far I have drawn a blank with both HSBC and BOCHK - neither have any boxes available for rent. We can get by without a bigger/second box but at some point we will have to move documents like our wills out of the box and keep them at home.

Monthly Review - September 2012

September was a month of outstanding financial progress with gains in my equities and commodities being increases by favourable FX movements and supplemented by  positive cash flow from the properties and positive savings. The result was an impressive jump in net worth.

Here are the details:

1. my Hong Kong equity portfolio appreciated significantly. In absolute dollar terms, this was the single biggest contributor to this month's result. I increased my investment in Sinotrans Shipping to the point where it is now one of my top ten holdings. I sold my very very small shareholding in Daisho Microline. I also purchased a few more shares in Xtep today which will show up in next month's report;

2. my AU/NZ equities appreciated;

3.my ETFs appreciated in line with the local markets. The exception was Vietnam where a combination of domestic market movements and FX losses caused the ETF to fall. I sold a few units from my position;

4. my commodities were up with most of the gain being in silver. I added a very small position in paper gold to the portfolio;

5. all of my properties were occupied with all tenants paying on time. There was very one small repair bill;

6. currency movements were positive, as the NZD and AUD rose against the HKD/USD;

7. my position in bonds remains small;

8. there were no open derivative contracts;

9. savings were solid with good income and moderate expenses. I purchased a small amount of physical gold (which has been treated as an expense) and would have purchased a bit more but BOCHK was out of stock.

My cash position rose due to new investments being less than sale proceeds, savings, cash flow from properties and dividends received. I currently hold 41 months of expenses in HKD cash or equivalents. This is above my target floor of 24 months.

For the month, my net worth increased by an impressive 4.5%. The year to date increase is 21.2%. My retirement date has been fixed for the middle of next year for reasons that have nothing to do with finance - financially, I am past the point where I can afford to retire.

Xtep purchased

I have added a few more shares in Xtep (HK:1368) to the portfolio. This has been one of my more disappointing investments and my original purchase is currently sitting at well below cost (even after allowing for the strong dividend payments). However, the company has remained profitable, produces good cash flow and has a strong balance sheet (net cash). Even if earnings decline somewhat as the industry continues to go through a consolidation phase, I expect that the shares will offer good value at current levels.

As an aside, it was a bit disappointing to see the shares jump after a broker put out a bullish report on the whole sector this morning. I ended up paying an average of HK$2.79 per share (including costs). If they drop back a bit next week, I will consider buying a few more.

HKMA continues to squeeze the property market

The HKMA's latest round of measures intended to cool the property market by further restricting mortgage lending are unlikely to have much impact for the simple reason that so many properties are being purchased with cash and the impact of QE3 combined with China's monetary expansion means that there is plenty of very liquid buyers out there.

As with most of the previous measures, the two groups of people most affected as local owner-occupiers prevented from trading up because they can no longer get the financing and smaller investors who need mortgage financing to add to their portfolios.  In effect, what the HKMA is doing (when combined with other government measures) is reducing the competition the very wealthy face when buying properties.

While it would now be more difficult to get mortgage financing for any new investment properties, since I was not planning to buy again at current price levels, this does not affect me. What it does do is reinforce my decision not to make any early repayments on my existing mortgages.

QE3 - my money is now worth less

As much as I may be happy to see the value of my investments get a near term push from the Fed's announcement of QE3 overnight, it also has to be remembered that what the Fed is effectively doing is creating more money without changing the "value" of the economy. Put differently, the amount of money chasing the same amount of goods and services has increased meaning that the money sitting in our bank accounts is now worth less when priced in goods and services. Of course, this rather simplistic observation ignores the intended hope that the stimulus will help borrowers with lower financing costs and encourage savers to spend more (among other things). As households continue to deleverage (unlike governments), it remains to be seen if this will happen.

It also remains to be seen how much of the new stimulus will filter through to the prices of consumer goods and services comprising the CPI (as the most commonly accepted proxy for inflation) and the extent to which the value of the USD relative to other currencies will be affected.

For my part:

• I benefit by being a net borrower (the value of my outstanding mortgages is greater than the value of my cash and fixed income investments)
• I benefit because the cost of servicing my floating rate mortgages is expected to stay low for longer
• I benefit from the support given to the nominal value of my risk assets
• I lose because I am paid in USD
• I lose because most of my assets are denominated in HKD (which is pegged to the USD)
• I lose because I expect the nominal cost of the goods and services which I consume to rise

I see no reason to change either my investing strategy or to change my retirement date.

Sinotrans Shipping purchased

I have added a few more shares in Sinotrans Shipping (HK:368) to the portfolio.

I paid HK$1.65 for the additional shares.

