February saw continued volatility in financial markets. In contrast to January (when many of my mark to market investments declined), most of my investments increased in value during February.
Here are the details:
1. my actively managed funds recovered some of their losses. All except Vietnam (which continues to plumb new depths) showed reasonable gains for the month. I currently have investments in actively managed funds investing in Thailand, Taiwan, Vietnam, Eastern Small Companies and European Small Companies;
2. my equity ETFs appreciated. I currently have exposure to Hong Kong only. I added to this position during the month;
3. my residual equity portfolio rose slightly;
4. my commodity investments rose during the month. I currently have exposure to silver, a commodity ETF and lean hogs ETC. Sliver and the commodities ETF gained during the month. Lean hogs declined. I purchased small positions in platinum and nickel at the end of the month;
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). The cash flow and the surplus have benefited from recent cuts in interest rates;
6. a weaker US$ was positive for the portfolio.
Investment movements this month were purchases of (i) HK Tracker ETF (ii) notional platinum and (iii) nickel ETC.
My income was at the high end of expectations this month. My spending was quite low this month and the resulting savings were a good supplement to the gains on my investments. However, I have concluded that I need to increase the monthly provision for future tax payments (in spite of the tax rebate and future tax reductions announced in the HKSAR government's budget) and that increased provision is reflected in the results for the month.
The end result was an increase in net worth of 2.3% for the month and a year to date increase of 2.8%.
Friday, February 29, 2008
Two Commodities Purchased
I have made two further investments in commodities:
1. platinum: made through a notional precious metals account (being the lowest cost/lowest spread option);
2. nickel: made through purchasing the LSE listed ETC (stock code "NICK").
Both of these are investments in commodities which are expected to be in deficit - that is supply will not meet demand in 2008. Both also have the possibility of continued or recommenced disruption to supply. In the case of platinum, South Africa's power shortage is the main risk to supply. In the case of nickel, industrial action (which is happening at one BHP mine at the moment) and political issues are the main risks to supply.
My investment in lean hogs (HOGS) is currently showing a loss of about 9%. This is getting close to the point where I should consider cutting my losses. I have not set a formal loss cutting point, but around 10 - 15% seems sensible.
Lastly, an attempt to pick up some more Lyxor commodities ETF this week failed when the price continued to rise above my limit. With the benefit of hindsight, I would have been better off buying at market.
1. platinum: made through a notional precious metals account (being the lowest cost/lowest spread option);
2. nickel: made through purchasing the LSE listed ETC (stock code "NICK").
Both of these are investments in commodities which are expected to be in deficit - that is supply will not meet demand in 2008. Both also have the possibility of continued or recommenced disruption to supply. In the case of platinum, South Africa's power shortage is the main risk to supply. In the case of nickel, industrial action (which is happening at one BHP mine at the moment) and political issues are the main risks to supply.
My investment in lean hogs (HOGS) is currently showing a loss of about 9%. This is getting close to the point where I should consider cutting my losses. I have not set a formal loss cutting point, but around 10 - 15% seems sensible.
Lastly, an attempt to pick up some more Lyxor commodities ETF this week failed when the price continued to rise above my limit. With the benefit of hindsight, I would have been better off buying at market.
Wednesday, February 27, 2008
Budget Benefits - spending decisons
A lot has been written about what American tax payers are planning to do (or should do) with the tax refunds they will get this year so I thought I would set out what I intend to do with the extra money available from the tax rebate and the rates waiver announced in today's budget speech.
The short answer is that I intend to spend the lot. No, not on consumer goods or even pseudo investments such as wine (tempting though it is). Nor do I intend to allocate any of the money to early repayments on one of our mortgages (why, when we have negative real interest rates?). Instead I will be shopping for additional investments. At this time, I have no idea what those investments will be. There will not be any investment specifically attributable to the rebate and rates waiver (although this is not a bad idea). Instead, the money will simply be absorbed by increasing the size and/or frequency of whatever investments I make between now and the end of April 2008.
And I really have to wonder why so many people have to be persuaded not to spend any windfall money they receive (whether from tax cuts, inheritance or otherwise)? Maybe I am missing something, but deciding to invest the money took a lot less time than typing this post.
The short answer is that I intend to spend the lot. No, not on consumer goods or even pseudo investments such as wine (tempting though it is). Nor do I intend to allocate any of the money to early repayments on one of our mortgages (why, when we have negative real interest rates?). Instead I will be shopping for additional investments. At this time, I have no idea what those investments will be. There will not be any investment specifically attributable to the rebate and rates waiver (although this is not a bad idea). Instead, the money will simply be absorbed by increasing the size and/or frequency of whatever investments I make between now and the end of April 2008.
And I really have to wonder why so many people have to be persuaded not to spend any windfall money they receive (whether from tax cuts, inheritance or otherwise)? Maybe I am missing something, but deciding to invest the money took a lot less time than typing this post.
Budget Benefits
The Hong Kong government released its 2008/9 budget today. As expected there was widespread distribution of some of the government's massive surplus. Also as expected (and appropriate) those less well off financially or who are disadvantaged in some way benefited most. (Hong Kong's massively overpaid civil servants had already been given large pay raises without going through the public scrutiny of a budget debate.) However, there were benefits for just about everybody. The items that will affect us are:
1. reduction in tax rate to 15% (from 16%) beginning in 2008/9. This is on going and not a one off reduction;
2. a one time salaries tax rebate of HK$25,000 (about US$3,200) per tax payer for the 2007/8 tax year. As we are a dual income household we will get this rebate twice. There is also a similar rebate on property tax, but I cannot tell from the budget speech whether we will receive both the salaries tax rebate and the property tax rebate or only one;
3. a waiver of rates for 2008/9;
4. an electricity subsidy of HK$1,800. I strongly disagree with this one. It will simply encourage people to use more electricity with consequential environmental costs;
5. wine duty (currently 40%) will be abolished. The last reduction in wine duty was (by and large) not passed on to consumers. If retailers fail to pass on the savings this time I will look into importing my own wine (probably consolidating shipments with friends to reduce the shipping costs). As nice as this is, I would have to drink a lot more wine before this became financially significant.
Other items from the budget of interest to me:
(i) inflation forecast to rise to 4.5% (reduced to 3.4% after measures adopted in the budget). Holding cash and repaying debt remain bad strategies;
(ii) token efforts to address environmental problems. This is very very disappointing;
(iii) more land to be placed on the auction list (some targeted at hotels). Given the number of properties already on the list which developers have not taken up, this is unlikely to result in a major increase in supply of new residential units;
(iv) reduction in corporate profits tax by 1% from 2008/9. This will be good news for the Hong Kong share market (which rose strongly this morning);
(v) no measures to broaden the tax base. If anything, the tax base will narrow further as a result of this budget. This is a political problem and a moral hazard as Hong Kong inches closer to something resembling a token democracy.
