December was a month of excellent financial progress. Equities and commodities appreciated and those gains were supplemented by favourable FX movements as the AUD/NZD appreciated against the USD. Cash flow on the properties was negative (although still a positive contribution to net worth) due to a combination of repair bills and a two vacancies (now filled). Savings were excellent.
Here are the details:
1. my Hong Kong equity portfolio appreciated. This was in spite of a sharp drop in China Gas (HK:384) ahead of the arrest of two executives. The stock is currently suspended and I have arbitrarily marked it down to HK$3.00 to provide against further falls once the suspension is lifted. This month I took up my rights entitlement in CCB (HK:939), my shares in Hua Han (HK:587) went ex-bonus and I purchased shares in Automative Holdings (ASX: AHE);
2. my ETFs were up with gains in Russia, Taiwan and India more than compensating for a decline in China. Hong Kong was flat. I purchased units in a Vietnam index tracker this month;
3. my commodities appreciated with silver making a significant jump and HOGS and NICK making much more modest gains;
4. two of my properties were vacant but the portfolio is still making a positive contribution to my net worth. There were a few repair bills to be paid and I had a small negative cash flow for the month. That said, as the biggest component of the monthly payments is principal on the mortgages, the properties remained profitable even with two vacancies for most of the month and the bills. The situation will be better in January with both vacant units now rented out, a net increase in rents and a drop in repair bills;
5. currency movements were favourable, as the AUD, NZD and RMB appreciated against the USD;
6. my position in bonds remains small. I purchased a token amount of RMB bonds this month;
7. a put option I had written against the NZD was exercised against me early in the month;
8. savings were strong with high income more than offsetting the additional end of year expenses (not including a holiday in Thailand over Christmas for which I had accrued a provision).
My cash position remains modest. HKD cash on hand and deposits now represent about 11 months' worth of expenses (up from ten months, in spite of new investments). This will jump significantly in January and February when I receive my end of year bonus.
For the month, my net worth increased 3.73%. The year to date increase is 29.55% (this is the full year end number). Needless to say I am very happy with this result.
My target retirement window remains sometime between early 2012 and early 2013. While the possibility of a one year extension exists, it will take some adverse market conditions or other unexpected event to require that. Every passing month brings me closer to my retirement goal.
A write up on the financial year as a whole will follow in a separate post.
Friday, December 31, 2010
Another milestone
Although my monthly net worth calculations do not reflect either (i) changes to the values of our properties or (ii) mrs traineeinvestor's assets and liabilities, I do run a separate consolidated balance sheet which reflects both of these factors and which is updated less frequently.
As part of my year end review, I updated the property valuations and outstanding mortgage balances and found that we have now reached the position where all of our properties have more than 50% equity (i.e. the amount of outstanding principal owed on each mortgage is less than half the value of the underlying property). This result is due to a combination of monthly principal payments and higher valuations as the local property market has risen this year.
The range of gearing ratios is 0% (i.e. no mortgage) to 49%. Assuming no further changes in valuations, the gearing ratios will continue to fall each month as additional mortgage payments are made.
As part of my year end review, I updated the property valuations and outstanding mortgage balances and found that we have now reached the position where all of our properties have more than 50% equity (i.e. the amount of outstanding principal owed on each mortgage is less than half the value of the underlying property). This result is due to a combination of monthly principal payments and higher valuations as the local property market has risen this year.
The range of gearing ratios is 0% (i.e. no mortgage) to 49%. Assuming no further changes in valuations, the gearing ratios will continue to fall each month as additional mortgage payments are made.
Back to 100% occupancy
Our last vacant unit has now been let, with a provisional lease agreement being signed last night and the first half of the security deposit being paid into our bank account today. The rent was slightly lower than the previous rent by about 4.7% (give or take a bit depending on how much we get for renting out the car parking space which the new tenant does not want). The lower rent is a reflection on the fact that the previous rent had been set at above market levels rather than a fall in market rents.
We have a couple of repair jobs to do (which is only to be expected) before the tenant moves in of which the most important is to replace one of the window frames which is in danger of falling out.
Our cash flow will now go from positive to positive with a healthy margin. A good way to end a good (financial) year.
We have a couple of repair jobs to do (which is only to be expected) before the tenant moves in of which the most important is to replace one of the window frames which is in danger of falling out.
Our cash flow will now go from positive to positive with a healthy margin. A good way to end a good (financial) year.
Wednesday, December 29, 2010
Vietnam ETF purchased
Prior to heading off to Thailand for a great Christmas holiday with my family, I placed a limit order for the locally listed Vietnam ETF. Given the pace of Vietnam's development, it's very favourable demographics, progress on economic liberalisation and relatively modest valuation metrics my expectations are that, over time, Vietnam's stock market will reflect that potential.
My limit order was hit at HKD286 per unit - the day before the country's credit rating was downgraded. Since the credit downgrade was well anticipated, the impact on the share market has been minimal and the greater risk to this investment remains currency devaluation.
My limit order was hit at HKD286 per unit - the day before the country's credit rating was downgraded. Since the credit downgrade was well anticipated, the impact on the share market has been minimal and the greater risk to this investment remains currency devaluation.
Tuesday, December 21, 2010
2010 - looking back
Back in January, I listed a number of things that I would like to achieve during 2010 . The year end is now close enough that I can assess how many of them I achieved or progressed:
1. savings rate >40%: achieved. I will not know the exact rate until sometime in January when the December income and expense numbers come in, but even if I have zero savings in December (which will not happen), I will have achieved a savings rate greater than 40% of gross income.
2. aligning investments with my retirement asset allocation: some progress was made. We continue to make payments on our mortgages with a view to having our home paid off when I retire, I purchased a few more bonds (all RMB) , added to the equity portfolio and got rid of all but two of the "too small to be worth the effort" investments.
3. I now have precise spending data for a full year and have spent a considerable amount of time thinking about how this will change once I retire. Achieved.
4. miscellaneous tasks. Fail. My firm's insurer has a discretion whether or not to extend coverage to retirees. I won't find out until after I retire. No progress on the tech skills and I have done nothing to expand teh social circle.
5. my life insurance policy has been changed to a non-US policy. Done.
6. Trailwalker. Fail. I injured my right knee in early May and am still getting physiotherapy. There is a possibility that this may be permanent (in which case I need to rethink a number of my retirement plans).
7. continuing the novel. Fail. I have probably written less than 50 pages this year.
8. a children free holiday with Mrs Traineeinvestor. Done and done twice. We went to New York in March and Japan in October. Neither was cheap but given our savings rate, both trips were very affordable.
9. photography. Fail.
To round matters out, work life balance was something of a mixed bag with good balance at the beginning and end of the year and no real balance during the rest of the year. It could have been worse.
On the whole it has been a good year. Financially, it was all I could have reasonably wished for (although the year is not quite over). In other areas, it was more mixed, but that is only to be expected given the demands of my job. The biggest negative was my sports injury.
1. savings rate >40%: achieved. I will not know the exact rate until sometime in January when the December income and expense numbers come in, but even if I have zero savings in December (which will not happen), I will have achieved a savings rate greater than 40% of gross income.
2. aligning investments with my retirement asset allocation: some progress was made. We continue to make payments on our mortgages with a view to having our home paid off when I retire, I purchased a few more bonds (all RMB) , added to the equity portfolio and got rid of all but two of the "too small to be worth the effort" investments.
3. I now have precise spending data for a full year and have spent a considerable amount of time thinking about how this will change once I retire. Achieved.
4. miscellaneous tasks. Fail. My firm's insurer has a discretion whether or not to extend coverage to retirees. I won't find out until after I retire. No progress on the tech skills and I have done nothing to expand teh social circle.
5. my life insurance policy has been changed to a non-US policy. Done.
6. Trailwalker. Fail. I injured my right knee in early May and am still getting physiotherapy. There is a possibility that this may be permanent (in which case I need to rethink a number of my retirement plans).
7. continuing the novel. Fail. I have probably written less than 50 pages this year.
8. a children free holiday with Mrs Traineeinvestor. Done and done twice. We went to New York in March and Japan in October. Neither was cheap but given our savings rate, both trips were very affordable.
9. photography. Fail.
To round matters out, work life balance was something of a mixed bag with good balance at the beginning and end of the year and no real balance during the rest of the year. It could have been worse.
On the whole it has been a good year. Financially, it was all I could have reasonably wished for (although the year is not quite over). In other areas, it was more mixed, but that is only to be expected given the demands of my job. The biggest negative was my sports injury.
Wednesday, December 15, 2010
Two slightly late updates
I have made two investments over the last month which I managed not to post:
1. I made a small FX investment in the NZD, believing that it was undervalued (both in general and, in particular, relative to the AUD). Specifically, I was expecting the Reserve Bank to implement an interest rate rise which had been delayed because of the Christchurch earthquake. I was proved wrong, and have realised a loss of 1.4% on my investment as of last week when the contract closed. As I received NZD when the contract closed, I now need to decide what to do with that money;
2. I purchased shares in Automotive Holdings (AHE), listed on the ASX. This is a company which should benefit from a robust Australian economy and should not be adversely affected by the strong AUD. The company has reasonable growth plans in place for both its main car retailing business and its smaller logistics business. While I initially had concerns about the debt levels, a material part of the debt is the floor plan (i.e. inventory financing). The company sells on a FY2011 expected PE of less than 10x and expected dividend yield of more than 7%. I paid AUD2.35 per share.