Top ten individual equities

Back in March I posted on my top ten individual equities. A lot has happened over the last six months so here is what the top ten currently looks like:

Rank	Company	Code	Allocation
1	CNOOC	883	1.6%
2	China Gas	384	1.4%
3	Henderson	12	1.4%
4	Sinopec	386	1.3%
5	Hutchison	12	1.2%
6	CCB	939	1.0%
7	Fairwood	52	0.9%
8	Cosco Pacific	1199	0.9%
9	Sinotrans	368	0.8%
10	China Blue Chemical	3983	0.8%

A few details:

1. As with the previous list, the allocations are the current value of each shareholding as a percentage of net household assets including properties at estimated current market prices.

2. The "top ten" have increased from 10.2% of household net assets to 11.3%. The portfolio has become more concentrated.

3. Five stocks have dropped out of the top ten: CKI, Hua Han, Westpac, HKR International and GDI. Of these, CKI, Westpac and GDI are trading higher today than they were in March (and have paid dividends). HKR International has gone sideways and Hua Han has fallen a little bit.

4. Seven of the top ten are showing meaningful positive returns (after allowing for dividends and transaction costs). Three are at our about break even (CCB, Sinotrans Shipping and China Blue Chemical). None are showing a meaningful loss.

5. The next eleven largest individual equities are not much smaller and have allocations ranging from 0.8% to 0.6%. Of these,nine are trading at well above cost, one at about break even (HKR International) and one at a meaningful loss (China Metal Recycling). (Eleven because there is very little difference in value between #19, #20 and #21 and a bigger drop down to #22.)

6. Of the five stocks which narrowly missed the March top ten, Fairwood has been one of the star performers and is no #7, K Wah (#17) has appreciated, CMR (#18) has fallen somewhat, Yanzhou Coal has fallen sharply (outside the top grouping) and Sino Oil & Gas has been an unmitigated disaster (outside the top grouping and currently in the "too small to be meaningful" category).

7. The accumulation of dividends has been an important contributor to total portfolio return.

In a sense I have been fortunate in that, as a group, the more profitable investments have had higher weightings and the less profitable or loss making investments have had smaller weightings.

Off topic: some recent reading

Some recent reading:

1. The Portable MFA: published by the New York Writers' Workshop, this covers novels, short stories, non-fiction and poetry. Both interesting and useful for someone who hopes to eventually find the time to write a book;

2. Flawless: the story of the world's largest diamond robbery. A real life crime story. Fascinating;

3. The Rise and Fall of Ancient Egypt: Toby Wilkinson's history of Egypt under the Pharaohs was a fascinating read - plenty of detail and a writing style that conveyed a feeling for this period of history. Subsequent visits to the ancient Egypt sections of the British Museum and the Metropolitan Museum of Art were more interesting as a result of reading this book. This one sparked a yearning to visit Egypt again;

4. The Age of Wonder: Richard Holmes' look at some of the scientific discoveries during the second half of the eighteenth century. In some respects, the book reads like a series of interlinked mid-length biographies starting with Joseph Banks and including other leading scientific figures such as William and Caroline Hershel and Humphrey Davy as well as some of the noteworthy scientific discoveries of the time. The emphasis is very much on the cultural or social impact rather than the science. A wonderful read;

5. Ulysses: James Joyce's novel is regarded my many as the greatest English language novel of the twentieth century. Having read (and enjoyed) Portrait of the Artist as a Young Man, I was expecting to enjoy Ulysses as well. I didn't. I found the writing to be dense, impenetrable and, at times, incomprehensible. Above all, it was boring. I can't see myself reading anything else by Joyce after this.

More Sinotrans Shipping purchased

Today I added a few more Sinotrans Shipping (HK:368) to the portfolio.

I paid HK$1.56 for the additional shares.

Diashomicroline sold

Daishomicroline (HK:567) is one of my smallest investments. Having concluded that I do not want to put any additional money into the company, I have disposed of my small shareholding.

The handset component manufacturer has been a disappointing investment and is one that should have been disposed of long ago. Although I have traded in and out of the position a few times and had an opportunity to exit at a modest profit at various times, the net loss is around around 37%. The one saving is that the amount involved is de minimus.

Ten pay days to go

With the date for my retirement now set for the end of June 2013, I will shortly be dusting off the list of things to do before my last day in the office. One of the items on the list is deciding what to do with the money from my last ten pay days. Financially, I have more or less hit the "number" needed to fund our retirement. Since that number is already grosses up to allow for cost increases and assumes that Mrs Traineeinvestor will not be working (she intends to continue working part time), I have a lot of flexibility in terms of what I do with everything I save out of those last ten payments.

