Tuesday, January 31, 2012

Book Review: Bad Science

In Bad Science, Ben Goldacre explains how and why we are led to believe fallacies about issues as diverse as vitamin supplememts, homeopathy, the MMR debate, AIDs vaccines in Africa and cosmetics.

Goldacre explains the fallacies behind many of the spurious claims made in support of many health or beauty related prducts or against various vaccines in sufficient detail to enable a lay person (like myself) to understand the ways in which members of the public are mislead (either deliberately or accidentally) using poor or simply bogus assertions of scientific validity.

While many of the issues raised were not exactly news (I have yet to meet a single person who believes that homeopathy is anything other than unmitigated rubbish), the most damning indictment is given to the journalists who would appear to me more devoted to generating scary headlines than reporting the truth.

Excellent. Thisbook is one to keep and revisit from time to time.

Monthly Review - January 2012

January saw the value of the portfolio move significantly higher, largely in line with the movements in equity markets and favourable exchange rate movements.
Positive cash from on the properties (fully leased), an excellent savings rate (low expenses) and my end-of-year payment added to the gains.

Here are the details:

1. my Hong Kong equity portfolio appreciated.  I purchased shares in VTech, HKR International and China VTM;

2. my AU/NZ equities appreciated;

3.my ETFs appreciated in line with the local markets, with all being positive. I sold the last of my Lyxor ETFs (a small position in the Lyxor Commodity Fund). I made a small addition to my position in the DB Vietnam ETF;

4. my commodities advanced, led by silver.  Following the sale of the  Lyxor Commodities Fund my direct exposure to commodites is now very small;

5. all of my properties are occupied with all tenants paying on time. Some minor repairs were incurred this month.  One property will become vacant at the end of February.  While I will miss the reliable and long standing tenant and will have to do some decoration work, it is likely to get a higher rental next time it is leased out;

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

7. my position in bonds remains small. No bonds were purchased this month.  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. I had no open derivative positions;

9. savings were excellent with very low expenses (even without my end-of-year payment).

My cash position increased significantly due to the sale of the Lyxor Funds and the end-of-year payment being signifcantly greater than the new investments. I currently hold 56.7 months of expenses in HKD cash or equivalents. This is an all time high - in fact it is too high given current inflation levels and the near zero nominal yields on bank deposits.

For the month, my net worth increased by a huge 9.04%. The year to date increase is 9.04%.  The year is off to a good start.

Friday, January 27, 2012

VTech purchased

I have added a few more shares in VTech (HK:303) to the portfolio.  There have been no changes to my views on the company (strong balance sheet, good yield etc).

One thing that has changed is the Fed announcing an intention to keep interests at very low levels until at least 2014.  This should support demand for stocks offering decent dividend yields.

Thursday, January 26, 2012

Vietnam Tracker Fund purchased

My original investment in the DB Vietnam Tracker (HK:3087) has been a very poor one - I am down about 43% on original cost.  Inflation/currency depreciation have been major contributors to the poor performance.

That said, my expectation that Vietnam will make considerable economic progress remains intact.  Economic liberalisation, development of the rule of law, recognition and protection of private property rights, improving infrastructure (especially in transportation and communications), improving education standards are supported by anecdotal stories of manufacturing shifting from the PRC (among other places) to Vietnam.  The demographic profile (a very young population) is also a positive.

This morning I added some additional units to the portfolio at a price of HK$162.50.

HKR International Limited purchased

This morning I added a few more shares in HKR International (HK:480) to the portfolio.  I paid an average of HK$2.73 per share.

Finally getting a smart phone.....

After many years of abuse, I finally had to concede that my Nokia had reached the end of its functional life.  I think I purchased it back in 2004 which would mean it lasted for about seven years.

Its replacement was an iPhone 4s.  Since I already have the iPad, I went with the Apple product on the assumption that the interface would already be familiar to me.  No problems so far (apart from the children using it as an entertainment device).

The only irritant was changing the service plan from voice only to voice + unlimited data.  It took a personal visit to the shop, seven phone calls and two e-mails to achieve this.  Each phone call required my personal details to be verified.  Four of the seven phone calls involved listening to some really awful hold music.  Clearly the phone companies don't have a problem with competition.

As an aside, it is expected that the unlimited data packages will be phased out making mobile internet access more expensive (free wifi coverage is pretty limited in Hong Kong) so I locked myself in for two years which was the longest term they would offer.

Saturday, January 21, 2012

Book Review: The Birth of Plenty

The Birth of Plenty is William Bernstein's examination of the factors which resulted in some countries producing rising GDP and rising living standards for their citizens and others growing more slowly, stagnating or declining.