1. reduction in tax rate to 15% (from 16%) beginning in 2008/9. This is on going and not a one off reduction;
2. a one time salaries tax rebate of HK$25,000 (about US$3,200) per tax payer for the 2007/8 tax year. As we are a dual income household we will get this rebate twice. There is also a similar rebate on property tax, but I cannot tell from the budget speech whether we will receive both the salaries tax rebate and the property tax rebate or only one;
3. a waiver of rates for 2008/9;
4. an electricity subsidy of HK$1,800. I strongly disagree with this one. It will simply encourage people to use more electricity with consequential environmental costs;
5. wine duty (currently 40%) will be abolished. The last reduction in wine duty was (by and large) not passed on to consumers. If retailers fail to pass on the savings this time I will look into importing my own wine (probably consolidating shipments with friends to reduce the shipping costs). As nice as this is, I would have to drink a lot more wine before this became financially significant.
Other items from the budget of interest to me:
(i) inflation forecast to rise to 4.5% (reduced to 3.4% after measures adopted in the budget). Holding cash and repaying debt remain bad strategies;
(ii) token efforts to address environmental problems. This is very very disappointing;
(iii) more land to be placed on the auction list (some targeted at hotels). Given the number of properties already on the list which developers have not taken up, this is unlikely to result in a major increase in supply of new residential units;
(iv) reduction in corporate profits tax by 1% from 2008/9. This will be good news for the Hong Kong share market (which rose strongly this morning);
(v) no measures to broaden the tax base. If anything, the tax base will narrow further as a result of this budget. This is a political problem and a moral hazard as Hong Kong inches closer to something resembling a token democracy.
Saturday, February 23, 2008
What does it mean to be wealthy (2)?
In the first post on this subject, I defined financial wealth as being a measure of a person's ability to sustain their lifestyle. This begs the obvious question about what lifestyle is being sustained.
Although somewhat arbitrary, if lifestyle is measured by consumption, then the following would be an indication of differing levels of relative wealth or poverty:
1. poor: can only afford the basic necessities of food, clothing and shelter;
2. lower middle class: can afford some discretionary expenditure, such as better food, consumer electronics, a cheap car and the like;
3. upper middle class: have or can afford some assets of lasting value, such as purchasing your own home as well as better consumer goods and services such as a new car and overseas holidays;
4. mass affluent: have or can afford assets above those needed to enjoy a middle class lifestyle such as a holiday home, a luxury car and private education for children;
5. wealthy: have or can afford substantial assets well beyond what is needed to sustain your chosen lifestyle.
This approach effectively defines financial wealth as a two dimensional matrix. At one level being wealthy is a function of ability to meet a chosen level of expenditure and to accumulate assets of lasting value (or not as the case may be). From a different perspective, wealth is defined in absolute terms by reference to what level of consumption a person is able to afford (which may be different from what a person actually chooses to spend).
The alternatives to defining what it means to be wealthy are either absolute measures such as those used by Merrill Lynch Cap Gemini for the purposes of their annual world wealth report or formula driven approaches such as the Thomas Stanley/William Danko PAW/UAW formula from The Millionaire Next Door. Each of these has its uses and cannot be dismissed as being wrong but without the missing limb of ability to choose a given lifestyle and to sustain that lifestyle they appear to be incomplete.
Although somewhat arbitrary, if lifestyle is measured by consumption, then the following would be an indication of differing levels of relative wealth or poverty:
1. poor: can only afford the basic necessities of food, clothing and shelter;
2. lower middle class: can afford some discretionary expenditure, such as better food, consumer electronics, a cheap car and the like;
3. upper middle class: have or can afford some assets of lasting value, such as purchasing your own home as well as better consumer goods and services such as a new car and overseas holidays;
4. mass affluent: have or can afford assets above those needed to enjoy a middle class lifestyle such as a holiday home, a luxury car and private education for children;
5. wealthy: have or can afford substantial assets well beyond what is needed to sustain your chosen lifestyle.
This approach effectively defines financial wealth as a two dimensional matrix. At one level being wealthy is a function of ability to meet a chosen level of expenditure and to accumulate assets of lasting value (or not as the case may be). From a different perspective, wealth is defined in absolute terms by reference to what level of consumption a person is able to afford (which may be different from what a person actually chooses to spend).
The alternatives to defining what it means to be wealthy are either absolute measures such as those used by Merrill Lynch Cap Gemini for the purposes of their annual world wealth report or formula driven approaches such as the Thomas Stanley/William Danko PAW/UAW formula from The Millionaire Next Door. Each of these has its uses and cannot be dismissed as being wrong but without the missing limb of ability to choose a given lifestyle and to sustain that lifestyle they appear to be incomplete.
Thursday, February 21, 2008
More HK Tracker Fund purchased
Since I dislike holding cash when the return on cash is less than the rate of inflation, I spend a lot of time looking for places to put my hard earned money. Currently, one month deposit rates at HSBC are less than 1% and inflation is officially at 3.4%. The real inflation rate is obviously higher than the official rate.
Today I added to my position in the HK Tracker Fund at a price of 23.90. The HK Tracker Fund is an ETF which tracks the Hang Seng Index (and usually trades at a slight premium to to the index reflecting the cash building up in the fund pending distribution).
I also attempted to add to my position in the Lyxor commodities ETF but the market opened above my limit and the order was not filled.
Today I added to my position in the HK Tracker Fund at a price of 23.90. The HK Tracker Fund is an ETF which tracks the Hang Seng Index (and usually trades at a slight premium to to the index reflecting the cash building up in the fund pending distribution).
I also attempted to add to my position in the Lyxor commodities ETF but the market opened above my limit and the order was not filled.
What does it mean to be wealthy (1)?
This is a question that generates a lot of different answers. Wikipedia summarises some of the concepts of "wealth", including differentiating macro economic wealth, personal wealth and various forms of material and non-material wealth.
Since this blog is about personal finance, I am more interested in the concept as it applies to personal finance. After giving the matter some consideration, I concluded that, in personal finance terms, being wealthy is a function of two concepts. The first concept is is about funding your lifestyle. The second concept is about the standard of that lifestyle. In this post, I will explore the first of those concepts.
In terms of funding your lifestyle, there are six discrete categories or stages of wealth:
1. unable to sustain your lifestyle;
2. able to sustain your lifestyle only through work;
3. able to sustain your lifesytle through work and accumulate capital;
4. able to sustain your lifestyle without working;
5. able to sustain your lifestyle without working or drawing down capital;
6. able to sustain your lifestyle without working and accumulate capital.
At one end of the spectrum, people could be described as poor or living below the poverty line. Unfortunately, a depressingly high number of people fall into this category. At least some of them are there as a result of choices which they made of their own free will. Others may find themsleves stuck in a financially precarious position through misfortune or lack of opportunity. Although others may disagree, a person who is drawing down capital to maintain their lifestyle at an unsustainable rate is, by my definition at least, poor.
