Wednesday, December 31, 2008

Monthly Review - December 2008

December was the a very positive month in for my investments. Just about everything appreciated in value, savings were positive and I continued to enjoy full rental income from my properties. However, the fact remains that my mark to market investments collectively lost a considerable amount of money in 2008.

Here are the details:

1. my actively managed funds all gained during the month. I am still holding losses on many of them. I currently have investments in actively managed funds investing in Thailand, Taiwan, Eastern Small Companies, European Small Companies and Vietnam;

2. my equity ETFs all appreciated. I currently have exposure to Hong Kong, India and Taiwan;

3. my residual equity portfolio appreciated;

4. my commodity investments went sideways. I opened a small position in the Lyxor Commodities ETF during December. My other positions (also small) are in nickel and lean hogs;

5. all my properties are all fully rented and the tenants are paying the rent on time. I have both a positive cash flow and a surplus of income over expenses (which represents an increase in net worth). One lease has expired and has been renewed at a slightly higher rental;

6. currency movements were marginally favourable as the USD weakened against a number of currencies.

One portfolio investment was made near the beginning of the month (Lyxor Commodities ETF).

Contrary to expectations, my income rose during the month but this was largely a timing difference and is not expected to be sustainable. My spending was high due to the family holiday (fully provided for). For the month, my net worth increased by 3.01%. The year to date decrease is 1.37%.

A separate post reviewing my finances for 2008 will follow shortly.

Saturday, December 06, 2008

Book Review: The Panic of 1907

The Panic of 1907 is a short (177 pages excluding appendices) history of the stock market crash of 1907, the events that led up to the crash and the lessons learned as a result. As short as the book is, it provides a concise and easily read history of the crash and is sufficient to understand the causes and consequences of the crisis. The authors (Robert F Bruner and Sean D Carr) are academics who refer to extensive source materials for further or more detailed reading.

The events of 1907 were essentially a monetary crisis rather than a general economic downturn. Some of the more interesting points related to the the contribution of the gold standard to the crisis, the inability of governments to intervene effectively (or at all) and the nature of the banking systems without the equivalent of a central bank (the US Federal Reserve could be argued to be a consequence of the crisis).

It certainly lead me to consider what would have happened in the current crisis (which is also a monetary crisis) in the absence of things that we take for granted in today's banking system: prudential oversight, uniform audited accounting reports, capital adequacy requirements, deposit insurance and transparency/equality of information for investors and depositors.

One area in which I felt that the books was deficient is that it did not bring out the personalities and personal histories of the individual characters, such as Charles T Barney and J P Morgan, who played prominent roles in the crisis and the events that preceded it. A second area is that I did not really feel that my understanding of the historical time in which the events took place was improved by reading this book.

On the whole a good read that is clearly relevant to the crisis we are experiencing today but one that could have benefited from greater depth (in particular on the leading characters).

Tuesday, December 02, 2008

Have we seen the end of cheap mortgages?

HSBC became the latest bank in Hong Kong to raise its interest rates for new mortgage loans. The new rates will be between 1% and 1.5% below HSBC's prime lending rate. This represents an increase of about 75 basis points. New borrowers will be paying between 3.5% and 4.0% on their home loans.

The stated reason for the increase is to reflect the higher risk premium of lending to home buyers. HSBC is not alone as other banks have also raised their lending rates for much the same reason.

I find this a very odd explanation for the interest rate increase and a very odd method of reducing the risks which banks face in advancing mortgage loans:

1. the banks have already adopted lower valuations (generally below market) as a risk management measure. This has the effect of requiring a higher deposit from borrowers;

2. for luxury properties banks have reduced the maximum loan to value ratio that they will accept. Again, this requires a higher deposit which reduces the banks' risk;

3. in a market where borrowers are competing for funding, higher risk borrowers would have to pay more for their loans - in effect a risk premium. The mortgage market is not such a market as (i) bank deposits are still rising faster than banks can lend money out (ii) generally speaking banks are not charging higher risks premiums for different customers (except at the extreme ends of the lending spectrum - preferred customers and those who need mortgage insurance). The argument that banks need to charge a higher risk premium to home buyers simply does not stand up to the facts;

4. higher interest costs actually increase the risk of default by borrowers. While this is largely irrelevant to the risk premium argument, it is still a true statement;

5. inter bank rates in Hong Kong have fallen over the last few months. Three month HIBOR currently stands at around 2.04%. Deposit rates remain close to zero for small short term deposits. This makes the decision to increase lending rates odd;

6. there is no regulatory pressure on Hong Kong banks to increase the capital needed to support mortgage lending.

A more likely explanation is that the banks are simply attempting to increase their lending margins. In a free and competitive market there is nothing wrong with this - if supply side competition kicks in the increases will not last long. If supply side pressure does not push interest rates back down, then the increases are no more than a reflection of supply and demand for mortgage loans.

On the latter point, the build up of bank deposits and the multi-year fall in the loan to deposit ratios have been cited as reasons why mortgage rates have been pushed as low as they went in the the last few years. The latest data from the HKMA may suggest that this trend is reversing. The rate of increase in HK$ and US$ deposits has been slowing for about a year now and the HK$ deposit level fell in absolute terms in September. US$ deposits and deposits in other currencies (mainly RMB) continue to rise (at a slower rate) but the net effect is that the decline in the loan to deposit ratio has reversed its trend and has been rising steadily during 2008. If this trend continues it may be some time before we again see the relatively cheap mortgages that we have enjoyed for the last few years.

Friday, November 28, 2008

Monthly Review - November 2008

November was the sixth successive month in which my investments declined in value. However, savings and net rentals were sufficient to result in a small increase in net worth for the month.

In financial terms, my investments declined (again) and the currency moved against me (again). In both cases the adverse movements where much smaller than in September or October.

Here are the details:

1. my actively managed funds all lost money. I am now holding losses on all of them. I currently have investments in actively managed funds investing in Thailand, Taiwan, Eastern Small Companies, European Small Companies and Vietnam. In a demonstration of the high beta nature of emerging markets and the leverage of the currency factor, some of my funds are down about 50% in HKD/USD terms;

2. my equity ETFs all lost money. I currently have exposure to Hong Kong and India. I added to both positions towards the end of the month;

3. my residual equity portfolio lost money local currency terms and lost more money due to adverse exchange rate movements;

4. my commodity investments went sideways. Fortunately, I only have positions in nickel and lean hogs left and these are very small (even smaller now that they have declined so far);

5. all my properties are all fully rented and the tenants are paying the rent on time. I have both a positive cash flow and a surplus of income over expenses (which represents an increase in net worth). One lease has expired and the tenant is staying in place while we see if we can reach agreement on a new lease;

6. currency movements were adverse as the USD strengthened and compounded the loss on my investments this month.

Two portfolio investments were made towards the end of the month (Hong Kong and India ETFs). I made made two small trades in warrants on the Hang Seng Index - one profitable and one loss making.

My income rose during the month but this is not expected to be sustainable. My expectation is that my income will decline by at least 20% from its peak. My spending was moderate. I did have to pay for the airfares and accommodation for our Christmas holiday - however this was already provided for. The resulting savings and the net rentals on the investment properties were greater than the losses on my investments - but not by much. For the month, my net worth increased by 0.37%. The year to date decrease is 4.25%.

Thursday, November 27, 2008

India ETF purchased

I completed my cash draw down on Monday when I added to my position in two India ETFs.

I picked India as for the second part of my attempt to make some investments at what appear to be attractive levels based on my views that:

1. the Indian economy has good long term growth prospects driven by a combination of demographics, deregulation, improving infrastructure and the rapid expansion of a skilled, educated and affluent middle class ;

2. there is considerable scope for interest rate cuts and other government measures to support or stimulate the market;

3. the Indian market has lagged many other markets in bouncing off its recent lows.