1. I made a small FX investment in the NZD, believing that it was undervalued (both in general and, in particular, relative to the AUD). Specifically, I was expecting the Reserve Bank to implement an interest rate rise which had been delayed because of the Christchurch earthquake. I was proved wrong, and have realised a loss of 1.4% on my investment as of last week when the contract closed. As I received NZD when the contract closed, I now need to decide what to do with that money;
2. I purchased shares in Automotive Holdings (AHE), listed on the ASX. This is a company which should benefit from a robust Australian economy and should not be adversely affected by the strong AUD. The company has reasonable growth plans in place for both its main car retailing business and its smaller logistics business. While I initially had concerns about the debt levels, a material part of the debt is the floor plan (i.e. inventory financing). The company sells on a FY2011 expected PE of less than 10x and expected dividend yield of more than 7%. I paid AUD2.35 per share.
Saturday, December 04, 2010
Stress testing for inflation (2)
Inflation is an issue which I need to be highly confident that I will be able to manage once I leave the working world. Previous posts explained why I worry about inflation and just how vulnerable the private portfolio is to the impact of inflation.
So, how do I get comfortable with the inflation issue?
1. know my expenses: I've been running detailed monthly expense accounts since December 2009. A year into this exercise, I have a pretty good idea where my money is going;
2. budget for post retirement changes: I'll travel a bit more, go out more and increase expenses in a few other areas. I'll also cut back in a few places;
3. create sinking funds: I'm putting aside an allowance for some of the larger one off items, of which the largest is refurbishing our apartment;
4. over engineer the budget: I arbitrarily added 20% to our expenses. I made no allowance for the fact that at some stage in the distant future our young children will become financially independent (I hope);
5. have a few emergency sources of funds which are not in the financial plan: a small whole of life policy which matures when I am 55, some Bordeaux which is way too expensive to drink and debt free home (our mortgage will be paid off shortly after I retire);
6. work longer: if I retire now the portfolio passes Firecalc with inflation at 3.7% or less. If I work for one more year the inflation threshold rises to 4.2%. I will be working at least one more year;
7. allocate assets to protect against inflation: most of our money is in real estate or equities. There is a very small allocation to bonds (which will probably be a bit bigger when the time comes). Since the cost of mortgage finance is below the inflation rate, I will carry some debt on our investment properties into retirement;
8. constant vigilance: I will continue to monitor expenses and income post retirement. If a problem is identified, I will take action sooner rather than later - asset reallocation, cutting expenses, finding a job or other actions;
9. mental preparation: I have a massive list of things to do once I retire. Keeping myself mentally and physically busy will prevent me from spending excessive amounts of time brooding about an issue which I believe I am well prepared for. Have had at least three years advance notice of my retirement target date, I hope to have no difficulties making the adjustment when the time comes.
As things stand, I'm pretty sure I will be ready to pull the trigger in early 2012 - both financially and emotionally.
So, how do I get comfortable with the inflation issue?
1. know my expenses: I've been running detailed monthly expense accounts since December 2009. A year into this exercise, I have a pretty good idea where my money is going;
2. budget for post retirement changes: I'll travel a bit more, go out more and increase expenses in a few other areas. I'll also cut back in a few places;
3. create sinking funds: I'm putting aside an allowance for some of the larger one off items, of which the largest is refurbishing our apartment;
4. over engineer the budget: I arbitrarily added 20% to our expenses. I made no allowance for the fact that at some stage in the distant future our young children will become financially independent (I hope);
5. have a few emergency sources of funds which are not in the financial plan: a small whole of life policy which matures when I am 55, some Bordeaux which is way too expensive to drink and debt free home (our mortgage will be paid off shortly after I retire);
6. work longer: if I retire now the portfolio passes Firecalc with inflation at 3.7% or less. If I work for one more year the inflation threshold rises to 4.2%. I will be working at least one more year;
7. allocate assets to protect against inflation: most of our money is in real estate or equities. There is a very small allocation to bonds (which will probably be a bit bigger when the time comes). Since the cost of mortgage finance is below the inflation rate, I will carry some debt on our investment properties into retirement;
8. constant vigilance: I will continue to monitor expenses and income post retirement. If a problem is identified, I will take action sooner rather than later - asset reallocation, cutting expenses, finding a job or other actions;
9. mental preparation: I have a massive list of things to do once I retire. Keeping myself mentally and physically busy will prevent me from spending excessive amounts of time brooding about an issue which I believe I am well prepared for. Have had at least three years advance notice of my retirement target date, I hope to have no difficulties making the adjustment when the time comes.
As things stand, I'm pretty sure I will be ready to pull the trigger in early 2012 - both financially and emotionally.
Stress testing for inflation (1)
When I retire, my expectation is that my cost of living will continue to increase due to inflation. Since I won't have employment related income, I need to be very confident that the private portfolio will continue to support our lifestyle over a lengthy time period. The point can be easily illustrated by using a spreadsheet (even for the semi-numerate such as myself) or one of the many calculators available on the internet. I used Firecalc at Early Retirement to illustrate the point.
If I plug in our current net assets, projected retirement budget, a 50 year retirement period and exclude the value of our home, Firecalc gives me the following results:
1. inflation at 3.7% pa or less: 100% success rate
2. inflation at 4.0% pa: 97.8% success rate
3. inflation at 5.0% pa: 75.6% success rate
The success rate falls very quickly as inflation climbs above 5% pa.
I also made an adjustment to reflect the fact that Firecalc assumes very low cost mutual funds as the investment vehicle of choice. Those funds are difficult to access from Hong Kong.
Even accepting that the calculator is using an average rate and that 3.7% is above the US CPI, these results do not give me the necessary level of comfort - CPI is not a satisfactory basis for estimating future cost of living increases. History tells us very clearly that extended periods of high inflation do happen and their impact can be devastating - the impact of the high inflation 1970s and early 1980s was an awful time to be relying on fixed incomes.
In any case, this is one of the reasons why I am still working (there are others).
There are a number of ways to gain the necessary level of comfort which I have written about before and will revisit in a future post.
If I plug in our current net assets, projected retirement budget, a 50 year retirement period and exclude the value of our home, Firecalc gives me the following results:
1. inflation at 3.7% pa or less: 100% success rate
2. inflation at 4.0% pa: 97.8% success rate
3. inflation at 5.0% pa: 75.6% success rate
The success rate falls very quickly as inflation climbs above 5% pa.
I also made an adjustment to reflect the fact that Firecalc assumes very low cost mutual funds as the investment vehicle of choice. Those funds are difficult to access from Hong Kong.
Even accepting that the calculator is using an average rate and that 3.7% is above the US CPI, these results do not give me the necessary level of comfort - CPI is not a satisfactory basis for estimating future cost of living increases. History tells us very clearly that extended periods of high inflation do happen and their impact can be devastating - the impact of the high inflation 1970s and early 1980s was an awful time to be relying on fixed incomes.
In any case, this is one of the reasons why I am still working (there are others).
There are a number of ways to gain the necessary level of comfort which I have written about before and will revisit in a future post.
Tuesday, November 30, 2010
Monthly Review - November 2010
November was a month of solid if unspectacular financial progress. Equities and commodities appreciated but those gains were partly offset by small losses on the ETFs and adverse FX movements as the AUD/NZD fell against the USD. Cash flow on the properties was negative(although still a positive contribution to net worth) due to a combination of repair bills and a two vacancies. Savings were average.
Here are the details:
1. my Hong Kong equity portfolio appreciated. There were no transactions this month;
2. my ETFs were mixed in line with their respective markets (Hong Kong, Russia, Taiwan, India and China) for a small net decline in value;
3. my commodities appreciated for a modest gain (with gains in the basket ETF, silver and HOGS offsetting a fall in NICK);
4. two of my properties were vacant but the portfolio is still making a positive contribution to my net worth. However, I have been hit hard with multiple repairs which were either paid in October or will be paid in November. This means that we had a negative cash flow in November. That said, as the biggest component of the monthly payments is principal on the mortgages, the properties remained profitable even with a vacancy and the bills. The situation will be better in December with one of the vacant units now let at a substantially higher rent;
5. currency movements were mildly unfavourable, as the AUD, NZD and RMB appreciated against the USD;
6. savings were positive in spite of income being low and expenses being slightly high. Net savings were average.
My cash position remains modest. Cash on hand and deposits now represent about ten months' worth of expenses.
For the month, net worth increased 1.53%. The year to date increase is 24.89%.
My target retirement window remains sometime between early 2012 and the end of 2013. Every passing month brings me closer to my retirement goal.
Here are the details:
1. my Hong Kong equity portfolio appreciated. There were no transactions this month;
2. my ETFs were mixed in line with their respective markets (Hong Kong, Russia, Taiwan, India and China) for a small net decline in value;
3. my commodities appreciated for a modest gain (with gains in the basket ETF, silver and HOGS offsetting a fall in NICK);
4. two of my properties were vacant but the portfolio is still making a positive contribution to my net worth. However, I have been hit hard with multiple repairs which were either paid in October or will be paid in November. This means that we had a negative cash flow in November. That said, as the biggest component of the monthly payments is principal on the mortgages, the properties remained profitable even with a vacancy and the bills. The situation will be better in December with one of the vacant units now let at a substantially higher rent;
5. currency movements were mildly unfavourable, as the AUD, NZD and RMB appreciated against the USD;
6. savings were positive in spite of income being low and expenses being slightly high. Net savings were average.
My cash position remains modest. Cash on hand and deposits now represent about ten months' worth of expenses.
For the month, net worth increased 1.53%. The year to date increase is 24.89%.
My target retirement window remains sometime between early 2012 and the end of 2013. Every passing month brings me closer to my retirement goal.
Friday, November 26, 2010
One vacancy down, one to go
One of our two vacant apartments was rented today. We have repainted and done some minor repairs, all of which were overdue, for a total cost of less than half a month's rent. We have also agreed to remove some of the loose furniture not wanted by the incoming tenant. Anything we can't sell before the tenant moves in will be donated to a local charity.
