Thursday, December 31, 2009
Monthly Review - December 2009
Here are the details"
1. my Hong Kong equity portfolio appreciated, in spite of a minor pull back in the overall market towards the end of the month. The only changes this month were the sale of Pacific Basin and the purchase of Shenzhen Expressway
2. my ETFs appreciated modestly with Russia, India and Taiwan advancing by more than a slight decline in Hong Kong
3. commodities appreciated
4. all but one of my properties was let and all tenants were paying on time. The renovation work on the last project has been completed and the agent is looking for a tenant for me (which is unlikely at this time of the year). Even with one vacancy I am close to break even on a cash flow basis and well ahead on an income basis
5. currency movements were neutral
6. I did not roll over my ELDs
7. savings were positive with income at the high end of expectations and expenses more or less in line. I had over provided for the cost of our holiday - a reversal of the excess accrual added to the bottom line.
For the month, net worth increased by 2.5%. For the year, net worth is up a staggering 75.3%.
I will do a separate post reviewing 2009 as a whole.
Saturday, December 26, 2009
Money Lessons of a Lost Decade
lessons from the "lost" decade.
I very strongly disagree with the notion that the first decade of the current millennium was in any way "lost" from a financial perspective. In spite of all the volatility (SARS in 2003 and the credit crisis in 2007 /8), it was a good decade financially for the traineeinvestor household. Most of my peers also did well during the decade. In part this was because we were all at the stages in our careers where promotions and rising incomes produced higher savings levels and in part because those rising savings levels arrived at times when the markets (real estate, equities) were either rising or had been weak (i.e. cheap).
One thing I would take away from the last ten years is a repeat of the same lessons I took from the 1980s and the 1990s (and from reading plenty of books on financial history). Market volatility is normal. Extreme volatility is not as uncommon as you would expect. Bubbles and the subsequent burstings can be expected from time to time. Learning to live with volatility and uncertainty is fundamental to being a successful investor.
As to the items listed in the article, these are almost all useful points to remember. I particularly like the statement that value is an absolute not a relative concept. While this is not strictly true (comparatives are important), I always hesitate when I see an analyst claim that a company deserves to trade at a premium to its peers.
The one point which I consider to be dangerous is to have the courage of your convictions - while this is fine if it means a willingness to take risks in order to generate returns, it is a very dangerous position to take when things start moving against you. Sometimes it is better to admit that you are wrong, deal with the consequences and to move on.
Wednesday, December 16, 2009
Ten reasons to retire
Five of the ten reasons are essentially a statement of the obvious - if you can't afford an acceptable standard of living on a sustainable basis then retirement is not an option.
As far as the five non-financial issues are concerned, these are all points to consider. However, their validity will depend on individual cases and your mileage may vary.
To put a different perspective on the table, here are some reasons why we should retire:
#1 You can afford it. If you have worked hard for a number of years, enjoy it. You've earned it. Why wait?
#2 You're not getting any younger. Your life span is a finite sum. Each day is a resource you can only spend once. Do you want to spend more of your finite days in the office or on the beach? Let's face it - no one ever died regretting not spending more time in the office
#3 You don't need more. Enough is enough. Seriously - if you need more money, fine keep working. If you have enough stop. If you can never have enough, get some therapy. Get a life
#4 You will get old. Your health will deteriorate. There are some things which most of us can only do while we are young and in good health. The longer you delay retirement the greater the risk that physical or mental deterioration will mean that you will never get around to them
#5 Priorities. People matter. Family. Friends. Others. Very few people can legitimately claim that their job is a priority item. Give priority to the things (people) that matter
#6 Personal interest. Most of have a list of things we want to do. Whether we make up a list and whether we call it a bucket list or not, it's there and maximising the part of your life spent in the cube farm has no place on the list. Why not get on with it?
#7 Physical health. Quitting the rat race means you have more time. Time to spend getting in shape. Go biking. Hiking. Swimming. Get out and smell the daisies before you start pushing them
#8 Stress. Some people thrive on it. Personally, I could survive very well without it. If the office is a stress generator, it's time to move on
#9 Mental health. There's no argument that the office can provide mental stimulation. But there are lots of other places you can find the mental equivalent of daily brain exercises - and get some refreshing variety into the bargain
# 10 Giving back. Call it the quest for meaning if your like. Retiring gives you more time to give something back. It's hard to spend your days volunteering at the SPCA if you're chained to a workstation
Of course, I could say that retiring early is good for the economy - by stepping down you open up a job opportunity for someone else - but I have taken the selfish approach and confined my list to personal reasons.
A quick search of the internet talks about the benefits of working part time to bridge the transition from working full time to living full time. This is something I support and intend to do myself.
Equally, if retirement means spending your days sitting in front of the TV or wandering aimlessly through the mall, it is hardly surprising that health issues will follow. Making sure you are in a position to address the potential for boredom, physical inactivity, mental inactivity and social isolation before you retire (preferably years before) is a fundamental part of retirement planning.
Thursday, December 10, 2009
Shenzhen Expressway purchased
Friday, December 04, 2009
- GDP forecasts being revised upwards. Hong Kong is now forecasting 4%+ GDP growth for 2010 (depending on whose forecast you are looking at)
- Hong Kong residential property prices are forecast to increase by 10%, 20% or 30% next year on the back of continued tight supply (this is actually debatable), renewed confidence and a continued supply of cheap and plentiful mortgages (ditto)
- stocks will continue to appreciate, although at a slower pace - valuations based on fundamentals like P/B and PE are mid-range
- monetary tightening will not happen until 2010 Q3 - 2011 Q3 (ditto)
- unemployment is expected to start falling in Hong Kong and elsewhere in Asia (or may have already done so) (although still rising elsewhere)
- corporate earnings are rising again (or at least recovering)
Sure, there are plenty of doomsayers out there, but their voices are starting to be drowned out by the optimists. Anecdotally, the air quality in Hong Kong is visibly deteriorating, taxi queues and road congestion have got worse and restaurants are getting full again.
Bubbles? There is a lot of talk about bubbles in the local/PRC stock market and the local property market. While stocks and property have rallied a long way off their lows, by historical standards:
- mass market residential property in Hong Kong is still much more affordable and lower in absolute terms than in the period leading up to the Asian crisis in 1997
- stock valuations based on P/B are close to their long term average of 2x. PE looks more elevated - to the point were value is getting hard to find - but this does not indicate a bubble
While there are calls from the IMF among others to pre-empt a bubble in asset values, I see no need for such action at this point. Valuations are not stretched. The economy is still recovering from the impact of the crisis (relatively limited here compared to the US) and confidence is returning. More to the point, as long as the HK$ is pegged to the US$ and the US refrains from raising interest rates, the Hong Kong Monetary Authority has little choice but to keep the supply of money in Hong Kong at high levels.
All in all, things are looking a lot better than at this time last year.
Wednesday, December 02, 2009
Book Review: Strategy for the Wealthy Family
While parts of the book are clearly more appropriate for very wealthy families with family offices or high end private bankers to take care of their needs, there is a great deal which could be adopted by lesser families (such as my own).
The author suggests that wealthy families adopt a formal strategy which amounts to treating the family in a similar manner as a business. Among other topics discussed:
- adopting a family constitution
- wealth preservation
- wealth management
- managing family business
- effective philanthropy
- living a truly wealthy life
- succession planning
There were sample documents for (among others) a family strategy document, an investment policy statement and an ethical will. There were two versions of the family strategy document, one for a US$5 million family and one for a US$50 million family. (Needless to say, I have no need of the latter.)