Among the possibilities:

1. add to the portfolio: this is the default option

2. pay down some of our mortgage debt: this is a low return option (our mortgages average out at around 1% pa). It will improve cash flow but wont do much in terms of improving our net worth and financial security

3. increase our contributions to charity: this will happen, but I'm inclined to wait until I have gotten used to not hearing to sound of my salary hitting the bank account each month before I starting parting with more cash

4. buy some collectibles or other hard assets: these are unlikely to be a financially good investment and there are issues with storage (fragile, vulnerable to humidity etc), things like wine, stamps, maps, books, jade, porcelain, art and a few other things have their attractions. Unfortunately, most categories have had very substantial increases in price in recent years and I am reluctant to buy in heavily

5.gold: okay, I am not a fan for a number of reasons, but I do not want to hold lots of depreciating paper money. Sure, paper is useful in the short term for paying the bills, but over the longer term it is a depreciating asset. Is holding some gold a legitimate alternative to holding cash and/or a useful portfolio diversifyer?

One thing I will not be doing is blowing it on increased spending.

The problem with socialism in one article

This well written article in the New York Post provides a neat summary with much that is wrong, not only with America's crusade against those who are economically successful, but many other countries as well: too many people claiming an entitlement to live off the assets and income of others.

Sinotrans Shipping purchased

I have added a few more shares in Sinotrans Shipping (HK:368) to the portfolio. Reasons for purchasing are here.

I paid HK$1.55 for the additional shares.

Monthly Review - August 2012

August was a month of modest financial progress with gains in my equities and commodities being largely offset by unfavourable FX movements, Positive cash flow from the properties and positive savings resulted in a small increase in net worth.

Here are the details:

1. my Hong Kong equity portfolio appreciated slightly. I made small additions to my positions in CCB, China Blue Chemical, Tontine Wines and China Metal Recycling and made a more substantial investment in Sinotrans Shipping. I sold my shares in Vodone;

2. my AU/NZ equities appreciated;

3.my ETFs largely went sideways in line with the local markets;

4. my commodities were  up with most of the gain being in silver;

5. all of my properties were occupied with all tenants paying on time. There was one small repair bill;

6. currency movements were negative, as the NZD and AUD fell against the HKD/USD;

7. my position in bonds remains small;

8. there were no open derivative contracts;

9. savings were solid with good income and moderate expenses. I purchased a small amount of physical gold (which has been treated as an expense).

My cash position fell due to new investments being less than savings, cash flow from properties and dividends received. I currently hold 35 months of expenses in HKD cash or equivalents. This is above my target floor of 24 months. It is also understated as the proceeds from the sale of Vodone will not be received until next week.

For the month, my net worth increased by 0.7%. The year to date increase is 15.9%. My retirement date has been fixed for the middle of next year for reasons that have nothing to do with finance - financially, I am past the point where I can afford to retire.

Edited 01/09/2012 to correct error in spreadsheet.

Vodone sold - loss taken

Vodone (HK:82) has been one of my worst performing investments. Overnight the company released its interim results - not only did the results fail to meet my expectations, they were well below what the market was expecting. I was particularly concerned to see the huge drop in gross revenue, failure to grow the cash balance by more than the placing proceeds and the adverse impact of PRC government policies. While the company still has a large cash balance and no debt, I lack the confidence to continue with this investment and have sold my position. Time  to admit that I got this one wrong and move on.

With a sale price of HK$0.68, my net loss will be a little bit over 40% (assuming a very small cheque from the spin off).

Disappointing.

Sinotrans Shipping purchased

Yesterday I added some more shares in Sinotrans Shipping (HK:368) to the portfolio. Reasoning is in my earlier post.

I paid HK$1.64 for the additional shares.

What could cause my retirement to fail?

Like many people, I tend to worry about things. As I get closer to bringing the working-for-a-living phase of my life to an end and the time at which I will no longer see my remuneration hitting the bank account at the beginning of each month, retirement related concerns have loomed large. The following is my review of the things which could cause my retirement to fail (either by forcing one or both of us to keep working or to take a material cut in our standard of living):

1. Illness, disability and infirmity: these things can happen to anyone. If I live long enough they probably will. The main safeguards here are (i) the financial over engineering built in to our finances (ii) we will have medical insurance for a time after I retire (shifting to a plan offered by my wife's employer if needed) (iii) Hong Kong's public health system is reasonably good (iv) hiring a full time domestic helper with experience in looking after invalids is both affordable and realistic and (v) the sorts of conditions which will result in increased spending on medical and support services will most likely result in reductions in spending elsewhere;