While the six week vacancy was longer than I had hoped we did manage to avoid having the property vacant over the Christmas-New Year period when it is traditionally hard to find tenants.
The really good news is that we secured a 22.6% increase in the monthly rent - a very meaningful increase that will provide a nice boost to the monthly cash flow. Even with one vacancy, we will now be back to a positive monthly cash flow. Given that the biggest outgoing every month is the principal component on the mortgage payments, the properties are providing a nice addition to our net worth each month.
I am less optimistic about the other vacant unit (which has been on the market since 1 November) rented before Christmas.
While the six week vacancy was longer than I had hoped we did manage to avoid having the property vacant over the Christmas-New Year period when it is traditionally hard to find tenants.
The really good news is that we secured a 22.6% increase in the monthly rent - a very meaningful increase that will provide a nice boost to the monthly cash flow. Even with one vacancy, we will now be back to a positive monthly cash flow. Given that the biggest outgoing every month is the principal component on the mortgage payments, the properties are providing a nice addition to our net worth each month.
I am less optimistic about the other vacant unit (which has been on the market since 1 November) rented before Christmas.
Thursday, November 25, 2010
Owning a private business is not for me
Prompted by this post on Seven Million in Seven Years and Adrian's response to my comment on stocks and real estate being my preferred investment choices for retirement, here are my reasons for not wanting to own or manage a private business post retirement:
1. I don't have the skill set for it. I have spent my entire working career in the professional services industry (apart from a brief stint in the finance industry). I have zero experience in running a business. It would be stupid to place my retirement at risk by investing in something that is outside my skill set. At best I could look to investing in a business with minimal capital requirements;
2. It's too risky. Most private businesses need a reasonable amount of capital. Most private businesses fail. A private business is not liquid. A private business is not a diversified investment. Cutting your losses usually means shutting the business down before the creditors do and writing off most, if not all, of your investment. I've seen enough failures and the hardships they have created not to want to risk taking myself and my family down that road;
3. It's hard work. Most private businesses require a lot of work. A lot of hard work. Signing up for a lot of hard work is not part of my retirement plan. There is a very long list of things to do once I say goodbye to my professional life. Working as hard as ever on an uncertain proposition which may or may not place my retirement plans in jeopardy strikes me as a very strange form of retirement.
I used the word "most" a lot in this post. Sure there are businesses which (i) don't require much capital (ii) do succeed and (iii) don't require a lot of hard work. If I find or think of such a business I'll be tempted to give it a go - but I'll be keeping it to myself. Given my lack of experience in business ownership and management, I simply don't think it's for me. If I wanted to continue working my butt off I could just continue doing what I'm doing now - I'm very well paid and am not placing (much) of my own capital at risk.
Real estate and stocks may not have the same upside as owning your own business, but they are less risky and less time consuming. That works for me.
1. I don't have the skill set for it. I have spent my entire working career in the professional services industry (apart from a brief stint in the finance industry). I have zero experience in running a business. It would be stupid to place my retirement at risk by investing in something that is outside my skill set. At best I could look to investing in a business with minimal capital requirements;
2. It's too risky. Most private businesses need a reasonable amount of capital. Most private businesses fail. A private business is not liquid. A private business is not a diversified investment. Cutting your losses usually means shutting the business down before the creditors do and writing off most, if not all, of your investment. I've seen enough failures and the hardships they have created not to want to risk taking myself and my family down that road;
3. It's hard work. Most private businesses require a lot of work. A lot of hard work. Signing up for a lot of hard work is not part of my retirement plan. There is a very long list of things to do once I say goodbye to my professional life. Working as hard as ever on an uncertain proposition which may or may not place my retirement plans in jeopardy strikes me as a very strange form of retirement.
I used the word "most" a lot in this post. Sure there are businesses which (i) don't require much capital (ii) do succeed and (iii) don't require a lot of hard work. If I find or think of such a business I'll be tempted to give it a go - but I'll be keeping it to myself. Given my lack of experience in business ownership and management, I simply don't think it's for me. If I wanted to continue working my butt off I could just continue doing what I'm doing now - I'm very well paid and am not placing (much) of my own capital at risk.
Real estate and stocks may not have the same upside as owning your own business, but they are less risky and less time consuming. That works for me.
Tuesday, November 23, 2010
Avoiding the new stamp duty is not that easy
The SCMP carried an article by Jake van der Kamp pointing out that property speculators could avoid the new stamp duty imposed on property owners who sell within two years by buying through a company rather than in their own names. In theory this is true. In practice it's not that simple because:
1. assumption of liabilities: when you buy a company, you will take the company subject to all of its assets and liabilities. A buyer will want to know exactly what those are before proceeding. Put differently, would you buy something which had the potential to contain undisclosed liabilities? I wouldn't, but if I did proceed, I'd want a discount for the additional risk and an indemnity from a credit worthy seller to compensate for the risk involved. Bear in mind that there will be at least one risk which you won't be able to pass back to the seller of the company - the stamp duty liability that would arise if the company sold the property within the two year period;
2. due diligence: for the reason mentioned above, you will want to do due diligence on the company before buying. You won't be able to rely on the audited accounts - even if any exist (which is unlikely for a new company), they only cover you up to the relevant balance date and, in any event, are not a guarantee. Assuming you (i) have the skill set needed to do the due diligence and (ii) can get the confirmations needed, why would you spend the time doing the extra work unless you are going to be compensated for it;
3. running costs: it costs money and time to run a company. Accounts have to be prepared. They have to audited. There are a bunch of forms to be completed each year. the annual costs will be in the vicinity of HKD10,000 pa (+/- a bit). For the average buyer of a self use flat that's a cost which is both meaningful and avoidable, unless the seller is going to compensate you for it;
4. selling: if you want to sell, you'll either have to sell the property or persuade someone else to accept the same risks and costs which you did when you brought the company. If you want to sell the company, you'll be competing against people selling properties directly which are not tainted by the issues associated with selling a company. If you want to sell the property not only are you then left holding an empty company which you must pay to wind down but you will also face the possibility that if the company's original acquisition was deemed to be a business activity, then any gain on sale will be treated as a taxable profit (which issue seldom arises when it is an individual who does the selling). If a gain on sale is treated as a taxable profit, bear in mind that the profit is calculated based on the original purchase price paid by the company - not the implied price you paid when you purchased the company - and you could end up in a situation where you are paying profits tax when you have actually made a loss.
Personally, if I have a choice between buying a property or buying a company which owns a property, I will take the property every time. I would need a lot of assurance/protection and compensation before I would take on the risks, expenses and work involved in buying someone else's company.
Another way of looking at this is to ask why most transactions involving properties are not already structured so that people buy and sell companies which own the properties. You would think that if it was that easy to dodge the stamp duty (which was already up to 4% payable by the buyer before last Friday's changes), everybody would be doing it and buyers would be happy to do so in order to avoid a hefty stamp duty cost. They don't. Outside the realm of high end commercial real estate it is very very unusual for someone to buy a company which owns a property rather than the property itself - for the reasons given above.
I'm sure a lot of creative thinking will be spent trying to avoid the new stamp duty, but I don't see it being as easy to avoid as Mr van der Kamp suggests.
1. assumption of liabilities: when you buy a company, you will take the company subject to all of its assets and liabilities. A buyer will want to know exactly what those are before proceeding. Put differently, would you buy something which had the potential to contain undisclosed liabilities? I wouldn't, but if I did proceed, I'd want a discount for the additional risk and an indemnity from a credit worthy seller to compensate for the risk involved. Bear in mind that there will be at least one risk which you won't be able to pass back to the seller of the company - the stamp duty liability that would arise if the company sold the property within the two year period;
2. due diligence: for the reason mentioned above, you will want to do due diligence on the company before buying. You won't be able to rely on the audited accounts - even if any exist (which is unlikely for a new company), they only cover you up to the relevant balance date and, in any event, are not a guarantee. Assuming you (i) have the skill set needed to do the due diligence and (ii) can get the confirmations needed, why would you spend the time doing the extra work unless you are going to be compensated for it;
3. running costs: it costs money and time to run a company. Accounts have to be prepared. They have to audited. There are a bunch of forms to be completed each year. the annual costs will be in the vicinity of HKD10,000 pa (+/- a bit). For the average buyer of a self use flat that's a cost which is both meaningful and avoidable, unless the seller is going to compensate you for it;
4. selling: if you want to sell, you'll either have to sell the property or persuade someone else to accept the same risks and costs which you did when you brought the company. If you want to sell the company, you'll be competing against people selling properties directly which are not tainted by the issues associated with selling a company. If you want to sell the property not only are you then left holding an empty company which you must pay to wind down but you will also face the possibility that if the company's original acquisition was deemed to be a business activity, then any gain on sale will be treated as a taxable profit (which issue seldom arises when it is an individual who does the selling). If a gain on sale is treated as a taxable profit, bear in mind that the profit is calculated based on the original purchase price paid by the company - not the implied price you paid when you purchased the company - and you could end up in a situation where you are paying profits tax when you have actually made a loss.
Personally, if I have a choice between buying a property or buying a company which owns a property, I will take the property every time. I would need a lot of assurance/protection and compensation before I would take on the risks, expenses and work involved in buying someone else's company.
Another way of looking at this is to ask why most transactions involving properties are not already structured so that people buy and sell companies which own the properties. You would think that if it was that easy to dodge the stamp duty (which was already up to 4% payable by the buyer before last Friday's changes), everybody would be doing it and buyers would be happy to do so in order to avoid a hefty stamp duty cost. They don't. Outside the realm of high end commercial real estate it is very very unusual for someone to buy a company which owns a property rather than the property itself - for the reasons given above.