At the moment I am still in the process of accumulating sufficient funds to retire (target 2012/age 46). However, given our age difference, whatever we save may have to last my wife for 50 years. Accordingly, the wealth preservation sections where extremely useful and I will be looking to adopt some (but not all) of them.
Recomended (even for not so wealthy families).
A small day trade successfully executed
Fairwood Holdings topped up
Tuesday, December 01, 2009
Monthly Review - November 2009
Here are the details:
1. my Hong Kong equity portfolio recorded solid gains. I sold Pacific Basin at a small profit and partially reinvested in VTech (the share price overran my limit and I elected not to chase the price). I also did a small profitable day trade in HSI warrants. The bad news of getting hit on a Hutchison Whampoa put warrant at an effective cost of HK$57.95 (current market is below HK$53) was not enough to outweigh the gains elsewhere in the portfolio.
2. my ETF's all marched upwards with India and Hong Kong leading the way.
3. my Australia and New Zealand equities and managed portfolio were down by a small amount.
4. my commodities recorded small gains.
5. one of my two outstanding ELD positions was exercised against me, resulting in me having holding a large position in Hutchison Whampoa which I am holding at a loss. The other position remains out of the money.
6. my rental properties remain fully let (except for the new purchase undergoing renovation) and all tenants are paying on time. Positive cash flow combined with P+I mortgages are a nice thing.
7. FX movements were very slightly adverse this month.
8. income was at the high end of expectations. Unfortunately, I had a lot of expenses this month - I paid the second installment of our Christmas holiday, I started paying for medical insurance for the first time, expenses for my Trailwalker and a few lesser items. I also received the tax bill for the company which holds some of my Hong Kong properties. Although not due until early January, I elected to pay it now. I still managed to achieve net savings (one of the benefits of having a high savings rate), although at a lower level than usual.
The end result was a net gain of 1.8%. The gain for the year to date is 70.9%. Absolutely unbelievable.
Note: this month's numbers were calculated at close of business on 1 December rather than at the end of the month as usual.
Monday, November 30, 2009
A small day trade successfully executed
I purchased some warrants on the Hang Seng Index (19288) paying HK$.182 per warrant and sold them less than two hours later for HK$0.19. Net of costs, I made a profit of about 2.1%. Given that I was using only a very small amount of money, the gain was not meaningful in the overall scheme of things, but enough to pay for a very nice dinner for two with a nice bottle of wine.
If nothing else, it gave me something useful to do during what is shaping up to be a monumentally boring day at the office.
Saturday, November 28, 2009
I placed my order early on Friday morning at 68.80. Unfortunately, in spite of the market being down heavily, VTech jumped against the general direction of the market and only about 62% of my order was filled before the share price rose above HK$71 per share. I elected not to chase the market. If the share price retreats to below HK$70, I will complete the rest of the order. If not, I will hold the shares purchased.
Pacifc Basin sold
The stock has been a disappointing investment - considerably underperforming the Hang Seng Index in spite of the strong rise in the Baltic Dry Index over the last six months. Being short of cash, I also needed to sell something to raise money to invest in VTech (303).
Tuesday, November 24, 2009
From two incomes to one (1)
What does the shift to a single income mean for our household?
The loss of income. Having run the numbers through the spreadsheet a few times, we have concluded that it should not affect my plans to retire in 2012-2013. If it does, it will only be by a year - because we are so close to hitting our number savings have less of an impact on the timing than return on investments.
Vulnerability to job loss. Clearly, if I were to lose my job we would have no income coming in and would need to live off investments until one of us could find a new job. This does not cause us any concern - if we really had to we could make some significant cuts in expenditure and probably get by indefinitely on our investments.
Boredom. The only thing worse than a bored spouse is a bored spouse who tries to relieve her boredom by going on shopping binges. We have come up with some projects to keep Mrs traineeinvestor busy - both physically and mentally. One of which will be tracking our spending in far more detail than we do at present. There are also some projects around the home which need doing. She is considering doing some further study.
Expenses. We are unsure whether expenses will go up or down and will monitor the situation carefully. In some respects, this is a dry run for my own retirement.
Savings. With time on her hands, we will be looking to get better deals on some of our household expenses. At the moment, we simply do not have the time to search out the best deal.
Portfolio. At the moment we do not keep any money set aside for an emergency fund. Having considered our situation, I see no need to change this arrangement. There will still be enough cash coming in from my job and our investments each month as well as money set aside to pay tax to deal with just about any emergency which could conceivably arise.
Insurance. Our medical insurance is provided by my wife's employer and will cease at the end of the week. I have arranged replacement insurance through my employer but have to pay for it myself. This is a significant expense.
Looking forward to the day when I retire.
Monday, November 23, 2009
Put option exercised against me
Given that equity markets are volatile, it was inevitable that an option I wrote would be exercised and I would end up owning shares that were worth less than I paid for them (at least on a short term basis). It is for this reason that I have only been willing to write options against shares which I would be prepared to hold long term. In the case of Hutchison Whampoa, the company is a long established blue chip company with a sound balance sheet and a diversified portfolio of earnings, at least some of which are defensive in nature. The 3%+ dividend yield is also attractive.
Sunday, November 22, 2009
Oxfam Trailwalker - 100 KM of hills
For those who are not familiar with the trailwalker concept, the original event was designed as training exercise for the Gurkhas when they were part of the British military garrison in Hong Kong. The event evolved into a charity event to raise money for Oxfam. Trailwalkers are now held in several countries including Japan, Belgium, England, New Zealand and Australia.
Sunday, November 15, 2009
Book Review - The Believers
1. why did the SFC fail to stop Madoff in spite of being repeatedly alerted to the likelihood that he was acting dishonestly?
2. why did so many people entrust so much money to one unlicensed investment fund run by an unlicensed adviser?
Adam LeBor's book focus's on the second question. The answer would make an interesting study in investor psychology or behavioural economics. In a nut shell people invested in Madoff because he created an aura of exclusivity. Being a Madoff investor was tantamount to being part of "our crowd", part of something special and unique. There was also a significant element of people trusting Madoff with their money because other people they knew and respected had also done so.
The obvious lesson for a small investor like myself is to avoid products which attempt to sell themselves on the basis of glamour, exclusivity etc. In effect, make sure I do not follow the crowd.
The other lessons from Madoff are not new. Stick with things which are easy to understand and transparent. Diversify. Know who has your money. Do your own research and do not invest until you have all the answers you need.
The first question receives much the same brief treatment as other writings: no satisfactory reason for the SEC's failure to shut Madoff down years earlier has been given.
Saturday, November 14, 2009
If (financial) disaster strikes
This article in the Wall Street Journal about people who continue to throw money at a lavish lifestyle. I totally fail to understand how people can burn through money on maintaining a lifestyle which is unsustainable and, quite frankly, have little if any sympathy for them. If anything, I feel resentful that the taxpayer will ultimately end up footing the bill for their irresponsibility. I also have to wonder how they are going to explain things to their children when the banks belatedly wake up to the fact that these people are bad credit risks.
How would I react if I lost my job?
Obviously, I would be disappointed, possibly even a shocked as it is relatively new position. Moving past that reaction would be my first task. Given that I would want references from my current employer, I would try to leave on the best terms possible. I would also explore the possibility of a part time position or extended notice period to give me time to look for another job. Even though the odds would be against either proposition it would not hurt to ask. (Actually, given that there would be a reasonable possibility of my next job being with a client, they would have an incentive to treat me nicely on exit.)
I would discuss with my wife. We are a team and would need to deal with it together. This does not mean transferring any of my angst on to her. It means we have to be on the same page when it comes to dealing with the financial situation.