I initially placed an order for units in the Lyxor India ETF (stock code: 2810) which I already hold before remembering that the iShares Sensex India ETF is also listed in Hong Kong now (stock code: 2836). As the latter is larger, more liquid and has lower fees I attempted to switch my order from the Lyxor fund to the iShares fund and ended up with some of each. This is sub-optimal but is unlikely to do may any real harm.

I have now reduced my cash position to the equivalent of about 2.5 years living expenses and accrued tax liability.

Wednesday, November 26, 2008

Positive savings rate in the US

According to to the U.S. Bureau of Economic Analysis, the savings rate in the US has risen over the last two financial quarters and is in positive territory.

Although not showing a return to the (modest) levels prior to the consumption frenzy of the last few years, it is still an improvement. Given that an excess of consumption and a deficiency in savings by American households has been cited as one of the causes of the current economic crisis this is, in one sense, encouraging. However, it also has to be remembered that high levels of spending by American consumers were a significant contributor to the last economic boom (both in America and the countries which sold goods and services to those consumers). Less spending by American consumers has to result in less income for the companies and individuals who supplied goods to them. (The economic theory known as the paradox of thrift states that increased savings levels results in lower levels of income for the economy as a whole.)

A few comments on the savings data:

1. American households are doing the opposite of governments and central banks - they are spending less in the face of economic uncertainty and adversity;

2. American savings rates are still significantly below rates in Asia. In fact a savings rate of just over 1% is very low by any measure;

3. the data does not reflect the wealth effect of rises and falls in asset values;

4. if the economy does shed jobs (and incomes for those still in employment declines), it is an open question whether the trend will be reversed as savings are drawn down to fund living expenses and/or households will make further cutbacks in spending thereby perpetuating the economic contraction.

Tuesday, November 25, 2008

Hong Kong Tracker ETF Purchased

This morning I purchased some Hong Kong Tracker (stock code: 2800) at HK$13.00.

While I expect economic conditions to get worse before they start to improve, I also recognise that:

1. the local market has fallen nearly 60% from its high point in early 2008Q4. Historically there have been very few occasions in which such a dramatic decline has not represented a good buying opportunity - if one can take a multi-year view of the markets;

2. gearing is relatively light amongst the Hang Seng Index constituent companies. They are well placed to weather the economic storm;

3. the banking sector is in much better shape than its counterparts in the USA and Europe. Sure they are taking write downs on assets held on their books but the scale of those losses is relatively small;

4. the Hang Seng Index is heavilty weighted towards China. While decoupling has been debunked at least in part, I remain optimistic that China's economy will be a relative out performer over the next few years;

5. the yield is higher than well rated HK$ bonds. While dividend yields from the Hang Seng Index constituent stocks canbe expected to come under pressure, even if the dividends contract by 50% (which is more than the Asian crisis), on a yield basis it is still more attractive than bank deposits and can be expected to recover over time;

6. in terms of valuation parameters (PE ratios, PB ratios) the market is as cheap as it has been for several years. Yes it can get cheaper, but as my attempts to day trade have demonstrated, timing the market is not a skill that I can claim to have any talent for.

My cash levels remain solid with about 2 years of worst case living expenses and accrued tax liability sitting in the bank (earning very little).

Monday, November 24, 2008

Negative equity is back (2)

Earlier this month I commented that negative equity situations had returned to the Hong Kong property market with an estimated 10,000 cases. That number was based on media reports which largely relied on comments from property agencies and other analysts.

On Friday the Hong Kong Monetary authority (which regulates banks in Hong Kong) announced that the number of negative equity cases in Hong Kong had risen to 2,568. This is roughly a quarter of the number reported earlier. Why such a big difference? The obvious reason is that the HKMA figure is as at the end of September. Property prices have fallen further in the month and a half - by 14.6% according to the Centa-City Index - which is likely to account for most of the difference.

The obvious question is how bad will the property and mortgage market get during this down part of the cycle? Some numbers to consider:

1. during the last low point (2nd quarter 2003), an estimate 106,000 homes were in negative equity (about 22% of all mortgaged homes);

2. residential property prices have fallen an estimated 20-30% off their peak earlier this year. During the last down turn prices fell by an estimated 60% over a six year period;

3. in May 2003 the total amount of outstanding mortgage loans was about HK$520 billion. It was just below HK$600 billion at the end of September. This probably represents a high water mark for the next few years at least. 14% growth over a five year period is quite low considering how far the property market advanced during that period. I take this as an indication that the average household inHong Kong is relatively lightly geared and has a healthy cash position (which is consistent with the low loan to deposit ratios at banks in Hong Kong);

4. banks have generally been conservative with their valuations. Even during the boom times they would only lend 70% loan to value and there was relatively little anecdotal evidence that valuations were inflated;

5. interest rates are very low (in both absolute and real terms) - certainly far lower than in 1997 when the market reached its previous peak.

While there is likely to be scope for further downside in the market in response to job losses, cuts in bonus levels, reduced willingness on the part of banks to lend money and general lack of confidence, it is hard to see property prices falling by 60% off their peak levels once again. It is too soon to be buying but the time will come. If I have learned two things from the experiences of previous economic cycles they are that assets acquired when times are seemingly bad will be better investments than assets acquired when times are good and that patience is one of the most important disciplines needed by an investor.

Saturday, November 22, 2008

HSI Call Warrant Sold - loss taken

When the rally I had expected to follow the PRC stimulus package failed to materialise, I took to loss on the call warrants purchased earlier in the week . The sale price us HK$0.105 showing a loss of about 38%. This loss neatly erased the net gains on the four previous short term trades made this year.

The ability to lose 38% of my investment in a few days shows just how much volatility and implied leverage these instruments involve. While this volatility and implied leverage gives the opportunity to make a lot of money very quickly, as I demonstrated this week, it also works the other way when I get it wrong. To illustrate the point, the Hang Seng Index jumped about 5% (in response to the HKMA's stimulus package) after I sold on Friday. If I had delayed the sale, my loss would have been only about 16%.

Incidentally, with the markets being so volatile, a strategy of buying calls and puts at the same time and trying to trade out both sides at separate times may be a valid strategy.

Friday, November 14, 2008

HSI Call Warrant Purchased

This morning I purchased a call warrant on the Hang Seng Index (stock code 15513) at HK$0.165.

Given the volatility which the markets are continuing to experience, opportunities to make (or lose) money through short term trading are quite appealing. That said, I am only using amounts of money which are relatively insignificant. Even if I lost 100% of the amount invested, it would not have any noticeable effect on my finances.

Thursday, November 13, 2008

A healthy state of mind?

Hong Kong share prices have fallen by over 50% from their highs, property prices have come back at least 20% (more at the luxury end of the market), people are being laid off, just about every piece of financial news is negative and both the experts and the amateurs alike are generally expecting things to get worse before they get better.


At a more personal level, our household net worth has fallen by about 19% from its peak (our biggest asset class is leveraged Hong Kong real estate), my income has fallen by more than 20% from its peak, we are carrying quite a lot of debt and our household expenses have risen (primarily due to our younger child starting school).


I should be lamenting the losses, kicking myself for not selling at the highs and worrying about the future. I find that I am doing none of these things. So why do I not feel worried about the future or upset about the losses:


1. even though my income has fallen by 20%, it is still considerably higher than our expenses. We are accumulating cash each month and have two incomes;

2. while our properties have declined in value, all but one (possibly two) are worth more than we paid for them, all have positive equity and collectively they are generating a positive cash flow each month and the p+i mortgages are being amortised a little bit each month;

3. I have been through two previous serious economic downturns and survived both. The keys to getting through are in part maintaining a positive cash flow, letting go of losing investments which do not have a serious prospect of recovering and building a cash reserve;

4. recognising that the opportunities that recessions generate later on will more than make up for the pain experienced during the down side of the cycle. The cash reserve that we are building up will fund future investments at (hopefully) very attractive prices;

5. sure I have made several loss making investments but it could have been a lot worse. I could have been one of the buyers of Lehman mini-bonds, speculated heavily in derivatives or have invested in shares on margin. Things could be a lot worse.

