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.