I would prepare a cv (actually, it would only take a few minutes to update the one I used last year). I would draw up a list of recruitment agencies and companies to approach. I would also look into further education options and a personal development project to keep me busy if all else failed.
I would arrange replacement medical insurance if I ceased to be covered under my current employer sponsored plan.
I would not make early payments into our mortgage. With an interest rate of about 1% and prepayment penalties applicable until May 2012, we are better off investing the money than in paying down debt.
I would start cutting expenses immediately. The immediate targets would be:
1. eating out - less frequent an cheaper
2. wine - expensive wine is one of my few real luxuries. It would be chateau cardboard for me going forward
3. transport - I usually take taxis. Going forward, it would be mostly buses
4. holidays - we would cut to one holiday a year (a visit home to see my parents)
5. gym - I would cancel my gym membership as soon as I have used up the balance of my current block of personal training sessions
6. children - I would not cut the children's schooling or extra curricular classes, but I would cut back on some of the more costly entertainment options
There are a few other lesser items which could be attacked as well.
I have run the numbers and with these savings, I would be close to having a sustainable lifestyle. Close but not close enough for comfort.
The other option which is still up for discussion is my wife returning to the workplace.
Wednesday, November 11, 2009
Defined contribution plans - a bad idea
1. insufficient contributions: in theory, contributions will be made by either the employer or the employee or both over the period of employment. Actuarial calculations will be done to ensure that the total contributions over the life of the plan, together with the return on investing those contributions, will be sufficient to fund the future benefits. With depressing frequency, the contributions are not sufficient. The usual reasons are over estimation of the return on investing the contributions and longer life expectancies. Even a small shortfall in return will make a big difference over the life of the plan. Less frequently, the employer will simply fail to pay - either deliberately or under due to insolvency;
2. who pays for the shortfall: when the value of a plan's assets are insufficient to meet the claims by plan members, one of three things will happen (i) the employer will become insolvent in which case the employees will be left with reduced benefits (ii) the employer will attempt to negotiate lower benefits or (iii) the employer will fund the shortfall - which will usually come as a large and unpleasant surprise to shareholders if (as is just about always the case) the shortfall had not been provided for in the accounts. Another way of looking at it is employees are taking a very significant credit risk on their employer;
3. change of employment: defined benefit plans were designed in the days when people changed jobs less frequently than today. Since defined benefit plans are usually not fully portable, and plan administrators charge significant fees to people who withdraw from a plan), changing jobs or being laid off can have a significant adverse impact on future retirement benefits (remember that the size of the benefit is often linked to years of service). In some countries, regulations have been used to address this problem but with, at best, mixed success;
4. estate planning: if you use an alternative plan (defined contribution or self saving) all the assets in the plan are yours to keep forever (once vested). If you die, you can leave them to your spouse, children, favourite charity etc. With defined benefit plans, there may (or may not) be a benefit to a surviving spouse, but that is all. Once you cease to be eligible for benefits on death your estate has no further claims to either your contributions or your employers. This is fundamental to the way the plans operate (remember the actuarial calculations). If you die a day after retirement, a lot of money gets to benefit strangers. (What happens to your contributions if you die before retirement will vary from plan to plan but you can be assured that you will get less than full benefit);
5. value of benefits: studies have been done as to whether a defined benefit plan produces greater benefits than a defined contribution plan. The results tend to depend on what numbers are put into the calculations and whether a COLA is included. Unions and people who receive defined benefit plans tend to argue that defined benefit plans are better;
6. return risk: someone has to bear the risk of return on the investment of plan assets being lower than what is needed to provide the stated benefits. This should be the employee. Arguments that the employer should bear this risk are logically and morally flawed. As an investor I want to invest in companies that carry on a specific business - not a side business of investing in securities etc. Actually, the employee can avoid the risk by using defined contribution plan assets to purchase an annuity at retirement (and will have flexibility to select an annuity which suits their personal circumstances). From an employee's perspective, taking the investment risk off the table also takes away the possibility of benefiting from above average returns;
7. tax treatment: this is currently a non-issue for me. However, tax treatment in other countries varies;
8. inflation: some plans provide for COLA. Some do not. The value of a non-COLA plan will decline over time (even with low inflation). In contrast, a defined contribution plan can be invested in assets which have at least some prospects for preserving their real value (including annuities).
At the risk of stating the obvious, if one form of plan imposes greater costs on employers than the other, employers will either take the cheaper option or employee fewer people.
As a conclusion, defined benefit plans are generally bad for employers and will be bad for most employees. From the employees' perspective they are effectively obtaining the illusory comfort of a fixed benefit on retirement in exchange for taking on solvency risk, losing the potential for upside returns, losing flexibility with their jobs, increasing the cost of changing jobs or being laid off, losing flexibility on retirement and losing the opportunity to leave something behind for their heirs. If the plan does not include a COLA feature they also face greater exposure to inflation reducing their real post-retirement income. This is a very poor trade off.
The one group of people who may be better off with overly generous defined benefit plans are civil servants whose retirement is backstopped by the the taxpayers. As a tax payer, I find this offensive.
Monday, November 09, 2009
Equity put option written
Here are the details:
Underlying: China Construction Bank (939)
Market price: $6.91
Strike price: $6.71
Valuation date: 7 December, 2009
Maturity date: 9 December, 2009Implied yield: 13.55%
Net purchase price if exercised: $6.64
If I get hit I will have effectively purchased the shares at about a 3.9% discount to the prevailing market price. This is a share which I am happy to hold long term if I get hit.
China Zhongwang - purchased
China Zhongwang was listed earlier this year. It's business is the development, manufacture and distribution of aluminium products. It's products have a number of uses - transportation and infrastructure being the main ones but also industrial machinery. As such the company is a proxy for both government spending on infrastructure and car manufacturing.
The latest interim report showed a clean balance sheet with cash on hand exceeding the aggregate of long and short term liabilities. It is audited by a big four audit firm.
The company's share price suffered a set back when a local publication alleged that the company's prospectus contained a misrepresentation (falling from a high of $11.30 to a low of $6.51). The person making the allegation has since retracted. The company has also appointed an independent firm (Ernst & Young) to review the basis of the allegation and report to shareholders. That report is outstanding.
Brokers have mixed views on the stock. Morgan Stanley has an overweight rating with a price target of $12.39 which leave considerable scope for further upside once investor confidence returns. Morgan Stanley was not one of the joint global co-ordinators in the IPO.
Hutchison Whampoa - sold
While Hutchison Whampoa remains a solid company I wish to include in the portfolio, the equity put option I wrote on 21 October has a strike price of $58.75. Given where the market is now, it is highly likely that the option will be exercised against me at the end of the month leaving me seriously overweight in one share.
Friday, November 06, 2009
Another arguement against democracy
I have to wonder what US national emigration figures would look like if the US stopped the draconian practice of taxing its non-resident citizens.
The situation is bad enough in Hong Kong where the civil servants are demanding a 2% pay raise - compared to current average increases in the private sector of 0.6%. Given that the civil servants already earn substantially more than equivalent private sector employees, work less hours and have practically no risk of being laid off this is outrageous. I hate to think what would happen if we had full democracy and the politicians started to pander to the majority of the population who are net takers from the taxpayers' contributions.
Thursday, November 05, 2009
Behavioural finance resource
I can see some constructive web-surfing time being spent there.
Monday, November 02, 2009
Book Review: How Much Is Enough?
One of the fundamental problems with this book is that it attempts to cover a lot of topics in a short book. Almost none of the topics get the level of detail necessary and, in most cases, come accross as shallow and incomplete summaries.
On the whole I found the book to be disappointing.