Bernstein identifies four factors which are necessary conditions for economic prosperity:

1. Property rights and the rule of law: these essentially ensure that risk taking will be rewarded - without which few people will be willing to work hard or take economic risk. The absence of punitive taxation and the absence of confiscation by the state

2. Power, transport and communication: essential to the development of trade (competitive advantage), lower costs and efficiency of markets

3. Capital markets: essential for providing capital needed for development and for limiting destructive behaviour by governments (particularly in the form of military adventurism)

4. Scientific rationalism: allowing for the possibilities of creative thinking unshackled by religious or other intellectual straight jackets permitted technological progress

Bernstein illustrates his thesis by using a number of countries as case studies, in particular England, France, Holland and Spain. For my part I found his arguments compelling. Of relevance to contemporary issues, Bernstein discusses issues such as economic inequality, excessive taxation and the link between economic prosperity and democracy.

Overall, a fascinating read.

Friday, January 20, 2012

HKR International Limited purchased

After taking a further look at HKR International (HK:480) overnight, I added some more shares to the portfolio this morning.  I paid HK$2.60 on opening for the additional shares.

Thursday, January 19, 2012

HKR International Limited purchased

This morning I added a few more shares in HKR International Limited (HK:480) to the portfolio.  HKR is primarily a property developer and investor with interests in hotels and a few miscellaneous assets.  The balance sheet is solid with relatively little debt and a reasonable amount of cash on hand.

The shares are trading at around a quarter of the guesstimated NAV.  Given the combination of the irregular nature of developers' profits, the impact of changes in property prices and currency movements (among other factors), determining current NAV involves even more guess work than usual, but there is a substantial margin for error.  Likewise, while I do not expect last year's dividend to be maintained, I am still expecting a healthy dividend yield on the current share price.

Lastly, the company has a good track record of not diluting shareholders' interests by issuing new shares and this is a positive.

I paid HK$2.57 for the additional shares.

Wednesday, January 18, 2012

De-cluttering the home

With the children growing up and our limited amount of shelf and cupboard space overflowing, it was long past time for a major de-cluttering operation.  After several months of procrastination we completed the task of weeding out things which we wouldn't be using again: clothes, toys and books that the children had grown out of, books that the adults were unlikely to read again and a large assortment of random items. Twenty five boxes in all (plus a few random items that wouldn't fit into the boxes) ended up being donated to the Salvation Army.

While it feels great to get the job done, sadly the apartment still feels very cluttered....

Tightening liquidity

Recent months have seen a reasonable amount of commentary about tightening liquidity in Hong Kong's financial markets.  It's reasonably clear that monetary conditions have become tighter:

1. Three month HIBOR has risen from around 0.2% to around 0.4% over the last 12 months.  This feeds directly into mortgage costs - two of our mortgages have now been reset at rates fractionally over one percent;

2. We are seeing some evidence of banks competing for HKD deposits, especially term deposits;

3. higher capital requirements are having an effect although I did not find any information quantifying the effect.

However, the above is slightly surprising given that HKMA statistics show that while HKD deposits are lower than their October 2010 peak they have been steadily increasing from their Februaury 2011 low. Total deposits in all currencies have been rising.

Given that inflation remains well above even the best rates available for deposits, I was slightly puzzled by the fact that all the anecdotal evidence and the hard fact of the higher HIBOR rates point to tighter liquidity at a time when HKD deposits have been rising.

The answer would appear to be on the lending side of the ledger.  Statistics published by the HKMA show that since October 2010 total loans have grown faster than total deposits and the difference of approximately HKD436 billion is (possibly) large enough to be significant.

As an aside, the HKMA statistics also show that the total outstanding balance of residential mortgage loans continues to increase (although very slowly).  At least part of this can be attributed to people being unwilling to make early repayments on the very low cost mortgages which were taken out during the height of the mortgage wars (about 2008-2010).  I'm one of them - HIBOR will have to get a lot higehr before I start making early repayments on debt that is, on averge, still costing me less than 1% pa.

Monday, January 16, 2012

Lyxor Commodities Fund sold

A missed post.  I sold the balance of my units in the Lyxor Commodities Fund two weeks ago for an average of HK$23.00 per unit.  This completes my exit from the soon to be delisted and deauthorised Lyxor funds.

Wednesday, January 04, 2012

VTech purchased

This morning I added a few more VTech (HK:303) to the portfolio.  There has been nothing to change my views on the company - a strong balance sheet, appealing products and a very healthy 7+% dividend yield.

I paid HK$80.00 for the additional shares.

China VTM purchased

Yesterday I added a few more China VTM (HK:893) to the portfolio.  The company is selling on a consensus forward PE of less than 5x and offers a trailing dividend yield of above 4%.  The company is also operating in an industry which is strategically important to China.

I paid HK$1.54 for the additional shares.

Tuesday, January 03, 2012

2012 Moving Forward (provisional)

As with previous years, I will not be making any resolutions for 2012.  Instead, I will follow my practice of using the new year as a convenient time to review various objectives, both in terms of either setting new ones or abandoning old ones and assessing progress.

1. retirement:  my target retirement date has moved around a lot over the last few years.  A year ago, I had intended to retire early this year.  While the numbers still make sense, the losses suffered in 2011 on my equity investments have dented my confidence to the point where I would like to continue working for "just one more year".  I will not be able to make a definitive decision on this until I come off contract early this year and, if I am offered a new contract, I know what the terms will be.  The work/not work decision will affect many of my other objectives for 2012, making this review very much a provisional one (although based on the assumption that I will continue working, although with a cut in income).