Maybe I am simply too optimistic? Or it may be that I am simply benefiting from having managed my personal finances prudently for several years.

HSI Put Warrant Sold

Yesterday I purchased some put warrants on the HSI (code: 15499) at HK$0.161. This morning I sold them back at HK$0.191. Net of transaction costs, I made a return of around 16% on the transaction. Regrettably, the amount involved was very small and in absolute terms the profit was nothing to get excited about (enough for three or four decent dinners with Mrs traineeinvestor with some nice wine).

This was the fourth short term trade this year. So far I have three profitable trades and one loss making trade. The numbers are not meaningful and I have no real intention of putting more money into trading activities. I am content for trading to remain an occasional hobby.

Wednesday, November 12, 2008

HSI Put Warrant Purchased

One of my vices is having delusions about making a living as an active trader of investments (shares, commodities etc). Needless to say, the urge to trade actively is one that should be (and usually is) constantly suppressed. Occasionally I allow myself to play with relatively small amounts. So far this year I have made 4 short term trades. Three have made money and one has lost money for a small net gain. I suppose I could say that it is not doing me any harm.

As examples: I lost money on a silver trade in August and made some money buying put warrants on the Hang Seng Index in March.

Today I purchased some HSI put warrants (15499) at HK$0.161 in the expectation that the HSI will weaken in the short term as the initial optimism over China's stimulus package falls away.

Tuesday, November 11, 2008

Negative equity is back

This should not come as a surprise to anyone but the number of negative equity cases in the housing market is back to an estimated 10,000. Most of these would have been people who purchased in the first eight months of this year with less than the standard 30% deposit.

Given the well regulated nature of the Hong Kong banking sector, banks can only lend up to 70% of property's value. Buyers who want to borrow more must either get insurance ( from the Hong Kong Mortgage Corporation) or go to a finance company for a second mortgage. Both of these are expensive options. However, given that banks have become more conservative in valuing properties for mortgage purposes some home buyers have been forced to resort to them. In effect it is the most marginal buyers who are now facing negative equity.

There is, as yet, no indication that mortgage defaults are rising from the extremely low levels experienced over the last few years.

Lastly, during the SARS epidemic at the end of the Asian financial crisis in 2003, negative equity cases peaked at an estimated 103,000 cases.

Sunday, November 09, 2008

Book Review: Time: A User's Guide

Like many people, I find that time management is one of the areas of my life that seems most difficult. The pressures of trying to accommodate all of the things one either has to do or would like to do into a busy schedule, over which I seldom seem to have any control, is a constant source of frustration. I've been grappling with this issue from much of my career. Traditional time management books and lectures seem to be of little use. Even good ones do not really explain why we feel like we are under so much time pressure. Late last year I made a conscious decision to try and address the time issue. Some of the techniques I decided to adopt were picked up from other books or searching the internet. A few are mentioned below. Stefan Klein is the first writer (at least that I have read) who explains why we get so stressed about time management.

Klein's book explains why people often complain about the lack of time in their lives and offers suggestions to help people address the issue. The book looks at the differences between long term and short term memory, how we respond to stimuli and the negative effect of distractions to getting things done. These points are important in explaining how inefficiently we often use the time which is available. Along the way, Klein also explains why attempts at multi-tasking not only do not work but are also counter productive and the differences between night owls and day larks.

Klein offers some practical advice for managing time issues better - not only to make better use of time but to reduce the feelings of stress that seem so common in our society. Klein's six suggestions are:

1. exercise a degree of control over your schedule. The more control over your schedule, the less stress you will experience and the easier it will be to get things done;

2. live in harmony with you biological clock. Night owls and day larks work to different schedules and trying to fight your body's natural clock is counter productive;

3. cultivate leisure time. Create some free blocks of time to destress and switch off from short term stimuli (such as mobile phones and blackberrys);

4. experience the moment. Even when you are bored and have nothing to do (waiting in line), simply observing and thinking about your surroundings can help;

5. learning to concentrate. The mind cannot concentrate on two things at once. Avoid multi-tasking - it is counter productive;

6. setting priorities. While time management books will often talk about things being urgent or important, Klein suggests comparing the consequences of not getting things done as a means of determining priorities.

Some of these will be difficult to achieve. Trying to schedule uninterrupted blocks of leisure time is not easy if you work in a demanding job and have young children at home. Still, having been attempting some of these techniques even before reading the book, I can confirm that they do work. Some of the examples I have been putting in to practice during the course of this year include:

(i) turning off my mobile phone, set my office phone to bust and turning off my computer monitor at work for short blocks of time (15-20 mins). This gives a perceptible boost to my productivity;

(ii) scheduling some "me" time each day. If I am stuck in the office until 2 am one day to meet a deadline, I will take time out the next day or so (during office hours if need be) to go to the gym, browse the bookshop, dash home to pick up one of my children from school etc. Put differently, I make sure that for at least 2 or 3 days a week, one or two things that are important to me take priority over anything else.

Time: A User's Guide is highly recommended.

Wednesday, November 05, 2008

Taiwan ETF purchased

The feeling that I am sitting on too much cash and the sight of markets which are 50% below their recent highs finally proved too much for me and I made a modest investment into a Taiwan ETF (stock code 2837). My purchase price was HK$4.83.

Why Taiwan? The investment was largely based on fundamentals - it is one of the cheapest of the better regulated Asian markets - and the expectation that continued improvements in relations with Beijing will result in tangible economic benefits and improved sentiment/investor confidence.

Incidentally, the range of ETFs listed in Hong Kong has been growing. In addition to ETFs for Hong Kong, PRC, India, Nasdaq, Russia and commodities we now have ETFs for Taiwan and Japan. (There are a few others, but they generally do not have sufficient trading volume even for a small investor like me.) This is good news as it will reduce the need to look to high cost managed funds for equity investments.

Saturday, November 01, 2008

Bank valuations lowered (again)

The latest on-line mortagee valuations available on HSBC's website have been reduced again. This is the second reduction in the last two months. For the properties we own, the drawdown from the peak valuations set in the first quarter of this year ranges from 19% to about 6%. As a generalisation, the more expensive properties have shown the biggest percentage declines and the smallest properties the lowest percentage declines in value. Recent sales data from Centaline suggests that the HSBC valuations are reasonably close to market values.

I have no intention of buying another property this year as (i) I think that the market has potential to fall further and (ii) my wife and I are each facing a period of job uncertainty and we wish to keep a cash buffer against the possibility of unemployment. I will hold off. However, when I do start buying again, I may well look outside Hong Kong to markets in the UK, Australia or New Zealand where falls in the value of property and falls in the currencies combine to make a more attractive investment proposition. Of course, investing overseas has its own issues, but if the return is there, it may well be worth it. As an added factor, at the rate the JPY is appreciating in response to the unwind of the carry trade, using a JPY mortgage to purchase a property in one of the markets hit hard by the credit crisis offers the prospect of making money on the mortgage as well.

Monthly Review - October 2008

October was the fifth successive month in which my investments declined in value. It was also the worst of the five months in terms of investment losses. In financial terms, my investments declined sharply (again), the currency moved against me (again) and my income fell (again).

In effect the rise of emerging markets, the rise in Hong Kong property prices, the rise of commodities and the fall of the USD which had combined to work so strongly in my favour for four years have all gone sharply into reverse and the trends seem to be accelerating.