A number of important topics were covered, including personal well being and not losing sight of the importance happiness as a goal, educating children on money, giving back, the importance of thinking longer term and avoiding being either overly conservative or overly aggressive with investments. However, the coverage of most of these topics was generally shallow - most readers would need more depth in order to derive full benefit from the points raised.
A selection of the issues I had with the materials presented:
1. the emphasis on shares: I was left with the impression that a portfolio invested entirely in shares was the only suitable form of investment. Given that the book was written with a predominantly Australian audience in mind, even this coverage was deficient in that the tax advantages (franking credits, capital gains taxes) were not mentioned. On the positive side, short term trading was properly condemned;
2.there was no mention of a balanced portfolio and no mention of the use of low cost index funds - the importance of keeping costs low;
3. diversification was explained in terms of holding a diversified portfolio of shares, not a diversified portfolio of assets;
4. real estate: a number of reasons why real estate was a bad investment were set out. While I would agree that shares are probably a better investment vehicle for most people and I liked the debunking of some real estate myths, the coverage was biased because none of the benefits of investing in real estate were included;
5. the roles of life insurance, medical insurance etc were not covered in any detail;
6. a whole chapter devoted to the need to have a personal finance adviser and how to select one. I had issues with the message that even people who know what they are doing should pay for a financial adviser;
7. most critically of all: the authors did not answer the question posed in the book's title!
On the whole, I did not find this book worthwhile reading. The good points did not come close to compensating for the deficiencies.
Saturday, October 31, 2009
Monthly Review - October 2009
Here are the details:
1. my direct equities showed a modest improvement for the month. The Hong Kong portfolio was up sharply while the shares listed in Australia and New Zealand rose more modestly. The only investment made was at the end of the month when I purchased Tai Cheung Holdings;
2. my ETF's also showed a modest improvement with gains in Hong Kong and Russia overshadowing a small decline in India;
3. my commodities were up with recoveries in lean hogs and nickel combining with an increase in the commodities ETF to overshadow a small loss on silver. The only investment made this month was a small purchase of notional silver;
4. real estate was good. All tenants were paying on time and there were no unexpected expenses. My average interest cost remains below 1%. The renovation project is on schedule. The second installment is due next week;
5. FX movements were favourable with the rise in the Australian dollar making a positive contribution to a balance sheet denominated in Hong Kong dollar's;
6. income was average but expenses were high due to the cost of taking Mrs Traineeinvestor to Macau for a weekend to celebrate her birthday, paying the annual bill for the home contents insurance and buying a package of 30 personal training sessions.
The end result was a 2.9% increase in net worth. The year to date increase is 67.8%. I was expecting a good year - but nothing like this.
I am on track to hit my number by the end of 2011. As mentioned elsewhere, I will continue working for at least two years after that to create a safety buffer and to provide some fun money.
Friday, October 30, 2009
Tai Cheung Holdings purchased
Tai Cheung Holdings is a small cap property investor and developer. Assets comprise a mix of industrial and retail properties, a 35% interest in the Sheraton Kowloon and some luxury residential development projects. There are no unrelated side businesses or past history of departing from the core real estate investment and development business. The company's track record for the last several years has been steady. As far as I can tell from reading the last annual report, the balance sheet is clean - the company has a small amount of debt and capital commitments associated with development projects but net cash. The cash position is likely to improve dramatically in the near future as luxury residential development projects reach completion.
The shares are trading at around $4.50 which represents a discount to the net asset value showing in the accounts. Tai Fook has estimated the net asset value based on current market values at above HK$12 per share - which means that the shares are trading at a 65% discount to NAV.
While I would expect the value of the assets to be materially higher than book value (given what Hong Kong property prices have done since 2003, they would have to be), I am not in a position to confirm or quibble with Tai Fook's estimates. That said, the shares are clearly trading at a discount to NAV which is substantially higher than I would expect to see even for a small investor/developer. The fact that the company has a history of paying reasonable and rising dividends is also encouraging - the trailing yield is 5.1%.
I purchased some shares this morning, paying an average of $4.48 per share.
Thursday, October 29, 2009
Bonus v Raise
MBH also made the comment that, if faced with a choice between a raise and a bonus employees should always take the raise because the effect of the raise will (a) replicate itself each year and (b) will compound future the effect of future pay increases.
I'm not sure if the decision is that straight forward. While the maths may make it look like the pay increase is the better option (for the reasons given above), the decision is not that simple:
(i) the effect of returns on investing the bonus received today need to be taken into account;
(ii) tax bracket creep may start to affect numbers - as income rises you may get pushed into higher tax brackets in the future (or tax rates may go up or down);
(iii) you need to consider how long you will be working for that employer - if retirement is near there may not be much, if any, compounding;
(iv) it is not a given that future salary increases will be the same in percentage terms. Often, employees whose salaries lag their peers get larger percentage increases than equivalent workers on higher salaries - in effect the gap will often close substantially reducing the calculated benefits of taking the salary increase (alternatively, an underpaid worker may be able to change jobs);
(v) more expensive workers may be more vulnerable to being laid off if cost cutting becomes necessary;
(vi) a bonus is more likely to be invested than an increase in income (at least in my case).
Unless the numbers were very one sided, I would most likely prefer the bonus now than the possibility of enhanced future earnings.
Thursday, October 22, 2009
Mortgages to remain cheap?
1. rising interest rates will affect the valuations of equity and debt securities
2. interest rates rising at different times and in different amounts will affect exchange rates
3. rising interest rates will affect the attractiveness of ungeared property as an investment and geared property even more so
4. rising interest rates will increase the cost of funding my floating rate mortgages and adversely impact my cash flow
As recently as last month, a number of experts were talking about 2010Q2 or 2010Q3 for interest rates in the US to start rising with Hong Kong following the US lead because of the currency peg. More recently, expectations of the time for interest rates to rise in the US have been pushed back to the end of 2010. The most cited reason for the delay in raising interest rates is the unemployment situation. Most people would view some inflation as an acceptable price to pay for the creation of jobs. The fact that Australia has already raised interest rates and is now expected to do so again does not seem to have affected the views on US monetary policy.
There is another reason why interest rates may remain low in Hong Kong: supply and demand. Hong Kong continues to remain awash with liquidity. Interest rates were driven to current levels (close to zero on deposits and about 1% on mortgages) because of the amount of liquidity in the banking system. So far this year, total bank deposits have risen by 3.8% while total bank loans have contracted by 2.9%. These numbers are not earth shattering - but they are big enough to appreciably reduce the banks' loan to deposit ratio and to keep the pressure on the banks to hold interest rates at current levels.
Put differently, a market where the supply of money has been materially higher than the demand for money has experienced an increase in supply and a reduction in demand. It is very very hard to see interest rates rising by much in this environment.
Wednesday, October 21, 2009
Equity put option written
Details are as follows:
Underlying: Underlying: Hutchison Whampoa (13)
Market price: $59.30
Strike price: $58.75
Valuation date: 21 November, 2009
Maturity date: 23 November, 2009
Implied yield: 16.53%
Net purchase price if exercised: $57.95
If I get hit I will have effectively purchased the shares at about a 2.3% discount to the prevailing market price. This is a share which I am happy to hold long term if I get hit.
As a side note, I would have made more money by buying and holding the underlying (even after transaction costs) rather than writing these options. While this is an exercise in increasing the yield on the cash component of the private portfolio, it is something to thing about.