2. Children: we have two relatively young children and anticipate supporting them through to at least their mid-twenties. This is in the budget. They could end up costing us more than expected, especially if they have difficulties finding a good job after they complete their formal education. Our safeguards in this respect are (i) teaching them the value of good money management - being prepared to say "no" as and when appropriate (ii) we have not made any provision for the cost of our children to fall away. In effect, we have proceeded on the basis that we will have something of a windfall when the eventually fall off the family payroll;

3. Divorce: a major issue for some. I have no concerns at all on this front;

4. Financial misfortune: I have probably spent more time thinking about our finances than is healthy. While there are obviously a number of things that can go wrong and there is no way to make our finances proof against all possible forms of adversity, we have concluded that the combination of investing in a variety of risk assets (mostly property and equities), reliance on cash flow to meet expenses, 20% gross up on anticipated expenses and a degree of self-discipline on our spending should see us through most economic cycles, moderate inflation, moderate deflation and market volatility. There is less that can be done about hyperinflation, natural disasters and social dislocation events but I do intend to add a little bit more physical gold to the portfolio. Although completely unnecessary from a financial perspective, I will have an additional six months of work next year and Mrs Traineeinvestor wishes to continue her part time job - in effect we will not need to begin touching our savings until some time in 2014;

5. Boredom: The thought of mentally dying of boredom is something that causes real concern. It was, in fact, Mrs Traineeinvestor's only reservation about my intention to retire early (although I do not consider 47 an early age to retire). I have my bucket list so I can have no excuses in this department.

Did I miss anything?

Sinotrans Shipping purchased

Today I purchased shares in Sinotrans Shipping (HK:368). The shipping industry is facing a very poor operating environment characterised by excess supply, unfavourable conditions for international trade and increasing cost pressures. As a result earnings have declined and share prices have followed. Sinotrans is no exception and its shareholders have been sharing the pain.

However, the company is is sitting on approximately USD880 million in cash which is slightly higher than the market capitalisation - in effect the shipping fleet is being valued at zero. This strikes me as excessively bearish even if the company does end up losing money in the second half of the year (it made a small profit in the first half). I am not expecting any dividend in the current year.

I paid an average of HK$1.68 per share.

As an aside, I spent some time looking at the PRC gold mining companies but could not get comfortable on the mine life issue so will not be purchasing.

Politics just got even more surreal than usual

The FT carried a story about the Republican party setting up a commission to consider putting America back on a gold standard.

While this is obviously a sop to the Ron Paul supporters and, even if Romney wins and even if such a commission is established, it won't mean anything since the commission will only have the power to make recommendations. As any student of economic history can point out, the gold standard almost certainly contributed to exacerbating the depth and duration of the Great Depression and other economic contractions that preceded it). While the chances of America readopting a gold standard are about zero, the mere fact that the issue has been raised at all speaks volumes about the politics of the party that puts such a proposal on its agenda.

I maintain that "none of the above" should be an option on all elections.

Of course, if it did happen, the price of gold (as measured in dollars) would skyrocket, gold mining shares would go through the roof and the pace of environmental destruction would accelerate as more mining projects become economically viable, there would be the inevitable rounds of regulation as countries competed to build their gold reserves and, most likely, regulations restricting ownership and export of gold and, possibly, outright confiscation.

Retirement - getting closer

After a series of discussions with my immediate boss, we have agreed that I will retire either end of March or end of June 2013. Previously, I had been thinking about either end of 2012 or early 2013 but have been more or less persuaded that early 2013 makes more sense for a variety of reasons which I will not go in to here.

This means that I will be earning and saving for an additional 3-6 months. I was already going to be in a position where I would have too much cash at the commencement of my retirement and now I will have even more. Leaving more cash in a bank account than is needed to ride out potential periods of poor investment returns is a bad idea in an inflationary environment. So, what to do with the additional money? I could, of course, simply add to the portfolio or knock a hole in one of the mortgages, but where is the fun in that? Besides, the mortgages are only costing us 1% pa and I expect zirp to be with us for some time.

I have already decided to allocate some to physical gold. I am also considering a few other options: more wine (prices for first growths have fallen in recent times), old maps (prices have gone up a lot), stamps (ditto), rare books (ditto) and art (ditto). With the possible exception of gold, I can't really regard any of these as proper investments - not only is my knowledge limited but their markets are neither transparent nor efficient and suffer from asymmetric information issues. There is also a storage issue for some of them. That said, I would expect whatever I buy to provide both an element of interest and act as a possible long term store of wealth.

I have considered increasing my support of some charities but feel more comfortable delaying that until I am more settled into the retirement and have got past the initial sensation of no longer having a pay cheque coming in each month.

A small confession....