I'm sure a lot of creative thinking will be spent trying to avoid the new stamp duty, but I don't see it being as easy to avoid as Mr van der Kamp suggests.
Monday, November 22, 2010
Cooling the Hong Kong property market (2)
Following on from the Hong Kong government's latest measures to cool the local property market, I gave some thought to other measures the government could take should the market continue upwards. Here's what I came up with:
1. foreign ownership restrictions: I have issues with this one. Hong Kong has almost not foreign ownership restrictions and our whole economy is based on free movement of capital in and out of Hong Kong;
2. increase the supply further: given the lengthy lead time between making land available for development and new properties being ready for occupation, this is a difficult one to get right. Memories of the serious policy mistakes of 1997/8 are still fresh in people's minds;
3. increase interest rates: while the HKD:USD prevents the government from controlling interest rates directly, it could impose a levy on loans used to finance property purchases. This would have the effect of making property ownership more expensive;
4. remove the interest deductability for investment properties and owner occupied homes;
5. cancel the rates concession;
6. increase the deposit requirement again or, alternatively, increase it only for non-owner occupied properties;
7. change the immigration scheme to exclude residential property from the list of eligible assets.
Any others?
The main issue with items 3, 4, 5 and 6 is that they will impact lower and middle income groups the most. These are the very people the government is supposed to be helping. Guessing whether these (or any other) measures will or will be adopted is a matter of speculation and will depend largely on what happens to the market in response to the measures announced last Friday. One thing that is clear though is that the government has both the tools and the political will to take steps to cool the market further should the need arise.
1. foreign ownership restrictions: I have issues with this one. Hong Kong has almost not foreign ownership restrictions and our whole economy is based on free movement of capital in and out of Hong Kong;
2. increase the supply further: given the lengthy lead time between making land available for development and new properties being ready for occupation, this is a difficult one to get right. Memories of the serious policy mistakes of 1997/8 are still fresh in people's minds;
3. increase interest rates: while the HKD:USD prevents the government from controlling interest rates directly, it could impose a levy on loans used to finance property purchases. This would have the effect of making property ownership more expensive;
4. remove the interest deductability for investment properties and owner occupied homes;
5. cancel the rates concession;
6. increase the deposit requirement again or, alternatively, increase it only for non-owner occupied properties;
7. change the immigration scheme to exclude residential property from the list of eligible assets.
Any others?
The main issue with items 3, 4, 5 and 6 is that they will impact lower and middle income groups the most. These are the very people the government is supposed to be helping. Guessing whether these (or any other) measures will or will be adopted is a matter of speculation and will depend largely on what happens to the market in response to the measures announced last Friday. One thing that is clear though is that the government has both the tools and the political will to take steps to cool the market further should the need arise.
Cooling the Hong Kong property market (1)
Last Friday the Hong Kong government announced three measures to cool the overheated Hong Kong property market:
1. reduced the maximum loan to value ratios for mid-range flats. The new LTV ratios will be 60% for properties priced between HK$8 million and HK$12 million. For properties priced at above HK$12 million the maximum LTV will be 50%. This has two effects. The first is that buyers need to come up with much larger deposits. While this will not be an issue for the majority of investors from the PRC who (anecdotally at least) are largely paying cash, it is an issue for those attempting to get on the property ladder for the first time or who are hoping to upgrade their homes. The second effect is that a higher deposit results in a smaller mortgage -both the level of indebtedness and the monthly commitments will fall resulting in reduced risk to both households and banks;
2. a new special stamp duty on properties which are sold within two years of the date of purchase - 15% if sold within 6 months, 10% if sold within 6-18 months and 5% if sold within 18-24 months. Historically, taxes on short term sales have have only one effect - by forcing people to hold for a longer time period, supply falls and prices go up;
3. plans to stabilise the supply of new units at around 20,000 p.a. These are only plans and it remains to be seen whether this is the right number.
The initial reactions have been mixed. Reports of sellers cutting prices and buyers holding off "until the picture becomes clearer" have been widespread. My own take is that the higher deposit requirement will have some impact on mid-range properties as there are reasonable numbers of buyers who will have to save more to pay the higher deposit deposit. A the top end of the market, there should be relatively little impact (if any). The higher stamp duty will obviously make buying and selling within two years unrealistic and reduce both demand and supply.
As a long term real estate investor, I am largely indifferent to the new measures. I don't want to see a bubble occur (because of the inevitable crash and other consequences which follow including an adverse impact on the rental market). Even more, I do not want to see a repeat of the serious policy issues of 1997/8 when the government attempted to significantly increase the supply of new properties and crashed the real estate market.
If the market comes down far enough, I'll consider adding to the portfolio. How much is enough? Good question and one that I don't have a ready answer to.
Also to be considered - if the market does not cool down sufficiently, what other measures can the government take?
1. reduced the maximum loan to value ratios for mid-range flats. The new LTV ratios will be 60% for properties priced between HK$8 million and HK$12 million. For properties priced at above HK$12 million the maximum LTV will be 50%. This has two effects. The first is that buyers need to come up with much larger deposits. While this will not be an issue for the majority of investors from the PRC who (anecdotally at least) are largely paying cash, it is an issue for those attempting to get on the property ladder for the first time or who are hoping to upgrade their homes. The second effect is that a higher deposit results in a smaller mortgage -both the level of indebtedness and the monthly commitments will fall resulting in reduced risk to both households and banks;
2. a new special stamp duty on properties which are sold within two years of the date of purchase - 15% if sold within 6 months, 10% if sold within 6-18 months and 5% if sold within 18-24 months. Historically, taxes on short term sales have have only one effect - by forcing people to hold for a longer time period, supply falls and prices go up;
3. plans to stabilise the supply of new units at around 20,000 p.a. These are only plans and it remains to be seen whether this is the right number.
The initial reactions have been mixed. Reports of sellers cutting prices and buyers holding off "until the picture becomes clearer" have been widespread. My own take is that the higher deposit requirement will have some impact on mid-range properties as there are reasonable numbers of buyers who will have to save more to pay the higher deposit deposit. A the top end of the market, there should be relatively little impact (if any). The higher stamp duty will obviously make buying and selling within two years unrealistic and reduce both demand and supply.
As a long term real estate investor, I am largely indifferent to the new measures. I don't want to see a bubble occur (because of the inevitable crash and other consequences which follow including an adverse impact on the rental market). Even more, I do not want to see a repeat of the serious policy issues of 1997/8 when the government attempted to significantly increase the supply of new properties and crashed the real estate market.
If the market comes down far enough, I'll consider adding to the portfolio. How much is enough? Good question and one that I don't have a ready answer to.
Also to be considered - if the market does not cool down sufficiently, what other measures can the government take?
Saturday, November 20, 2010
Is the CPI an appropriate basis for retirement planning?
With the risk of deflation likely avoided, more attention is now being given to the level of inflation. A number of countries have already started taking measures to curb excessive inflation (e.g. China, Australia). In simple terms, for consumers, if we experience inflation this means that the nominal cost of living will be higher in the future than it is today. If one assumes that there will be an inflationary economic environment going forward, that will have an impact on retirement planning and investment management. In order to address the issue, it is necessary to hazard a guess as to the amount of future inflation. Given that professional economists routinely get their estimates of near term inflation wrong, my first working assumption is that there is very little chance of my being able to accurately estimate future inflation rates over a longer time period, so I'll be honest with myself and call it a guess.
How much will obviously depend on where you live and how you spend you money. As an example, a family with school aged children and without employer subsidised health care will (most likely) face a larger cost of living increases than individuals and couples without school aged children and with employer subsidised health care. A family living in a developing economy will be more vulnerable to food price inflation than a family in a developed market. Location and individual circumstances matter. My own spending habits will also change materially over time. Accordingly, my second working assumption is that, even if CPI is an accurate measure of inflation (see below), I cannot rely on it as a measure of my own personal expenditure inflation.
Many countries construct a consumer price index to measure changes in the price of a selected basket of goods and services which consumers buy. Each country has its own basket/methodology and will periodically revise both the components in its basket and the weightings given to each component. While it is unarguable that consumer spending habits will change over time and that the CPI construction must be revised from time to time, there will be lags between changes in spending habits and the CPI basket being updated. My third working assumption is that CPI is always at least slightly outdated and, even if accurately constructed, will never accurately reflect what is happening in the real economy. Historically, there have been times when the CPI has badly lagged the real world - the energy shocks of the early 1970s being a classic example.
CPI numbers are constructed by governments. Governments have considerable incentive to understate the true rate of inflation, both for political and economic reasons. It has often been said that the Fed's job is to manage inflation expectations and beliefs, not to manage inflation itself. The decision to stop publishing M3 data is often cited in support of these claims. There are many people who argue that the understatement is very significant. The evidence (both for and against) is somewhat mixed. My own personal cost of living as certainly been rising much quicker than CPI. My fourth working assumption is that even if I don't subscribe to conspiracy theories, there is a very real possibility (probability?) that CPI is biased to understate the true rate of inflation.
My own personal basket of expenditures is heavily weighted to (i) housing (ii) education and (iii) travel. Post retirement, I will need to add (iv) health care to the list. My personal weighting far exceed the weightings given in the Hong Kong CPI basket. All of these items have historically increased at rates exceeding the general CPI. My fifth working assumption is that I should expect to experience a personal rate of inflation which is higher than the general rate of inflation.
Conclusions
The implications of my five working assumptions are sobering:
1. I need to assume that the real level of inflation I need to protect myself against will be higher than any official CPI data;
2. the required return on investments needs to be adjusted upwards to compensate for the expected level of inflation;
3. while my own personal rate of inflation is totally irrelevant to the pricing of assets in the marketplace, if inflation generally is understated, it follows that asset pricing and asset allocation needs to be revisited.