Tuesday, October 20, 2009
The failure of democracy
However, one area where democracy has demonstrably failed is fiscal accountability. The basic problem is this:
1. politicians must keep enough voters happy in order to be (re) elected
2. politicians must promise more than the other candidates (up to the point of sounding stupid) in order to be (re) elected
3. short term benefits are perceived as being of greater value than longer term costs (refer to numerous papers on behavioral economics and/or psychology). In effect the value of a hand out today is perceived as being greater than the cost of repaying the loan used to fund that hand out tomorrow
4. benefits are specific. Taxation is general. Borrowing is general. Voters and politicians alike focus on the specific benefits which they will derive rather than the costs which all taxpayers must bear
5. there is a misalignment of beneficiaries of government hand outs and the persons funding those handouts. It is very easy for people to want benefits which someone else is paying for. I'd be happy to vote for someone else to subsidise my lifestyle too
6. often the persons bearing the cost of a government hand out (e.g. promises of benefits in the future, debt issuance) have no say in the matter because they are either too young to vote or have not been born yet. In effect, democracy encourages taxation without representation
7. the number of people taking money from the common pot exceeds the number of people contributing to that pot - usually by a wide margin. Politicians will always seek the support of the majority who take from the pot rather than the minority who contribute to it. With a one vote per person electoral system, the ballot box gets to play Robin Hood
The combined effect of the seven factors listed above is that governments, politicians and a majority of voters alike all have incentives to create and perpetuate a system which keeps promising more than the system can sustain and lacks constraints to prevent it doing so. Historically, the result for societies which perpetually live beyond their means is economic stagnation or decline. Always. Look at California - one of the wealthiest places in the world and it still managed to spend its way to the point of bankruptcy. It is also one of the most expensive places in America to live in or do business. Even with its people fully aware of the impossibility of taxing its way out of its deficit hole, the state continues to spend more than it can afford. In adopting the politically expedient approach of soaking the rich though higher taxes, the state is going to drive a lot of people and businesses (i.e. taxpayers) out of state, making a bad situation worse.
Quite frankly, I am happy to live in a place which has only a very limited form of democracy. The taxes are low. I have all the civil and commercial freedoms I could wish for (with the notable exception of clean air in which to exercise my right to freedom of speech).
I also need have no concerns about my eventual retirement being ruined by the government being forced to raise taxes to cover the costs of electoral bribes and voter/civil servant greed. Given the chance, I will vote against any proposals to introduce greater democracy here.
The only obvious solution is to prohibit governments from borrowing (other than for national emergencies such as war, natural disaster or similar). If funding is needed for capital intensive projects like highways, airports and the like, it should be on a non-recourse basis, BOT or other arrangement which has the effect of capping the taxpayer contribution. Put differently, the message to the voters should be a simple one: if you want something you pay for it.
Monday, October 19, 2009
The Anecdotal Recovery (3)
While I realise that atmospheric and weather conditions can contribute to the build up of air pollution, the blunt reality is that neither factor causes pollution. The pollution is the direct and partially avoidable result of economic activity. It may be good for our wallets but it is bad for our lungs.
Sunday, October 18, 2009
Book Review: Errornomics
I particularly enjoyed the discussion on overconfidence. I was amused by the fact that the author only identified three groups of people who, as groups, did not suffer from overconfidence: weather forecasters, bridge players and people suffering from depression. Since I don't play bridge and am not a weather forecaster, I guess that means I am either overconfident or suffering from depression.
The final chapter with Hallinan's conclusions includes some good advice for avoiding (or at least reducing mistakes):
1. think small: be aware of the small things that unconsciously affect your decision making. One of the examples given was scent in shops;
2. think negatively: ask what could go wrong;
3. keep a list of your dry holes: you will get a better perspective on your real abilities in a particular area by keeping records of all the decisions you made (and the ones you didn't make) and their outcomes;
4. avoid multitasking: ok, we all know that multitasking is inefficient but it is also dangerous. A huge number of accidents and other mistakes are caused by people being distracted from a primary task (i.e. multitasking);
5. be happy: happy people make fewer mistakes than unhappy people;
6. recognise that money does not generally reduce mistakes: that's right - paying people more does not usually improve the quality of decision making.
Hallinan also has some observations for early retirees which I will come back to in a future post.
Longevity and early retirement
One of the concerns I have as an early retiree wannabe is the stories and studies which show that those who take early retirement tend to die younger than those who keep working. While there have been plenty of doubts cast over those studies, they gave given me cause to think (and are one of the reasons why I intend to do a 1-2 year part time transition after I hit my number).
However as reported in the Telegraph article, the following findings pretty much debunk the view that early retirees die younger. Key quotes:
"The study, for the Economic and Social Research Council, also found that those who get the choice of early retirement are also more likely to enjoy a longer life.""Early retirement is generally good for people's health and well being unless it has been forced on them."
"Those forced into early retirement generally have poorer mental health than those who take routine retirement, who in turn have poorer mental health than those who have taken voluntary early retirement."
I will try to track down the original study and read for further details. In particular, I will be looking for factors which contribute to the longevity of early retirees (or are at least positively or negatively correlated).
Wednesday, October 14, 2009
What If Interest Rates Increase?
So what happens to my finances if interest rates start to rise?
All other things being equal, if interest rates start to rise I would expect the following:
1. most assets will start to look less attractive: yields on fixed rate bonds, equities and real estate will all look less attractive and may fall in price
2. borrowers will try to lock in low rates while they can: lots of bond and note issues. Costs to borrowers will start to rise
3. cash will be crowned king (again). Holding cash will, in the short term, be a sound investment
4. floating rate bonds and notes should hold their value (and may even appreciate)
5. option premiums will rise due to the interest rate component of option prices and (potentially) higher volatility expectations
Based on the above, my finances would take a beating:
A. I have used mortgage finance for all my Hong Kong property purchases. All my mortgages float and are linked to either one or three month HIBOR. The effects of rising interest rates would be felt almost immediately. While I run a positive cash flow (assuming full occupancy), it will not take much in the way of interest rate increases to reverse this position. Since the cost of fixing an interest rate for longer terms is prohibitive (you have to assume very large increases in rates), the correct strategy is to make early payments once interest rates cross a pre-determined threshold. I need to decide what that threshold will be.
B. The value of my real estate may decline. However I see no reason why rents would fall. This means that I should not be in a hurry to sell properties in order to discharge debt. Given the transactional costs and the role properties play in my retirement planning, I would prefer to ride out the cycle.
C. The value of my share/fund portfolio may decline. There may be an adverse impact on dividends. It would pay to weight the portfolio towards companies with net cash rather than net debt. Possibly banks as well as they may benefit from expansion of their interest margins. I suspect that I would be a net seller of equities while interest rates rise.
D. Once interest rates appear to have reached their high point, I will start to buy assets again. Possibly long term bonds (not that easy in Hong Kong), equities and real estate (although I already have enough exposure to the latter).
In terms of strategy, the best way for me to deal with a rise in interest rates is to (i) defer making new investments (ii) hold my properties (iii) review the equity portfolio and tilt towards companies with net cash (iv) build cash reserves and/or write more options and (v) if interest rates reach a pre-determined level, start paying down some of the mortgages. If a suitable fixed rate mortgage came onto the market, I could consider a refinancing. However, given the current slope of the HIBOR yield curve, I would consider that unlikely.
This is all a bit tentative because there have been times when rising interest rates have been accompanied by rising asset values. This is usually a product of either demand lead growth or deregulation of some kind (or both) or because of inflation (actual or expected). It is for this reason that, even though I expect interest rates to rise at some point, I will not be making substantial alterations to the portfolio in anticipation. Rather, I will deal with the situation when it arises and focus on the longer terms goals.
Friday, October 09, 2009
The anecdotal recovery (2)
Using the same indicators:
1. Taxi queues: they have got longer, although still short of pre-crisis duration.
2. Restaurant bookings: restaurants are getting busier. Today I had to call three restaurants to get a lunch booking for next Tuesday in Central.