At the other end of the scale are people with the greatest degree of economic freedom possible. In between are people who, much like economies, are going through various stages of personal economic development. Most of us start off with relatively little in the way financial assets (e.g. university students) and will progressively accumulate wealth as we go through our lives. Some people are more successful at this than others and will become genuinely wealthy. Whether as a result of choice, misfortune or lack of opportunity, many will not attain improved degrees of personal wealth or at least will not attain the degree of personal wealth that they aspire to.
Most of my acquaintances are at stage 3. They work because they have to but, at the same time, are managing to save and invest with a view to graduating to a more affluent stage. Some (like myself) intend to quit their jobs when they are in a position to do so. Most have not expressed an intention to do so. In addition, most of the people I know who have reached a position where they do not need to work to support their lifestyle continue to do so. An interesting question for me is why people who clearly have no need to work continue to do so? (A topic for another post, perhaps.)
The categorisation of wealth set above begs one important question: what is your "lifestyle"? I will address this question in the second part of this post.
Since this blog is about personal finance, I am more interested in the concept as it applies to personal finance. After giving the matter some consideration, I concluded that, in personal finance terms, being wealthy is a function of two concepts. The first concept is is about funding your lifestyle. The second concept is about the standard of that lifestyle. In this post, I will explore the first of those concepts.
In terms of funding your lifestyle, there are six discrete categories or stages of wealth:
1. unable to sustain your lifestyle;
2. able to sustain your lifestyle only through work;
3. able to sustain your lifesytle through work and accumulate capital;
4. able to sustain your lifestyle without working;
5. able to sustain your lifestyle without working or drawing down capital;
6. able to sustain your lifestyle without working and accumulate capital.
At one end of the spectrum, people could be described as poor or living below the poverty line. Unfortunately, a depressingly high number of people fall into this category. At least some of them are there as a result of choices which they made of their own free will. Others may find themsleves stuck in a financially precarious position through misfortune or lack of opportunity. Although others may disagree, a person who is drawing down capital to maintain their lifestyle at an unsustainable rate is, by my definition at least, poor.
At the other end of the scale are people with the greatest degree of economic freedom possible. In between are people who, much like economies, are going through various stages of personal economic development. Most of us start off with relatively little in the way financial assets (e.g. university students) and will progressively accumulate wealth as we go through our lives. Some people are more successful at this than others and will become genuinely wealthy. Whether as a result of choice, misfortune or lack of opportunity, many will not attain improved degrees of personal wealth or at least will not attain the degree of personal wealth that they aspire to.
Most of my acquaintances are at stage 3. They work because they have to but, at the same time, are managing to save and invest with a view to graduating to a more affluent stage. Some (like myself) intend to quit their jobs when they are in a position to do so. Most have not expressed an intention to do so. In addition, most of the people I know who have reached a position where they do not need to work to support their lifestyle continue to do so. An interesting question for me is why people who clearly have no need to work continue to do so? (A topic for another post, perhaps.)
The categorisation of wealth set above begs one important question: what is your "lifestyle"? I will address this question in the second part of this post.
Tuesday, February 19, 2008
Why is the turmoil in the equity makets having so little impact?
One of the things which has struck me as I have updated my balance sheet each month is the fact that the declines in many of the world's equity markets (and all of the ones I invest in) have had a very limited effect on my net worth numbers. No, I did not predict the down turns and did not exit the market and did not sell short or buy put options (apart from one very small and very short term trade).
Here's what has happened:
1. my portfolio of funds has declined. All of them have fallen to some extent or another (with Vietnam being the worst performer). However, I managed to add to my position in the HK Tracker fund at close to the January lows. The gain on this trade has partially off set the losses on the other funds;
2. my residual equity portfolio has fallen by less than the market in local currency terms - due to the fact that the largest shareholding by value has actually gone against the trend and increased by about 15% this year. Currency movements have also been in my favour (I benefit from a weaker US dollar). The net result is that this part of the balance sheet is almost unchanged in Hong Kong dollars (my currency of account);
3. my investments in commodities, although not large, have shown good gains so far this year. The very small loss on lean hogs is much less than the gain in silver and also less than the gain on Lyxor commodities ETF. (The decision to sell some of my silver has, so far, been a bad call);
4. my properties are fully let and show a positive cash flow and a healthy margin of income over expenses which flows through to my net worth calculation each month. As real estate represents the biggest asset class by a very large margin, the effect of this monthly profit is significant. As an aside, I do not mark property values to market in my personal balance sheet (I do in the consolidated his and hers balance sheet) but if I did this would show a material upwards adjustment already in 2008.
In short, I have been lucky enough to hold a mix of asset classes which has performed very well under the difficult conditions over the last few months. Although there is more variation in return, the individual assets have produced a number of winners which has also played a role in preserving my capital.
I am under no illusion that I have been lucky rather than good, but it is nice to know that I have (so far) managed to get through the turmoil in good shape and without suffering much in the way of financial pain.
Here's what has happened:
1. my portfolio of funds has declined. All of them have fallen to some extent or another (with Vietnam being the worst performer). However, I managed to add to my position in the HK Tracker fund at close to the January lows. The gain on this trade has partially off set the losses on the other funds;
2. my residual equity portfolio has fallen by less than the market in local currency terms - due to the fact that the largest shareholding by value has actually gone against the trend and increased by about 15% this year. Currency movements have also been in my favour (I benefit from a weaker US dollar). The net result is that this part of the balance sheet is almost unchanged in Hong Kong dollars (my currency of account);
3. my investments in commodities, although not large, have shown good gains so far this year. The very small loss on lean hogs is much less than the gain in silver and also less than the gain on Lyxor commodities ETF. (The decision to sell some of my silver has, so far, been a bad call);
4. my properties are fully let and show a positive cash flow and a healthy margin of income over expenses which flows through to my net worth calculation each month. As real estate represents the biggest asset class by a very large margin, the effect of this monthly profit is significant. As an aside, I do not mark property values to market in my personal balance sheet (I do in the consolidated his and hers balance sheet) but if I did this would show a material upwards adjustment already in 2008.
In short, I have been lucky enough to hold a mix of asset classes which has performed very well under the difficult conditions over the last few months. Although there is more variation in return, the individual assets have produced a number of winners which has also played a role in preserving my capital.
I am under no illusion that I have been lucky rather than good, but it is nice to know that I have (so far) managed to get through the turmoil in good shape and without suffering much in the way of financial pain.
Sunday, February 17, 2008
Latest Interest Rate Fixings
All my mortgages are at floating rates. Some are prime linked (i.e. they are set by the lending banks) and some are linked to HIBOR (the Hong Kong Inter-Bank Offer Rate set by the market). Interest rates on the prime linked loans adjust at the discretion of the banks and were adjusted downwards shortly after the US Federal Reserve cut US interest rates. HIBOR linked loans are typically reset every three months. Some of these mortages have reset already and the balance will reset to reflect the interest rate cuts over the next two months or so.
The good news is that the latest round of interest rate fixings have been at rates between 2.95% and 3.26% - all below the rate of inflation and tax deductable (although with tax rates at either 16% or 17% this is not as big an issue in HK as in higher tax jurisdictions).