In short, CPI is not an appropriate surrogate for inflation in retirement planning. For me at least, I have to assume a higher rate of future increases in the cost of living.
Footnote: strictly speaking, inflation is a measure of the change in the money supply, not changes in the nominal prices of goods and services.
How much will obviously depend on where you live and how you spend you money. As an example, a family with school aged children and without employer subsidised health care will (most likely) face a larger cost of living increases than individuals and couples without school aged children and with employer subsidised health care. A family living in a developing economy will be more vulnerable to food price inflation than a family in a developed market. Location and individual circumstances matter. My own spending habits will also change materially over time. Accordingly, my second working assumption is that, even if CPI is an accurate measure of inflation (see below), I cannot rely on it as a measure of my own personal expenditure inflation.
Many countries construct a consumer price index to measure changes in the price of a selected basket of goods and services which consumers buy. Each country has its own basket/methodology and will periodically revise both the components in its basket and the weightings given to each component. While it is unarguable that consumer spending habits will change over time and that the CPI construction must be revised from time to time, there will be lags between changes in spending habits and the CPI basket being updated. My third working assumption is that CPI is always at least slightly outdated and, even if accurately constructed, will never accurately reflect what is happening in the real economy. Historically, there have been times when the CPI has badly lagged the real world - the energy shocks of the early 1970s being a classic example.
CPI numbers are constructed by governments. Governments have considerable incentive to understate the true rate of inflation, both for political and economic reasons. It has often been said that the Fed's job is to manage inflation expectations and beliefs, not to manage inflation itself. The decision to stop publishing M3 data is often cited in support of these claims. There are many people who argue that the understatement is very significant. The evidence (both for and against) is somewhat mixed. My own personal cost of living as certainly been rising much quicker than CPI. My fourth working assumption is that even if I don't subscribe to conspiracy theories, there is a very real possibility (probability?) that CPI is biased to understate the true rate of inflation.
My own personal basket of expenditures is heavily weighted to (i) housing (ii) education and (iii) travel. Post retirement, I will need to add (iv) health care to the list. My personal weighting far exceed the weightings given in the Hong Kong CPI basket. All of these items have historically increased at rates exceeding the general CPI. My fifth working assumption is that I should expect to experience a personal rate of inflation which is higher than the general rate of inflation.
Conclusions
The implications of my five working assumptions are sobering:
1. I need to assume that the real level of inflation I need to protect myself against will be higher than any official CPI data;
2. the required return on investments needs to be adjusted upwards to compensate for the expected level of inflation;
3. while my own personal rate of inflation is totally irrelevant to the pricing of assets in the marketplace, if inflation generally is understated, it follows that asset pricing and asset allocation needs to be revisited.
In short, CPI is not an appropriate surrogate for inflation in retirement planning. For me at least, I have to assume a higher rate of future increases in the cost of living.
Footnote: strictly speaking, inflation is a measure of the change in the money supply, not changes in the nominal prices of goods and services.
Book Review: The Flaw of Averages
Statistical uncertainties. A topic which the non-mathematician in me found rather daunting. As someone who prefers to do my own retirement planning and investment management, the reality is that I have to deal with a wide range of uncertainties on a daily basis. Getting away from that fact is not possible so I need to have at least some understanding of the basics.
Sam Savage's "The Flaw of Averages" was exactly what I needed to get my mind around some of the key issues. Written in terms that even a layperson can easily understand (and with plenty of humour), this book made for an educational and entertaining read.
Some key takeaways:
1. replacing uncertain future outcomes with a single average and then relying on that single average to plan for the future is a systemic error which explains why forecasts are always wrong (this is known as the "flaw of averages";
2. there is an important distinction between "risk" and "uncertainty" (uncertainty being an objective feature of the universe while risk is a more personal construct;
3. techniques for reducing uncertainty;
4. average inputs do not always deal produce average results;
5. the Seven Deadly Sins of Averaging (actually 12 of them);
6. some practical examples from the world of personal finance. Of these the most important is that a retirement portfolio which is adequate if a single average rate of return is achieved over the life of the portfolio is as likely to fail as to succeed.
Highly recommended for anyone with an interest in personal finance or investment management.
Sam Savage's "The Flaw of Averages" was exactly what I needed to get my mind around some of the key issues. Written in terms that even a layperson can easily understand (and with plenty of humour), this book made for an educational and entertaining read.
Some key takeaways:
1. replacing uncertain future outcomes with a single average and then relying on that single average to plan for the future is a systemic error which explains why forecasts are always wrong (this is known as the "flaw of averages";
2. there is an important distinction between "risk" and "uncertainty" (uncertainty being an objective feature of the universe while risk is a more personal construct;
3. techniques for reducing uncertainty;
4. average inputs do not always deal produce average results;
5. the Seven Deadly Sins of Averaging (actually 12 of them);
6. some practical examples from the world of personal finance. Of these the most important is that a retirement portfolio which is adequate if a single average rate of return is achieved over the life of the portfolio is as likely to fail as to succeed.
Highly recommended for anyone with an interest in personal finance or investment management.
Friday, November 19, 2010
Why you don't need an adviser
In my previous post, I had a mini-rant against financial advisers who charge high fees without offering any value added services. My view is that you do not need to pay for a financial adviser if you are willing to do a small amount of homework, do a small amount of work and accept responsibility for your decisions.
Financial advisers cost money. Most charge either a percentage of assets under management or get a commission from anything you invest on or both. There are usually a few other costs thrown in. So what do they offer in exchange for these services? The list may include:
1. basic investment advice: for the most part you don't need this. Even if you want to spend as little time as possible on your investments, reading a few books like The Boogleheads Guide to Investing will be enough to tell you to (i) keep the costs low (ii) go with an equity/bond/cash allocation that suits your age profile, risk tolerance etc. (iii) avoid chasing performance and so on. You don't need an adviser to tell you to do this
2. selecting investments that will outperform: most advisers fail to beat an appropriate benchmark before fees. Even fewer do it after their fees. Past out performance is not a basis for determining future performance. Predicting which advisers will "outperform" is a guessing game with the odds firmly stacked against you. If you want to try and do better than a basic investment investment plan (see #1 above), you need to accept (i) that more work will be involved (ii) the odds are stacked against you (iii) you have a better chance of outperforming if you aren't handicapped by the adviser's fees
3. access to investment products: in the bad old days, there were no ETFs listed in HK, there were no low cost index funds available to the public and it was an exercise in futility trying to access products like Vanguard. Your options were largely (i) buy shares directly or (ii) pay a hefty front end load and a hefty management fee to buy into actively managed funds. Front end loads of up to 5.75% and MERs in excess of 3% pa were not uncommon. And people wondered why the fund penetration rate in Hong Kong was so low. That started to change in November 1999 with the listing of the HK Tracker fund - the first ETF to be listed in Hong Kong. Now there is a wide range of ETFs listed on the HKSE. You pay no front end load on these (only brokerage and other transaction costs which are quite low) and while the typical MER is higher than Vanguard it is still only a fraction of what you would pay for an actively managed fund. It is also easy enough to buy ETFs listed on overseas exchanges if there is something you want but can't find locally. You don't need an adviser to access these - only a broker and a willingness to read the offering document and watch the bid ask spread before you buy
4. domestic tax planning: if your only place of domicile is Hong Kong, you don't need tax advice to make your investments. Hong Kong's tax laws are that simple. Unless you are investing as part of a business, you do not pay taxes on capital gains, you do not pay taxes on dividends and you do not pay tax on interest. There is no estate duty under Hong Kong law. Stamp duties and a few other levies are payable on some investments, but unless you are dealing with very large transactions these cannot be avoided. I see no scope for a financial adviser to add any value here
5. international tax planning: if you are tax resident in another jurisdiction, have assets in another jurisdiction or are a citizen of another jurisdiction, you will probably need to have at least a basic understanding of the tax implications. For most countries the three main issues which need to be considered are (i) withholding taxes on income (ii) application of estate taxes and (iii) liability to pay income taxes. The first two can usually be found with relatively little effort using the Internet. The latter issue will usually require more work and may require the assistance of a professional tax adviser. As a general proposition, if the tax situation is sufficiently complicated that you need an adviser then you need a tax adviser and it would be risky to rely on a financial adviser
6. estate planning: there is no estate duty in Hong Kong. Assets held overseas may or may not be caught in an overseas estate tax regime. There are some legal restrictions on who you can and cannot leave your money to. Depending on circumstances, you may want or need to set up a trust (e.g. to benefit infant children). Advice on these areas is best given by a lawyer (not a financial adviser)
7. insurance: work out how much you need and shop around for the best deal. This applies to term life insurance, medical insurance and home and contents insurance. You don't need a financial adviser to do this for you
8. budgeting: for those having trouble saving and who can't be bothered to do a budget, the most basic solution is to set up an automatic investment plan. Many banks will offer monthly stock purchase plans which include ETFs. Decide how much to invest each month, which ETFs you want to buy and take 30 minutes to go to the bank and set it up. Do what you want with whatever is left in the bank account after those payments. It's not the best financial plan but it's much better than not saving at all. Anyone who can't be bothered to do even this probably does deserve to fall into the clutches of a financial adviser
Quite frankly, I fail to understand why any high cost financial advisers are still in business.
As a side note, I have yet to find a financial adviser in Hong Kong who only charges by the hour (or flat fee).