Here are the details:

1. my actively managed funds all lost money. I am now holding losses on all of them. I currently have investments in actively managed funds investing in Thailand, Taiwan, Eastern Small Companies, European Small Companies and Vietnam. In a demonstration of the high beta nature of emerging markets and the leverage of the currency factor, some of my funds are down about 50% in HKD/USD terms;

2. my equity ETFs all lost money. I currently have exposure to Hong Kong and India;

3. my residual equity portfolio lost money local currency terms and lost more money due to adverse exchange rate movements;

4. my commodity investments lost money. Fortunately, I only have positions in nickel and lean hogs left and these are very small (even smaller now that they have declined so far);

5. all my properties are all fully rented and the tenants are paying the rent on time. I have both a positive cash flow and a surplus of income over expenses (which represents an increase in net worth);

6. currency movements were adverse as the USD strengthened and compounded the loss on my investments this month.

No investments were made in October.

My income once again declined during the month and is expected to decline further over the next few months. My expectation is that my income will decline by at least 20% from its peak.

My spending was moderate. The resulting savings did not even come close to matching the losses on my investments. For the month, my net worth decreased by 6.34%. The year to date decrease is 4.6%.

Wednesday, October 29, 2008

Hong Kong Property Prices Falling Sharply

After rising in the first quarter, Hong Kong property prices have fallen sharply over the last six months or so. Although hard numbers are not easy to come by and are not always useful, estimates in the order of a fall of 20-30% from peak valuations are often being quoted. These numbers seem to be about right although there is considerable variation depending on which sector of the market is being looked at. Rentals have fallen by much lesser amounts, but are also trending downwards. Transaction volumes have also contracted significantly as buyers keep their hands firmly in their pockets.

As a homeowner who also has a leveraged portfolio of investment properties, this is considerably more significant to my personal finances than the 50-60% falls in the local stock market.

Banks are also cutting back on lending. They are doing this in three ways. The first is by increasing the deposit requirement (particularly for luxury homes). The second is by tightening the criteria for income coverage. The third is by raising the interest rates they are charging for new loans (which has an impact on affordability).

There is also rising anecdotal evidence that buyers are walking away from contracts rather than settle. It's cheaper to forfeit a 5-10% deposit than to buy a property that is not worth 10-20% less than it was when you signed the provisional agreement to purchase.

While the the financial pain I am experiencing is quite acute, I have no concerns regarding personal solvency given that I still have very healthy equity in all the properties we own, positive cash flows from existing tenants, a secure (although declining) income from my job and have been building up cash since the end of 2007 (the purchases made since then have been relatively minor after netting out positions sold). At some stage I will deploy the cash built up to acquire additional assets - when and what are yet to be determined - however, if the real economy continues to deteriorate the option of repaying some of our mortgages exists. While this would be sub-optimal from a longer term investment perspective, it would improve cash flow and reduce risk levels.

Monday, October 27, 2008

I guess this answers the decoupling question

One of the questions that was actively debated earlier this year was whether or not the emerging markets had decoupled from the western developed economies (in particular, the US).

With share markets around the world seemingly in a competition to see which can fall the furthest from their respective peaks (ditto commodities) and the common driver being concerns about a global recession being lead by the US housing market, the answer to the decoupling question today has to be that decoupling is far less of a reality than many had believed (or hoped).

My own take back in January has, unfortunately, proven to be optimistic in so far as the financial markets are concerned. Even more unfortunately, the financial meltdown is beginning to show signs of spreading to the rest of the economy. Corporate insolvencies, job cut backs and salary reductions (mostly through bonus reductions) are happening in Hong Kong already. Property prices are following equities (although not as dramatically). This is a global phenomena - whatever decoupling has happened in the world's economies it has not been enough to insulate the rest of the world from the global deleveraging that is taking place.

Saturday, October 25, 2008

Book Review: Understanding Asset Allocation

Asset allocation was one of two investing topics which I had resolved to learn more about some time ago. I picked Victor Canto's "Understanding Asset Allocation" from several books on the subject at my local books store not only because it came with solid recommendations (and not just by those whose reviews were printed on the dust jacket) but also because it was the shortest of the choices available. I was hoping for a relatively light easy-to-read introduction to the subject.

While I did find Canto's take on the subject interesting, it was heavier going that I had hoped for. I put this down to an expectation issue on my part rather than a criticism of the book.

On the whole I did get a good introduction to an important subject. Canto explains different asset allocation models (strategic asset allocation and cyclical asset allocation) clearly and supports them with historic case studies showing how the different models worked in different market conditions. The major take away I took from this book was the importance of anticipating and participating in asset cycles. Of course, this requires an ability to successfully cycle into the asset classes which will outperform during the following period of time (usually measured in years) and to avoid the asset classes which are likely to underperform.

One of the more interesting points raised is Canto's view on the debate between active and passive fund management. In Canto's view active management tends to (or perhaps has a better chance of outperforming) during small cap cycles while passive managment is the better option during large cap cycles. I wasn't wholly convinced as too much seems to depend on your choice of active fund manager, but in spite of my reservation, Canto presents a reasonable amount of data to support his views.

While the explanation of asset cycles was useful and something to consider in my investment decision making going forward, two issues remain.

The first issue is a practical one. Outside the United States, the ability to invest in low cost funds which track the relevant indexes is quite limited. Certainly, there is nothing available in Hong Kong that would enable the type of diversification and asset allocation that Canto describes to be implemented.

The second issue is a conceptual one. If asset allocation is a methodology that in effect attempts to generate above market returns, by definition it is impossible for every investor to successfully implement. This does not mean that the attempt should not be made, but the bottom line is that for every investor who beats the market by cycling out of asset classes that will underperform and into those which will outperform, almost by definition there must be someone who, consciously or not, is doing the reverse.

On the whole a useful book that introduced my to another way of looking at asset selection.

Friday, October 03, 2008

Monthly Review - September 2008

A bloodbath.

September was the fourth successive month in which my investments declined in value. It was also the worst of the four months in terms of investment losses.

In financial terms, my investments declined sharply, the currency moved against me and my income fell (again). To add to the pain, HIBOR jumped by about 1% which has increased the cost of some of my mortgages and the banks have finally reduced the mortgagee values of Hong Kong residential prices.

In effect the rise of emerging markets, the rise in Hong Kong property prices, the rise of commodities and the fall of the USD which had combined to work so strongly in my favour for four years have all gone sharply into reverse.

Here are the details:

1. my actively managed funds all lost money. I am now holding losses on all of them. I currently have investments in actively managed funds investing in Thailand, Taiwan, Eastern Small Companies, European Small Companies and Vietnam;

2. my equity ETFs all lost money. I currently have exposure to Hong Kong and India;

3. my residual equity portfolio lost money local currency terms and lost more money due to adverse exchange rate movements;

4. my commodity investments lost money/ Fortunately, I only have positions in nickel and lean hogs left and these are very small (even smaller now that they have declined so far);

5. I have one vacant property (which will be occupied in two weeks time). However, the remaining properties are all fully rented and the tenants are paying the rent on time. I have both a positive cash flow and a surplus of income over expenses (which represents an increase in net worth). I also got stuck with two large bills (i) to touch up the vacant flat and (ii( to replace two air conditioning units in another property;

6. currency movements were adverse as the USD strengthened and compounded the loss on my investments this month.

The only investment made this month was a profitable day trade in warrants linked to the Hang Seng Index. Regrettably, the amount involved was insignificant.

My income declined during the month and is expected to decline further over the next few months. My spending was in the moderate. The resulting savings did not even come close to matching the losses on my investments.

