Monday, December 31, 2007

Negative Real Interest Rates

Among the week's worth of mail that was waiting for us when we returned from our Christmas holiday were notices of changes in interest rates on two of our mortgages. The new rates are 3.95% and 4.00%. Given that these are all tax deductible (at an admittedly low rate), this means that the cost of borrowing is very close to the most recent official inflation rate of 3.4%. In effect, the real cost of borrowing money in Hong Kong is approaching zero.

Looking at the issue from a different perspective, if you put money on deposit the interest rates at most banks will range from zero (for small amounts on call) to close to 3% (for large (HK$1.0 million +) 12 month deposits). There is no tax on interest in Hong Kong. In effect, putting money on deposit is a losing proposition. Every day that you leave money sitting on deposit, the real value of that deposit is declining by more than the interest that is being earned.

If you believe that the true rate of inflation is higher than the official rate (which it probably is) then the position is even better for borrowers or worse for depositors. There are widespread expectations of further interest rate cuts in 2008. At the same time most of the forecasts for the inflation rate are in the range of 3-3.5% (I have seen at least one forecast for inflation to rise to 5% in 2009). If these forecasts turn out to be accurate, then the real cost of leaving money on deposit will increase and the real cost of borrowing will shift from mildly positive to mildly negative.

The implication is that it is better to be a borrower than a lender/depositor.

Of course there is no such thing as a free lunch. Borrowing money carries risk. Money that is borrowed has to be invested somewhere that will show a better nominal return than the nominal cost of funds. If the investment fails to generate the required return or loses money then material damage to your wealth can result. My own view (and practice) is that it is better to take the risk of borrowing in moderation than accept the certainty of wealth erosion that comes with leaving money on deposit.

When you take the reality of negative real interest rates and add the huge build up of deposits in the Hong Kong banking system, it is hard not to be at least reasonably optimistic about investing in Hong Kong (credit crisis notwithstanding).

Sunday, December 30, 2007

Monthly Review - December

My net worth increased by 1.7% in December. The increase for the year is 35.4%.

The return on my investments was mixed. Spending was low (the Christmas holiday had been expensed back in October). Income was strong, with a small bonus in the Christmas stocking.

Here are the details:

1. my unit trusts declined in value during the month. The declines were most noticeable in the emerging markets funds and represent the continuation of a trend;

2. my residual share portfolio depreciated in local currency returns but benefited from currency movements to end about even for the month. The takeover offer for one of my holdings announced last month did not proceed;

3. my investment in silver appreciated;

4. my tenants continued to pay the rent on time and rents continue to be higher than the expense component of the outgoings. The tenant who was late with her rent has caught up (but annoyingly still refuses to set up an standing instruction). The only negative here is the new flat which is now fully renovated but in need of a tenant (which may take a while in view of the fact that the building will be covered with scaffolding as the exterior renovation is undertaken over the next five months);

5. currency movements were in my favour for the month;

6. expenses were moderately below budget. There were no large items (the family holiday had been expensed in prior months). I reviewed the accruals for future expenses and decided to increase the provision for future tax bills;

7. my income was high. I received a small bonus this month.

The combined effect of the combined effect of the above resulted in a 1.7% increase in net worth at month end. The only investment activities undertaken during the month were regular monthly payments into two small cap investment funds.

A full review for the year will be made in a separate post.

Wednesday, December 12, 2007

Hong Kong Property Market - looking good

The SCMP's Property post carried a very bullish article on the Hong Kong residential property market. Key points to note:

1. new supply for each of the next 3 years is estimated at around 12,000 units (compared to 20-25,000 units a year on average over the last decade);

2. market activity driven by end users rather than speculators (unlike the 1990s boom);

3. rents rising in line with price increases;

4. stock market profits and pay raises are "buoying" home buyers;

5. affordability levels remain in the "comfort zone" of buyers.

Oddly, there was no mention of lower interest rates or liquidity. No negatives were cited.

The experts quoted predicted price rises of 20-30% in 2008 (up to 40% in the luxury sector).

This makes the Hong Kong market look very different from parts of the US market.

Unfortunately, it will be a while before I can put together a deposit for another property.

Sunday, December 09, 2007

Investing in overseas property

Hong Kong has no shortage of real estate developers and agents promoting offers to invest in overseas properties. From time to time when I have nothing better to do I go to one of these exhibitions as a form of entertainment and as a means of learning a little bit about other markets. While there have been occasions when I have been tempted to buy, I have never done so. My reasoning is essentially:

1. it costs a lot more to market a property in an overseas market. Someone has to pick up that extra cost, and it usually ends up being the buyer;

2. if the developer could sell the property at the same price in the local market, why would they bother marketing it in Hong Kong? The short answer is that they increase the price when selling overseas properties to Hong Kong based buyers. I usually don't bother, but on one occasion I asked a friend who was living in the city where a development was being built (Melbourne) to check the prices being offered to local buyers. The prices being offered to Hong Kong buyers were typically 3-5% higher than the prices being offered to local buyers (if I recall correctly). On another occasion, I was with a friend who already owned property in the relevant city (London) who told me that what was being offered to Hong Kong buyers was "far too expensive" for the location and type of property;

3. as a foreigner you are more vulnerable to other types of scams and your own ignorance than local buyers.

If I want to invest in an overseas market, I would favour going there in person and doing a lot of research first. Even then, while investing in other cities can be profitable and can help to diversify a portfolio, managing properties long distance can be challenging and will definitely involve more hassle than investing locally. As a single example, you will have to familiarise yourself with a new set of tax laws.

The only overseas properties I own are in a city which I (i) know very well having lived there for a number of years and (ii) have relatives living who can help out if necessary. I have been tempted to invest in other cities (London, Shanghai and Bangkok (during the Asian crisis)), but have never quite managed to overcome my worries about making a sizable investment in an illiquid asset in a market in which I have significantly less knowledge that either local investors or the vendors.

Saturday, December 08, 2007

Tenant default

One of my tenants failed to pay this month's rent when it was due last week. I have had the agent contact her and she has promised to make the payment on Monday. I have also repeated an earlier request for her to set up a standing instruction (which all my other tenants have done). She declined without giving a reason.

Tenants who fail to pay on time every time are, quite frankly, a pain. Given that I do not want to leave any more money in the non-interest bearing account used to collect rent and make the mortgage payments than absolutely necessary, unreliable tenants force me to keep the float in that account higher than I would like. I now add a clause to my lease agreements requiring tenants to pay by auto pay. While this does not guarantee that a tenant will not default, experience to date shows that auto pay significantly reduces the risk of late or missed payments.

Monday, December 03, 2007

Monthly Review - November

My net worth increased by 1.8% in November (0.6% was due to correcting an error in previous balance sheets).

The year to date increase is 33.1%.

The return on my investments was mildly positive. Spending was low. Income was strong.
Here are the details:

1. my unit trusts declined in value during the month. The declines were most noticeable in the emerging markets funds;

2. my residual share portfolio appreciated (largely due to one of the two largest shares in the portfolio being subject to a takeover offer);

3. my investment in silver was almost unchanged;

4. my tenants continued to pay the rent on time and rents continue to be higher than the expense component of the outgoings. The only negative here is the new flat which is now fully renovated but in need of a tenant (which may take a while in view of the fact that the building will be covered with scaffolding as the exterior renovation is undertaken over the next five months);

6. expenses were moderate. There were no large items;

7. my income was high.

The combined effect of the combined effect of the above resulted in a 1.8% increase in net worth at month end. Currency movements were negligible this month. The only investment activities undertaken during the month were regular monthly payments into two small cap investment funds and a small speculative trade in HSI warrants.Looking ahead to December, I expect a small increase in income, a smaller increase in expenditure (due to the Christmas parties and buying presents) and have no material plans to change any investments.

2007 looks like being a great year for my finances.

Monday, November 26, 2007

Another unsolicited offer (2)

More out of curiosity than anything else, I made a few inquiries regarding the property which is the subject of the most recent unsolicited offer.

I was more than mildly surprised to receive a bank valuation (which should be quite conservative) which was 16% higher than the unsolicited offer. I ran the numbers through the spread sheet and came up with an IRR of 42.6% if I sold at the bank valuation and 23.0% if I sold at the unsolicited offer price. A big difference.

It's a good example of how well a leveraged investment can do when things go well. It's also a good example of the importance of doing your homework before making any important investment decisions. In this case, it took one e-mail to a lending officer to get the valuation.