Financial advisers cost money. Most charge either a percentage of assets under management or get a commission from anything you invest on or both. There are usually a few other costs thrown in. So what do they offer in exchange for these services? The list may include:
1. basic investment advice: for the most part you don't need this. Even if you want to spend as little time as possible on your investments, reading a few books like The Boogleheads Guide to Investing will be enough to tell you to (i) keep the costs low (ii) go with an equity/bond/cash allocation that suits your age profile, risk tolerance etc. (iii) avoid chasing performance and so on. You don't need an adviser to tell you to do this
2. selecting investments that will outperform: most advisers fail to beat an appropriate benchmark before fees. Even fewer do it after their fees. Past out performance is not a basis for determining future performance. Predicting which advisers will "outperform" is a guessing game with the odds firmly stacked against you. If you want to try and do better than a basic investment investment plan (see #1 above), you need to accept (i) that more work will be involved (ii) the odds are stacked against you (iii) you have a better chance of outperforming if you aren't handicapped by the adviser's fees
3. access to investment products: in the bad old days, there were no ETFs listed in HK, there were no low cost index funds available to the public and it was an exercise in futility trying to access products like Vanguard. Your options were largely (i) buy shares directly or (ii) pay a hefty front end load and a hefty management fee to buy into actively managed funds. Front end loads of up to 5.75% and MERs in excess of 3% pa were not uncommon. And people wondered why the fund penetration rate in Hong Kong was so low. That started to change in November 1999 with the listing of the HK Tracker fund - the first ETF to be listed in Hong Kong. Now there is a wide range of ETFs listed on the HKSE. You pay no front end load on these (only brokerage and other transaction costs which are quite low) and while the typical MER is higher than Vanguard it is still only a fraction of what you would pay for an actively managed fund. It is also easy enough to buy ETFs listed on overseas exchanges if there is something you want but can't find locally. You don't need an adviser to access these - only a broker and a willingness to read the offering document and watch the bid ask spread before you buy
4. domestic tax planning: if your only place of domicile is Hong Kong, you don't need tax advice to make your investments. Hong Kong's tax laws are that simple. Unless you are investing as part of a business, you do not pay taxes on capital gains, you do not pay taxes on dividends and you do not pay tax on interest. There is no estate duty under Hong Kong law. Stamp duties and a few other levies are payable on some investments, but unless you are dealing with very large transactions these cannot be avoided. I see no scope for a financial adviser to add any value here
5. international tax planning: if you are tax resident in another jurisdiction, have assets in another jurisdiction or are a citizen of another jurisdiction, you will probably need to have at least a basic understanding of the tax implications. For most countries the three main issues which need to be considered are (i) withholding taxes on income (ii) application of estate taxes and (iii) liability to pay income taxes. The first two can usually be found with relatively little effort using the Internet. The latter issue will usually require more work and may require the assistance of a professional tax adviser. As a general proposition, if the tax situation is sufficiently complicated that you need an adviser then you need a tax adviser and it would be risky to rely on a financial adviser
6. estate planning: there is no estate duty in Hong Kong. Assets held overseas may or may not be caught in an overseas estate tax regime. There are some legal restrictions on who you can and cannot leave your money to. Depending on circumstances, you may want or need to set up a trust (e.g. to benefit infant children). Advice on these areas is best given by a lawyer (not a financial adviser)
7. insurance: work out how much you need and shop around for the best deal. This applies to term life insurance, medical insurance and home and contents insurance. You don't need a financial adviser to do this for you
8. budgeting: for those having trouble saving and who can't be bothered to do a budget, the most basic solution is to set up an automatic investment plan. Many banks will offer monthly stock purchase plans which include ETFs. Decide how much to invest each month, which ETFs you want to buy and take 30 minutes to go to the bank and set it up. Do what you want with whatever is left in the bank account after those payments. It's not the best financial plan but it's much better than not saving at all. Anyone who can't be bothered to do even this probably does deserve to fall into the clutches of a financial adviser
Quite frankly, I fail to understand why any high cost financial advisers are still in business.
As a side note, I have yet to find a financial adviser in Hong Kong who only charges by the hour (or flat fee).
Thursday, November 11, 2010
Investment services to be avoided
Like may professionals, I get more cold calls from financial advisers than I would like (the preferred number of calls is zero). While standards have improved (very) marginally over the years, most are from "independent" financial advisers selling high cost and inflexible insurance products or off the plan overseas real estate.
This week I received a cold call from a large financial institution, one that I did not have a relationship with. Curiosity got the better of me and I agreed to meet with them to see what they had to offer. I should have known better. I really should have. Their product had the following features:
1. front end load of "only" 2-3% depending on the amount invested;
2. annual management fee of 1.5-2% depending on the amount invested; and
3. annual platform fee of 0.3%.
The very neatly dressed and earnest "senior vice president" assured me that they were completely transparent, that there were no hidden fees or charges etc etc etc
And what did they offer to earn these "completely transparent" fees? Access to thousands of mutual funds, ETFs and individual stocks. Big deal. I can also access thousands of funds, ETFs, individual stocks and other investments without paying those fees.
He also waxed eloquently about the portability of the plan - if I leave Hong Kong, I can keep the same account wherever I live (except the US). Hmmm .... and I can't do that with any of my existing accounts?
He seemed surprised when I told him it was a very unattractive proposal.
I really don't understand why anyone would sign up for something as ridiculous as this.
This week I received a cold call from a large financial institution, one that I did not have a relationship with. Curiosity got the better of me and I agreed to meet with them to see what they had to offer. I should have known better. I really should have. Their product had the following features:
1. front end load of "only" 2-3% depending on the amount invested;
2. annual management fee of 1.5-2% depending on the amount invested; and
3. annual platform fee of 0.3%.
The very neatly dressed and earnest "senior vice president" assured me that they were completely transparent, that there were no hidden fees or charges etc etc etc
And what did they offer to earn these "completely transparent" fees? Access to thousands of mutual funds, ETFs and individual stocks. Big deal. I can also access thousands of funds, ETFs, individual stocks and other investments without paying those fees.
He also waxed eloquently about the portability of the plan - if I leave Hong Kong, I can keep the same account wherever I live (except the US). Hmmm .... and I can't do that with any of my existing accounts?
He seemed surprised when I told him it was a very unattractive proposal.
I really don't understand why anyone would sign up for something as ridiculous as this.
Saturday, November 06, 2010
QE II - the personal impact and USD debt instruments
There has been plenty of coverage on the impact of QEII on the economy, on currencies, on stocks, on bonds, on commodities and so on. At a more personal level, how does it affect me?
The positives
1. the value of my investments went up: stocks appreciated, commodities appreciated
2. the risk of deflation (both longer term and shorter term) has been reduced. As the holder of a portfolio of risk assets, deflation would be a very bad thing for me
3. the decline in the USD and corresponding decline in the HKD (which is pegged to the USD) boosted the value of my non-USD/HKD denominated assets
4. the HKD peg to the USD is expected to create an influx of hot money. Combined with the continued low interest rates in the US, this means that it is likely that I will continue paying very low nominal interest rates and negative real interest rates for some time
The negatives
1. I am paid in USD: the decline in the USD amounts to a pay cut
2. the HKD peg to the USD means that there is an expectation of more money flowing into Hong Kong (among other places). Not only does this create the risk of an asset bubble, but it adds to inflationary pressures
3. some of our household spending is denominated in currencies other than the USD/HKD. QEII effectively means that the cost of overseas holidays, imported wine etc etc have increased. Not all of these costs are captured in general measures of inflation
4. the continued debasement of the USD (the world's largest currency) increases the risk of longer term inflation significantly
5. I am still accumulating assets. The increases in nominal prices of real estate, equities etc makes it more difficult to acquire assets at attractive prices
6. continued low nominal interest rates combined with increased inflationary expectations make bonds even less attractive going forward. Diversification across asset classes is now harder. This means that the risk to the private portfolio has also gone up
Conclusions
All in all, in the short term I am clearly a net beneficiary of QEII. However, over time the on-going effect of a pay cut and higher inflation (whether or not captured in CPI data) will erode those benefits. Also, the risks to my retirement have also changed - whether for better or worse being a complete guessing game.
Random thoughts on USD debt instruments
While there is no limit to the amount of money the Fed can create, there have to be limits to the amount of money investors are prepared to tolerate. Give (i) the ultra low interest rates for USD denominated debt instruments (ii) a Fed which is very publicly attempting to create inflation and (iii) the widespread belief that the US wants a weaker dollar, why anyone would want to buy USD debt instruments is totally beyond my understanding. The only justifications for buying that asset class in isolation are either a belief that the USD will strengthen or a belief that there will be a deflationary environment going forward.
The positives
1. the value of my investments went up: stocks appreciated, commodities appreciated
2. the risk of deflation (both longer term and shorter term) has been reduced. As the holder of a portfolio of risk assets, deflation would be a very bad thing for me
3. the decline in the USD and corresponding decline in the HKD (which is pegged to the USD) boosted the value of my non-USD/HKD denominated assets
4. the HKD peg to the USD is expected to create an influx of hot money. Combined with the continued low interest rates in the US, this means that it is likely that I will continue paying very low nominal interest rates and negative real interest rates for some time
The negatives
1. I am paid in USD: the decline in the USD amounts to a pay cut
2. the HKD peg to the USD means that there is an expectation of more money flowing into Hong Kong (among other places). Not only does this create the risk of an asset bubble, but it adds to inflationary pressures
3. some of our household spending is denominated in currencies other than the USD/HKD. QEII effectively means that the cost of overseas holidays, imported wine etc etc have increased. Not all of these costs are captured in general measures of inflation
4. the continued debasement of the USD (the world's largest currency) increases the risk of longer term inflation significantly
5. I am still accumulating assets. The increases in nominal prices of real estate, equities etc makes it more difficult to acquire assets at attractive prices
6. continued low nominal interest rates combined with increased inflationary expectations make bonds even less attractive going forward. Diversification across asset classes is now harder. This means that the risk to the private portfolio has also gone up
Conclusions
All in all, in the short term I am clearly a net beneficiary of QEII. However, over time the on-going effect of a pay cut and higher inflation (whether or not captured in CPI data) will erode those benefits. Also, the risks to my retirement have also changed - whether for better or worse being a complete guessing game.