This makes it very hard to justify making early repayments - so what should I do with the extra cash flow?
The good news is that the latest round of interest rate fixings have been at rates between 2.95% and 3.26% - all below the rate of inflation and tax deductable (although with tax rates at either 16% or 17% this is not as big an issue in HK as in higher tax jurisdictions).
This makes it very hard to justify making early repayments - so what should I do with the extra cash flow?
Hong Kong Marathon
Nothing to do with personal finance, but I took part in the Hong Kong marathon today. Cooler weather and improved (but still horrible) pollution levels made for a better (but still slow) time and a much more pleasant experience than last year. That said, the Hong Kong marathon is hardly a world class event, suffering from a boring route (most of it is spent running up and down motorways), awful pollution and (in spite of the best efforts of the many highly appreciated voluteers who make the event possible), an almost total absence of crowd support.
The temptation to splurge on a trip to run an overseas marathon next year instead of repeating the Hong Kong marathon is growing.
The temptation to splurge on a trip to run an overseas marathon next year instead of repeating the Hong Kong marathon is growing.
Thursday, February 14, 2008
Valentine's Day Financial Massacre
I hate Valentine's Day. Based on a straw poll of people in the office, I am part of a large majority who believe that the day should be renamed National Florists' Day to celebrate the ridiculous mark ups that the florists make. Of course the florists are not the only ones who gouge the (usually) men who feel emotionally pressured to demonstrate their feelings by emptying out their wallets. Restaurants, greeting card suppliers and chocolate vendors all jack up their prices, safely assuming that people will be forced to buy almost no matter how outrageous the price. Needless to say, people who feel both compelled to do something and know that they are being exploited will resent it.
In effect the crass commercial circus that is the modern Valentine's Day has very little to do with its romantic origins. If anything, it is much easier and more pleasurable to demonstrate the love and affection I feel for Mrs Traineeinvestor on any of the other 364 days in the year - at least she knows that I am acting from the heart rather than under duress.
And yes, my wallet is feeling much lighter today.
In effect the crass commercial circus that is the modern Valentine's Day has very little to do with its romantic origins. If anything, it is much easier and more pleasurable to demonstrate the love and affection I feel for Mrs Traineeinvestor on any of the other 364 days in the year - at least she knows that I am acting from the heart rather than under duress.
And yes, my wallet is feeling much lighter today.
Tuesday, February 12, 2008
Tax Payment - Ouch!
My first installment of tax (representing about 80% of the total) was paid today. The remaining 20% is due on 25th April.
Even with taxes at 16% of total income (less a few allowances), writing a single cheque for the equivalent of nearly 13% of my annual income is a rather painful experience. Still, it's a better system than pay-as-you-earn as I get the use of the money for longer.
As with previous years, I had been intending to put the tax payment on my credit card to earn the reward points and get a small amount of additional interest on the money but HSBC put an end to that scheme. First, HSBC declared that tax payments made on credit cards would not earn reward points (unlike the last time I did this). Second, HSBC also messed up the application for the necessary increase in the credit limit by allocating it to a credit card which is not linked to my on-line payment accounts (I have two HSBC credit cards). By the time I noticed the mistake, it was too late to fix it. This was the first time I have ever had a problem with HSBC in over 20 years of banking with them.
Even with taxes at 16% of total income (less a few allowances), writing a single cheque for the equivalent of nearly 13% of my annual income is a rather painful experience. Still, it's a better system than pay-as-you-earn as I get the use of the money for longer.
As with previous years, I had been intending to put the tax payment on my credit card to earn the reward points and get a small amount of additional interest on the money but HSBC put an end to that scheme. First, HSBC declared that tax payments made on credit cards would not earn reward points (unlike the last time I did this). Second, HSBC also messed up the application for the necessary increase in the credit limit by allocating it to a credit card which is not linked to my on-line payment accounts (I have two HSBC credit cards). By the time I noticed the mistake, it was too late to fix it. This was the first time I have ever had a problem with HSBC in over 20 years of banking with them.
Monday, February 11, 2008
Book Review: Invest Like A Shark
I 'm still not sure why I brought this book. The title made it sound a like it was written by a get rich quick seminar promoter. What I found was a coherent story of a successful investor who adopted an investment startegy that, while highly aggressive (by my standards at least), sounded similar to the way some hedge funds invest. The other interesting feature was how James DePorre had to turn his life around after becoming deaf as an adult and losing his career as a lawyer as he struggled to adapt.
The good features of Invest Like A Shark incuded:
1. a chapter on why a lot of conventional advice will deliver mediocre results. Some of these were (for me) new ways of looking at old issues;
2. a chapter on some of the myths of Wall Street. Some of these I agreed with. Some I was not convinced by. There was nothing in this section I found new (and I did wonder why the author felt that some of these were considered myths);
3. an emphasis on market psychology. There are studies which suggest that psychology plays a big part in determining successor failure as an investor and DePorre's comments on this area were interesting;
4. a clearly defined set of principles to be a "shark" investor. These were interesting. The way in which DePorre addressed risk management through diversification and cutting losses sounded a lot like some of the hedge fund managers interviewed in Hedge Hunters .
Things I didn't like:
5. too much emphasis on being a "shark". He really did sound like a shady seminar shyster at times. Even for a short book (195 pages) there seemed to be a bit too much repetition. This was a shame as the underlying message was actually quite good (regardless of whether you want to be an aggressive trader or not);
6. not enough data to support his views. DePorre argues from principles and sometimes produces examples to support his views, but no real evidential support is given. This is the major failing of the book.
In conclusion, the book is a reasonably interesting read and combines some useful ideas and interesting observations with a coherent but aggressive investment strategy. Unfortunately, the absence of supporting research data and a slightly cheesy writing style make the book less than compelling reading. If you want to read about how to trade aggressively, books about hedge fund managers and some other books on trading make better and more interesting reading.
The good features of Invest Like A Shark incuded:
1. a chapter on why a lot of conventional advice will deliver mediocre results. Some of these were (for me) new ways of looking at old issues;
2. a chapter on some of the myths of Wall Street. Some of these I agreed with. Some I was not convinced by. There was nothing in this section I found new (and I did wonder why the author felt that some of these were considered myths);
3. an emphasis on market psychology. There are studies which suggest that psychology plays a big part in determining successor failure as an investor and DePorre's comments on this area were interesting;
4. a clearly defined set of principles to be a "shark" investor. These were interesting. The way in which DePorre addressed risk management through diversification and cutting losses sounded a lot like some of the hedge fund managers interviewed in Hedge Hunters .
Things I didn't like:
5. too much emphasis on being a "shark". He really did sound like a shady seminar shyster at times. Even for a short book (195 pages) there seemed to be a bit too much repetition. This was a shame as the underlying message was actually quite good (regardless of whether you want to be an aggressive trader or not);
6. not enough data to support his views. DePorre argues from principles and sometimes produces examples to support his views, but no real evidential support is given. This is the major failing of the book.