Saturday, November 24, 2007

Another unsolicited offer (1)

I received a call from a real estate agent today saying he had a firm offer for one of my properties. Leaving aside the question of where he got my mobile number and the fact that I have no interest in selling the property, the offer is at a level which indicates a solid increase in price. Although I have not kept precise records of the cash flow on the property, a rough calculation would suggest that accepting the offer would result in a realised return (net of all costs etc) on capital invested of somewhere between 21 - 24 % pa.

I'm not interested in selling for the following reasons:

1. what would I do with the money? I would just turn around and look for another property to invest in. Unless I am trading up, all I will end up doing is incurring a lot of transaction expenses;

2. I have sold one property this year already. If I make a habit of selling properties, I risk being classified as a trader for tax purposes. If that happened, I would have to pay profits taxes on all future property sales (excepting our home). Even at Hong Kong's middle of the range tax rates, this is a very high cost.

I wish all my investments would do this well.

I need an auditor

I was updating some of the numbers in my balance sheet and noticed that when I adjusted one of the line item assets the total gross assets and the net assets (i.e. net worth) didn't change. When using the "sum" function I had managed to miss the last item in one column. In effect I have been understating my net worth for at least part of 2007 (probably since I purchased my last property in June). It's not a large amount (about 0.6% of net assets), but it's irritating that I have been recording and reporting inaccurate numbers for at least a few months.

Monday, November 12, 2007

Cost of Funds Falling

My mortgages are all at floating rates. The most recent fixings have been at rates of 4.5%, 4.3% and 3.9%. In mid year most of the fixings were at or around the 5% mark. The 3.9% is very cheap money, being lower than the net yield on properties and, after adjusting for tax, is probably not far away from the genuine rate of inflation - meaning that the real cost of funds is getting close to zero.

There really is very little incentive to pay of debt early and, so long as I remain confident that asset values will rise in at least nominal terms over the medium term, considerable incentive to use leverage when investing.

Of course, the sharp declines in a number of stock markets today is as good a warning against the perils of over gearing as any.

Sunday, November 11, 2007

HK Property Prices Still Rising

Hong Kong property prices have risen strongly this year. This is mostly good news as our portfolio is heavily weighted towards this sector. The decline in certain sectors of the United States housing market and the credit crunch have, so far, been almost a complete irrelevance to Hong Kong (and the rest of Asia generally).

Instead, strong economic growth, falling unemployment, rising incomes, robust stock markets, high levels of monetary liquidity, low real (and nominal) interest rates and an absence of excess supply have all contributed to give people both the means and the confidence to either enter the property market for the first time (whether as an owner occupier or an investor), to upgrade an existing home or to add to an investment portfolio.

Will these conditions (and the upward trend in prices) continue? Here are some issues:

1. China: the economic growth story in China is one of the biggest drivers of the Hong Kong economy. If China's economy slows, this may have a knock on effect for Hong Kong;

2. United States: much has been written about the declines in certain sectors of the US housing market and the sub-prime credit crunch. There has been no indication that this is having any effect whatsoever on Hong Kong;

3. Supply: supply numbers for 2008 and 2009 are generally predictable and do not show any large increase in supply;

4. Cost of Funds: interest rates are low and are as likely to fall further as to rise. It is possible to get funding on residential mortgages at around 4.5% pa. In contrast, bank deposits pay a pitiful return which is well below the rate of inflation making bank deposits a losing investment;

5. Affordability: in spite of rising prices, home ownership is still affordable (very affordable compared to the bubble of the mid 1990s). In many housing estates, it is still cheaper to own than to rent;

6. Rents: rents have risen at a much slower pace than property prices since the bottom of the market in 2003. However, they are still rising and this is a positive factor for owners of rental properties;

7. Liquidity: HIBOR fell to below 4% last week. Banks are engaged in an intensive battle for market share. There is no shortage of liquidity in Hong Kong's financial system.

There are of course other factors which can influence the direction of the property market. However, absent either a slow down in China's economic growth story or an increase in supply of new units (which would be at least three years away because of the lead time for new developments), I continue to remain optimistic about the Hong Kong property market.

Wednesday, November 07, 2007

Going against the trend - initial thoughts

The markets for most investments have experienced a prolonged bull market for a few years now and, like most investors, times have been good. That said, values in many markets are either expensive or, if not expensive, hardly represent a bargain. So I asked myself what assets I could identify that have been poor performers and may, just may, merit a counter cyclical investment. OK, I know that chartists and momentum investors (of which I am not one) would argue that investing against the trend is very risky but the lure of the cheap is sometimes hard to resist.

In any case, here is the list that I have come up with so far:

1. the United States Dollar: formerly the world's reserve currency, it has depreciated significantly against most developed country currencies and is being universally predicted to decline further;

2. housing prices in the United States: I don't know enough about this one to comment. Since I am not keen on the idea of investing in something that requires active management in a country where I do not live or habitually visit, this one is unlikely to be considered further;

3. natural gas: this has taken something of a hammering since June on the back of rising supply;

4. lean hogs: lean hog prices have fallen significantly since August. I'm not sure why;

5. soy bean oil: a huge fall in the last few weeks. I have no idea why. Soybeans have risen;

6. sugar: generally in down trend for about a year. I have no idea why;

7. credit instruments: some of these have taken a hammering in he credit crisis. It's a highly specialised field and I'm inclined to leave this one to the professionals;

8. shares in banks and other financial institutions: I am not allowed to deal in individual shares, so this will be excluded from further analysis.

I could add items like farm land in Zimbabwe to the list, but that is a little extreme for my taste.

I'm sure there are are other unloved investments out there but items 3-6 above will serve for the purposes of my initial research. At this stage, I have not researched any of them, but it will be interesting to see what I come up with.

Any others?

A very small speculation (2)

On Monday I purchased some put warrants on the Hang Seng Index. By the end of Monday, I was up more than 20%. Yesterday I watched about half the gains evaporate as the market rallied. This morning I took what was left of Monday's paper profits and sold the position. I ended up with a net gain of 7% in two days. This is a nice rate of return (although on a very small amount of money).

I am not sure if I want to make a habit of making short term speculations, but it was fun.

Monday, November 05, 2007

A very small speculation

This is speculation - pure and simple.

This morning I pulled the trigger and made a token investment in some put warrants (similar to put options) on the Hang Seng index. The amount involved is trivial, so win or lose it will have no noticeable effect on the overall value of my investments. At the end of the day the Hang Seng index had fallen by a touch over 5% and the warrants were up about 20%.

I accept that I am attempting to time the market which I would normally shy away from (not that it is possible to make any investment without making assumptions about the future) and I do not want to make a habit of speculating in this manner.

In one sense I am slightly irritated with myself for giving in to the temptation. In another sense, I have to remember that a warrant (option) is a wasting asset with a finite life (it expires in April). This means that I have to monitor the markets almost continually and attempt to time the exit.

Saturday, November 03, 2007

Early retirement - how soon (1)?

After reading these inspirational posts from The Digerati Life and My Wealth Builder, I took a long hard look at my progress towards my retirement goals.

The starting point was my goal of retiring at 50 with assets that generated sufficient passive income to support our desired lifestyle (i) with a reasonable margin for error and (ii) without having to rely on draw down of capital to meet expenses.

Both 2006 and 2007 (year to date) have seen my income and savings both reach levels that were well above both budget and expectation. My periodic reviews of progress towards my goal using various retirement calculators has shown the required rate of return to achieve retirement at 50 steadily declining. It currently stands at 5.4-5.7% pa (depending on which calculator I use).

Today I looked at the numbers from a very different perspective: how soon can I retire?

If I use a 7% rate of return on investments, the answer is that I can retire at age 47 - three years ahead of schedule and less than six years away.

Why 7%? This was selected for two reasons:

(i) 7% is the aggregate of (a) the net yield after outgoings and tax on residential property and (ii) the rate of inflation. It seems to be a reasonable assumption that capital values and rents will appreciate at roughly the rate of inflation; and

(ii) 7 % is less than the long run average return on equities in most markets and also seems to be a reasonable assumption.

(To be more precise a return on investments of 6.7% pa will enable me to retire at 47.)

Of course, all this optimism is a good indicator that I am getting ahead of myself. Still, it is nice to think that retirement is less than six years away.

Wednesday, October 31, 2007

Monthly Review - October

My net worth increased by 3.1% in October.

The year to date increase is 30.6%.

The return on my investments was positive. Spending was low. Income was strong (although down a bit from last month). There were no negatives to report.