3. Property prices: these have risen further since June although not dramatically so. Tellingly, residential rents have started rising again. The latter is good news for me.
I can add the following to the list:
4. Traffic: it takes longer to get to and from work each day. The difference is most easily measured in the mornings where my taxi fare is typically HK$2-3 more than it was at the beginning of the year.
5. Air tickets: airlines are reporting higher loads. Some of my colleagues are starting to encounter problems with getting bookings on popular routes on short notice.
Property purchase completed
I have paid a deposit to the contractor and the renovation work will start on Saturday. It will take about two months to rip out the existing interior (absolutely everything is to go) and install the new interior so I will have to cover the mortgage payments and other outgoings during that period and probably a bit longer while I look for a tenant. The latter may be a bit of an issue as the flat will be hitting the leasing market shortly before Christmas/New Year which is traditionally a quiet period. There is enough float in the account I use for mortgage payments to cover this (assuming none of my tenants default) so I should not have to divert money from my salary to cover the outgoings.
Wednesday, October 07, 2009
Equity put option written
Details are as follows:
Underlying: Petro China (857)
Market price: $9.13
Strike price: $8.96
Valuation date: 5 November, 2009
Maturity date: 11 November, 2009
Implied yield: 16.80%
Net purchase price if exercised: $8.84
If I get hit I will have effectively purchased the shares at about a 3.2% discount to the prevailing market price. This is a share which I am happy to hold long term if I get hit.
Posted by traineeinvestor
Regardless of how beneficial the peg has been, it means that my earnings and many of my assets are effectively denominated in US dollars and are depreciating when measured against a number of other currencies and commodities.
I had a small amount of money left after funding the purchase of the new property (settlement is tomorrow) and decided to invest in something which should be inversely correlated with the US dollar. My choices were other currencies (e.g. Australian or New Zealand dollars), a commodity ETF (which I already hold) or precious metals. I chose silver. Although it has had a great run, it remains volatile, which is attractive from a trading perspective. In terms of fundamentals, silver's industrial uses are also a positive factor.
Since physical silver is not readily available in Hong Kong, I invested using a notional precious metals account.
My purchase price was HK$134.6 (US$17.25) per ounce.
Friday, October 02, 2009
Our TV died
The replacement has been purchased (a 40 inch Sony with HD capability and a two year warranty) and will be delivered on Monday afternoon. We were offered an extended warranty but declined. Oddly we were also offered interest free two year financing. Since the total payments under the installment option were the same as making a single payment at the time of purchase, we took the installment option. We had already negotiated our discount and could not get the shop to lower its price further.
Replacing the existing tube TV with a flat screen also meant we could accommodate a bigger screen than we had previously which is a plus.
The old TV (along with a defunct dehumidifier and a broken fan) will be taken away for recycling on the weekend. It's not clear whether we will get paid anything for the old stuff or actually have to pay someone to take it away.
Of course the challenge will be keeping two small children entertained without a TV for four days......
Property purchase update #2
Hmm....as much as I like the service which DBS provides I may need to consider using other lenders next time. This also tells me that DBS is a very conservative institution as the total balance of my outstanding loans with them is, in the over scheme of things, a fairly insignificant amount (although a lot of money to me).
The resulting shortfall in funding was largely covered by the decision to sell all of my actively managed funds earlier this week. The balance of the shortfall will be covered by deferring part of the first installment of the renovation costs and the agent's commission on the purchase until the beginning of October when I get my next salary payment. Both the contract and the agent have agreed to this.
Thursday, October 01, 2009
Monthly Review - September 2009
With the exception of a very small decrease in my commodity positions, all other mark to market asset classes appreciated during the month. Gains were compounded by favourable currency movements and supplemented by option premiums and positive cash flows from my investment properties.
Income from my job was good and expenses were low.
Here are the details:
1.my actively managed funds were very up. I liquidated all of these investments towards the end of the month;
2. my index tracking funds were up. I currently have exposure to Hong Kong, India, Taiwan and Russia;
3. my equity portfolio rose. I currently have meaningful investments in 19 companies listed in either Australia (3) or Hong Kong (16). I took a material loss on a position in Amvig after a disappointing results announcement and an inexplicable asset sale and share buy back proposal;
4. my commodity investments declined very slightly;
5. my ELDs produced positive returns for the month. I had no outstanding CLDs this month;
6. 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);
7. currency movements were positive as the US$ declined.
I sold shares in Amvig (cutting a loss) and my actively managed funds (to pay for a property purchase completing next month). I entered into two OTC option contracts writing a put options against Hutchison Whampoa and China Construction Bank.
Income was strong (it will be erratic under the new job) and contributed to the gain for the month. My spending was low due to an absence of major items.
October and November will be lean months as I use all my available cash (and possibly a short term loan from my wife) to complete a property purchase in early October, pay for the closing costs and the renovation costs and cover the mortgage payments during the renovation period (and likely a gap beyond that until I can find a tenant).
For the month, my net worth increased by 4.8%. The gains came from the combined effect of increased investment values, a weaker US$, positive rental income from properties and a high savings rate. The year to date increase is 63.1%.
Even allowing for the payout arising from changing jobs, it has been fantastic progress this year. The possibility of retiring at the end of 2011 is, once again, very real.
Wednesday, September 30, 2009
Sold - all actively managed funds
The funds sold were:
4. Asian small cap
5. European small cap
As a group, I lost money on these investments (largely due to buying too close to the top of the last bull market).
Given that I now have a modest range of index tracking ETFs which have much lower expense ratios (although still high by US standards), it was a relatively easy to decide to liquidate these funds rather than the ETFs, the HK listed stocks or to use the money currently allocated to ELDs.
As an aside, I found it difficult to figure out whether the funds had out performed or under performed their respective benchmarks during the periods I held them.
Monday, September 28, 2009
How not to sell financial services
Recently, I met with what has to rank as the worst sales pitch I have ever come across:
1. the adviser reeked of cigarette smoke
2. the adviser had a lot of visible dandruff on his suit
3. the adviser droned on and on and on about how happy his very wealthy clients were with the products he had sold them
4. he mentioned one client by position with sufficient detail that I could probably work out the client's identity. This raises serious concerns about confidentiality and professionalism (or the lack thereof)
5. when the adviser eventually got around to talking about me, he made a number of unwarranted assumptions -at least three of which were wrong
6. even after I said I had all the life insurance I needed (not quite true, but I was not going to do business with this person anyway), he spent a few minutes talking about the benefits of whole of life policies
7. apparently actively managed funds with an unspecified front end load were preferable to low cost no load ETFs "because people can trade the ETFs too easily"
Not even worth the entertainment value.
A will is simply instructions for dealing with your assets after your death. If you do not have a valid will, your assets will be divided according to the laws of the relevant jurisdiction - which may not be the way in which you would like them to be divided. The basic requirements for a valid will under Hong Kong law are:
(i) your signature must be witnessed by two mentally sound adults who are not beneficiaries under the will;
(ii) you must be an adult of sound mind at the time you make the will.
It is not necessary for a will to be prepared or witnessed by a lawyer. However, having a lawyer prepare the will does reduce the risk of mistakes being made (e.g. not all of your assets being included in the will, excluding persons who are entitled to a share of your estate by law etc). We used the services of a lawyer to make sure that we did not make any of these mistakes.