In conclusion, the book is a reasonably interesting read and combines some useful ideas and interesting observations with a coherent but aggressive investment strategy. Unfortunately, the absence of supporting research data and a slightly cheesy writing style make the book less than compelling reading. If you want to read about how to trade aggressively, books about hedge fund managers and some other books on trading make better and more interesting reading.
Book Review - A 20,000% Gain in Real Estate
This is a short "how I made a fortune" book. In short, "A 20,000% Gain in Real Estate" is the story about how Kevin Kingston went from being a down and out Wall Street stock broker whose career went off the rails in the 2000 tech wreck to running a very successful real estate investment business in about 5 years.
At only 113 pages long (including appendices) the book is refresingly free from waffle and can be read in a few hours. It also contains some valuable lessons for anyone looking to make money in real estate:
1. use of leverage: Kingston explains very clearly how he raised the money for his investments and how he made leverage work for him. More detail on the key terms to negotiate when raising money would have been useful
2. yield on investments: This is what services the debt and, for some investors, pays the living expenses. It's also one component in determining value. Put differently, good cash flow gives significant downside protection
3. adding value: the ability to add value through refurbishment and other arrangements is an effective way to significantly increase your return on equity
4. doing your sums: working through the numbers is a critical part of making investment decisions
5. the importance of location: the lession I took from the book is that the best location does not mean the most expensive areas. Rather a well located property is one where the amenities, demographics and the overall tone of the neighbourhood will all work in your favour (especially if you are adding value through refurbishment). The book may have benefitted from spending more time on this issue
What was missing from the book was the nitty gritty advice on matters such as legal issues, tax planning and the like. In my view the book did not suffer from absence of detailed coverage of these issues (and there is plenty of other material on these issues available in other books or on the internet). As mentioned above the concise and to-the-point writing style meant that the key points came through very clearly.
All in all a good motivational read that brings out a number of the critical concepts involved in making real estate invetsment successful but not a sufficiently complete coverage of the issues to rate as a good "how to" book.
At only 113 pages long (including appendices) the book is refresingly free from waffle and can be read in a few hours. It also contains some valuable lessons for anyone looking to make money in real estate:
1. use of leverage: Kingston explains very clearly how he raised the money for his investments and how he made leverage work for him. More detail on the key terms to negotiate when raising money would have been useful
2. yield on investments: This is what services the debt and, for some investors, pays the living expenses. It's also one component in determining value. Put differently, good cash flow gives significant downside protection
3. adding value: the ability to add value through refurbishment and other arrangements is an effective way to significantly increase your return on equity
4. doing your sums: working through the numbers is a critical part of making investment decisions
5. the importance of location: the lession I took from the book is that the best location does not mean the most expensive areas. Rather a well located property is one where the amenities, demographics and the overall tone of the neighbourhood will all work in your favour (especially if you are adding value through refurbishment). The book may have benefitted from spending more time on this issue
What was missing from the book was the nitty gritty advice on matters such as legal issues, tax planning and the like. In my view the book did not suffer from absence of detailed coverage of these issues (and there is plenty of other material on these issues available in other books or on the internet). As mentioned above the concise and to-the-point writing style meant that the key points came through very clearly.
All in all a good motivational read that brings out a number of the critical concepts involved in making real estate invetsment successful but not a sufficiently complete coverage of the issues to rate as a good "how to" book.
Reviewing My Investment Decisions
One of the things I spent some time on over the Chinese New Year holidays was reviewing all my investment decisions since the begining of 2007. Specifically, I wanted to understand why the private portfolio had survived the downturn in the equity markets so well. Here is the scorecard:
1. Hong Kong Property Upgrade: We sold one small residential property and purchased a much larger one in June/July 2007. The unrealised gain on this transaction is sufficiently large to outweigh the effects of the other transactions listed below
2. Silver: I made small incremental purchases of silver during 2007. I then sold a significant part of my position in January 2008. The purchases were good profitable investments. So far the sale has been a bad call (although I still hold the rest of the position)
3. Vietnam Fund: I purchased this in January 2007 as part of an attempt to diversify my investments. This has been the worst performing investment decision I have made for several years and is currently showing a loss of about 17%. I would have to go back at least seven or eight years to find an investment that has shown such a big loss. Worse, there is a significant cost to exit due to the Vietnamese foreign exchange controls.
4. European and Eastern Small Companies Funds: I began making monthly contributions to these two funds in early 2006. I kept making the contibutions right through 2007 and only stopped them in January 2008. These were high cost actively managed funds. While the Eastern small companies fund has made me money, the European small companies fund has not. Collectively, I was making good returns through to the third quarter of 2007 but am now showing a small net loss. My capital would have been better deployed elsewere
5. Hong Kong Tracker: this was purchased in January 2008. Althought the fund is showing a small gain, it is too early to evaluate the wisdom of this investment
6. Lyxor Commodities ETF: this was purchased in January 2008 and is showing a small gain. Again, it is too early to say whether this was a good investment decision or not
7. Lean Hogs ETC: this was purchased in February 2008 and is showing a small loss. It is too early to know whether this was a good decision or not
8. Hang Seng Index Put Options: this was a trade I made in a couple of days in November 2007. While a 7% net return on an investment in a few days is nice, subsequent attempts to make small short term trades have failed due to tight limits on orders preventing execution. I do not want to become a day trader, so I will not be doing this too often.
I am wary of playing "what if" games with the investment decisions I considered but did not make, but for the record:
9. Commodities ETCs: I considered investments in ETCs for lean hogs, sugar, natural gas and soyabean oil in early November. These would have showed a net return of 11.6% over three months
10. Hong Kong Property: I looked at a renovation project
before Chinese New Year but decided not to due to caution about taking on additional gearing and concerns over the age of the building and the state of the exterior/common areas
The other factors which have significantly affected my financial position over the period under review were (i) a high and rising income from employment (ii) favourable exchange rate movements (iii) falling interest rates in Hong Kong (partly offset by rising interest rates on my overseas property mortgage) and (iv) the fact that over 60% of our total assets are invested in Hong Kong real estate.
The factors set out above explain why the steep falls in equity markets have had such a limited effect on my financial position: the declines in my equity funds have been offset by gains in other areas, underweighting equities and favourable foreign exchange movements. I do not expect this situation to continue for ever, but it gives me considerable comfort to know that my finances have performed very well in times of moderate uncertainty.
1. Hong Kong Property Upgrade: We sold one small residential property and purchased a much larger one in June/July 2007. The unrealised gain on this transaction is sufficiently large to outweigh the effects of the other transactions listed below
2. Silver: I made small incremental purchases of silver during 2007. I then sold a significant part of my position in January 2008. The purchases were good profitable investments. So far the sale has been a bad call (although I still hold the rest of the position)
3. Vietnam Fund: I purchased this in January 2007 as part of an attempt to diversify my investments. This has been the worst performing investment decision I have made for several years and is currently showing a loss of about 17%. I would have to go back at least seven or eight years to find an investment that has shown such a big loss. Worse, there is a significant cost to exit due to the Vietnamese foreign exchange controls.