I have made no secret that I am not a fan of gold as an investment. No cash flow. No real fundamentals to speak of. It just looks pretty and it endures.  But I have been buying small amounts of physical gold (1 oz Maple Leafs) every now and again for some time as part of a "just in case" strategy. I purchased again this morning. The total amount is not large - only the equivalent of one of the smaller positions in individual equities and about a fifth of the value of the paper silver - and, to date, it has been kept off the balance sheet (like my bonded wine and a few other things).

Why blog about this now?

With retirement now quite close (updated post to follow) I have realised that I expect to retire with slightly more than my financial needs require and am looking for some assets that provide either a "just in case" degree of protection or an element of interest (like the wine does). I can see myself adding a bit more every now and again not because I believe it is going to be a great investment but to provide a little more diversification and a small degree of insurance in case things go badly wrong elsewhere.

China Blue Chemical purchased

China Blue Chemical (HK:3983) shares took a tumble this morning after the release of interim results that were viewed by the market as being disappointing. Based on my read of the results, the company is still in very good shape - the annualised PE is at or little below 10x, the cash from from operations is still very good and the balance sheet is very robust (the company has a large amount of net cash). While some of the factors which contributed to the decline are likely to remain relevant for some time, others would appear to be cyclical. Lastly, the company is operating in an industry which should be supported by government policies.

I paid HK$4.59 for the additional shares.

China Construction Bank purchased

This afternoon I also added a few more shares in China Construction Bank (HK:939) to the portfolio.  It offers a 5%+ yield and is selling on multiples (price to book, PE and dividend yield) which are well below long term averages - in effect assuming NIM compression, slow down in loan growth and/or write downs will be material.

I paid HK$5.39 for the additional shares.

As an aside, I need to start looking for some additional shares to add to the portfolio and (work permitting) hope to spend some more time reading annual reports etc over the next few weeks.

China Metal Recyling purchased

Today I placed several orders for small numbers of additional shares in some of the existing portfolio companies. So far, the only order which got filled was for China Metal Recycling (HK:773). A combination of a strong balance sheet, a good story (national expansion and industry consolidation) and a good yield make the stock attractive. I do expect some margin compression to show when the next results are released.

I paid HK$5.86 for the additional shares.

Annuities just became less attractive

The UK's Daily Telegraph carried this article explaining why a court ruling will mean that men will get smaller annuities going forward.

Leaving aside the legal and social issues, the implication is very simple: if you are a man, then when you buy an annuity which falls under the new rules, you are effectively subsidising the women who buy annuities. This is because men (on average) will die at younger ages than women (on average) and annuities are priced based on the average life expectancy of the people in the relevant demographic. In effect, male purchasers who buy annuities will be paying for something that they will not be getting.

Since buying an annuity was always a somewhat marginal decision effectively involving accepting lower investment returns as the price for longevity insurance, the additional cost may well be enough to tip the balance against purchasing annuity. If I ever get to the point where I would consider an annuity, I will be asking some very pointed questions about the basis on which the quotes given to me are made.

Put simply, annuities just became even less attractive.

Since a lot of other goods and services effectively involve averaging risk across different groups of people (e.g. health insurance), I don't actually have an issue with the court decision itself - it's only the implications for myself as an investor that I am concerned with.

Tontine Wines purchased

This morning I purchased a few more shares in Tontine Wines (HK:389) to the portfolio. Although I expect some margin contraction during the current financial year, the company is still growing its output and expanding its distribution capabilities. The balance sheet is strong (although cash will be run down as the company expands) and I am optimistic that the 4.2% trailing dividend yield can be at least maintained. Although the company will not be a major beneficiary of the latest policy initiative (which focuses on red wine), there may still be some support from the policy.

I paid HK$0.69 for the additional shares.

Cheering for Standard Chartered

Having read a considerable amount of the press coverage on the allegations being made by a US regulator against Standard Chartered Bank, one can only conclude that this is yet another example of American politics in action - a series of allegations made which are either completely unsubstantiated or blown wildly out of all proportion even before a proper investigation has been made. The spirit of McCarthyism is alive and well.

Hopefully Standard Chartered Bank will continue to vigorously defend themselves (unlike HSBC which tamely rolled over) and all the non-US governments and regulators which failed to stand up to intrusions on their sovereignty like the PATRIOT Act.

I don't own shares in SCB but am very tempted to go and buy a few to show moral support for the latest victim of the US regulators and politicians.

It is long past time that the rest of the world told America's political grandstanders to foxtrot oscar.

The impact of inflation (again)

I found this handy calculator for showing the impact of inflation on asset values, expenses etc. There is also lots of other useful data on the site.

From a retirement perspective, I am somewhat paranoid on the effects of inflation on my ability to sustain our desired standard of living over what I hope will be four decades of not participating in the work force. Several years of watching governments print ridiculous amounts of money to cover their unsustainable spending can do that to anybody.