2. finances: the main objectives for my finances in 2012 are:
  • maintain a healthy savings rate.  The actual rate will depend on the new terms, but will likely be well below the rates achieved in the last three years
  • end the year with at least 2-3 years worth of expenses in cash/near cash.  I currently sit on 35.5 months worth
  • look to diversify the portfolio.  The loss of the Lyxor ETFs has made this process harder
I will not be making early repayments on the mortgages - all are currently costing less than 1% (new mortgages would probably cost at least 2.25%).  This includes the home mortgage - a subject which I will revisit once I actually retire.

3. home renovation project: whether this gets done in 2012 or 2013 does not matter.  However, we have to be ready to do it when one of our larger rentals becomes vacant.

4. writing: a repeat of last year's objective.  This year I am setting myself the target of reaching at least 200 pages of material (including what I have written already).

5. health and activities:  I will do the HK marathon next month (absent illness or injury) but am undecided about doing the Hong Kong Trailwalker this year.  Diet is something of an issue, especially the excessive consumption of sugar.

6. skill set: I made some progress on the tech front in 2011 and would like to do more in 2012.  Photography is one area I would like to do better at.  I also want to look into self publishing on Kindle or other platforms as an alternative to traditional publishing.

7. preparation for retirement: I am more or less there.  The biggest outstanding item is medical insurance - my firm policy can be extended into retirement at the discretion of the insurer and I will not know whether this will happen until I have actually given notice.  There are a number of lesser items which can all be done while I am serving out my notice period.

There is nothing else that particularly comes to mind, though this will have to remain provisional until my employment situation is sorted out.

Review 2011 - a disappointing year

Like the proverbial curate's egg, 2011 was good in parts.  Unfortunately, it was also bad in parts.  Very bad.  In summary, it would have been a good year all round if I had not lost so much money in the equity markets.

Financial matters

In so far as investments were concerned, 2011 provided a painful and expensive lesson in the benefits of diversification, asset allocation, risk management and behavioural investing. 

As a summary, equities incurred significant losses as I not only failed to take money off the table at various times but as I continually added to my positions on the basis of value (or, at least, perceived value) while the markets continued  to slide downwards.  Commodities also produced negative returns, but the amounts involved were much smaller. In contrast, real estate values ended the year at higher valuations than 12 months previously and also produced positive cash flows, bonds produced positive returns and currency movements were favourable as the USD weakened against the AUD, NZD and RMB.

As a snapshot, my personal balance sheet (which records real estate at gross cost) grew by a meagre 5.68% during the year while the household balance sheet (which includes Mrs Traineeinvestor's assets and also marks real estate to current market value) increased by 10.3%.  While this is a disappointing result, the fact that we ended 2011 with a higher net worth than we started in rather difficult economic times is a positive.

While I will have to wait a couple of weeks to finalise the spending numbers, the annual savings rate will be above 50% once again.  This is in spite of inflationary cost increases - especially in food, transport, holidays and government charges.  Higher income and a reduction in some discretionary items helped.
The big issue on the table (in some respects, the only one that matters) is whether or not to retire in 2012.  Even though the numbers still add up, the financial set back of 2011has dented my confidence to the point were I am seriously considering working for "just one more year".  I will not be making a decision on this until after I come off contract early this year.

Review of 2011 objectives

Going through the items identified in my January 2011 post on moving forward:

1. savings rate: as mentioned above, the savings rate was excellent (above 50%)

2. asset allocation: this was partially achieved as cash/near cash increased to close to three years of living expenses.  However, the quest for greater diversification failed and the reduced availability of low cost ETFs will hamper progress on this issue going forward

3. investment focus: this was an abject failure.  As far as equities and commodities were concerned, I got it completely wrong and lost a lot of money as a result

4. decision on home mortgage: undecided.  If I am working for another year (to be decided in late Jan or Feb), then this decision can be deferred for another year

5. expense management:  while it was not possible to avoid the impact of inflation, expenses were reasonably well managed.  I underspent on several discretionary items this year

6. get a medical done: not done and no excuse

7. tech skills: getting better but still not my forte.  At least I managed to migrate everything onto my new computer without assistance or losing anything

8. home renovation project: postponed for 12-24 months.  It's not urgent and can wait.  Current thinking is that we will move into one of our rentals for 3-4 months while the project is being done. This will be cheaper than using a serviced apartment

9. sporting activities: I managed to complete both the Hong Kong marathon and the more challenging Hong Kong Trailwalker without injury problems.  The pace may be very slow, but I'm happy just to be able to get around and enjoy the experience

10. novel: fail - not really much progress this year

11. diversify social network: fail and I don't feel too bothered by it

Other matters

Apart from the above, I managed to get in a reasonable amount of travel during 2011 and actually managed to use all my holiday allowance.  I also managed to do some volunteering work which I found extremely satisfying.

In spite of the financial mess, 2011 was actually quite an enjoyable year.