Monthly Review - January 2013

January was another month of excellent financial progress. The bull market in equities continued. Commodity prices improved. FX movements were favourable. Cash flow from the properties was positive with all properties back to fully occupied. I received my end of year pay out for 2012 so income was high and there were no major expenses. The result was a very 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 added to my positions in NWS and Herald Holdings. I hold shares in CMR which is currently suspended following an attack by a short seller alleging fraud. I have arbitrarily assumed that the shares will fall by a third when the suspension is lifted;

2. my AU/NZ equities appreciated moderately;

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

4. my commodities rose slightly. I opened a position in notional platinum;

5. all of my properties were occupied with all tenants paying on time. There were no major bills this month;

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 at month end although I did a small AUD/HKD FX contract during the month which was closed out for a very small profit;

9. savings were very high with good income (due to m 2012 year end payout) and expenses were low.

My cash position rose with more money coming in than going out due to new investments. I transferred some money to Mrs Traineeinvestor which is treated as an expense. I currently hold 42 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 6.2%. The year to date increase is 6.2%. My retirement date has been fixed for the middle of this year for reasons that have nothing to do with finance - financially, I am past the point where I can afford to retire.

China Metal Recycling - shares suspended

Shares in China Metal Recycling (HK:773) remain suspended today pending the company's response to allegations of fraud by a short seller.  There have been several allegations of fraud against PRC companies in the past and this is the not the first time I have found myself invested in a company involved in controversy (not necessarily fraud). The most recent example was China Gas (HK:389) which I still hold and which is currently my largest single stock investment by some margin and a hugely profitable one.

CMR is audited by Deloitte Touche Tohmatsu. According to AA Stocks, UBS had a buy recommendation with a $15.20 price target last week and HSBC has reiterated a buy recommendation today (i.e. after the allegations) with a price target of HK$13.00. If I have been wrong about CMR, I am in good company.

CMR has denied the short seller's allegations and promised to clarify shortly. In the mean time, there isn't much I can do until the suspension is lifted. When it is lifted, I would expect there to be a meaningful drop from the pre-suspension price of HK$9.43.

Platinum purchased (#2)

I made a second purchase of paper platinum this morning.

I paid HKD 13,164 per oz (equivalent to USD 1,693 per oz).

China VTM privatisation delayed

China VTM (HK:893) is currently subject to a proposed privatisation offer (by way of a scheme of arrangement) from it's controlling shareholder. The offer price is HK$1.93 per share. While this represents a decent premium to the prices at which the shares were traded before the offer was announced, to my mind it still undervalues the cash rich company. To make matters worse, the offer timetable has been pushed back and we will not see the offer being officially made until April which means that the proceeds of the offer won't be available until sometime after that (possibly late May or June). No reason for the delay has been given. To be quite frank, this is a pointless irritation.

Given that most of the buyers are purchasing shares for arbitrage purposes, it was no surprise to see a couple of cents trimmed off the share price to reflect the delay. I will still wait for the offer to go through rather than sell into the market but am tempted to pick up a few more. Net of costs, I would make about 6% if I purchased at current prices (HKD1.81) and the scheme is approved. Of course, there is the risk that the scheme will not be approved in which case I would expect the share price to fall significantly.

Probably best to do nothing?

Platinum purchased

I had been intending to purchase some more physical gold as part of my "just in case" fund, but BOCHK was "out of stock". Being somewhat agnostic as between physical and paper precious metals, I decided that if I was buying paper instead of physical, I might as well buy platinum instead of gold because (i) a greater percentage of platinum mined is actually used (catalytic converters, jewelery etc) and (ii) platinum production is potentially at greater risk of disruption to sources of supply.

I paid HKD12,868 per oz (equivalent to USD1,655 per oz).

Term life policy cancelled

Having concluded that we have reached the point where we can retire, it was time to ask whether we still need to carry a term life policy.  The short answer is "no" - by definition if there is enough money to support myself and my family for a retirement period that could run for 40+ years, then there is enough money to support my family without me. 