For the month, my net worth decreased by 4.08%. The year to date increase is now a very anemic 1.85%. There is now a very real possibility of my net worth showing an overall decline for this year.

Looking forward, a slowing global economy will continue to impact my earnings and I have revised my estimated income down again and expect my monthly income to be 15-20% less than its peak earlier this year. Unless I decide to cut back on living expenses, this will result in a reduced savings rate in the future.

Wednesday, September 24, 2008

Book Review: The Eccentric Billionaire

In the early 1970s, John D MacArthur was one of only five American billionaires. Far less has been written about MacArthur than his four contemporaries (Howard Hughes, J Paul Getty, D K Ludwig and H L Hunt). To a large extent this is because MacArthur's story is far less colourful than the other leading tycoons of his day. This does not make MacArthur either uninteresting or uneducational. While Nancy Kriplen's biography provides a very readable summary of MacArthur, it feels somewhat light on detail and the anecdotes that often illustrate the character of the subject.

After a relatively lower class (but not impoverished) childhood, followed one of his elder brothers into the insurance business working as an insurance salesman before eventually buying his own insurance company and growing Banker's Life and Casualty into one of the larger insurance companies in America. Profits from his insurance business were reinvested in real estate. The rise of MacArthur's business empire and his eventual decision to leave the bulk of his fortune to charity (allegedly to reduce the amount of his estate that would be lost in taxes) are covered in sufficient detail.

At a personal level, the biography conveys some measure of what MacArthur was like as a man: driven, frugal in the extreme, dysfunctional as a family man, generous to people he liked, litigious and so on.

However, at the end of this relatively short book (the main text is only 175 pages long) I was left with the impression that I had been presented with a summary of the man and not a detailed study of his life. In short, while I learned a little bit about MacArthur, I was disappointed at the lack of depth.

Monday, September 15, 2008

Restoring emotional capital

In terms of my personal finances, 2008 is rapidly developing into the worst since the Asian crisis. Commodities and equities have all shown negative returns. Currency movements have been negative. The income from my job has declined about 11% since April and is expected to decline further. My overseas properties have fallen somewhere between 10-15% (est) over the last 12 months.

The only positive news is that mortgagee values of Hong Kong properties (which are far and away our biggest asset class) still stand at higher levels than at the beginning of the year. Given that transaction volumes have fallen sharply and people are beginning to accept both (i) that the global financial crisis and (ii) the slowing of the PRC economy are going to have some impact in Hong Kong, it is hard to see property prices staying at current levels.

My decision making has been mixed. Accumulating cash has been a good call (in spite of the corrosive effect of inflation) as was cancelling my monthly contributions to two small cap funds. Unfortunately, I made far too many investments in falling markets, all of which have shown losses this year.

In short, my emotional capital is currently at very low levels and my confidence both in financial markets and my ability to make the correct decisions is also low.

How to restore that emotional capital? There are several obvious steps:

1. stop making decisions for a time. I have been through three severe economic contractions during my adult life. In all three cases, superb opportunities have been presented .... for those who are both patient enough not to invest too soon and brave enough to invest before it is recognised that the crisis is over. I should impose a moratorium on new investments for a few months. I should, but I suspect that will be a hard resolution to keep;

2. review current investments. Previous experience has shown that quality assets will recover their value. It is the more marginal assets that are at risk of loosing all their value. I have already taken losses on silver and exited the Lyxor commodities ETF at a modest profit. No decisions have been taken regarding my remaining investments;

3. consider job security. My income has fallen and is expected to fall further. There is not much I can do about it. Job security is reasonable and the combination of a long notice period and a tail on my income, gives me a degree of security that is good by private sector standards .... but not assured;

4. focus on the positive. Recessions require less time in the office and allow more time for other things. I'm still waiting for the work loads to fall off a bit, but actually looking forward to having less to do in the office (and a fall in income is an acceptable price to pay for a better work life balance);

5. pay off some debts. I have no difficulty in carrying my mortgages even during a recession. However, if I am not making new investments of any substance for some time, repaying a mortgage or two is an acceptable alternative to holding cash;

6.catch up on the backlog. I have a very long list of things that need to get done (both at work and outside it) or which I want to do. Now is a good time to make a start on those projects (and hopefully finish a few). The sense of accomplishment will be good antidote for the general feeling of negativity.

Anything else?

Wednesday, September 10, 2008

Is this capitulation?

Up until the middle of last week, the daily read of newspapers, blogs and other financial commentators produced a wide variety of views on the current state of financial markets. Typical sentiment included the mildly optimistic ("this is a good opportunity" and "we are seeing value based opportunities"), the hugely pessimistic ("housing is still over valued", "deleveraging has only just begun" etc) and the indecisive ("it could go down further before it goes back up"). Recommended actions varied accordingly.

Towards the end of last week there was a noticeable shift in tone towards the hugely pessimistic. There is far more talk about how much further markets have to fall, how bad the recession is going to be and investors starting to cut their losses (especially in commodities). Talk of value and opportunity became increasingly hard to find.

The question I have to ask myself is whether we are getting close to what Sir John Templeton would describe as the point of "maximum pessimism"? Obviously my ability to predict the future is no better than anyone else's (and my track record this year has been generally bad). However, instinct and experience suggest that hopes of a short downturn, a mild recession and a quick recovery appear to be fading. We are also beginning to see meaningful evidence (beyond the anecdotal) that the current economic problems which originated in the United States are spreading to Asia.

As hard as it is to admit to being wrong, I have decided to cut my losses on some of my investments and hold more cash. I have placed orders to sell the last of my remaining holding in the Lyxor commodity ETF (at a small profit) and silver (at a material loss). I am reviewing my other investments but will probably ride out the equity funds and be content to build my cash until I have a much higher degree of confidence that the scope for further downside is limited. One of the points I will have to keep reminding myself of is that markets tend to lead the economy - stock markets have historically rebounded before the underlying economy rebounds. In effect, the best time to buy aggressively is while most "experts" are still negative.

I have also recently revised my income expectations down by 10%. That is starting to look insufficient. I will rework the numbers over the weekend, but will probably need to reduce my income expectations further.

Monday, September 08, 2008

Book Review: The Black Swan

Nassim Nicholas Taleb's "The Black Swan" (subtitled "The impact of the highly improbable") is a provocative and interesting read. The real strength of "The Black Swan" is that it prompts the reader to think and, in a few places, challenges some of my beliefs (or at least made me consider them anew). That alone makes me rate the book highly.

Among the book's many high points are the way it produces good reasons why financial analysts, economic forecasters and governments (among others) are not worth taking too seriously (Taleb describes them as being more or less fraudulent). This alone justifies the book as a seriously good read from an investing and financial planning stand point. That said, this is nothing new (see "The Zurich Axioms" by Max Gunther as another example). The track record of people who forecast the future is pretty dismal. Even Nostradamus has a pretty mediocre track record compared to his reputation. His criticisms of classical economic theory are also well expressed (although there was nothing novel in Taleb's views).

I did not agree with all of Taleb's views. As examples (all paraphrased):

1. The problem of the upper bound: I disagree with the notion that there is no practical difference between knowing that there is no upper bound and knowing that there is an upper bound but not knowing where it is. Often there will be no practical difference but in some situations, knowing that there is a limit to the matter under consideration (however uncertain) will have implications for decision making. The turkey problem can illustrate this point. The turkey has no idea of how big he will get, but knows that at some point its growth will come to an end (reach its uncertain upper bound) when it becomes someone's dinner. For the turkey the difference is significant;

2. The reasoning that it is necessary to conceive what technology will be invented in the future in order to predict the future is impossible to obtain because if we could know what technology would be available in the future we would invent it now, thereby rendering the prediction meaningless does not hold up to facts. The concept of a flying machine was conceived centuries before a practical flying machine was built. The concept of space flight was around for decades (at least) before Sputnik.