Here are the details:

1. my unit trusts appreciated in value during the month. Strong gains in emerging markets dominated the portfolio;

2. my residual share portfolio appreciated;

3. my investment in silver was up;

4. my tenants continued to pay the rent on time and rents continue to be higher than the expense component of the outgoings. The only negative here is the new flat which is now fully renovated but in need of a tenant (which may take a while in view of the fact that the building will be covered with scaffolding as the exterior renovation is undertaken over the next five months);

6. expenses were moderate. There were no large items;

7. my income was high (although less than last month).

The combined effect of the combined effect of the above resulted in a 3.1% increase in net worth at month end.The only investment activities undertaken during the month were regular monthly payments into two small cap investment funds.Looking ahead to November, I will have to finish paying for the fit out cost of the new property. I am contemplating buying a speculative put option on the Hang Seng Index.

Monday, October 15, 2007

Good news and bad...I think

The refurbishment of my last property purchase was finally completed. That's the good news. The bad news is it was three weeks late due to the original batch of flooring being defective and having to be reordered. Although this did not cost me any money, it did result in a three week delay.

The other development is that the owners' committee has decided to refurbish the exterior of the building, including the pipes. (The lobby and common areas were refurbished earlier this year.) A levy is being raised from all the owners to meet the cost. In very rough terms the levy on my unit is about equal to 2% of its value. Based on previous experience, this will add to the value of the building and its appeal to renters (higher rentals and shorter vacancies), so I do not mind paying it. The bad news is that the refurbishment work is likely to take 3-4 months (to be confirmed) and, during that time, it will be hard to locate a tenant. In summary, I will have to put my hand in my pocked for a fairly large cheque, am likely to have difficulty finding a tenant for 3-4 months but will experience an uplift in value and future rent levels.

Saturday, October 13, 2007

The making of an asset bubble

The last few months have seen the Hang Seng index rise more than 40 per cent. It reached an all time high above 29,000 points last week. The market surge has been driven by a combination of factors, including expectation of a wave of money from the PRC following relaxation of foreign exchange controls to allow mainland investors to buy Hong Kong shares, high levels of investor confidence and negative interest rates.

In valuation terms, the Hang Seng index is now quite expensive, although not ridiculously so. It is certainly a lot more reasonably priced than the markets on the mainland.

The local property market is also experiencing a less dramatic rise. A combination of low levels of supply (especially on Hong Kong Island and in the luxury sector), negative real interest rates, rising rent levels and high confidence levels (at least in part due to the rise in the stock market) are driving the property market.

Holders of bank deposits in Hong Kong have been faced with negative real interest rates for a number of years (hence my long held aversion to holding any more cash than I absolutely have to). With mortgage interest rates having fallen further (one of my latest HIBOR fixings was at 4.55%) and rents rising, property remains an attractive asset class.

Last week's budget announcement of a small tax cut to be introduced in 2008/9 and a waiver of one quarter's rates is also good news.

Now if only the Hong Kong government would actually do something about the pollution.

Saturday, October 06, 2007

Monthly Review - September

This month's update was delayed for one very simple reason. When I first put all the numbers for September into my spreadsheet, the result was an unbelievable 6.1% increase in net worth for the month. In rather blunt terms, I assumed that I had made a mistake and moved a decimal place somewhere. After going through the numbers again, I was delighted to conclude that the original calculation was correct. Here's how it happened:

1. my residual share portfolio was up;

2. my funds were up strongly (they are heavily weighted towards emerging markets);

3. my tenants continued to pay the rent on time and the income from my properties was higher than the expense component of the outgoings (actually, one tenant missed a payment but has now caught up);

4. silver was up strongly;

5. currency movements were strongly in my favour. This was the single biggest contributor to the monthly change;

6. it was a strong month for income and my expenses were at the low end of expectations.

The year to date increase in net worth is a staggering 26.62%. While I appreciate that some the gains this month are very fickle (especially the effect of currency movements), this year's progress towards my retirement goal has been impressive.

Monday, October 01, 2007

Book Review: Affluenza

I purchased this book looking for something interesting to read on a long haul flight. I was severely disappointed.

Oliver James is a psychologist and Affluenza is a long winded rant against materialism, materialistic (i.e. capitalist) values and the "depression, anxiety, addiction and ennui" that results from being infected with the wrong values. The premise of taking a good hard look at the values we base our lives on and the consequences of having such values is a good one - it is an issue which at a personal level I regard as important and very worthy of examination. Unfortunately, I can not recommend Affluenza as a worthwhile contribution to the subject.

My single biggest issue was that the overall tone came across as a snivelling, whining rant against economic development, material possessions and consumption based lifestyles. I have some sympathy and agreement on the latter two points. Even so, it made for rather trying and dull reading.

At a more specific level, I found that time and time again I either disagreed with James' views or found myself wondering about the validity of his research. As examples:

1. his comments on the best ways of raising pre-scho0l children were inconsistent with my own experiences as a parent. Our pre-schoolers have a great time at their pre-school and other classes, showed very little separation anxiety in the first few weeks, none at all after the first month or so and can be observed laughing and playing with other children and the teachers. This experience is not unique;

2. the supposed explanation of the difference between "authentic" and "sincere" was very muddled and unclear. I read the chapter twice and have no idea what he was on about;

3. at the end of the book I had reservations about his methodology. Given the sweeping claims and generalisations made in the book, I was very very surprised to see the very small sample sizes on which James' views were based. Certainly he refers to more comprehensive data sets provided by other researchers, but I had little confidence in the validity of his conclusions as a result.

The final analysis? Yes, there are some screwed up people with some values with which I do not identify and there are a lot of people whose state of happiness is less than ideal in this world. Yes, I have little doubt that money is not a substitute for either genuine values or happiness. No, I did not think much of this book.

Monday, September 10, 2007

Book Review: The Origin of Wealth

Eric Beinhocker's critical review of traditional economic theory and his explanation of "complexity economics" was a riveting read.

Beinhocker recounts the history of the development of tradtional economic theory and explains in considerable detail why traditional economic theory does a poor job of both describing and predicting real world events. In the process of describing the beginings of a new approach (dubbed complexity economics) which draws heavily on evolutionary theory Beinhocker draws a number of conclusions regarding the process by which economic wealth is created. A number of those conclusions have implications for wealth management and financial planning (as well as a number of other issues).

One of the more thought provoking books on financial matters that I have read for some time. Highly recommended.

Monday, September 03, 2007

Monthly Review - August

My net worth decreased by 1.05% in July.

The year to date increase is 19.3%.

The return on my investments was negative with just about everything moving in the wrong direction. In some case the downward movements were due to, or made larger by, adverse currency movements.

Here are the details:

1. my unit trusts fell in value during the month;

2. my residual share portfolio was almost unchanged in local currency terms but took a beating due to adverse currency movements;

3. my investment in silver was down;

4. my tenants continued to pay the rent on time and rents continue to be higher than the expense component of the outgoings. The exception is the new flat which is being renovated. However, even though I have a small negative cash flow on the portfolio as a whole (a situation which will change once the new flat is leased) income is still higher than the expenses;

6. Expenses were moderate. The only unexpected item was being forced to pay a deposit for our Christmas holiday (!) in order to secure the booking;

7. my income during the month was at the high end of the range.

The combined effect of the combined effect of the above resulted in a 1.33% decrease in net worth at month end.

The only investment activities undertaken during the month were (i) regular monthly payments into two small cap investment funds and (ii) paying the second installment for the fit out cost of the new property.

August brought to an end my lengthy run of consectutive monthly increases in net worth.

Friday, August 17, 2007

No mortgage crisis here

A huge amount has been written about the sub-prime mortgage crisis in the United States. A lot has been written about how falling house prices in the United States which have contributed to the sub-prime crisis. I use the term "contributed" very deliberately. In my view a number of other factors have also contributed to the problem:

(i) the lax (in some cases on-existent) lending standards by lenders;

(ii) inadequate regulation of mortgage lenders, real estate agents and valuers;

(iii) lax regulatory oversight;

(iv) poor investment evaluation and risk assessment by rating agencies, (for the most part) institutional investors which enabled so many high risk loans to be off loaded by mortgage lenders;

(v) a glut of new housing starts.