Now that I can retire, the annual premium changes from being the cost of ensuring that my family will not suffer financial distress following my death to an unnecessary expense - and quite a large one at that.

The fact that the policy was on very good terms which could not be obtained again should I change my mind at some time in the future is, of course, entirely irrelevant.

The policy has now been cancelled.

Next project: update my will.

Herald Holdings Purchased

I have spent some time looking at the very small investments in the portfolio -  investments valued at less than a somewhat arbitrary threshold - on the basis that I need a really good reason to hold such investments in order to justify the time spent monitoring them.  I sold a few such investments last year and still have several more to deal with.

One of the remaining ones is Herald Holdings (HK:114). This has been a very profitable investment in percentage terms due to a low initial purchase price and the high dividends the company has paid. After spending quite a bit of time thinking about it, I decided to add to my position rather than sell it. In addition to the manufacturing businesses returning to profitability (although some concerns over the order book were expressed in the most recent interim report) the company has a considerable amount of cash on hand and a portfolio of investment securities. The latter should have benefited from the share market gains since the last set of financials were released.

While the trailing dividend has been 9 cents per year for the last three years, I am not sure if that will be maintained. Even if it is cut to 6 cents, that is still a very attractive 6.8% yield.

Over the last few trading days I have accumulated some additional shares at HKD 0.87 per share.

NWS Holdings Purchased

This morning I purchased some more shares in NWS Holdings (659).

One of the issues I am grappling with at the moment is identifying investments that offer a reasonable yield. The rise in the stock market in recent months has made that a lot harder. NWS Holdings offers a trailing yield of 5.7%. While there is some possibility of the dividend being reduced due to falling income from the toll road operations due to adverse regulatory interference with operations, the size of any such reduction would appear to be both non-material and (I hope) will be overcome in the longer term by rising traffic volumes and growth in other businesses.

I paid HKD 13.00 for the additional shares.

Six pay days to go

My seventh to last pay cheque has hit the bank account ... only six more to come. Or maybe not. Senior management will be in town next week to "discuss my proposed retirement" and I have been told that in addition to understanding why I want to retire early, there will be a push to either extend the date or to persuade me to continue part time for a while longer. I am open to working part time as it will help me transition into retirement and the exact end date has always been subject to a bit of flexibility to allow for proper completion and/or transition of whatever projects I have running then.

On other matters, I have notified the insurance company of my intention to cancel my term life policy. The response was an e-mail urging me to consider the financial needs of myself and my family very carefully before cancelling because it would not be possible for me to get the same coverage without paying a much higher premium if I change my mind. Since I (or more accurately my family) do not need the coverage, it is still a wasteful expense no matter how good the deal.

I have drafted a revised will. The only material difference from the current one is to include my siblings as minor beneficiaries (they had previously been named to receive a share of the proceeds of the term life policy). I'll have someone review it to make sure I haven't messed up the drafting before signing it.

Nothing else to report on as I count down to retirement.

2013 - Moving forward

After celebrating a fantastic 2012, it's time to put the empty bottles of Bollinger in the recycling bin, sober up and start thinking about 2013.

1. Retirement: my employer has been informally notified that I will be retiring mid-year which means that the decision to retire is now locked in. The exact date will be fixed nearer the time and will depend on work needs at that time. This effectively defines and drives much of what I need/want to do in 2013.