There were other items as well.

I have mixed views on the barbell strategy. Sure, it would have been an ideal investment strategy over the last year or so with declining stock markets. However, I have to wonder how it would have performed (in both absolute and relative terms) if we had unexpectedly high and persistent inflation.

Taleb's writing can be irritating. He comes across as being overly self opinionated and a man who has a very high opinion of himself (and a low opinion of many other people). It would have been a more pleasant read if the author had been a little bit more humble in expressing his views.

In conclusion, a very thought provoking and interesting read. Highly recommended.

Sunday, August 31, 2008

Monthly Review - August 2008

August was the third successive month in which my investments declined in value. It was scant comfort to note that the loss was entirely attributable to adverse currency movements (in local currencies, my investments recovered a token amount of the losses of the preceding two months). My savings were sufficiently robust to tip the net result for the month into positive territory.

Here are the details:

1. my actively managed funds were mixed. I currently have investments in actively managed funds investing in Thailand, Taiwan, Eastern Small Companies, European Small Companies and Vietnam. The loss on the Vietnam fund was reduced by a strong recovery in the Vietnamese stock market;

2. my equity ETFs generally went sideways. I currently have exposure to Hong Kong and India. My exposure to Hong Kong was increased during the month;

3. my residual equity portfolio appreciated in local currency terms but ended up losing money due to adverse exchange rate movements;

4. my commodity investments lost money, a situation that was compounded by my attempt to pick a short term bottom in silver;

5. my properties are all fully rented and tenants are paying the rent on time. I have both a positive cash flow and a surplus of income over expenses (which represents an increase in net worth). That happy situation will come to an end in September when one tenant vacates. I also got stuck with a large bill (due next month) to replace two air conditioning units in another property. Even with the vacancy and the additional expense, the portfolio should still be close to break even on a cash flow basis and make a positive contribution to my net worth each month;

6. currency movements were adverse (the USD recovered some of its losses) and were the biggest single factor in the net loss on my investments this month.

The only investments made this month were a purchase of HK Tracker units and some silver. My income was in at the high end of expectations this month. My spending was in the low range. The resulting savings were more than previous months and helped to produce an increase in net worth of 0.3% for the month. The year to date increase is 6.1%.

Looking forward, a slowing global economy is starting to impact my earnings and I have revised my estimated income down by a slightly arbitrary 10% going forward. Unless I decide to cut back on loving expenses, this will result in a reduced savings rate in the future.

Saturday, August 30, 2008

Should I carry a mortgage in retirement?

The standard advice is that all debts (possibly excepting a reverse mortgage) should be repaid in full before retiring. My own take on this issue also tended towards the conclusion that retirement should be debt free. My reasoning is here: A debt free retirement?

Given where interest rates are today (all but one of my mortgages is currently costing me less than 3% pa) it is not difficult to persuade myself that investments in either real estate or equities should be able to produce total returns which are meaningfully above the cost of debt. There is no such thing as a free lunch, and investing rather than paying off the mortgages carries with it a higher degree of risk. The question is whether the potential for higher returns is sufficient to justify the additional risk involved. In particular, could I live (both financially and emotionally) with the possibility that the investment would show a return which was below the cost of servicing the debt?

My conclusions are as follows:

1. if there is enough margin in my budget and/or my lifestyle so that I should never need to be be a forced seller of any investments (either to make the mortgage payments or to meet lifestyle expenses), then the additional risk is reduced to the point where I would be willing to carry debt in retirement (but probably not as much as at present);

2. if there is insufficient margin in my budget and/or lifestyle to be highly confident that I would never be a forced seller of investments, then the potential for better returns is not sufficient to justify the additional risk involved.

In the latter situation, the retirement numbers are probably going to be a bit marginal in the first place and (in my case) I would prefer to work for an additional year or two to ensure that I would start in the former situation. It follows that there is a strong logical case for maintaining at least some debt in retirement (although not as much as I carry at present).

There is one other advantage of carrying some debt in retirement. The total pool of assets will be larger which allows for greater diversification and will, to a greater or lesser extent, mitigate the additional risk involved in carrying a mortgage.

There is also one very obvious risk involved. Interest rates are currently very low. In a situation where interest rates rise, it is easy to expect investment values to fall. This creates a rather unpleasant situation where expenses are rising and the ability to cut those expenses by selling investments to pay off the debt is being challenged by falling investment values. This is a very real risk and suggests that, without the back up of earned income, retirement debt should be used in moderation.

In practical terms, I could see myself keeping P+I mortgages on one or two properties in amounts that would allow the mortgage payments to be covered by the rental on those properties. If the remaining portfolio can meet our needs then, in the longer term, I would expect to gain financially as a result without needing to be materially concerned about the risks involved.

Thursday, August 21, 2008

Inflation Rises - Growth Slows

Hong Kong's consumer price index rose by an annualised 6.3% in July (up from 6.1% in June). The primary drivers of the continued high levels of inflation were:

1. food (up 11.7%);

2. residential rents. (6.7%);

3. utilities (up 7.9%).

The rise was accompanied by predictions from economists that inflation may have peaked with commodity prices coming off their peak and economic growth showing signs of slowing.

Also released today was a number of revised forecasts for Hong Kong's GDP growth. Lehmans was quoted as cutting their forecast for Hong Kong's 2008 GDP growth from 4.5% to 2.8%.

With borrowing rates for residential property buyers still below 3% (although up from the lows seen earlier this year) and bank deposit rates still generally below 1% (unless you are prepared to lock up a meaningful sum of money for a long period of time), it is still an environment were it should pay to minimise holding cash and resist the temptation to accelerate debt repayments.

The difficulty (as I have painfully discovered) is that an asset like cash which shows a negative real return (and a very low nominal return) is still better than assets which are actually declining in price. In some respects, the current market is rewarding patient investors who are prepared to accept small losses as the lesser of the evils represented by the various investment choices available.

Sunday, August 17, 2008

Catching the falling knife - it's dumb and it hurts

I purchased a small position in silver early last week, paying US$15.02 per oz. The reasoning was a rather simple case of having believed that the very quick drop was over done (in percentage terms silver had dropped far more than the other precious metals) and that the bounce from close to US$14 would continue. I was expecting a quick return to somewhere above US$16.

I was proven wrong the next day when I woke up to find that silver had dropped below US$13 in overnight trading, leaving me sitting on a quick and ugly loss (as well as feeling stupid). The question is whether I should (i) take my losses and sell now (ii) buy more (if it was worth buying at US$15 it should be even more attractive at under US$13) or (iii) do nothing and treat it as a longer term portfolio investment.

I have no particular views on which is the best course of action at this point. I have no pressing need for the money so do not expect to be a forced seller at any point.

Sunday, August 10, 2008

Reviewing My Investment Decisions (2)

Back in February I reviewed my investment decisions over the preceding 12 months . Given the poor return on investments so far in 2008, I have decided that it is time for another review of the private portfolio and my decisions so far this year. A periodic review process is a healthy part of any financial planning exercise, so long as it does not end up as a case study in damaging confidence through second guessing or introducing an avoidable emotional element to future decision making it should be a healthy and productive exercise.

Here is the scorecard:

1. Hong Kong Property: This is our biggest asset class by far. The only activity this year has been the completion by Mrs traineeinvestor of a property purchase agreement which was signed in December 2007. The portfolio remains fully occupied with no tenants in default. Cash flow remains positive due to low interest rates with a modest boost from the waiver of rates and maintenance expenses being much lower than budgeted. All mortgages are P+I and are steadily being amortised. The only decision made this year were to decline a fix and flip opportunity out of concern over declining liquidity. In effect, the real estate provides a modest positive wealth effect every month (without taking into account capital fluctuations).