Random thoughts on USD debt instruments
While there is no limit to the amount of money the Fed can create, there have to be limits to the amount of money investors are prepared to tolerate. Give (i) the ultra low interest rates for USD denominated debt instruments (ii) a Fed which is very publicly attempting to create inflation and (iii) the widespread belief that the US wants a weaker dollar, why anyone would want to buy USD debt instruments is totally beyond my understanding. The only justifications for buying that asset class in isolation are either a belief that the USD will strengthen or a belief that there will be a deflationary environment going forward.
Friday, November 05, 2010
Foster parents to a kitten
We recently acted as foster parents for a two month old kitten rescued by the SPCA. While our own cat (adopted from the SPCA in 2008) did not take kindly to the presence of the intruder or being denied access to part of our apartment, the experience was a good one. As expected, he spent most of his time hiding (either behind our bed or under a cabinet) and would bolt for cover whenever anyone came into the room. At night we could hear him running around, scratching furniture, unravelling the toilet paper, knocking things over and generally having fun. By the end of his stay it took very little effort to coax him out from hiding to play. I was tempted to keep him, but decided that it will take more work to get our own cat used to the idea of sharing her territory.
Yesterday I received a call from the SPCA to say that he had been adopted. Yeah!
Definitely an experience that was enjoyable and will be repeated.
Yesterday I received a call from the SPCA to say that he had been adopted. Yeah!
Definitely an experience that was enjoyable and will be repeated.
Thursday, November 04, 2010
RMB Bonds - revisited
As recently as September I asked myself whether RMB denominated bonds were a worthwhile investment . My conclusion was that while RMB bonds were fine for RMB which I already hold (which is not much), I could get better yields on equities so it didn't make a lot of sense to convert HKD into RMB in order to buy the bonds. I also felt that the China A50 Tracker fund was a better (although riskier) way to invest in the RMB. I purchased shares in some small caps and the China A50 Tracker fund last month - so far a good call, although the returns over a single month are not really that meaningful.
More recently, the market has rallied and (IMHO) the risk of investing in equities has gone up with the market. Also, with retirement getting closer, I need to start getting used to the idea that I need to have at least some of my money into low risk investments and accept the the correspondingly low returns.
The latest offering is from China Development Bank and offers a yield of 2.7% (which will get cut to around 2.5% after bank charges and FX conversion spreads) with a term of three years. It's not a great deal as the upside is limited, but it is better than leaving cash in the bank. Also, if I buy a series of these sorts of short dated investments with differing but generally short maturity dates (probably in a variety of currencies), this will form part of the cash/near cash asset allocation that I will need to have in place in retirement.
Accordingly, I have converted some more HKD to RMB (currently limited to a maximum of RMB20,000 per day) and made an application. I suspect that the application will be scaled back due to over subscriptions, but there will no doubt be no shortage of additional RMB bond issues.
More recently, the market has rallied and (IMHO) the risk of investing in equities has gone up with the market. Also, with retirement getting closer, I need to start getting used to the idea that I need to have at least some of my money into low risk investments and accept the the correspondingly low returns.
The latest offering is from China Development Bank and offers a yield of 2.7% (which will get cut to around 2.5% after bank charges and FX conversion spreads) with a term of three years. It's not a great deal as the upside is limited, but it is better than leaving cash in the bank. Also, if I buy a series of these sorts of short dated investments with differing but generally short maturity dates (probably in a variety of currencies), this will form part of the cash/near cash asset allocation that I will need to have in place in retirement.
Accordingly, I have converted some more HKD to RMB (currently limited to a maximum of RMB20,000 per day) and made an application. I suspect that the application will be scaled back due to over subscriptions, but there will no doubt be no shortage of additional RMB bond issues.
Saturday, October 30, 2010
Monthly Review - October 2010
October was a very good month for financial progress. Just about everything moved my way and, in in the case of equities, the gains were impressive. Even the currency movements were mildly favourable as the USD depreciated further. Cash flow on the properties was negative(although still a positive contribution to net worth) due to a combination of repair bills and a single vacancy. The cash outflows will increase next month as we will have two vacancies and one of the vacant properties will be getting a minor makeover (repainting, new kitchen bench, resealed floor etc etc etc). Savings were low.
Here are the details:
1. my Hong Kong equity portfolio appreciated quite strongly. I purchased shares in AUPU and some other small caps and sold some call warrants on HWL;
2. my ETFs appreciated in line with their respective markets (Hong Kong, Russia, Taiwan, India and China) ;
3. my commodities appreciated for a modest gain (with gains in the basket ETF, silver and NICK offsetting a fall in HOGS);
4. one of my properties is vacant but the portfolio is still making a positive contribution to my net worth. However, I have been hit hard with multiple repairs which were either paid in October or will be paid in November. This means that we had a negative cash flow in October. That said, as the biggest component of the monthly payments is principal on the mortgages, the properties remained profitable even with a vacancy and the bills. That may change next month;
5. currency movements were mildly favourable, as the AUD, NZD and RMB appreciated against the USD;
6. savings were positive in spite of income being low and expenses being slightly high. Net savings were modest;
7. I transferred some money to mrs traineeinvestor for tax planning purposes. As this is an outright transfer it represents a reduction in the net worth of the private portfolio
My cash position was reduced after purchasing some equities, a transfer to mrs traineeinvestor, repaying a tenant's bond, paying for a short holiday in Japan and setting aside a reserve for the property related expenses. Cash on hand now represents about six month's worth of expenses.
For the month, net worth increased 3.8%. The year to date increase is 23.0%.
My target retirement window remains sometime between early 2012 and the end of 2013.
Here are the details:
1. my Hong Kong equity portfolio appreciated quite strongly. I purchased shares in AUPU and some other small caps and sold some call warrants on HWL;
2. my ETFs appreciated in line with their respective markets (Hong Kong, Russia, Taiwan, India and China) ;
3. my commodities appreciated for a modest gain (with gains in the basket ETF, silver and NICK offsetting a fall in HOGS);
4. one of my properties is vacant but the portfolio is still making a positive contribution to my net worth. However, I have been hit hard with multiple repairs which were either paid in October or will be paid in November. This means that we had a negative cash flow in October. That said, as the biggest component of the monthly payments is principal on the mortgages, the properties remained profitable even with a vacancy and the bills. That may change next month;
5. currency movements were mildly favourable, as the AUD, NZD and RMB appreciated against the USD;
6. savings were positive in spite of income being low and expenses being slightly high. Net savings were modest;
7. I transferred some money to mrs traineeinvestor for tax planning purposes. As this is an outright transfer it represents a reduction in the net worth of the private portfolio
My cash position was reduced after purchasing some equities, a transfer to mrs traineeinvestor, repaying a tenant's bond, paying for a short holiday in Japan and setting aside a reserve for the property related expenses. Cash on hand now represents about six month's worth of expenses.
For the month, net worth increased 3.8%. The year to date increase is 23.0%.
My target retirement window remains sometime between early 2012 and the end of 2013.
Thursday, October 14, 2010
iShares A50 purchased
Yesterday I added the iShares A50 tracker ETF (2823) to the private portfolio, paying HK$13.56 per unit. With China's stock markets having lagged the current (near) world wide rally, several A shares now selling at discounts to their H share counterparts and increasing confidence in both China's domestic economy and the ability of the developed world to avoid a double dip, it appears to be a reasonable investment. It is also an indirect play on the RMB.
Monday, October 11, 2010
Small cap purchases
Over the last few weeks I have purchased shares in six small cap companies. In all cases, the shares have been selected based on meeting all or most of the following criteria:
1. low PE ratio
2. strong free cash flow
3. good dividend yield
4. no debt
5. little or no dilution of shareholders over the last three years
6. insiders holding meaningful interests in the company
7. no selling by insiders in the last two years
In all cases, I have read the most recent annual report and (if more recent) interim report as well as any other recent announcements.
In some cases, the liquidity is very limited so I have only purchased small parcels - in all cases less than my usual allocation (probably violating the principle that one should always play for meaningful stakes).
The six companies and the average price paid are:
1. Tai Sang Land (89) - HK$3.23
2. Kenford (464) - HK$0.63
3. AUPU Group (477) - HK$0.99
4. Allan International (684) - HK$3.24
5. Varitronix (710) - 2.72
6. Perenial (725) - HK$0.84
1. low PE ratio
2. strong free cash flow
3. good dividend yield
4. no debt
5. little or no dilution of shareholders over the last three years
6. insiders holding meaningful interests in the company
7. no selling by insiders in the last two years
In all cases, I have read the most recent annual report and (if more recent) interim report as well as any other recent announcements.
In some cases, the liquidity is very limited so I have only purchased small parcels - in all cases less than my usual allocation (probably violating the principle that one should always play for meaningful stakes).
The six companies and the average price paid are:
1. Tai Sang Land (89) - HK$3.23
2. Kenford (464) - HK$0.63
3. AUPU Group (477) - HK$0.99
4. Allan International (684) - HK$3.24
5. Varitronix (710) - 2.72
6. Perenial (725) - HK$0.84
Tuesday, October 05, 2010
Taxing dividends is illogical and wrong
In the course of the debates over tax rates a point which those advocating higher taxes for the rich often make is that the average tax rate paid by the rich is lower than that paid by less wealthy high income earners. These claims are nonsense at best and disingenuous untruths at worst.