The question is whether the problems which sectors of the US housing market and the sub-prime problems could be repeated in Hong Kong. The sharp downward movements in many stock markets and some currencies (especially the AUD and NZD) as investors sell show that there is a loss of confidence. At this stage there is nothing to suggest that the Hong Kong mortgage market will experience problems of the kind being experienced in the United States. There are a number of reasons for this:

(a) mortgage loans in Hong Kong are tightly regulated. Loan to value ratios on draw down are limited to 70%. While second mortgages are available, they tend to be the exception rather than the norm. All loans need to be supported by evidence of identity and income. There are some holes in the process which could be exploited, but there is no wide spread practice of "no financials" or "no documents" loans;

(b) affordability levels are still good by historical standards (certainly much better than during the 1990s bull market). Nominal and real interest rates are low. There is no sign of market forces driving interest rates higher;

(c) Hong Kong is awash with liquidity. The ratio of bank deposits to loans has been climbing steadily since the late 1990s. In spite of the appreciation of local and China stocks, there is no sign of a slow down in deposit growth. All this money sitting in banks earning very low interest rates is a loss making proposition for investors;

(d) even in the worst of the Asian crisis when Hong Kong property prices had fallen 50-60%, the default rate on mortgages never got much above 1.5% (and the loss rate would have been a lot less);

(e) we do not have a glut of new housing. If anything there is a shortage at the upper end of the market;

(f) even if things do go wrong, the PRC has shown a willingness to support Hong Kong. They are also suffering from excess liquidity and are trying hard to reduce that excess liquidity. All they have to do is allow more PRC investors to invest in Hong Kong and some of that liquidity will end up here.

I find it hard to make a credible case for a mortgage lending crisis to hit Hong Kong. There may be volatility in share and property prices or even an out right crash, but such problems (or opportunities if you prefer) are likely to be the result of a loss of confidence rather than a change in economic fundamentals.

Tuesday, August 14, 2007

Credit crunch not affecting mortgage interest rates

For some time the fixings on my floating rate mortgages (at least the HK$ ones) have been hovering either just above or just below 5% pa.

With the so called credit crunch making headlines around the world, one would normally expect interest rates to rise, especially in the short duration end of the yield curve (which is what is used to determine the interest rates on my mortgages). So far this hasn't happened. In fact my most recent fixing showed a slight decline in the interest rate I am paying.

In searching for an explanation, I came up with the following possibilities:

1. the HKMA has successfully supported the market, keeping interest rate rises in check;

2. demand for money has slowed;

3. the credit crunch is confined to sectors of the market which do not (or at least do not yet) affect Hong Kong interest rates.

I have no idea which (if any) is the correct explanation. If I had to guess I would say #1 and #3 are the more likely explanations. This leaves open the possibility that if the credit crunch continues to expand that I may face higher interest rates at some point in the future. Against this it can be argued that any sign of a meaningful slowdown in economic activity is likely to see interest rate cuts. Accordingly, I have concluded that even if interest rates do increase, it is unlikely to be by much.

Saturday, August 11, 2007

Bad Weather and Irrational Behaviour

The Typhoon #8 signal was hoisted early on Friday afternoon bringing the working week to a premature close. The usual chaos ensued as everyone tried to head home on at more or less the same time.

One of the more interesting phenomena that happens every time the #8 signal gets hoisted is the dash for the supermarket. Huge numbers of people joined very long queues to buy enough food to feed an extended family for several days. Why they do this is beyond me. Buying enough to last for a day is both understandable and sufficient. Buying so much food that the supermarket shelves still look unnaturally depleted two days later is irrational. I have never seen a #8 signal stay hoisted for more than a day. So why do people buy so much more food than they are likely to need?

Friday, August 03, 2007

An Insurance Claim (2)

The insurance company has told me that my claim has been accepted without the need to have a damage assessment. I'll have to wait a few weeks before I find out whether they will reimburse the full cost of the new wine fridge or the price of the old wine fridge. There is about HK$1,400 difference.

Thursday, August 02, 2007

An Insurance Claim (1)

Well this just sucks.

My wine fridge died on me on Sunday. The firm that supplied the warranty has gone out of business (which probably explains why it was so cheap) so I had to find another company to come and have a look at it. Unfortunately, this took two days. Some of the wiring has fused and the compressor has broken. The cost of repair would be about the same as the cost of a new one. It would also take a few weeks.

With my wine sitting in the Hong Kong heat (and experiencing accelerated aging) I want to get the collection back into a better temperature controlled environment as soon as possible. So today I bit the bullet and ordered a new one. I'm hoping it will be delivered on the weekend.

I've put in the insurance claim and am waiting for the inevitable dispute over the cost of the replacement.

What I don't know (and won't know until I start taking corks out of bottles) is whether a week of high temperatures will damage the wines. I'll open a couple of bottles on the weekend and see if they are ok.

Wednesday, August 01, 2007

Monthly Review - July

My net worth increased by 2.3% in July.

The year to date increase is 20.6%.

The return on my investments in the was positive (if only by a small margin) in spite of the volatility at the end of the month.

July was not a great month in terms of either spending (too high) or return on investments. However, given the state of the markets and the fact that a lot of the excess expenditure was a hang over from last month's lack of discipline I have to be satisfied with how the numbers ended up. Here are the details:

1. my unit trusts appreciated in value during the month. Strong gains at the start of the month outweighed the declines towards the end;

2. my residual share portfolio was almost unchanged;

3. my investment in silver was slightly up;

4. my tenants continued to pay the rent on time and rents continue to be higher than the expense component of the outgoings. The exception is the new flat which is being renovated. However, even though I have a small negative cash flow on the portfolio as a whole (a situation which will change once the new flat is leased) income is still higher than the expenses;

6. Expenses were high, but almost all of the excess was carry forward from June which I had made a provision for last month. The effect was felt in my cash flow not my balance sheet;

7. my income rose very slightly during the month.

The combined effect of the combined effect of the above resulted in a 2.3% increase in net worth at month end.

The only investment activities undertaken during the month were (i) regular monthly payments into two small cap investment funds and (ii) purchase of a very small amount of additional paper silver.

Looking ahead to August, I will have a minor cash outflow as I finish paying for the fit out cost of the new property. I will also see my income rise again.

Of course, as I type this the month of August is off to a horrific start. The local market was down over three per cent today. Most other markets in Asia also down sharply. Somehow, I do not think this year's succession of positive monthly return will be continued.

Monday, July 30, 2007

Budget updated

I have updated my budget through to the end of the year to take into account:

(i) the recent sale and purchase of properties (including different rental levels and mortgage payments)

(ii) changes to spending to reflect additional costs associated with my children (which I fear will be the beginnings of a trend)

(iii) changes to my income projections for the rest of the year

(iv) a short holiday at Christmas for the family in Asia instead of further away (at lower cost).

Even after putting aside money for tax I will still have a cash surplus at the end of the year and the surplus will be slightly larger than the previous budget. The question is: what should I do with it?

Sunday, July 29, 2007

Predictions of economic doom usually wrong

Last week's sell off in the markets resulted in long faces among some investors and talk of a either a "crash", a "correction"or an "opportunity to buy the dips"among the media.

My take: the sell off is nothing to get excited about and not something that justifies much in the way of comment. Last week's sell off is nothing more than normal market volatility and evidence that capital markets are working in the usual manner.

A more interesting question is whether we are seeing the beginnings of either an economic slow down or a genuine tightening in the credit markets. Problems with sub-prime lending and the US housing market notwithstanding, I see no evidence of either at this point. That said, I am generally inclined to ignore predictions of economic doom given that the majority of such predictions are simply wrong. Here are some examples:

1. 1987 share market crash: while it lead to a deep recession in some economies (Australia, New Zealand) there was no world wide recession and most markets recovered fairly quickly. The endless comparisons to the 1929 crash and resulting depression were all well off the mark;

2. 1997 Asian crisis: it caused a lot of economic misery in Asia ( Thailand, Indonesia, Hong Kong etc) but the rest of the world was largely unaffected;

3. Y2K: this was a complete non-event (unless you were one of those who had the misfortune to spend the new millennium sitting in a crisis management office);

4. 2000 tech wreck: largely an isolated event that was bad news for investors in the tech heavy NASDAQ index and people who worked for a small number of companies that failed for one reason or another (bad business models, accounting fraud) but a non-event for the rest of the world;

5. 2002/3: SARS/Avian flu: the world wide pandemic never emerged. Only Hong Kong was effected to any noticable extent. Within a year of the SARS epidemic, Hong Kong's economy, share market and property market had all recovered strongly.

There are plenty of other examples I can point to. Certainly there will be economic ups and downs. Some will be global events while others will be much more localised. My point is that the only doom sayers who usually manage to predict such events correctly are those who predict doom and gloom on a regular basis (and who history has shown to be usually wrong).