2. Overseas real estate: I have two small properties overseas. I have not purchased or sold an overseas property for several years although I did discharge one small high cost mortgage which no longer served its original purpose earlier this year. These are now debt free and rented. Although the yields are not great, they are reliable cash flow generators. Capital values have probably fallen this year, but are still well above cost.

3. Residual equity portfolio: Two shares account for about 90% of the value. The remaining four shares have little value and probably should be sold as the amounts are not meaningful and it will cut my administration time. As a group these shares have appreciated this year. No decisions have been made or are contemplated.

4. Actively managed equity funds: These include Asian small cap, European small cap, Thailand, Taiwan, Vietnam and a very small managed portfolio. I stopped making monthly contributions to the two small cap funds in January. That was a good decision. The investment in the Vietnam fund in early 2007 was a very bad decision. Not only did I buy near the top of a rather frothy market but I purchased a fund which featured a partial lock up and very stiff exit costs which have inhibited thoughts of cutting my losses. It is the worst investment I have made for several years. As a group these funds have declined in line with the markets they invest in.

5. Index equity funds: These are limited to Hong Kong and India. I have had exposure to Hong Kong since Tracker was launched. I have added to the position a few times and purchased the India fund in March 2008. While the timing of my investments earlier this year was poor, as a group I am happy with these investments.

6. Commodities: As a group this has been a very successful investment class over the last three years. My investment in silver started at around US$6 per oz. I exited (after a short term repurchase) with a net sale price above US$17 per oz. Although I missed the top by quite some distance, the decision to exit currently looks quite good. The Lyxor commodities ETF purchased earlier this year also shows a healthy gain. Much smaller investments in platinum (since sold), lean hogs and nickel show losses which are, collectively, much smaller than the gains on silver and the ETF. If I was a disciplined trader I should have taken the loss on the nickel some time ago.

7. Cash: I am not a fan of holding cash. The rates of return are simply too low (well below the rate of inflation). Still in a declining market not investing has been a pretty sensible decision. As things stand I have enough cash on hand (factoring post termination pay outs) to meet all living expenses for about three years should I lose my job tomorrow.

8. Currencies: I have not set out to trade any currencies (apart from building up a token position in RMB which is more about cash management than currency speculation), although I did consider it. However, with assets priced in a number of currencies, FX fluctuations have had a material impact on my balance sheet. The decline of the USD was a positive factor for some time. Over the last few months the USD has started recovering and this is now working against me.

In conclusion, while I could beat myself up for not exiting my equity positions late 2007 or early 2008, that would be somewhat unfair given that I did reduce purchases, did shift to lower cost funds and have built up cash. My commodities have done well and as a whole my decisions here have been pretty good. It also has to be remembered that I remain a beneficiary of the decisions in 2003-2007 to aggressively purchase Hong Kong real estate using leverage. The resulting portfolio with its positive cash flow and amortising mortgages makes a steady positive monthly contribution to our net worth.

The two decisions I should be flogged for were the decision to buy the Vietnam fund and not cutting my losses on the nickel investment. In the overall scheme of things, the resulting losses are not large and I have learned a lesson from the Vietnam fund.

On the whole, I am happy with my decisions so far this year. After five years of fantastic returns, the set backs of the last seven months are relatively minor and it would be a mistake to be overly critical of my investment management during that time.

Thursday, August 07, 2008

HK Tracker Fund Purchased

Having decided that I have too much cash on hand and being paranoid about inflation eating into the value of cash, I decided to make a small additional investment in the HK Tracker Fund. HK Tracker Fund is an ETF which tracks the Hang Seng Index. The purchase price was $22.80 which was, unfortunately, close to the high for the day.

Wednesday, August 06, 2008

Interest rates creeping up

A quick review of the latest interest rate fixings on my mortgages shows that the cost of debt financing has crept up off the low points set in the second quarter. The increases are not large and even the highest rate is still well below both the net yield on the underlying properties and the rate of inflation. In other words, debt finance is still cheap.

The interest rates I am currently paying range from a low of 2.1286% to a high of 3.0014%.

As an aside, given that deposit rates have not moved (still close to zero), this effectively represents margin expansion for the lending banks. New loans are currently available on less favourable terms than some of the more recent loans I have taken out, which will also help the banks' profitability.

A typhoon and an attempted scam

The typhoon #8 signal was hoisted early this morning which means that offices, schools (it was summer holidays anyway) and most shops will be closed and services suspended until the signal is lowered. Depending on the severity of the weather, a reasonable number of people will go to work anyway. It is usually possible for those like myself who do not live on or close to an MTR station to find a taxi although you may get quite wet in the process.

The first taxi I flagged down wanted to charge me a HK$30 premium because of the typhoon. This would have roughly doubled the fare. I have been living in HK for well over a decade and this is the first time a taxi driver has tried to extort more than the metered fare from me. It's illegal for them to charge more than the metered fare. In any case, with two other taxis coming down the street behind him, it was a rather pointless exercise and I had no hesitation in telling him to foxtrot oscar. My only regret is that I forgot to make a note of his licence plate.

Monday, August 04, 2008

Monthly Review - July 2008

July was another ugly month. While not as awful as June, it was the second month in a row that my net worth declined. This is the first time this has happened since I started keeping monthly records in January 2007.

As a group, my mark to market investments largely went sideways and showed a small net loss. Adverse currency movements amplified the losses and were the biggest contributor to the overall decline.

Here are the details:

1. my actively managed funds were mixed. I currently have investments in actively managed funds investing in Thailand, Taiwan, Eastern Small Companies, European Small Companies and Vietnam. The loss on the Vietnam fund is now approaching 50% of the capital invested. It is unlikely that I will invest in another fund that effectively locks me in for several years;

2. my equity ETFs recovered some of last month's losses. I currently have exposure to Hong Kong and India

3. my residual equity portfolio fell;

4. my commodity investments showed very marginal decline with a loss on my commodities fund slightly outweighing small gains in my Nickel and Lean Hogs ETCs;

5. my properties are all fully rented and tenants are paying the rent on time. I have both a positive cash flow and a surplus of income over expenses (which represents an increase in net worth). Although some of the reductions in interest rates have been slightly reversed with the rise in HIBOR, the cash flows remain positive;

6. currency movements were adverse (the USD recovered some of its losses) and were the biggest single factor in the net loss for the month.

The only investment made this month was a small subscription for an RMB bond issue. My income was in at the low end of expectations this month. My spending was in the mid range. The resulting savings were less than previous months but still helped to offset the effects of the losses on my investments.

The end result was a decrease in net worth of 0.3% for the month. The year to date increase is 5.8%. Looking forward, it has been several months since I made any meaningful investments and my cash holding has been building up. With inflation running at 5.4% officially and deposit rates still at close to zero, cash is depreciating quite rapidly and finding suitable investments is something of an imperative. The difficulty is finding somewhere attractive to invest the money.

Thursday, July 31, 2008

Book Review: Superclass

When I picked up a copy of David Rothkopf's book on "the global power elite and the world they are making", I was assuming from the cover image of a world under the thumb of a pin stripe wearing man that this would be another diatribe bashing the rich and powerful.

Fortunately, it was a well balanced study that provides an overview of what it takes to be one of the estimated six thousand strong "superclass", how the superclass network and carry on their "business". The later is an interesting point as the superclass covers people from a wide variety of backgrounds, including the obvious candidates from the world of wealthy business types, CEO's from some of the world's largest companies and political leaders. Also included were religious leaders, pop stars, athletes and scientists. In one sense, the superclass is representative in that it draws people from a variety of backgrounds. (For other purposes the group is weighted towards male business and political leaders from the world's wealthy economies.)