4. European and Eastern Small Companies Funds: I began making monthly contributions to these two funds in early 2006. I kept making the contibutions right through 2007 and only stopped them in January 2008. These were high cost actively managed funds. While the Eastern small companies fund has made me money, the European small companies fund has not. Collectively, I was making good returns through to the third quarter of 2007 but am now showing a small net loss. My capital would have been better deployed elsewere
5. Hong Kong Tracker: this was purchased in January 2008. Althought the fund is showing a small gain, it is too early to evaluate the wisdom of this investment
6. Lyxor Commodities ETF: this was purchased in January 2008 and is showing a small gain. Again, it is too early to say whether this was a good investment decision or not
7. Lean Hogs ETC: this was purchased in February 2008 and is showing a small loss. It is too early to know whether this was a good decision or not
8. Hang Seng Index Put Options: this was a trade I made in a couple of days in November 2007. While a 7% net return on an investment in a few days is nice, subsequent attempts to make small short term trades have failed due to tight limits on orders preventing execution. I do not want to become a day trader, so I will not be doing this too often.
I am wary of playing "what if" games with the investment decisions I considered but did not make, but for the record:
9. Commodities ETCs: I considered investments in ETCs for lean hogs, sugar, natural gas and soyabean oil in early November. These would have showed a net return of 11.6% over three months
10. Hong Kong Property: I looked at a renovation project
before Chinese New Year but decided not to due to caution about taking on additional gearing and concerns over the age of the building and the state of the exterior/common areas
The other factors which have significantly affected my financial position over the period under review were (i) a high and rising income from employment (ii) favourable exchange rate movements (iii) falling interest rates in Hong Kong (partly offset by rising interest rates on my overseas property mortgage) and (iv) the fact that over 60% of our total assets are invested in Hong Kong real estate.
The factors set out above explain why the steep falls in equity markets have had such a limited effect on my financial position: the declines in my equity funds have been offset by gains in other areas, underweighting equities and favourable foreign exchange movements. I do not expect this situation to continue for ever, but it gives me considerable comfort to know that my finances have performed very well in times of moderate uncertainty.
Update on the Hong Kong Property Boom
I have written a number of posts on the Hong Kong propety market. In spite of the declines in global equity prices and continuing economic uncertainty in financial markets, the Hong Kong property market continues to show considerable strength. Like the real economy, it shows no sign of being adversely effected by the so called credit crisis. In fact it has risen strongly in the last six months. As things stand, it is difficult to see many reasons for the market to weaken and easy to see several reasons for it to remain strong.
On the positive side:
1. supply remains tight
2. affordability levels are reasonable by historical standards
3. incomes are rising (both salary increases and bonuses)
4. employment is strong (unemployment is at near record low levels)
5. interest rates are low (around 3.2%)
6. rents are rising
7. confidence is high
8. inflation is rising (currently above 3% and expected to rise further)
9. liquidity remains very high and there are no signs of banks restricting lending
On the negative side:
1. prices have advanced significantly over the last four years. Luxury prices have reached or exceeded the previous peak in 1997. Mid-market and mass-market prices are still below the 1997 peaks
2. uncertainty regarding the effect of a recession or near recession in the US
3. decline in equity prices reducing the amount of money available to invest and (possibly) damaging confidence
4. bank valuations are tending to lag market prices meaning that buyers need larger deposits. In the overall scheme of things, I view this as a healthy development
The other thing to consider is future developments. Although this is largely speculative:
1. the possibility of further cuts in interest rates in the US. Given the peg between the Hong Kong and US currencies, this would result in lower interest rates in Hong Kong as well. This would aid affordability
2. tax reductions and rebates, rates waivers and a re-introduction of the home owership scheme all providing a stimulus to demand. We will find out later this month when the government releases its budget
3. loss of confidence (more likely if the share market keeps falling)
4. the Hong Kong government releasing more land for residential development. There has been no indication that the government is intending to do this. Given that this was one of the causes of the post 1997 collapse in property prices and caused considerable political unrest, any increase in land supply is likely to be carefully controlled to prevent a repeat
Given that Hong Kong real estate remains our dominant asset class, this is an issue which I spend a proportionately (and appropriaely) large amount of time thinking about. As things stand, I am happy to continue holding the properties in our portfolio. I would be happy adding to the portfolio but only with reduced gearing levels to better manage the risk should there be downturn.
On the positive side:
1. supply remains tight
2. affordability levels are reasonable by historical standards
3. incomes are rising (both salary increases and bonuses)
4. employment is strong (unemployment is at near record low levels)
5. interest rates are low (around 3.2%)
6. rents are rising
7. confidence is high
8. inflation is rising (currently above 3% and expected to rise further)
9. liquidity remains very high and there are no signs of banks restricting lending
On the negative side:
1. prices have advanced significantly over the last four years. Luxury prices have reached or exceeded the previous peak in 1997. Mid-market and mass-market prices are still below the 1997 peaks
2. uncertainty regarding the effect of a recession or near recession in the US
3. decline in equity prices reducing the amount of money available to invest and (possibly) damaging confidence
4. bank valuations are tending to lag market prices meaning that buyers need larger deposits. In the overall scheme of things, I view this as a healthy development
The other thing to consider is future developments. Although this is largely speculative:
1. the possibility of further cuts in interest rates in the US. Given the peg between the Hong Kong and US currencies, this would result in lower interest rates in Hong Kong as well. This would aid affordability
2. tax reductions and rebates, rates waivers and a re-introduction of the home owership scheme all providing a stimulus to demand. We will find out later this month when the government releases its budget
3. loss of confidence (more likely if the share market keeps falling)
4. the Hong Kong government releasing more land for residential development. There has been no indication that the government is intending to do this. Given that this was one of the causes of the post 1997 collapse in property prices and caused considerable political unrest, any increase in land supply is likely to be carefully controlled to prevent a repeat
Given that Hong Kong real estate remains our dominant asset class, this is an issue which I spend a proportionately (and appropriaely) large amount of time thinking about. As things stand, I am happy to continue holding the properties in our portfolio. I would be happy adding to the portfolio but only with reduced gearing levels to better manage the risk should there be downturn.
Wednesday, February 06, 2008
Silver - Partial Sale
I sold about 44% of my investment in silver this morning. The decision was one I had been mulling over for several days. Specifically, I had become aware that the fundamentals had changed since I made my first investment in early 2005. At that time demand was believed to be greater than supply with the shortage being met by selling government stock piles. Since then, the fundamentals have changed. On the supply side new mines are being developed (either silver mines or base metal mines that produce silver as a by product) and the expected growth in demand from new applications (in the technology and medical fields) has been slower to develop than expected. As a result the market has moved into a situation where supply now exceeds demand.