Extrapolating backwards and assuming that the next forty years will collectively be a repeat of the last forty years (who knows?) would suggest that I can look forward to 449% cumulative inflation over that time period. Put differently, in forty years time, I will need $5,489, 904 to have the equivalent purchasing power of $1,000,000 today. That's actually a number that I find quite scary and explains my preference for tangible and risk assets and dislike for perpetually depreciating paper.

The calculator uses as US data and inflation in many other places has averaged a bit higher (there is also a series of data for Hong Kong on the HKMA website but it does not go back as far) AND uses CPI numbers which represent a basket of goods and services which will be different from my own expenses. Accordingly, I have used different numbers when doing my own projections.

Monthly Review - July 2012

July was a month of solid financial progress with value of the portfolio increasing with gains in my Hong Kong equities and favourable FX movements accounting for most of the increase. Positive cash flow from the properties and positive savings added to the increase in net worth.

Here are the details:

1. my Hong Kong equity portfolio appreciated. I made small additions to my positions in CCB, China Blue Chemical, Hang Seng Bank, Sinopec and China Metal Recycling. I sold my shares in Varitronix;

2. my AU/NZ equities appreciated;

3.my ETFs rallied in line with the local markets;

4. my commodities were flat with a small gain in silver being offset by falls in NICK and HOGS;

5. all of my properties were occupied with all tenants paying on time. There were two small repair bills and one tenant reported a leak during the typhoon which will require some sealing work to be done;

6. currency movements were positive, as the NZD and AUD rose against the HKD/USD;

7. my position in bonds remains small. I purchased some RMB sovereign bonds;

8. There were no open derivative contracts;

9. savings were solid with good income and moderate expenses. A family holiday in Thailand came in under the accrued expenditure.

My cash position increased due to new investments being less than savings, cash flow from properties and dividends received. I currently hold 43 months of expenses in HKD cash or equivalents. This is above my target floor of 24 months.

For the month, my net worth increased by 2.5%. The year to date increase is 15.0%. I remain on track to retire at the end of 2012.

China Metal Recycling purchased

This morning I added a few more shares in China Metal Recycling (HK:773) to the portfolio. The company offers a reasonable balance sheet, good operating cash flow, nice dividend yield on around 5.5% and has a good story to tell (industry consolidation and national expansion). I also like that the controlling shareholder has been topping up his investment either by new purchases or through the dividend elections.

I paid HK$5.77 for the additional shares.

RMB sovereign bonds purchased

Having been on the road for most of the last two and a half weeks on a very hectic schedule (three countries, four cities and more air miles than I care to think about), I took a short break from a few things, including updating this blog. That said, there wasn't much to report.

The only investment related activity (apart from a few dividends hitting the bank account) was the subscription for a small quantity of RMB sovereign bonds. These will not be a great investment (2.38% is a negative real return) but it's better than putting the money on deposit with a bank in Hong Kong and, although I could get a bit more if I opened an account across the border, the additional costs and the inconvenience of doing so would outweigh any benefits.

China Construction Bank purchased

This afternoon I added a few more shares in China Construction Bank (HK:939) to the portfolio. China's banking sector has been hit hard over recent months by concerns over the quality of their loan books, policy based initiatives which have the effect of compressing net interest margins and, in CCB's case, one specific bad loan which has received a lot of media coverage.

In the belief that these concerns are overdone, I added a few more shares to the portfolio this afternoon.

I paid HK$4.78 for the additional shares.

China Blue Chemical purchased

This afternoon I added a few more shares in China Blue Chemical (HK:3983) to the portfolio. The company has a sound balance sheet, high profit margins and is operating in a sector which is expected to benefit from policy based support.

I paid HK$4.34 for the additional shares.

RMB Soverign Bonds

This morning I put in an application for the RMB Sovereign bond issue. At 2.38% pa it offers a negative real return for the next three years (even with a full waiver of bank fees etc). Given the currency risk, you could describe it as return free risk. So why buy it?

To begin with, the amount I applied for was a token amount - the unused RMB sitting in my bank account earning a fraction of 1% and that is exactly the point. The alternatives are to leave the money sitting in the account earning less than 2.38% or to hunt for better investments. I have no shortage of cash looking for a home at the moment and that cash yields less than the 2.38% on offer, making the RMB bonds simply a better choice than leaving the money in the bank.

Now there are plenty of other issues of RMB bonds I could consider - but all of the ones which are available to me either carry material credit risk or require a minimum of RMB 1 million face value. I am tempted by the latter, but would have to buy quite a bit more RMB than I currently hold - at this time I am not completely sold on the RMB's prospects for appreciation against the HKD.