While the absence of any conspiracy theories and a corresponding degree of objectivity was welcome, by the time I reached the end of the book, I was left feeling that I had not learned anything new and could just as easily have been reading a series of newspaper or magazine articles as much as a book. Put differently, while the book represented a useful summary of the world's elite and how they operate, it was ultimately a rather bland read that offered little in the way of insight.

Wednesday, July 16, 2008

"Professionals" still bullish on Hong Kong property

The weekly Property Post supplement to the South China Morning Post carried a front page article on how professionals are still bullish on the Hong Kong property market.

Refreshingly, the professionals being quoted were actually investors as opposed to permabull real estate agents. These are investors who put their own money into the market. The expectation was for a small drop in prices (5-7%) due to a combination of factors (declining share indices, small rises in interest rates and general economic uncertainty) before the fundamentals reassert themselves and the uptrend continues. All of the investors quoted were intending to hold their positions and, in most cases, look for opportunities to add to them.

Among the fundamentals cited were:

1. limited supply of new units

2. rising rental incomes (up 19% year on year)

3. cheap debt finance (still below 3% for new loans)

4. readily available debt finance (banks are still keen to lend and have excess deposit build up)

5. lack of alternative places to invest (close to zero percent interest on short term bank deposits and inflation rates above 5%)

The longer term case for property investment in Hong Kong remains solid.

Monday, June 30, 2008

Monthly Review - June 2008

From a financial perspective, June was the worst month I have experienced since I started keeping monthly records in January 2007. If I had been keeping monthly records for longer, I suspect I would have had to go back several years to find a month in which I had lost as much money.

As a group, my mark to market investments all fell in value by meaningful amounts with the sole exception of my relatively small exposure to commodities. Adverse currency movements amplified the losses.

Here are the details:

1. my actively managed funds all fell. I currently have investments in actively managed funds investing in Thailand, Taiwan, Eastern Small Companies, European Small Companies and Vietnam. The loss on the Vietnam fund is now approaching 50% of the capital invested. It is unlikely that I will invest in another fund that effectively locks me in for several years;

2. my equity ETFs also fell. I currently have exposure to Hong Kong and India

3. my residual equity portfolio fell;

4. my commodity investments showed very marginal appreciation with a gain on my commodities fund slightly outweighing small declines in my Nickel and Lean Hogs ETCs;.

5. my properties are all fully rented and tenants are paying the rent on time. I have both a positive cash flow and a surplus of income over expenses (which represents an increase in net worth). Although some of the reductions in interest rates have been slightly reversed with the rise in HIBOR, the cash flows remain positive;

6. currency movements were adverse (the USD recovered some of its losses) and amplified the losses on investment. Currency movements have played a major role in determining the returns on my investments over the last 6-12 months. For the most part I have been a beneficiary of a falling USD. This month was one of the few months in recent times when the currency movement has been adverse.

To put the losses into context, the total mark to market write down was the equivalent of about 7 months of gross income from my Hong Kong rental properties. It is also worth mentioning that many of the investments continue to be held at well above cost. However, this is small comfort when I consider that I could have taken some quite good profits or cut my losses with at least some of them over the last six months.

There were no investments made this month. My income was in line with expectations this month. My spending was on the low side. The resulting savings helped to offset the effects of the losses on my investments. The end result was a decrease in net worth of 1.2% for the month. The year to date increase is 6.2%.

Looking forward, it has been several months since I made any investments and my cash holding has been building up. With inflation running at 5.4% officially and deposit rates still at close to zero, cash is depreciating quite rapidly and finding suitable investments is something of an imperative.

Wednesday, June 25, 2008

World Wealth Report

The 2008 edition of the Cap Gemini Merrill Lynch World Wealth Report has been released. As usual the report made interesting, although slightly predictable, reading.

Among the highlights:

1. The number of HNWIs passed the 10 million mark for the first time (up 6% to 10.1 million).

2. Global HNWI wealth increased 9.4% to $40.7 trillion.

3. The average wealth of HNWIs reached $4 million for the first time.

4. India, China and Brazil had the fastest growing populations of HNWIs. Emerging markets continued to show higher rates of growth in HNWI populations than developed markets.

5. The US still has the highest number of HNWIs (3.3 million).

6. The population of UHNWIs increased to 103,300.

7. HNWIs asset allocation showed a material shift to more conservative investments with cash, deposits and fixed income making up 44% of assets (from 35% in 2006) with substantial reductions in real estate and alternative investments. Equities remained the largest asset class (33%) There was also a rotation away from investments in North America.

The section on "passion investments" made interesting reading and supports the thesis of Robert Frank's Richistan .

Definitions:

High Net Worth Individuals (HNWIs) hold at least US$1 million in financial assets, excluding collectibles, consumables, consumer durables and primary residences.

Utra-High Net Worth Individuals (Ultra-HNWIs) hold at least US$30 million in financial assets, excluding collectibles, consumables, consumer durables and primary residences.

Monday, June 23, 2008

Hedging inflation - not speculating on commodities

There has been a considerable amount of commentary (mostly by politicians trying to blame the free market and others for their incompetence) about how speculators are contributing to the increases in the prices of many commodities and the resulting effects of inflation. This is largely nonsense. Certainly, speculators play a role in driving up prices just like any other demand factor does. However, there are much larger factors at work:

1. rising end-user demand. The world's economy is still growing and the demand for raw materials will increase with such growth (although not necessarily on a linear basis);

2. market distortion. Many countries heavily subsidise the prices of raw materials and key consumer goods. In some cases this is defensible - in some countries subsidies (or similar) on foods are very necessary to prevent starvation. In some cases subsidies are indefensible on both economic and environmental grounds. Fuel subsidies that prevail in many emerging markets are the worst example. They stimulate demand at a time when the world desperately needs to consume fewer hydrocarbons for both economic and environmental reasons. As much as it goes against my belief in the free market, the case for (higher) user taxes on hydrocarbon products is pretty overwhelming.

As to the calls for speculation in commodities to be regulated in some manner, this is totally unjustified. Not only is it an erosion of free market principles, but any measures which are likely to be introduced will (most likely) prevent consumers from taking one of the few steps available to them to hedge against the impact of rises in commodity prices on their standard of living.

The proposition is simple. Rising prices of essential commodities are an expense which most households cannot avoid paying and can only take limited steps to reduce. Investing in the underlying commodities (e.g. through an ETC or a commodity based ETF) is a simple and effective means of providing a hedge against the impact of rising commodity prices. The gains on the hedge instrument would offset to at least some degree the increased living expenses.

As a side note, there is plenty of academic commentary on the benefits that speculators bring to a market. Attempting to regulate speculators out of the market is likely to be detrimental to the markets as a whole.

Tuesday, June 10, 2008

Millionaire density by country

Barclays Wealth released an interesting report on concentrations of millionaire households. It was the 5th report in a series and, like the earlier reports, made for interesting reading.

Among the data included is the density of millionaire households in various countries expressed as the percentage of all households in each country as a percentage of total households. The top 10 countries were:

1. Hong Kong (26.4%)
2. Singapore (23.3%)
3. Switzerland 22.3%
4. Denmark (17.9%)
5. Britain (15.5%)
6. Ireland (14.8%)
7. United States (14.7%)
8. Australia (11.9%)
9. Italy (11.8%)
10. France (11.7%)

The report also makes a number of forecasts regarding wealth creation for the next 10 years. In terms of total millionaire household populations, it should be no surprise that China, India and Russia are all expected to show significant growth in the creation of high net worth households. While the US and Japan are expected to retain their places as the two countries with the highest total wealth held by the domestic sectors, China and India are both expected to join the top 10 countries by 2017.

The report makes a number of observations on trends in matters ranging from asset allocation, comparisons between household wealth and GDP and other matters.