Our estate planning is relatively simple:
(i) I have left my entire estate to be divided equally among my children (to be held in trust while they are young) - my wife does not benefit at all;
(ii) my wife will take my interest in two properties in which we are "tenants in common" - this takes place by operation of law and falls outside my estate;
(iii) a life insurance policy will pay a lump sum to my wife which is intended to be sufficient to discharge the mortgage on our home. Due to drawing down to fund an investment in my employer, the amount of the policy is no longer sufficient. I will increase this when the policy comes up for renewal in February next year. The same policy also provides for smaller payments to my siblings.
My wife's will is also simple with certain life interests to her parents and the rest to our children.
The lawyer we used confirmed that these arrangements are compliant with Hong Kong legal requirements for testamentary dispositions.
An enduring power of attorney is an authority and/or directions to be followed in the event that you are still alive but unable to direct your own affairs. This can happen to people who suffer from deteriorating mental capability as they age, in a coma etc. I do not have an enduring power of attorney but should get one.
Friday, September 25, 2009
Property purchase update #1
When I signed the agreement, I negotiated multiple pre-completion visits. This will enable the building contractors to do all the measurements and start work immediately after completion (instead of taking 1-2 weeks to do the measurements etc.
I have also signed the formal sale and purchase agreement and had the lawyer check the title and the body corporate rules.
I have submitted a mortgage application to DBS for a loan equal to 60% of the purchase price. This level of gearing was selected because it will give me a small positive cash flow on a 20 year P+I mortgage with headroom for interest rates to rise to 3% and assuming that the property is rented at the mid-point of the agent's indicative rent. Of course, if interest rates remain where they are, I will have a positive cash flow even at the lowest rental level.
I also have to sell some of my equity investments to fund the rest of the purchase price, pay the stamp duty and other closing costs and fund the renovation - I do not have enough cash on hand. I'll make a decision over the weekend but am leaning towards selling all of the actively managed funds. With the increase in the number of relatively low cost ETFs, the justification for paying the higher MERs of actively managed funds is becoming very marginal.
Completion is due on 8 October.
Thursday, September 24, 2009
10 percent penalty
I've sent off a replacement cheque for the original amount together with a politely worded plea for leniency which, having previous experience in dealing with the self serving blood suckers on the local council, I expect to fall on deaf ears.
Wednesday, September 23, 2009
Life insurance - how much?
James pointed out that I had not addressed the important question of how much life insurance is needed.
So how much insurance is needed?
There is no universally correct number however the following may serve as a starting point:
If you have no dependants
If you have no dependants (or people you wish to benefit in the event of your death to an extent that exceeds the net assets of your estate): zero - you do not need any life insurance.
If you have a spouse/significant other but no children
If either (i) your spouse is financially independent through employment or other means or (ii) your estate (net of debt) will provide sufficient wealth to meet his/her financial needs, the theoretical answer is that you do not need life insurance. That said, a discussion with your spouse on the subject would be in order - you may conclude that a policy sufficiently large to pay off the home mortgage and any other debts is appropriate - especially if those debts could not otherwise be met out of the estate.
If your spouse is wholly or partly financially dependant on you, then things get a bit more complicated. The correct amount of life insurance is an amount which when aggregated with the net value of your estate (i.e. after paying off the mortgage and other debts) will be sufficient to sustain your surviving partner in the same life style as at present (or something acceptably close to it) for life. The ability and willingness of a non-working spouse to (re)enter the workforce, age and other factors will all affect the number that comes out of this exercise.
If you have children
If you have children, the bottom line is that you should provide through a combination of inheritance and life insurance, sufficient funding for them to become functional independent adults. Notwithstanding my father's opinion that this does not happen until the children reach at least 40, I would normally settle for ensuring that their cost of living, education costs etc are covered until they have completed an undergraduate degree. Anything beyond that is nice to have but not a necessity.
Once the children are grown and financially independent, life insurance to benefit them becomes optional.
Adding it up
The aggregate needs of a surviving spouse and children (net of estate assets) is the minimum amount of term life coverage I would consider necessary. Anything less may involve subjecting your surviving family members to undesirable financial constraints. Anything more, and you need to weigh the cost of the premium against the additional payments to your family.
What if the insurance premium is too great an expense?
Then you will need to accept that you cannot provide for both your spouse and your children in full and will need to make some compomises. If you have to make compromises, I would prioritise as follows:
first: discharge of any mortgage or other debts which cannot be met out of the estate
second: educational expenses for children (to be held on trust)
third: enough money to support your spouse for a year or two while he/she adjusts and/or finds a job
An annual review is in order. As the children grow older, your spouse grows older and you accumulate assets, the amount of life insurance needed will usually decline (absent other factors). You may eventually reach the stage where it is no longer necessary and you can save yourself the expense of further premium payments.
My own situation
Until recently, our life insurance needs were relatively modest. My spouse was working and able to support herself and our children if the mortgage had been paid off. So I took out a term life policy which (i) would discharge the home mortgage and (ii) would leave small legacies to my siblings (based on love and affection rather than financial need). Under my estate my wife would take our current home and the previous home while the remainder of my estate would be held on trust for our children. Given my wife's earnings and the value of the estate, it was not necessary to provide life cover for our children.
That position has now changed. Mrs traineeinvestor has resigned from her job so that one parent can stay at home to deal with school work etc (she is still negotiating a finish date). Also, I drew down against the home mortgage to fund an investment in my employer which means that the life policy would not cover the home mortgage any more. Accordingly, I need to increase the amount of cover. My wife and I are working through the numbers but the likely outcome is that I will need to double the size of the cover when the policy comes up for renewal.
Monday, September 21, 2009
Equity put options written
This morning I entered into two new contracts against China Construction Bank (939) and Hutchison Whampoa (13). Details are as follows:
Underlying: China Construction Bank (939)
Market price: $6.46
Strike price: $6.21
Valuation date: 19 October, 2009
Maturity date: 21 October, 2009
Implied yield: 9.43%
Net purchase price if exercised: $6.16
Underlying: Hutchison Whampoa (13)
Market price: $56.45
Strike price: $54.80
Valuation date: 19 October, 2009
Maturity date: 21 October, 2009
Implied yield: 12.15%
Net purchase price if exercised: $54.23
If I get hit I will have effectively purchased the shares at about a 4.6% (CCB) or 4.0% (HWL) discount to the prevailing market price. These are both shares which I am happy to hold long term if I get hit.
Amvig - loss taken
Concluding that the proposed share buy back was an incredibly bad deal for shareholders was a no brainer - paying a massive 29% premium to the market price before the deal was signed was, in my view, indefensible. The explanation (that it was linked to the price paid by the vendor when it originally subscribed for the shares in 2007) was not a reason for the pricing but, in my view, an admission that they did not have a basis for pricing the repurchase so high.
Such a stupid explanation also sends a pretty clear message to shareholders and I really have to wonder what on earth the directors were thinking when they put this deal together?
Given that the deal is subject to shareholder approval, and that neither of the two largest shareholders can vote, there must be a reasonable possibility of the deal being voted down by shareholders. Given the fall out from the announcement, it would not suprise me to see the directors move into damage control mode and issue further announcements.
The whole issue of the repurchase price overshadows the issue of the whether the asset sale was in the best interests of the shareholders and the interim results which came in below market expectations.
The next question was whether I should bail out now, take the loss and move on or whether the share price had dropped to a level where it represents a good investment.
At present price levels I would probably conclude that the stock may represent good value (it is trading at the post announcement price target set by Credit Suisse). However, this transaction has pretty much destroyed my confidence in Amvig's board of directors and management and I have decided to sell on that basis. At an average sale price of HK$3.83 I have taken a 19% loss on this investment.
I was tempted to keep one board lot of shares for the sole purpose of being able to attend the EGM and put some rather blunt questions to the directors but decided I had better things to do with my time.