The catalyst for selling part of my position was a report prepared by HSBC on precious metals which I received overnight. The HSBC report forecast sharply lower prices for silver (USD14.00 /oz in 2008, USD13.50/oz in 2009 and USD12.75/oz in 2010). Current prices are around USD16.30/oz. The HSBC report expresses the view that the rise in the price of silver is largely due to investment demand for precious metals generally including by the silver ETF absorbing a considerable amount of physical silver.
The conclusion I reached was that in order to continue holding silver I would need to believe that (i) investment demand (rather than end user demand) would continue and would actually grow to absorb the expected increase in supply and/or (ii) that the expected supply and demand figures are simply wrong.
I am actually considering exiting the position completely, but wish to spend another day or two thinking about it before doing so.
The other factor weighing on my mind is the possibility that I may have become emotionally wedded to this investment. It has been good to me, but that is not of itself good enough justification to retain the position.
My original poistion was opened in January 2005 at UD6.63. Since then I have added to the position in small amounts at irregular intervals. The weighted average cost was UD8.90.
The catalyst for selling part of my position was a report prepared by HSBC on precious metals which I received overnight. The HSBC report forecast sharply lower prices for silver (USD14.00 /oz in 2008, USD13.50/oz in 2009 and USD12.75/oz in 2010). Current prices are around USD16.30/oz. The HSBC report expresses the view that the rise in the price of silver is largely due to investment demand for precious metals generally including by the silver ETF absorbing a considerable amount of physical silver.
The conclusion I reached was that in order to continue holding silver I would need to believe that (i) investment demand (rather than end user demand) would continue and would actually grow to absorb the expected increase in supply and/or (ii) that the expected supply and demand figures are simply wrong.
I am actually considering exiting the position completely, but wish to spend another day or two thinking about it before doing so.
The other factor weighing on my mind is the possibility that I may have become emotionally wedded to this investment. It has been good to me, but that is not of itself good enough justification to retain the position.
My original poistion was opened in January 2005 at UD6.63. Since then I have added to the position in small amounts at irregular intervals. The weighted average cost was UD8.90.
Six Months To Process Insurance Claim
At the begining of August 2007 I filed an insurance claim for my old wine fridge. After a flurry of e-mail exchanges, I completed Axa's rather cryptic claim form and gave them copies of the documents supporting the claim. I was told within a few days that Axa would not appoint a loss assesor (which was no surprise as the amount involved was only HK$9,180 and I had an engineer's report to evidence the death of the old wine fridge).
A full six months later, I finally get told that the cheque is in the post. There was no explanation or apology for the unacceptably long delay. As this is the first time in my life I have made an insurance claim for anything other medical bills (which normally get settled within a couple of months), I was more than a little but surprised at the delay. Quite frankly, a delay of six months in settling an undisputed claim is ridiculous and have written to Axa (or slightly more accurately the agent) making my views known.
The message I take from this is that, while insurance is important, I cannot depend on the insurance companies to make payments promptly and should look to my own resources first.
A full six months later, I finally get told that the cheque is in the post. There was no explanation or apology for the unacceptably long delay. As this is the first time in my life I have made an insurance claim for anything other medical bills (which normally get settled within a couple of months), I was more than a little but surprised at the delay. Quite frankly, a delay of six months in settling an undisputed claim is ridiculous and have written to Axa (or slightly more accurately the agent) making my views known.
The message I take from this is that, while insurance is important, I cannot depend on the insurance companies to make payments promptly and should look to my own resources first.
Monday, February 04, 2008
A Small Speculation - Lean Hogs
My only investments in commodities to date have been paper silver and the Lyxor commodites ETF. The silver investment has been very successful although it represents a small part of our overall asset allocation. I made a decision last year to increase the exposure to commodities. In January, I made a small investment in the Lyxor commodities ETF (currently down about 1.2% on cost). I am not sure what percentage of our assets should be allocated to commodities, but have provisionally given myself a limit of 3% or total assets.
Today I took on another position, investing in lean hogs. The price of lean hogs declined steadily in the second half of 2007 and flattened towards the end of last year and the early part of January. The reason for the decline was generally accepted as being overbreeding by (primarily) US producers. Given rising feed costs (soyabeans and corn), there may have been some pressure to reduce stock numbers as well, but I have not found much to support that theory. At the same time, pork prices in China and Hong Kong have risen significantly. Pork prices rose 56% in China in the 12 months to November 2007. Some provincial governments have been handing out coupons to citizens to help defray the rising costs. China imports pigs from the US to meet the shortage. I have no idea whether the extreme weather conditions in China will affect the supply, but the possibility exists.
My expectation is that rising demand in China (and a few other places) will exert greater influence on the prices set in western markets. At the same time, the combination of lower revenues and rising costs should result in reduced breeding by farmers. In short, I can see a credible case for improving fundamentals.
From a technical perspective, the recent price movements could be taken as a breakout signal. I am not a huge fan of technical chart analysis, but am not totally hostile either. While it looks like a breakout to my inexperienced eyes, it is too soon to trigger interest from momentum investors.
As I do not have time to constantly watch the futures markets and do not wish to have several hundred live pigs delivered to my front door, I purchased the HOGS ETC traded on the London Stock Exchange. Exchange Traded Commodities are essentially the same as ETFs, only they track a single commoditiy or a basket of commodities. Unlike futures and options there is no leverage (although you can trade on margin if you wish) and no expiry date (so no roll over costs). There are embeded management and other expenses (as with ETFs).
Today I took on another position, investing in lean hogs. The price of lean hogs declined steadily in the second half of 2007 and flattened towards the end of last year and the early part of January. The reason for the decline was generally accepted as being overbreeding by (primarily) US producers. Given rising feed costs (soyabeans and corn), there may have been some pressure to reduce stock numbers as well, but I have not found much to support that theory. At the same time, pork prices in China and Hong Kong have risen significantly. Pork prices rose 56% in China in the 12 months to November 2007. Some provincial governments have been handing out coupons to citizens to help defray the rising costs. China imports pigs from the US to meet the shortage. I have no idea whether the extreme weather conditions in China will affect the supply, but the possibility exists.
My expectation is that rising demand in China (and a few other places) will exert greater influence on the prices set in western markets. At the same time, the combination of lower revenues and rising costs should result in reduced breeding by farmers. In short, I can see a credible case for improving fundamentals.
From a technical perspective, the recent price movements could be taken as a breakout signal. I am not a huge fan of technical chart analysis, but am not totally hostile either. While it looks like a breakout to my inexperienced eyes, it is too soon to trigger interest from momentum investors.
As I do not have time to constantly watch the futures markets and do not wish to have several hundred live pigs delivered to my front door, I purchased the HOGS ETC traded on the London Stock Exchange. Exchange Traded Commodities are essentially the same as ETFs, only they track a single commoditiy or a basket of commodities. Unlike futures and options there is no leverage (although you can trade on margin if you wish) and no expiry date (so no roll over costs). There are embeded management and other expenses (as with ETFs).
Sunday, February 03, 2008
Book Review: Hedge Hunters
Hedge Hunters was written by Katherine Burton, a reporter for Bloomberg News. The book is essentially a series of interviews with the current (or in one case the past) mangers of eighteen succesful hedge funds.