The most irritating thing about all these events is that I have a poor record of taking advanatge of the investment opportunities that they create.

Saturday, July 28, 2007

Bank Manager Quits

I had developed a very good relationship with a manager at the bank which provides most of our property finance in Hong Kong. He made loan applications about as easy as I could reasonably expect (short of doing no financials loans). Everything was done by phone or e-mail and he came to see me when the time came to sign the documents. I never had to get off my butt and visit the bank. If I pointed out that another bank was offering a better deal he would match it. Best of all, he would get the bank approval required for each tenancy in a matter of days without ever having to amend the terms of a lease (other banks could take weeks and would insist on pointless or impossible amendments). Things had reached the point were he was taking me out to lunch.

Anyway, he has quit to join another bank (unfortunately one with which I have had less satisfactory dealings) so I will need to build up a relationship with his successor.

Friday, July 20, 2007

My accountant would not approve

Keeping a form of personal net worth balance sheet is a useful financial planning tool. I've been doing it in one form or another for many years. Keeping a balance sheet requires some decisions as to what is included and what is excluded.

A true statement of (financial) net worth would include every asset ranging from our home to my oldest pair of socks. Each asset would be listed and valued at current realisable value. Every obligation including accruals for future expenses would be set out on the other side of the balance sheet. The difference between the two numbers would be my net worth at a given point in time.

While that approach may meet the approval of purists and accountants, it suffers from three flaws:

1. it is hopelessly impractical. I have better things to do with my time than to count the sets of underwear in the laundry hamper;

2. placing a value on many of the non-financial assets is nothing more than a guessing game;

3. many of the non-financial assets have no relevance to the purpose for which the balance sheet is drawn up. Knowing how many t-shirts I have will not affect my retirement planning.

Accordingly, it is sensible to confine the balance sheet to those items which are relevant to the purpose of financial planning. This is actually quite easy. There are no items (included or excluded) which I have any ambivalent thoughts about.

In the asset side of the balance sheet I include all our investments: shares, properties (including our home), managed funds, bullion, cash and foreign exchange. On the liabilities side I include all our borrowings and accruals for tax (there is no PAYE in Hong Kong), and an estimate of expenses incurred but not paid (e.g. credit card and utility bills). Everything else is ignored.

The items that are not included are items intended to be consumed (e.g. furniture, clothes), paintings (probably worth something but not much), my wife's jewellery (ditto) and my modest collection of claret (at least some of which will be drunk). If we had a car (completely unnecessary in Hong Kong), it would be treated as an item to be consumed and excluded.

Every item in the balance sheet needs to have a number assigned to it. Liabilities are all hard numbers (even the accruals are fairly accurate). Assets such as shares, managed funds, bank deposits and foreign exchange can be valued simply by checking the latest prices on line. The only asset which has any uncertainty attached to it is real estate. Assessment of current market prices is something of a guess. (A real estate agent looking to win a listing will give you a very different number from a bank officer looking for a worst case forced sale valuation.) I take an approach which makes life simple and errs on the side of under valuing the assets. All real estate is included at cost. Cost means the purchase price + stamp duty + agency + initial fit out + other transaction costs. I make no attempt to reflect current values in the balance sheet (although current values of the portfolio are well above cost.

My accountant would not approve but it makes my life easier and ensures that I do not fall into the trap of thinking that I am better off than I actually am.

Thursday, July 19, 2007

Your home's value and your net worth

Mighty Bargain Hunter recently published this post on why he does not consider it appropriate to include the value of his home in his net worth calculation. As the comment I submitted appears to have been lost in the internet or caught in a spam filter (the story of my life), I set out my comments here. [Edit: it looks like the delay in publishing was due to a spam filter. My comments now appear on Mighty Bargain Hunter's blog.]

There have been many articles written about whether a person's home is an asset or a liability and whether it is relevant to retirement planning. My take on these questions is set out in these three posts: Part 1 , Part 2 and Part 3 .

Mighty Bargain Hunter makes the very valid point that an over inflated sense of financial net worth can be dangerous - especially to people who lack even a modest degree of financial self discipline and, on occasion, even to those who are reasonably savvy. Some of the horror stories of people who borrowed against their home equity to finance consumption spending illustrate the point very well. While I am of the view that home equity is part of net worth, if excluding it from your personal balance sheet motivates you to save more or to spend less, then excluding it is the right thing to do.

However, I must respectfully but strongly disagree with some of other reasons given for not including home equity in a net worth statement:

1."I didn’t earn a dime of that increase. "

This is not true. Mighty Bargain Hunter earned every penny of the increase when he risked his deposit (if any), his credit rating and his future cash flow in taking out the mortgage loan and making the purchase.

2. "The increase in my net worth is a gift from easy money policy and wild real estate speculation."

So what? I really struggle to see why this is relevant to the question of whether or not to include home equity in a net worth calculation. While easy money policies and speculation did contribute to increases in real estate values, studies have shown other factors to be more significant: land supply, planning restrictions and demographic shifts among them. More to the point, the same easy money policies and speculation have also contributed to increases in equity prices. If home equity is excluded on this basis then logically equity price gains should also be excluded. Another problem is that if this logic was applied consistently then any increase in value of an investment property should also be excluded? My take is that the cause of an asset increasing or decreasing is irrelevant to issue of whether or not to include that asset in a net worth calculation.

Another way of looking at the issue is to ask whether you would take negative equity into account if the value of your home declined due to tighter credit conditions (rising interest rates) and panic selling? Failing to do so would consistent with the view that increases in the value of home equity should not be included in a net worth calculation. However, that approach would create the same problem that Mighty Bargain Hunter is addressing - it would over inflate the net worth picture.

My own take is that I include both the asset (our home) and the liability (our mortgage) in my net worth calculation. I do this for two reasons:

1. I like to see the complete picture;

2. home equity is important to my retirement plan and it is important to keep track of it as part of the planning process.

If I felt that excluding the value of my home equity from the calculation would improve my financial management, then I would consider taking a different approach.

Tuesday, July 17, 2007

Mandatory Provident Fund Fees Slammed

The South China Morning Post included an article describing the effect of fees and costs on the payout which retirees can expect from their investment in their mandatory provident fund (MPF). (For those not living in Hong Kong MPF is our mandatory retirement savings scheme.) The article was derived from a report from the Consumer Council.

The report essentially said that based on returns of about 5% per annum, fees of up to 3% per annum would effectively consume about half of the total return over a lifetime of saving.

This is not rocket science. It is not news. The absurdly high fees (even by the standards of the Hong Kong funds industry) go a long way towards explaining why so few people make more than the statutory minimum investment into their MPF plan ( I do not know of anyone). In fairness to the service providers, some of those fees are justified by the additional regulatory burden imposed by the regulations. How much? I do not know, but not much.

The MPF scheme is a poor one. In fact it is an awful scheme. In its defence, it has only three things going for it:

1. it is compulsory: while the merits of compulsion are debatable, as a tax payer I do not want to face rising tax bills in my old age to pay retirement benefits to those who did not save while working;

2. only a limited range of substantial institutions can offer schemes and assets must be held through an approved custodian: there is very little risk of scheme assets being lost as a result a manager or custodian failing;

3. it is a defined contribution scheme: much better in the longer term than defined benefit schemes.

The reasons why the MPF scheme is so awful are:

4. no choice: employees must use the scheme provider selected by their employer;

5. day to day fees and costs are outrageously high. Low cost index funds are unheard of;

6. the cost of switching service providers can cripple already poor returns. If you switch jobs and have to switch your service provider you will be screwed.

In effect, savers are assured of achieving returns well below market and even below what they would expect the average actively managed fund to achieve.

The MPF scheme should be scrapped and replaced with a more flexible mandatory scheme. Savers should have the option of setting up and managing their own scheme and given a much better range of investment options. Default options can be used for those who do not wish to (or fail to) take control of their own retirement savings.

Friday, July 06, 2007

New Property Purchase (3) - Completion

Out with the old and in with the new. The sale of one small property completed at the end of June and the purchase of a larger property completed yesterday with no problems.

The refurbishment work will start tomorrow and should be completed in about 8-9 weeks. Until the new property is rented out I will have to meet all the mortgage payments and other outgoings from my own pocket in part (the other part will come from the cash back from the lending bank and from surplus cash flows on other properties). Between the short term negative cash flow generated by this property and the need to start putting money aside for my January tax payment, the amount of cash available for new investments this year will be quite low.