Hang Seng Bank purchased

Yesterday afternoon I added a few more shares in Hang Seng Bank (HK:11) to the portfolio. This completes the reinvestment of the sale proceeds from Varitronix which I sold earlier in the week. Hang Seng Bank is now one of my ten largest individual equity holdings.

I paid HK$107.00 for the additional shares.

Sinopec purchased

This morning I added a few more shares in Sinopec (HK:386) to the portfolio. In spite of  the policy based losses on the refining business and the threat of a cut to the dividend, the company still offers an acceptable level of value at current prices. Any improvement on the refining side would be expected to see a material re-rating.

I paid HK$6.50 for the additional shares.

China Blue Chemical purchased

I have also reinvested some of the proceeds from the sale of Varitronix into China Blue Chemical (HK:3983). So far CBC has been a volatile investment and the share price is getting close to the three year low. Given the absence of negative catalysts being announced, I am curious as to the reasons for the sell off but, in any event, have added to my loss making position.

I paid HK$4.28 for the additional shares.

Hang Seng Bank purchased

Following the sale of Varitronix (HK:710), I added a few more shares in Hang Seng Bank (HK:11) to the portfolio. Hang Seng Bank offers an attractive dividend yield of 4.8% (payable quarterly). While I do not expect a lot of growth, I view it as a reasonably low risk yield investment.

I paid HK$107 for the additional shares.

Varitronix sold

Following the profit warning that came out after the close on Friday, I sold my shares in Varitronix (HK:710) this morning for prices ranging from HK$3.10 to HK$2.83. Net of dividends and transaction costs, I realised a gain of about 16%. This may be a case of panic selling, but I have had too many recent experiences with companies not living up to expectations.

China Metal Recycling purchased

This morning I added a few more shares in China Metal Recycling (HK:773) to the portfolio. The company is still expanding and my expectation that it will continue to benefit from industry consolidation, geographic expansion and (potentially) policy initiatives remains intact. That said, I also expect there to be some margin compression as the company expands.

I paid HK$6.20 for the additional shares.

Dividend elections

Several companies in which I invest offer shareholders a choice between receiving a dividend in cash or in new shares. For some shares the default option is to receive cash and for others the default option is to receive additional shares.

As a general practice I will take the shares if (i) the underlying shares are highly liquid and (ii) at the time the election is made the subscription price for the new shares is at least a 2-3% discount to the prevailing market price. Out of four recent elections, I took my dividend in the form of new shares for Henderson (HK:12), K Wah (HK:173) and Cosco Pacific (HK:1199) and in cash for China Metal Recycling (HK:773).

It remains slightly irritating that I am unable to participate in dividend reinvestment plans for my Australian shares. The SFC would be doing Hong Kong investors an immense favour if they exempted offerings of new shares (rights issues, dividend reinvestments) to existing shareholders of companies listed on well regulated stock exchanges - at the moment Hong Kong investors are being disadvantaged by being excluded from such offerings.

Monthly Review - June 2012

After May's bloodletting, it was pleasing to see a solid recovery in the value of the portfolio with gains in my Hong Kong equities and favourable FX movements accounting for most of tthe increase. Positive cash flow from the properties and positive savings added to the increase in net worth.

Here are the details:

1. my Hong Kong equity portfolio rallied strongly. I made small additions to my positions in Yanzhou Coal, GDI and Sinopec;

2. my AU/NZ equities were flat;

3.my ETFs rallied in line with the local markets;

4. my commodities were flat;

5. all of my properties were occupied with all tenants paying on time. One property will be refurbished shortly and I had to pay the first installment of the levy;

6. currency movements were positive, as the NZD and AUD rose significantly against the HKD/USD;

7. my position in bonds remains small. I purchased some iBonds but was disappointed (but not surprised) at only getting three board lots. I would like to add some more bonds to the portfolio but am finding direct purchases of bonds through the banks I have accounts with to be something of an exercise in frustration in Hong Kong;

8. There were no open derivative contracts. My last AUD/HKD contract expired out of the money so I pocketed the premium;

9. savings were solid with good income and moderate expenses.

My cash position increased due to new investments being less than savings, cash flow from properties and dividends received. I currently hold 41 months of expenses in HKD cash or equivalents. This is above my target floor of 24 months.

For the month, my net worth increased by 3.7%. The year to date increase is 12.2%. I remain on track to retire at the end of 2012.

GDI Purchased

Yesterday I added a few more shares in GDI (HK:270) to the portfolio. The utility company offers a modest yield of 3.2% with reasonable prospects for this to grow over time.

I paid HK$5.50 for the additional shares.