The hedge fund managers interviewed included familiar names such as Julian Robertson, Michael Steinhardt, Richard Perry and Boone Pickens. However, most of the names were not familar to me which added an element of interest to the book.
In terms of insight into what makes a successful hedge fund manager or a successful investment strategy, a few common (but not universal) themes emerged from the various interviews:
1. while all of them had some grounding in the financial services industry before starting or joing a hedge fund, the range of university degrees and backgrounds was suprisingly diverse;
2. all of these investors, without exception, did not employ strategies that involved long term holding of investments. For many of the managers who claimed to prefer longer term investments, their idea of longer term was two or three years at most. When an investment reached the point where they did not believe it would continue to appreciate at an acceptable rate, it would be cut from the portfolio. This is a far cry from the Warren Buffett style;
3. most of them were quite ruthless about cutting losing positions early. Those that did not automatically cut losing positions used a rigerous review process that appeared to favour cutting losses unless they had a very strong case for continuing with a position;
4. down side protection was as important as winning on the upside. A combination of diversification with position limits, loss cutting and (for many) long short strategies were all designed to limit losses. Use of derivatives to limit risk was variable - some managers used options to hedge exposure, others did not;
5. return expectations were far more modest than is commonly believed for hedge funds. Where target returns (net of fees) were quoted they were surprisingly low (in one case 10-12%). Although a number of managers have acheived average annual returns of more than 20%, numbers around 12-15% were more common. The key for many, is to avoid or minimise losing years rather than emphasising winning years;
6. there was a fair amount of disdain for noise (general chatter about the market, sell side analysis etc). On the contrary, there was a clear preference for doing their own research (in huge detail) and, above all, their own thinking. A couple made comments about avoiding crowded investment ideas.
All in all an easy read which provided some useful (though limited) insights into the world of hedge funds. Although lacking depth or detail (possibly difficult to provide in a book of this nature), it was clearly written and easy to read.
The hedge fund managers interviewed included familiar names such as Julian Robertson, Michael Steinhardt, Richard Perry and Boone Pickens. However, most of the names were not familar to me which added an element of interest to the book.
In terms of insight into what makes a successful hedge fund manager or a successful investment strategy, a few common (but not universal) themes emerged from the various interviews:
1. while all of them had some grounding in the financial services industry before starting or joing a hedge fund, the range of university degrees and backgrounds was suprisingly diverse;
2. all of these investors, without exception, did not employ strategies that involved long term holding of investments. For many of the managers who claimed to prefer longer term investments, their idea of longer term was two or three years at most. When an investment reached the point where they did not believe it would continue to appreciate at an acceptable rate, it would be cut from the portfolio. This is a far cry from the Warren Buffett style;
3. most of them were quite ruthless about cutting losing positions early. Those that did not automatically cut losing positions used a rigerous review process that appeared to favour cutting losses unless they had a very strong case for continuing with a position;
4. down side protection was as important as winning on the upside. A combination of diversification with position limits, loss cutting and (for many) long short strategies were all designed to limit losses. Use of derivatives to limit risk was variable - some managers used options to hedge exposure, others did not;
5. return expectations were far more modest than is commonly believed for hedge funds. Where target returns (net of fees) were quoted they were surprisingly low (in one case 10-12%). Although a number of managers have acheived average annual returns of more than 20%, numbers around 12-15% were more common. The key for many, is to avoid or minimise losing years rather than emphasising winning years;
6. there was a fair amount of disdain for noise (general chatter about the market, sell side analysis etc). On the contrary, there was a clear preference for doing their own research (in huge detail) and, above all, their own thinking. A couple made comments about avoiding crowded investment ideas.
All in all an easy read which provided some useful (though limited) insights into the world of hedge funds. Although lacking depth or detail (possibly difficult to provide in a book of this nature), it was clearly written and easy to read.
Saturday, February 02, 2008
To Buy Or Not To Buy?
On Friday I had a look at a potential property investment. Having crunched the numbers the proposal looks attractive as either a buy, renovate and sell proposition or as a buy, renovate and lease proposition. The asking price (before negotiation) is also at or slightly below the two bank valuations I obtained. In the current bullish market, finding a property at bank valuation is not easy and usually indicates a bargain.
However, there are some issues with the property. Specifically, the age of the building. At 41 years, this is old by Hong Kong standards and will deter some potential buyers. If banks revert to the lending policies they had in the 1990s, a future buyer might have difficulty financing the purchase. In terms of managing my downside, in less boyant market conditions, I could anticipate that the property would be difficult to sell.
The second issue is the exterior of the building and the common areas. The building is run down and very unattractive. All of this is factored into the price. Again, the issue is managing the downside. If the property market reverted to being a tenant's market, I could anticipate difficulties in leasing the property as tenants prefer properties with a more attractive appearance. There is some prospect of the owners spending money on an upgrade of the common areas and the exterior. Several units have recently been renovated, showing that people are willing to spend money on their units in the building. However, I would not want to rely on such an uncertain prospect.
The other factor weighing on my mind is my personal liquidity. We have the vast majority of our wealth in illiquid assets. I currently have very little cash and would have to sell some of my funds to make this investment. After doing so, I would have very little cash build up for 3 or 4 months as I fund the refurbishment and the holding costs. Put differently, at a time of considerable economic and some personal uncertainty, I would put myself in a position where I had reduced my liquidity and tied myself to an illiquid and cash draining project for several months.
I am still debating whether to put an offer in, but current thinking is to pass. I will feel more comfortable looking for opportunites in a few months when I will have built up the means to fund a purchase without selling other assets.
However, there are some issues with the property. Specifically, the age of the building. At 41 years, this is old by Hong Kong standards and will deter some potential buyers. If banks revert to the lending policies they had in the 1990s, a future buyer might have difficulty financing the purchase. In terms of managing my downside, in less boyant market conditions, I could anticipate that the property would be difficult to sell.
The second issue is the exterior of the building and the common areas. The building is run down and very unattractive. All of this is factored into the price. Again, the issue is managing the downside. If the property market reverted to being a tenant's market, I could anticipate difficulties in leasing the property as tenants prefer properties with a more attractive appearance. There is some prospect of the owners spending money on an upgrade of the common areas and the exterior. Several units have recently been renovated, showing that people are willing to spend money on their units in the building. However, I would not want to rely on such an uncertain prospect.
The other factor weighing on my mind is my personal liquidity. We have the vast majority of our wealth in illiquid assets. I currently have very little cash and would have to sell some of my funds to make this investment. After doing so, I would have very little cash build up for 3 or 4 months as I fund the refurbishment and the holding costs. Put differently, at a time of considerable economic and some personal uncertainty, I would put myself in a position where I had reduced my liquidity and tied myself to an illiquid and cash draining project for several months.
I am still debating whether to put an offer in, but current thinking is to pass. I will feel more comfortable looking for opportunites in a few months when I will have built up the means to fund a purchase without selling other assets.
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