Saturday, June 30, 2007

World Wealth Report 2007

The 2007 edition of the Gap Gemini Merrill Lynch World Wealth Report was released earlier this month. Once again it made interesting reading. Among the highlights:

1. the number of High Net Worth Individuals in the world increased by 8.3% to 9.5 million;

2. the number of Ultra-HNWIs increased 11.3 % to 94,970;

3. the aggregate net worth of all HNWIs was US$37.2 trillion, an 11.4% increase over 2005;

4. the incease in the number of HNWIs and their aggregate net worth was primarily driven by GDP growth and rising equity markets (no surprise);

5. the countries with the fastest growing populations of HNWIs were all either emerging markets or countries with close connections with emerging markets. Singapore, India, Russia and Indonesia produced the largest percentage increases in the number of HNWIs. All of these countries had strong stock markets during 2006;

6. Ultra-HNWIs grew their wealth faster than the HNWI population as a whole (this was not surprising);

7. HNWIs reallocated some of their assets away from alternative investments into real estate in 2006. Interestingly, about half of the HNWIs asset allocation to real estate was in the form of second or holiday homes, frequently purchased without the use of mortgage finance;

8. they also spent more money on "investments of passion" such as art, jewlery, wine, antique cars etc. Increasingly, investments of passion are viewed as investable assets rather than just hobbies of the wealthy;

9. geographical asset allocation is trending away from North America to Europe.

A High Net Worth Individual is a person whose financial assets (i.e. assets other than the primary residence) exceeed US$1 million. An Ultra High Net Worth Individual is a person whose financial assets exceed US$30 million.

Monthly Review - June

My net worth increased by 2.1% in June.

The year to date increase is 17.8%. The return on my investments in the first half of the year was ahead of the desired return for the full year. In dollar terms savings are slightly ahead of my budget (in spite of my best efforts to overspend in June). This is due to increases in income being greater than increases in spending. More discipline on the spending front is needed.

June was a disappointing month. Although the headline increase in net worth appeared to be a solid result a look at the numbers tells a different story:

1. my unit trusts declined in value during the month. The change was relatively small, but it was a negative performance;

2. my residual share portfolio declined in value during the month. The change was relatively small, but it was a negative performance;

3. my investment in silver declined in value during the month. In percentage terms it was a material change in the value of my investment in silver but the overall effect on my net worth was small;

4. my tenants continued to pay the rent on time and rents continue to be higher than the expense component of the outgoings;

5. the modest gain on the sale of a small investment property was realised at the end of the month;

6. I had a self inflicted blow out in expenses during the month. See here for further details;

7. my income rose during the month.

The combined effect of the increase in income, the realised gain on the property disposal and the net income from the investment properties was greater than the losses on the investment funds, shares and silver.

The only investment activities undertaken during the month were (i) completion of the sale of one small investment property (ii) agreeing the budget for the fit out of the new property purchase to be completed next month (iii) regular monthly payments into two small cap investment funds and (iv) a small amount of cash converted into RMB in anticipation of participating in the launch of an RMB bond issue.

Looking ahead to July, I will have major cash outflows as I complete the purchase of another property and make the first payment to the contractor and pay the credit card bills for our holiday.

Friday, June 29, 2007

Spending - some controls needed (2)

Having spent a few days thinking matters over, I have identified a number of potential cost savings. These are:

1. en primeur wine: With the season nearing its end, I am being bombarded with e-mails from the wine merchants. This year I will limit myself to a single case of mid priced wine for future consumption. I have deleted my multi-case "wish list";

2. food: I can save a bit of money with my lunches and snacks without compromising the quality of the food. Fruit and other items purchased at the supermarket is a lot cheaper than food purchased at the likes of Pret, Mix etc. I also have the option of attending various training courses which usually come with a sandwich lunch. Sitting through a training course that I do not really need is a pretty high price to pay for a "free" lunch but when I am trying to get into some better spending habits, every gesture helps;

3. wine (again): in terms of the wine purchased for drinking at home, I will set a price limit on purchases. In case you hadn't guessed, my wine consumption is a bit more than what my doctor would suggest is optimal. In any case, I will be spending more time looking at the bin end specials and less time reading the reviews of the more expensive stuff;

4. personal training: I signed up for a set of personal training sessions as a means of motivating myself to get into the gym a bit more often. When the current set runs out in September, I will not sign up for any more sessions. I will have to look at the waistline as a source of motivation.

The two economies I considered but do not intend to implement are:

A. taking the bus instead of a taxi: taking a bus will save me HK$25 per trip. This is a worthwhile saving. Unfortunately the price of that saving is often not seeing my children before they go to bed in the evenings. Family is more important than the savings;

B. charity: I tend to give quite freely when friends and colleagues are looking for support for various charitable endeavours. While there is no obligation to give, I would prefer to continue to support worthwhile causes.

The above ideas are not much, but I have to start tightening the purse strings somewhere.

Thursday, June 28, 2007

Spending - some controls needed (1)

This month's spending has been horrendous due to a number of reasons:

1. we went on holiday - which had been largely budgeted for but it still hurts to see the cash leave the bank account. The fact that the holiday cost more than expected was a reflection of the original budget being inadequate rather than a lack of control on the spending side;

2. we (meaning me) went a little berserk with the shopping while on holiday buying new carpets and paintings. We will have to pay for the latter to be framed. In effect, I have spent about twice my annual budget for luxuries in a single month;

3. a succession of minor routine non-routine expenses for items such as medical expenses, insurance premia, a birthday party for one child, increased school and tuition expenses (another child will start school in August) which collectively have had a significant impact on this month's savings. Some of these expenses will be recurring.

With the latest property purchase due for completion in the first week of July and refurbishment and mortgage payments starting immediately after completion, I will also be bleeding cash until the refurbishment has been completed and the property has been rented out.

I have revised the budget for the second half of the year and it is not a pretty picture to reflect both the June blowout and the expected recurring increases in expenditure for the rest of the year. Although the savings rate will still be "high" by general standards it will fall short of what I had hoped for.

I will be spending some time over the next few days working out where I can cut some expenses.

Sunday, June 24, 2007

Book Review: The Last Tycoons

William D. Cohan's "secret" history of Lazard Freres & Co was a hugely detailed but slightly heavy read. The historical aspects of the firm's founding and the various crisis it faced during the period of its history from founding in New Orleans in 1848 (as a dry goods store) through to its IPO in 2005 were the more interesting parts of the book.

The story is dominated by four themes:

1. the "Great Men" strategy where the firm set out to attract, cultivate and rely on a succession of "Great Men" to drive its advisory business and set it self apart from other investment banks. With Andre Meyer and Felix Rohatyn being among the greatest investment bankers of their respective generations it was a strategy that for a long period of time enabled Lazard Freres to differentiate itself from competing firms. However, this strategy ultimately contributed to the failure of Lazard Freres to evolve and maintain its top tier investment banking rating;

2. the wealth that a successful investment banking business can generate for those sufficiently high in the profit distribution chain. Even the comparatively unsuccessful partners (a very relative term) were earning staggering sums of money;

3. the level of political infighting and squabbling that came close to destroying the firm and was a major contributor to the seemingly endless state of crisis that the firm experienced in the years leading up to its IPO;

4. the ownership structure that made Michel David-Weil and a few others phenomenally wealthy but ultimately doomed the firm to existence outside the ranks of the elite investment banks for a number of reasons.

In short the book was an interesting insight into the lives of successive generations of investment bankers and their cut throat world.

Book Review: John Jacob Astor

Axel Madsen describes John Jacob Astor as "America's first multimillionaire" (a label which arguably should be attributed to Stephen Girard) and chronicles his rise from the relative poverty of his childhood in Germany through his immigration, initially to England and then to the United States in 1784.

In financial terms, Astor began his career as a butcher's apprentice in his home town of Waldorf (following his father), moved to London for four years to learn how to make flutes before arriving in Baltimore with a consignment of flutes for trade at the age of 20. He moved to New York a few weeks later once he had sold enough of his flutes to In historical terms, Astor's arrival in the new world was shortly after the United States had declared independence from England.

In New York, Astor took a job peddling for a baker, before once again switching career to work for a local fur dealer. During this early stage of his career he continued to supplement his income by selling musical instruments, some made by his brother, imported from London (although advertising them as German in view of the anti-English sentiment prevailing at the time). Profits and savings were invested in more musical instruments and furs. The former were imported from the old world to the new while the furs were exported from the new world to the old where the prices were better.