As a side note, ASX listed Amcor is the controlling shareholder of Amvig. After this affair, I would not invest in Amcor either.
Friday, September 18, 2009
Amvig Holdings - an investment that went wrong
Leaving aside the fact that the stock fell significantly ahead of the suspension and results announcement - at a time when the market was rising, I need to consider whether I should take the loss and move on or keep my investment.
I am particularly concerned at the proposal to repurchase a substantial block of shares at $7.00 each which represents a huge premium to the share price at the time the shares were suspended and a ludicrous 67% premium to the prevailing price of $4.19. Given these numbers, my initial reaction is that the deal is highly damaging to the interests of shareholders and there is a good chance that the shareholders will vote down the proposal.
I need to spend some time getting my head around the terms of the sale and the impact on future profitability per share before making a decision.
Thursday, September 17, 2009
Where life insurance gets complicated is the variations (and the ridiculous and archaic legal documents which I will ignore).
Life insurance comes in three basic forms which can be summarised as follows:
1. term life: you pay a premium and if you die during the term of the contract (usually annually), the designated beneficiary will be paid the face amount of the contract;
2. whole life: you pay a recurring premium and are insured for life with the added benefit that if you are still alive when you reach a specified age, the policy will mature and you will be paid a guaranteed minimum cash value. There are several variations to these types of policies and the other forms of permanent life cover such as universal life cover and limited pay;
3. investment linked insurance plans: these are essentially a whole life insurance contract bundled with an investment savings scheme and sold as a single product.
As a general proposition, if you need to provide for dependants in the event of your death, a term life policy is a good idea. It's cheap and you are not locked in for more than the term of the contract. The downside is that your premiums are not fixed (they may go up each year) and the insurance company is not obliged to offer you a renewal each year (although some will commit to doing so).
Whole life is is generally a bad idea because the premiums are higher, the rates of return are awful and there is a lack of flexibility - you will lose a lot of your money if you cancel the policy before maturity. As a general proposition, you can achieve a much better result by taking out a term policy every year for as long as needed and investing the difference elsewhere.
An investment linked insurance scheme is almost always a bad idea. Term life renewed annually with the difference in premiums being reinvested should produce a much better result.
The key message is that insurance should never be viewed as a form of investment. Put differently, if whole life and investment linked polices where such great investments, why would insurance companies engage an army of people to sell them? The agents who sell policies earn massive commissions from the sale of whole life and investment linked polices - commissions which come out of the policy holder's pocket.
If you ever have the misfortune to be cornered by someone peddling whole life or investment linked policies, just asking two simple questions will demonstrate why these things are the modern equivalent to the medieval practice of buying indulgences:
1. how many years before I can surrender the policy and get back at least the total amount which I have paid in? You will either be given a number which will horrify you or be fobbed off with some nonsense about it being a long term plan;
2. how much commission will you get out of it? You will either be told a number which is close to a year's premiums (there is some variation here) - and remember that this is your money. Alternatively, they will shamelessly dodge the question.
The thing to remember about life insurance is that it is a tool to protect dependants in the event of your death - it is not a form of investment.
Wednesday, September 16, 2009
Resources for personal finance and investing
General personal finance - forums and aggregators
PFblogs. This site aggregates a very large number of personal finance and investment blogs. I tend to visit almost daily.
Bogleheads. This is for those who follow the John Bogle philosophy of keeping costs to a minimum and investing in a mix of low cost index funds with periodic rebalancing. I'd subscribe to this approach if I could access such funds from Hong Kong. Even with limited access to such products, this is still worth an almost daily visit.
Early Retirement. A forum for people who have or wish to retire early. Excellent reading for both motivational and more practical purposes. The retirement calculator is an excellent tool.
The only issues I have with these are (i) there is a lot of stuff which is of limited interest to me and (ii) they are (understandably) very US centric. All three sites are worth visiting often, but I frequently find myself spending too much time there.
A word of caution - while there are a lot of great blogs and other websites out there, there is also a lot of material which is either wrong or dangerous.
General personal finance - blogs
Millionaire Mommy Next Door. Written by Jen Smith, a self made millionaire who retired very early in spite of starting on a low income. Ms Smith's story and her postings cover many important personal finance issues in a clear no-nonsense style.
7Million7Years. Written by entrepreneur Adrian Cartwood, who went from having a negative net worth to more than seven million in the bank in the space of seven years. Very different from a lot of other writers, the author provides a very refreshing and welcome approach to achieving financial independence.
The Simple Dollar. If I had to pick one blog to recommend to people who were just beginning to manage their finances, this would be the one. Although I have outgrown a lot of the postings, it is worth visiting for the book reviews alone.
These are my three favourites. There are some other regular reads listed in my sidebar.
Hong Kong real estate
Centanet. I primarily use this for looking at transaction records when buying or negotiating lease terms
HSBC property valuation tool. A number of banks have these on-line valuation services. They tend to be conservative, but will generally give a good benchmark for calculating the maximum amount which a bank will lend against the property. I also use this for keeping track of the value of the portfolio
SCMP Property Post. A bit limited but it gives me an idea about what is going on in the market
Walking around and visiting show flats for new buildings. Having purchased from a Hong Kong property developer once, I have no intention of ever repeating the experience. The main point of these visits is to remind myself that the secondary market represents better value (and to get decorating ideas).
Taking the time to look at properties every few months. There is no better way to know the market than to get out there and look around.
Talking to investors (professional and private). Usually a worthwhile exercise (and generally more interesting than most of the other conversations that come up).
There are much better Chinese language sources - unfortunately, I do not read Chinese
Hong Kong stocks
Bloomberg. Although I do not have access to a Bloomberg terminal, I can get some of the feeds on a delayed basis through my bank. This is a good source of leads for stock research.
Reports provided by contacts at brokers and private banks. I view broker reports with a high degree of suspicion. Again, they are a useful source of leads for further research.
HKEX. This enables me to read recent announcements, annual and interim reports etc for all HK listed companies. Other stock exchanges provide similar services.
Finet. A HK financial portal. There is a reasonable amount of useful information on this site.
I tend to avoid talking to people about stocks or frequenting stock chat forums - it's too easy to get caught up in the herd and too much time is wasted reading rubbish.
Ten favourites are listed here .
Books on economic history. The more I read about this subject the more comfortable I am with my handling of my finances - probably a bad sign.
Newspapers and magazines
The Economist. The best magazine for global financial and economic commentary. We subscribe to this.
The Financial Times. It's a UK paper and I am neither from the UK nor do I have any substantive investments there. However, it rivals the economist as one of the best sources of commentary on global financial and economic issues. We recently decided to subscribe when access to a free copy got cut.
SCMP. Hong Kong's leading newspaper. SCMP contains good coverage of financial issues with (as you would expect), a focus on Hong Kong and greater China.
Fuller Money. Although predominantly chart focused, there is a huge amount of very useful material - enough to justify a subscription. Even if you do not want to subscribe, the free abbreviated comment of the day makes interesting reading.
Merrill Lynch Cap Gemini World Wealth Report. This report comes out once a year. Leaving aside the voyeuristic statistical data, the high level insights into how the wealthy manage their money makes this mandatory annual reading for me.
Barclays Wealth. The Insight reports make very good reading.
People - the most important category
My parents - who taught me that money does not grow on trees and exposed me to the financial world at an early age.
My long suffering wife - who shares many of my values and puts the breaks on some of my more reckless ideas.
A wide group of friends, colleagues and mentors who provide both ideas and informal brain storming sessions.
The people component has been the most incredibly valuable resource in my financial journey. I seriously doubt if I would be as close to achieving financial independence without them.
Other suggestions welcome.