2. Finances: even before the year end rally we were financially independent. The subsequent upsurge and the extension of paid employment to mid-2013 gives us an extra boost on the financial front. On a cautionary note, I do not and should not expect my investments to keep going up. There will be years when they go down - sometimes a lot. I can't prevent this from happening which makes the issue one of dealing with the market's fluctuations rather than attempting to avoid them. From a financial perspective, the main points are:

• don't do anything stupid. This primarily means, not buying into over priced markets, keeping my exposure to speculative stocks small and avoiding investments which benefit financial intermediaries more than they do me;
• keep looking for effective ways to achieve greater diversification with our investments. This is a perennial issue and one that I have only executed to a very limited extent;
• keep living expenses below 2012 levels. Given the blow out in the cost of our holidays, this should not be difficult. It might be better to rephrase with the objective of trying to limit the inflationary and other increases in our cost of living; 
• between me working for about six months and Mrs Traineeinvestor working part time, we should still generate some savings this year. A back of the envelope calculation suggests that the combination of salaries for part of 2013 and dividends/interest for 2013 and 2014 may meet our household budget for all of 2013 and 2014. If so, this is great news as it means that we will not need to touch principal or rely on capital gains for at least the next two years;
• one of our Hong Kong properties will become debt free in April 2013. If property prices were lower/yields more attractive, I would consider gearing up and buying another property. However, given the current state of the market, sitting back and watching the cash flow hitting the bank account seems more sensible;
• absent new investments, we will have a lot of cash by mid-year. Given the corrosive effects of inflation, finding suitable investments for this money is important but currently buoyant market conditions make it difficult. The idea of simply buying a property in New Zealand or some blue chip stocks as a long term store of value and generator of at least some cash is appealing even if valuations are not all that attractive at this time;
• while I would give some thought to alternative investments and am tempted to add a few cases of wine as an investment (or some other collectible), illiquid investments which do not produce cash flow will never make up a material part of the portfolio.

3. Lifestyle: the issue here is to successfully transition from a full time occupation where my days (and often my nights) are filled with things to do to not working where it is up to me to keep myself gainfully occupied. The main points:

• being pro-active in maintaining and expanding social contacts. Historically, most of my social activities have been linked to work and have happened with very little effort on my part. Going forward, I will need to be more pro-active in marinating theses contacts (and developing new ones). This is not a major concern - just something to monitor;
• follow through with the bucket-list. It's getting pretty long, which a good thing, so I really have no excuses for not keeping myself mentally stimulated;
• complete a first draft of the novel. Absent some major dislocation to my life, there should be no excuse for not achieving this;
• maintain the fitness regime. While it is unlikely that I will do another trailwalker, I'd like to keep doing an annual marathon for at least a few more years.

4. Miscellaneous: there are a handful of miscellaneous issues that need to be addressed:

• new will. My current will was drafted on the basis that there would be a payout under a life insurance policy should anything happen to me. As I will be cancelling the life insurance policy, I need to update my will;
• cancel my term life policy. By definition if there is enough money to support me and my family then there is enough money to support the family without me;
• move the family's medical policy from my employer sponsored scheme to my wife's employer's scheme.

And that's about it for the headline items.

Monthly Review - December 2012

December was another month of excellent financial progress with gains in my equities being more than sufficient to overcome declines in commodity values and a slight loss on FX movements and was supported by savings (in spite of a blow out in holiday expenditure). Cash flow from the properties was about break even with all properties back to fully occupied but having to pay a few repair bills. 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 added to my positions in Hutchison and Sinolink and made a small investment in Paladin;

2. my AU/NZ equities appreciated moderately;

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

4. my commodities fell with most of the loss 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 at the beginning of the month. There were repair bills and agency costs associated with the new tenancy;

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

7. my position in bonds remains small. I rolled a small amount of RMB into some PRC quasi government bonds

8. there were no open derivative contracts;

9. savings were average with good income being matched by high expenses related to a family holiday to Australia and general Christmas spending and the need to buy a new camera;

My cash position fell with more money going out than coming in due to new investments. I currently hold 33 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 2.3%. The year to date increase is 30.2%. 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.

As this is the last review for 2012, it only remains to add that, from a financial perspective, I wish every year could be as good as 2012.