One of two noticeable feature of Astor's business career is how he used the profits of each business activity to invest in other businesses, each of which was both rapidly growing and tremendously profitable at the time. Money made in trading musical instruments was invested in the fur business, which he eventually dominated and would ultimately form the basis of his staggering fortune. In turn, the profits of the fur business were invested in international trade (with China among other countries) and real estate in the rapidly growing city of New York.

The second noticeable feature was Astor's involvement in political matters - as a means of furthering his business interests.

While Madsen's book provides an interesting chronology of Astor's career, the background information on the age in which Astor lived is quite limited and conveyed little of life in that era and it left only a very superficial impression of what Astor was like as a person.

In short, the book was an interesting read but could have been a lot more interesting.

Tuesday, June 12, 2007


We have (after several years of marriage and children) finally instructed a lawyer to prepare our wills. This was something that should have been done years ago (i.e. when we were married and updated as children arrived).

As morbid as the subject of death is, there is some comfort in knowing that if anything happens to us, arrangements are in place that will ensure that the children will be properly cared for and most of the estate assets will be safe guarded for them.

One interesting feature of the estate planing exercise was looking at the effect of assets that would fall outside the estate such as properties held as joint tenants and life insurance policies. For certain purposes, having assets in the name of one spouse only gives greater flexibility when it comes to providing for children and other dependants.

New Property Purchase (2) - Financing And Refurbishment

I have finalised the finance for the purchase:

1. 70% gearing;
2. 20 year p+i term;
3. 0.5% cash rebate;
4. interest rate at the lower of prime - 0.8% or 1 month HIBOR + 0.5%;
5. repayment penalties of 2% in the first year and 1% in the second year.

I could have obtained a better cash rebate by using a different bank but decided to use a bank which I know from experience is flexible and fast in approving leases rather than take a risk and end up with a bank which is an unknown quantity in this respect.

I have also finalised the contracting for the refurbishment of the unit. The apartment will be completely stripped and all new fit out installed. The contractor has confirmed that he will be ready to start as soon as completion has taken place.

Saturday, June 02, 2007

Monthly Review - May

My net worth increased by 2.7% in May.

The year to date increase is 15.4%.

May was very much a case of just about everything making modest advances in spite of some volatility towards the end of the month:

1. investments in funds did well. It was nice to see my Thai fund (an investment made a matter of days before last year's military coup) advance to the point where it is now showing a rate of return comfortably above the minimum needed to achieve my retirement objectives;

2. the residual share portfolio was mixed but showed a small net increase for the month;

3. silver continued to live up to its reputation as the "restless metal" but ended the month with a slight gain;

4. with all properties fully let and the tenants paying on time, rental income was higher than expenses;

5. my income was at the high end of expectations and my savings were good with no unexpected or large expenses.

The major developments were the sale of our smallest investment property and the purchase of a larger property. Neither of these transactions had any impact on the numbers for May. The sale will be booked in June and the purchase will complete at the beginning of June.

Friday, May 25, 2007

Funds - some new choices

I have written previously about my frustration with the very limited range of low cost no load funds available to retail investors in Hong Kong.

The situation has improved this year with a number of new ETFs being launched and listed on the Hong Kong Stock Exchange. Unfortunately, for most of them the volume of units traded each day are very small (for a few, the volume is zero), but there is enough in a few of them (Commodities, Russia, China, India and Hong Kong) to have at least a few viable low cost investment options. Unfortunately some of the ETFs for broader markets that I would be interested in have almost no turnover so I will have to continue to look elsewhere for many of my investment needs.

Saturday, May 19, 2007

New Property Purchase (3) - Refurbishment

I have had a preliminary meeting with the contractor. Looking at the rough cost estimates for the basic redecoration and the full fit out and the comparable rental yields, the full fit out option should be the better financial option when looking at this project in isolation. The factors for and against the full fit out were as follows:

1. Yield: the yield on total cost will be higher;

2. Cash Flow: I will have a positive cash flow on a 20 year P+I mortgage (which I will not get with the basic fit out);

3. Pay Back Period: the pay back on the additional expense is 3.9 years on the preliminary figures. I have identified a few areas where some costs can be saved without having an adverse impact on the rental income. I hope to get the pay back period down to around 3.6 years with the final numbers. This is an important point, because the fit out will depreciate so it has to pay for itself and provide an acceptable return before it needs to be replaced;

4. IRR: the projected IRR obviously depends on what numbers I input for (i) the basic fit out (ii) the full fit out (iii) the additional rental and (iv) how long I expect the additional fit out to last. The latter is the most important factor. Some items could last 10 years. Others will need reworking/replacing every 3-4 years. If I assume an average of 4 years, my IRR is a low 5.2%. If I assume 5 years, the IRR jumps to 12.9%. The former does not justify the expense. The latter is acceptable to me as it is comfortably above the return I need to earn on my investments in order to retire on schedule (but would not get a property developer excited);

5. Time to next project: this actually favours the basic fit out. The additional money that I will spend on the full fit out (compared to the basic) is money that is not available to contribute to the next purchase;

6. Time to lease: the full fit out will take about 10 weeks. The basic fit out will take 4-5 weeks. This effectively costs me about a month in income.

Monday, May 14, 2007

New Property Purchase (2) - Financing

I started the search for the lowest cost mortgage for my new investment property today.

So far the best offer on the mortgage financing is prime - 3.2% (effectively a floating rate of 4.8%) with 0.9% cash back and the usual 3%, 2%, 1% early repayment penalty in the first three years.

I was rather disappointed to find that the banks I approached have all stopped offering HIBOR linked mortgages. Although the rate quotes above is actually slightly lower than the current HIBOR linked rates I am paying (about 0.1 - 0.3% less), the responsiveness of the HIBOR fixing mechanism has always been preferred especially when interest rates fall.

I will keep looking and see what is available, but the best offer so far already looks like the one I will use. The fact that it happens to be one of the banks we already use is an added bonus as I will go through less of the tiresome money laundering checking that banks have to do when taking on a new client.

I have also instructed lawyers. Given the relationship and the fact that the lawyers we use are already very cost competitive, I do not see any point in spending time shopping around for cheaper legal fees.

Saturday, May 12, 2007

New Property Purchase (1) - Provisional Contract Signed

Well, that was quick.

We signed the provisional agreement to sell one property (our smallest) on Thursday and I have signed the the agreement to purchase another property today.

The new property is larger than the one sold. The projected ungeared yield will be between 4.1 and 4.6% if I do minimal repair and redecoration work and 5.6 and 6.2% if I do a high quality fit out. Yields are calculated using gross costs and net rental income and are, therefore, real net yields.

The yield should be at or slightly above the target yield from properties in my retirement plan (4%) depending on the actual rental and the vacancy rate.

The building has several features which make it attractive:

1. very efficient floor plan;

2. the building is currently undergoing a refurbishment of the common areas. The lobby has been done and work has started on the very modest club house (a couple of mah jong rooms, a small recreation room and a small pool) and is expected to extend to the exterior of the building later this year. At least 3 or 4 other flats in the building have recently been purchased and are being (or will soon be) renovated by the new owners;

3. close to good transport links, good schools and shops;

4. above average size. I will be writing a post on the rise of the middle class in emerging markets and explaining why mid size and larger flats have more potential for growth than smaller ones.

The downside is that I will be putting down the minimum deposit (being cash poor is a necessary consequence of trying to be fully invested at all times). Even after I get the property rented out it will have a negative cash flow on a 20 year mortgage if I go with the basic fit out option (although income will still exceed expenses by a meaningful margin). Also, the portfolio as a whole will have close to break even cash flow. Put differently, any vacancy will result in negative cash flow on the properties.

As a final point, the net rental income on the portfolio as a whole will now meet the revised contribution to our retirement income. Going forward, purchasing properties becomes "optional" and I could, should I wish, concentrate on building up the equity portfolio (funds) required and/or pay down some of the mortgages to improve the cash flow.

Friday, May 11, 2007

An unsolicited offer (4)

Sold! After the initial unsolicited approach did not result in a sale, we decided to let the agent look for a buyer at the price we had counter offered at. Our motivation for selling was primarily recognition of the fact that, while the property (our smallest) should always be easy to rent out due to its location, it has limited potential for improvement. After looking at some other properties we see better opportunities elsewhere.

We achieved our asking price and signed the provisional sale and purchase agreement yesterday. Completion is due at the end of June.

The IRR on this investment (after all costs) will be about 13.3% pa. This would not excite a private equity investor but it is well above what we need to be able to retire at age 50.