Yanzhou Coal purchased

This afternoon I added a few more shares in Yanzhou Coal (HK:1171) to the portfolio. The stock has been hammered by a combination of the general sell off in equities over the last few months, the fall in coal prices and concerns over the effects of fluctuations in the AUD on its investment in Australia. Whiel I expect that the trailing dividend will be cut, I am still expecting a yield of around 4.5-5.0 percent on current prices (and, yes, there is a substantial element of guess work involved).

I paid HK$11.80 for the additional shares.

iBond subscription

As expected the second issue of iBonds by the Hong Kong government was massively oversubscribed with 332,467 applications for a total of HKD49.8 billion. Even the maximum allocation of three or four units (HKD30,000 or HKD40,000) is de minimus - better than leaving money in the bank but so small as to be almost not worth bothering about. Disappointing but not unexpected.

Sinopec purchased

This morning I added a few more shares in Sinopec (HK:386) to the portfolio. The additional investment is based on the expectation that the dividend will be more or less maintained (currently a trailing yield of 5.3%). I paid HK$6.89 for the additional shares.

Hong Kong's currency peg

The Hong Kong dollar is "pegged"* to the US dollar at the rate of HKD 7.80 = USD 1.00 since 17 October, 1983.

From time to time the peg has been put under pressure - either upwards (as happened a few years ago) or downwards (as happened in the Asian crisis. Given the size of Hong Kong's fiscal reserves relative to the size of the economy, it is a reasonably safe bet that if the peg is ever removed (or adjusted) it will most likely be a voluntary action on the part of the Hong Kong government rather than something imposed by market forces.

But from time to time calls are made for the peg to go with the usual argument being that the peg has the effect of raising inflation (during the Asian crisis/SARS it was blamed for deflation). While the peg does (obviously) affect inflation in Hong Kong, to my mind that is a cheap price to pay for the volatility that would come from a freely floating currency. Joseph Yam (former head of the HKMA) is the most recent person to call for the removal of the peg. (A number of people have commented that his comments on the peg are a weak attempt to divert attention away from the misguided political criticism he took in connection with the minibond saga, but that is another story).

My own HK$0.02 worth is that Hong Kong has benefited from the peg and it is better to keep it - stability, low interest rates, financial safe harbour status and other benefits all flow from the peg. The impact (upwards or downwards) on CPI is a very small price to pay for these benefits.

Building refurbishment levy

Yesterday I received a notice that one of the buildings I own an apartment in is going to have some restoration work done to the exterior and common areas. The building in question is not over forty years old and has been well maintained over the years - the last substantial work was done in 2003/2004 and was being completed at around the time I purchased  the property.

As a landlord, this affects me in three ways:

• I will have to pay a building levy in two installments - half now and half in December. This is the equivalent of four months of net of outgoings rent
• while the work is being carried out there will be disruption to the occupants of the building - scaffolding, workers in the common areas, noise etc. Depending on the timing of the work this may affect any vacancy that may arise or the amount of rent I am able to negotiate
• in the longer term, the work will enhance the appearance of the building and help it to maintain its value and its appear to prospective tenants

It's work that needs to be done and, as much as I begrudge the two cheques I will have to write, I have to accept that it is money well spent.

Property regulation - New Zealand style

Much has been written about the efforts by the Hong Kong government to control increases in the prices of Hong Kong residential property prices - punitive stamp duty rates and more restricted access to mortgage finance.

Other countries have adopted similar measures, including China, Singapore and New Zealand. Given the sate of the New Zealand economy you would have thought that they would be doing everything possible to encourage investment. Sadly not - not only does New Zealand have a set of tenancy laws which are drafted and administered on the principle that landlords are evil parasites and tenants their innocent victims, not only do rates demands (local property taxes) march inexorably upwards each year at rates far beyond either inflation or rental increases but they have now decided that landlords should not be able to claim depreciation on their buildings. Given the already dismal yields, you either have to take a very long term view or conclude that your money is better off invested elsewhere. All this on top of an increase in GST which bumps up my expenses with no corresponding increase in income.

I've concluded that it is very difficult to justify further investment in New Zealand real estate and that investing in shares is a better proposition (much like Hong Kong at the moment, although for different reasons). Given how few companies that I would be interested in are listed in New Zealand, it is more likely that the money will end up in Australia....effectively New Zealand government policy has pushed my money offshore.

And in case you were wondering what set off this rant - I have just done my New Zealand tax return for 2011/2012 and found that due to the elimination of building depreciation my tax bill has gone up by 126 percent.

Quite frankly, it would almost be rational to sell up and move on but the properties still appeal as a long term store of value that will at least throw off enough after tax income to cover some of the costs of time spent in New Zealand each year. Put differently, the one positive from all of this is that the same policies which are squeezing the landlords are also discouraging new investment in a city which has a growing population.