The perks of being unplugged

I have just returned from a family holiday to Australia. It has been close to a decade since my last visit and since I have some money invested there and from time to time consider sending some more money down under, a few observations are in order.

One of the first things that struck me was the comparative rarity of free WiFi. Hotels were charging AUD20 per day for WiFi access. A very few restaurants (i.e. one) and airport departure lounges would offer free WiFi to customers. That was it - any other on line access had to be paid for. Since being unplugged is not the easiest thing in the world, I made the decision to largely do without. I ended up checking on e-mails and a few other things a total of three times over the course of 10 days and enjoyed it. Being unplugged for several days not only had a calming effect, but I also found more time to think and was more interested in getting out to see and do things.

The second obvious thing was that Australia rivals London for the title of the most expensive place I have been to. Meals in restaurants cost about double what a comparable meal costs in Hong Kong. Taxis are 2 - 2.5 times the cost of taxis in Hong Kong. The running shoes I normally buy are 50-60% more expensive than in Hong Kong. A can of soft drink from a convenience store is about twice the cost in Hong Kong (even allowing for the slightly larger can size). But for all of that, Australia is very obviously an affluent society. An article from the 27 December, 2012 edition of the Australian Financial Review noted the following:

• average household wealth rose 6.6% to a record AUD868,000
• the rise was driven more by increased savings than rising asset prices
• while total household debt as a percentage of household disposable income has stayed roughly flat in the last five years, net household debt (total debt less interest bearing assets) fell from 42% of household disposable income in 2006 to 35% in 2012

Australia's compulsory and flexible superannuation regime has a lot to do with the strength of household balance sheets. When it comes to financing an affordable and sustainable retirement, Australia has implented something that actually works - both for the individual retirees and for the taxpayers who are invariably left picking up the pieces when politicans make promises that can never be kept.

Service levels were very good - and consistently so. Perhaps a notch short of what we commonly find in places in Asia, but miles ahead of the US, the UK or Europe.

Australia is definitely a country I would like to spend more time in, but costs are so high as to be an issue.

Review 2012

After the disappointments of 2011, it is extremely satisfying to look back and review 2012. Going through the 2012 objectives, was very much an exercise in ticking boxes:

1. I will retire in mid-2013 (exact date to be confirmed). From a purely financial perspective, I am past the point where working has become an optional exercise and am carrying on for non-financial reasons (although the extra buffer is nice to have, particularly given the economic and political uncertainties that we currently face);

2. Our finances have done very well this year. Although I am waiting for a couple of year end items before finalising the accounts for 2012 and posting a year end summary:

• our savings rate should be in excess of 50% of pre-tax income
• I have about three years worth of expenses in cash/near cash
• I did not achieve any greater degree of diversification

3. Our home renovation project did not take place and there is no certainty that it will take place in 2013. Even though I have set aside money for the project, we are in no hurry to get it done. The longer it is delayed the better;

4. I have taken the novel to more than two hundred pages and am setting myself the ambitious target of finishing a rough first draft by the end of 2013;

5. I did both the Hong Kong marathon and the Hong Kong trailwalker in 2012. The times may have been slow, but I did derive considerable satisfaction from completing these challenges;

6. I have made some progress on the skill set and am now able to resolve a number of technical problems by myself that I would normally rely on others to deal with. While this is not necessarily the best use of my time, it does reduce the stress levels that modern technology can induce;

7. My retirement preparations are as advanced as I can reasonably make them. The firm and a small group of close colleagues have been notified. A wider announcement will be made nearer the time. Medical insurance looks like it will be addressed not by continuing my firm's policy post-retirement (if that option is available) but by swapping the family to my wife's subsidised firm policy. I have no shortage of things to do in retirement and, working hours permitting, will start working on some as my career winds down. The only outstanding items of any significance are (i) cancel my term life insurance and (ii) prepare a new will. It helps that Mrs Traineeinvestor is fully supportive and that she intends to continue working part time.

All in all, 2012 was a great year.