Sunday, May 06, 2007

A Small Touch Of Envy

For the last few days our living room has commanded a view of Paul Allen's luxury motor yacht moored at the Kennedy Town wharf. At 127 metres (416 feet) "Octopus" is one of the largest private yachts in the world and comes complete with a helicopter and submarine.

Even living in a city where conspicuous displays of wealth are common place, a boat like that serves as a good illustration of the colossal gulf between the genuinely wealth and the merely mass affluent members of the middle class.

OK, so the only way I will get near a luxury mega-yacht is if I undertake a bit of training and sign on as a crew member, but it has rekindled my one time ambition to own my own, much more modest, sailing yacht and I ended up spending a few hours gazing lustfully at the websites of various yacht builders and brokers. The thought of spending at least part of my retirement years sailing around Greece and Turkey or the Caribbean is a very pleasant one.

Of course, the classic definition of a boat is "a hole in the water into which money is poured" so I am well aware of the cost involved and the implications in terms of retirement if I do succumb to temptation. is easy to understand how people become addicted to consumption based lifestyles.

Back to reality......

Book Review: The Only Three Questions That Count

Ken Fisher is a well known investment manager and long running Forbes columnist. I have read his columns on and off for many years (although comments on specific US companies are of limited direct relevance to me). He also appears in the Forbes list of the richest Americans. So it was that I picked up his book with considerable anticipation. I was not disappointed.

The most important lessons I took from Fisher's book were:

1. the need to challenge conventional wisdom as a matter of course when making investing decisions. He provides explains the theory and gives some good examples of this (although the notion that deficits are bad is not exactly a universally held belief - basic Keynesian economics teaches that deficit spending is a good way to boost an economy). He also makes the point that the power of the internet and some basic tools such as spreadsheet software make it very easy for individual investors to do some quite sophisticated investment analysis;

2. the need to keep your own thinking processes under tight control. Again, this is nothing new (many writers have covered the sorts of cognitive errors that Fisher talks about) but Fisher does express the issues and illustrate them with examples in a manner which makes for practical reading.

Fisher's key investment principles can be summed up as:

3. benchmarking is better than seeking absolute returns. Seeking absolute returns is a poor strategy involving unacceptable levels of risk;

4. if you want to beat the market (after defining what market you are referring to) the preferred approach is to over or underweight various sectors - but only where you believe that you have a basis for knowing something hat the rest of the market does not. It logically follows that (i) unless you have a basis for believing that the market will be "down a lot" in the short term, you should be fully invested at all times and (ii) no one style of investing will be best;

5. if you have a reasonable amount to invest (US$200,000 or more) you are better off investing directly in shares rather than buying index funds and ETFs.

One rather trivial negative: it would have been very useful if the websites referred to in the text had been listed in an appendix for ease of future reference.

All in all a very educational and interesting read.

Wednesday, May 02, 2007

Another look at wine

I'm not sure if this is sensible or not. I have been building a (very) modest collection of wine for five years now. To date I have been treating the wine purchases as a hobby (or an investment in future drinking) and have kept the amounts involved quite small. However, the reality is that I will be very unlikely to drink all of what I have been buying. So far I have been treating my wine purchases as an expense and do not include their value in my balance sheet.

The value of my wines (quoted in GBP) has appreciated, although not by enough to get excited about. The currency factor has also worked in my favour. While the initial focus was on wines which were intended ultimately be drunk, I am giving serious consideration to purchasing some of the more expensive wines for investment purposes. My expectations in terms of returns would be modest - although I am not sure how easy it would be to quantify those expectations. Also, the amount of the investment would be low - wine would not be a core investment.

Is this a good idea?

Monday, April 30, 2007

Monthly Review - April

My net worth increased by 2.6% in April.

The year to date increase is 12.3%.

Once again, I was slightly surprised to see that my investments showed a net increase in local currency (which was further boosted by a slight weakening of the US$). Here's the breakdown:

1. my holdings of funds were mixed. Vietnam continues to disappoint while the rest were a mixed group. Overall there was a small net increase before currency adjustments and a slightly larger one after currency conversion. My Thai fund (purchased a matter of weeks before the coup) is finally back into positive territory;

2. my investment in silver went up and went down to end about where it started;

3. my direct holdings of equities were mixed and ended up about square before currency movements and slightly ahead after currency movements;

4. my properties generated net income (rents were higher than expenses). With having 100% occupancy for the first time since the third quarter of 2006 and the Hong Kong government giving a waiver on rates for the first two quarters, the cash flow is well above the level of the expenses and this was a meaningful contribution to the month's result;

5. my savings for this month were good although my income (which fluctuates from month to month) was towards the lower end of the typical monthly range and we had some unexpected medical expenses (treated as an expense for now but which will be recovered through insurance in a couple of months).

The only movements in investments this month were:

A. regular monthly contributions to Asian and European smaller companies funds;

B. sweeping up miscellaneous cash that his built up in certain bank accounts and applying it to (i) a very small addition to my position in silver and (ii) a small partial repayment of an overseas mortgage. I am quite pleased that I am now in the habit of monitoring these cash balances and utilising them instead of letting them sit in unproductive low or no interest bank accounts for prolonged periods.

So far 2007 is shaping up to be a great year financially. However, I am not satisfied with my asset allocation decisions on my funds/equities - a subject for another post.

Saturday, April 28, 2007

Investments are better than repayments

Yahoo Finance carried this interesting article comparing making early repayments on a home mortgage against investing the money that would otherwise be spent on those early repayments.

The study on which the article was based concluded that more than 40% of people faced with this issue would be better off putting the additional savings into treasury bonds/mortgage backed securities. For the reasons identified in the article, the 40% number is almost certain low - very low. The time frame for the comparison was 25 years and was based on a number of assumptions on matters such as tax rates, interest rates and the return on the fixed interest securities. While the analysis is obviously dependent on what inputs are used for the financial modeling, the conclusion seems pretty clear to me: if the interest rate on the mortgage is below the long term rate of return (after adjusting for taxes) and your time horizon is long enough, you are better off directing savings to investments and not making early payments on your mortgage.

This is essentially the same conclusion that I wrote about back in February in this series of posts on the returns , the risks and my rather conservative strategy in making additional investments in preference to additional mortgage repayments.

Personally, I prefer equities or real estate to bonds for this purpose as the expected return gap is larger. Obviously circumstances such as tax rates (current and future)and risk appetite are highly relevant. In my own case, while I am happy not to make additional investment in preference to early repayments, I have not taken the logic to its ultimate conclusion and gone for interest only loans.

An unsolicited offer (3)

As an update, our counter offer has been ignored. There has been no response from the person who made the unsolicited approach so I am now assuming that the matter is at an end.

The home as a retirement asset (3)

In the final instalment in this series I consider the role of the home in a retirement plan. The answers to the two previous questions were very clear (your home is an asset and is part of the calculation of net worth). This one is slightly harder and a lot will depend on factors such as personal circumstances, your personal retirement plan and your expectations about future house prices and rental levels.

Starting with the basics:

1. your house represents a store of wealth. As such it can be utilised to help fund retirement. For people who are poor savers, it may end up being their only significant asset;

2. you have to live somewhere. Unless you want to take environmentally friendly living to its logical extreme and sleep on the streets, your choices are to own or to rent your accommodation. In terms of cash flow owners have to pay various outgoings and maintenance while renters have to pay rent;

3. owning your own home usually has a feel good factor that is difficult to quantify but may well become more significant as people get older. Owning your own home (without a mortgage) gives people a lot of peace of mind.

Focusing on #1 as being the most significant factor, if you start to run out of money in your retirement, the value in your home can be utilised in a number of ways:

A. you can sell it (either outright or as a trade down). Sure, you still have to live somewhere but selling the home should be able to fund several extra years of living expenses. Alternatively, the proceeds from the sale of a home could be used to fund a move to an assisted living community or a nursing home (both or which are very expensive and likely to become more so);

B. you can raise money against it. For retirees this is typically a reverse mortgage which means you get to continue to live in the home for life. The financing costs may be expensive but it is an additional source of money to get you through your retirement years.

My own approach to look to the value of our home as a form of insurance policy. It is not intended to be a primary source of retirement funding but is a store of wealth which can be utilised as an alternative to eating cat food should things go wrong.

As a final point, I do not advocate reliance on the home as a means of funding retirement (other than as a source of a lump sum move to assisted living or a retirement home). Rather, I prefer to recognise the fact that the home has value which can be realised should the primary retirement plan run into difficulties.