Taxing dividends is double taxation
Here's why:
1. in simple terms, a company is a pooling of the investments of its shareholders. Apart from some legal distinctions which are not relevant, it is little different from a partnership for present purposes (although the tax treatment is vastly different). If the company makes a profit, it does so with the shareholders' money and does so for the shareholders;
2. if a company makes a profit, it will pay tax on that profit;
3. the company may decide to hand some or all of the tax paid profits over to its shareholders by way of a dividend - the critical point is that what is given to shareholders already represents the profits which have been earned using the shareholders' money and on which tax has already been paid. No additional economic activity takes place and no additional income or profit is earned by anyone;
4. this means that tax has already been paid on the profits before they are distributed to shareholders. Taxing those distributions again is double taxation - taxing the same income twice. This is plainly wrong.
Some countries have recognised the issue
Some countries recognise that taxing dividends as income is a form of double taxation and have addressed the issue. Australia and New Zealand have an imputation regime under which dividends are deemed to be net of the amount of tax which the company has already paid on the underlying earnings. The main effect of these regimes is to capture the differences between the company's tax rate and the marginal tax rate of the recipients of the dividends and avoid the penalty effect of double taxation. Hong Kong goes further and mostly ignores dividends for tax purposes.
Inconsistent to treat partnerships and companies differently
Further support for treating dividends as income and double taxing them can be found by comparing the treatment of income earned from investing in a partnership (no double taxation) and a company (which is subject to double taxation). Differences in the form of legal vehicle should have no material bearing on the amount of tax to be paid.
Contradiction in double tax regimes
The final point to be made on this issue is the contradiction of treating dividends as taxable income in the hands of the recipient but not as a tax deductible expense on the part of the company. As a general principle, what is assessable revenue for a recipient should be a deductible expense for the payer.
Arguing from a false premise
Assertions that those who receive dividends (and capital gains) do not pay a "fair" share of taxes, fail to recognise the fact that tax has not only been paid on the underlying earnings already but is being paid again when the dividend is treated as taxable income. The net result is that the actual tax rates being paid on the relevant earnings are actually significantly higher than is claimed.
Consequences
History has shown that this double tax issue has consequences - companies are less likely to pay, and shareholders are less likely to want, dividends if the effect of the dividend is to transfer some of the tax paid profits of the company to the tax collectors without any actual income being generated. It is little wonder that dividend yields are so much higher in countries (like Australia) which treat dividends appropriately, than in countries which impose punitive double tax regimes. It is also at least a partial explanation for the massive amounts of unproductive cash sitting on the books of many companies. While I am not an expert in assessing the cost of capital to a company, it seems fairly reasonable to also expect that a double tax regime increases the cost of capital to the company with the usual consequences following.
And capital gains?
The same principle also applies to taxation of capital gains (although other factors involved make the analysis more complicated).
Taxing dividends is double taxation
Here's why:
1. in simple terms, a company is a pooling of the investments of its shareholders. Apart from some legal distinctions which are not relevant, it is little different from a partnership for present purposes (although the tax treatment is vastly different). If the company makes a profit, it does so with the shareholders' money and does so for the shareholders;
2. if a company makes a profit, it will pay tax on that profit;
3. the company may decide to hand some or all of the tax paid profits over to its shareholders by way of a dividend - the critical point is that what is given to shareholders already represents the profits which have been earned using the shareholders' money and on which tax has already been paid. No additional economic activity takes place and no additional income or profit is earned by anyone;
4. this means that tax has already been paid on the profits before they are distributed to shareholders. Taxing those distributions again is double taxation - taxing the same income twice. This is plainly wrong.
Some countries have recognised the issue
Some countries recognise that taxing dividends as income is a form of double taxation and have addressed the issue. Australia and New Zealand have an imputation regime under which dividends are deemed to be net of the amount of tax which the company has already paid on the underlying earnings. The main effect of these regimes is to capture the differences between the company's tax rate and the marginal tax rate of the recipients of the dividends and avoid the penalty effect of double taxation. Hong Kong goes further and mostly ignores dividends for tax purposes.
Inconsistent to treat partnerships and companies differently
Further support for treating dividends as income and double taxing them can be found by comparing the treatment of income earned from investing in a partnership (no double taxation) and a company (which is subject to double taxation). Differences in the form of legal vehicle should have no material bearing on the amount of tax to be paid.
Contradiction in double tax regimes
The final point to be made on this issue is the contradiction of treating dividends as taxable income in the hands of the recipient but not as a tax deductible expense on the part of the company. As a general principle, what is assessable revenue for a recipient should be a deductible expense for the payer.
Arguing from a false premise
Assertions that those who receive dividends (and capital gains) do not pay a "fair" share of taxes, fail to recognise the fact that tax has not only been paid on the underlying earnings already but is being paid again when the dividend is treated as taxable income. The net result is that the actual tax rates being paid on the relevant earnings are actually significantly higher than is claimed.
Consequences
History has shown that this double tax issue has consequences - companies are less likely to pay, and shareholders are less likely to want, dividends if the effect of the dividend is to transfer some of the tax paid profits of the company to the tax collectors without any actual income being generated. It is little wonder that dividend yields are so much higher in countries (like Australia) which treat dividends appropriately, than in countries which impose punitive double tax regimes. It is also at least a partial explanation for the massive amounts of unproductive cash sitting on the books of many companies. While I am not an expert in assessing the cost of capital to a company, it seems fairly reasonable to also expect that a double tax regime increases the cost of capital to the company with the usual consequences following.
And capital gains?
The same principle also applies to taxation of capital gains (although other factors involved make the analysis more complicated).
Hutchison Warrants Sold
Hutchison Whampoa (13) has had a great run. While I purchased the shares too early and was sitting on an uncomfortably large loss for while, the shares are now solidly in the black.....which is a good thing because at current market prices they are my largest investment in the shares of a single company.
I also have some Hutchison warrants that were purchased back in July 2009 at HK10.4 cents. For a long time I was seriously underwater with paper losses in excess of 80%. The recent appreciation of the underlying share price has not only put me back in the money but has had the effect of making me seriously overweight Hutchison. Accordingly I sold the warrants this morning at HK14.4 cents for a gain of about 37% after transaction costs.
Now if only I had purchased the warrants when they were trading at less than 2 cents.....
I also have some Hutchison warrants that were purchased back in July 2009 at HK10.4 cents. For a long time I was seriously underwater with paper losses in excess of 80%. The recent appreciation of the underlying share price has not only put me back in the money but has had the effect of making me seriously overweight Hutchison. Accordingly I sold the warrants this morning at HK14.4 cents for a gain of about 37% after transaction costs.
Now if only I had purchased the warrants when they were trading at less than 2 cents.....
Friday, October 01, 2010
Monthly Review - September 2010
September was an outstanding month for financial progress. Just about everything moved my way and, in some cases, the gains were impressive. Even the currency movements were favourable as the USD depreciated. Portfolio gains were supplemented by positive cash flow on my properties and a good savings rate. Also, I transferred some more money to mrs traineeinvestor which had no material impact on the monthly result.
Here are the details:
1. my Hong Kong equity portfolio appreciated....a lot. I purchased shares in Vodone and some small caps (details to follow in a separate post)
2. my ETFs appreciated in line with their respective markets (Hong Kong, Russia, Taiwan and India)
3. my commodities appreciated for a modest gain (ETF, silver, HOGS, NICK)
4. all of my properties were let and are making a positive contribution to my net worth. However, I have been hit hard with multiple repairs which were either paid in September or will be paid in October. Also, one property became vacant at the end of September. This means that a small negative cash flow in September will be come a much larger cash flow in October. That said, as the biggest component of the monthly payments is principal on the mortgages, the properties will remain profitable even with a vacancy
5. currency movements were favourable, as the AUD and NZD appreciated against the USD
6. savings were positive with income being average and expenses also being below average. Net savings were good
7. I transferred some money to mrs traineeinvestor for tax planning purposes. As this is an outright transfer it represents a reduction in the net worth of the private portfolio
My cash position was slightly increased after purchasing some equities and the transfer to mrs traineeinvestor and now represents about 10 month's worth of expenses.
For the month, net worth increased 6.63%. The year to date increase is 18.4%.
My target retirement window remains sometime between early 2012 and the end of 2013
Here are the details:
1. my Hong Kong equity portfolio appreciated....a lot. I purchased shares in Vodone and some small caps (details to follow in a separate post)
2. my ETFs appreciated in line with their respective markets (Hong Kong, Russia, Taiwan and India)
3. my commodities appreciated for a modest gain (ETF, silver, HOGS, NICK)
4. all of my properties were let and are making a positive contribution to my net worth. However, I have been hit hard with multiple repairs which were either paid in September or will be paid in October. Also, one property became vacant at the end of September. This means that a small negative cash flow in September will be come a much larger cash flow in October. That said, as the biggest component of the monthly payments is principal on the mortgages, the properties will remain profitable even with a vacancy
5. currency movements were favourable, as the AUD and NZD appreciated against the USD
6. savings were positive with income being average and expenses also being below average. Net savings were good
7. I transferred some money to mrs traineeinvestor for tax planning purposes. As this is an outright transfer it represents a reduction in the net worth of the private portfolio
My cash position was slightly increased after purchasing some equities and the transfer to mrs traineeinvestor and now represents about 10 month's worth of expenses.
For the month, net worth increased 6.63%. The year to date increase is 18.4%.
My target retirement window remains sometime between early 2012 and the end of 2013
Thursday, September 30, 2010
Some random thoughts on America's tax debate
Todd Henderson's badly written piece about the effects of tax increases proposed on America's "wealthy" and the comments that followed made for reading that was both entertaining and depressing.
There's not much to add to the extensive criticism of Mr Henderson or the very limited support he has received. However, a few random thoughts:
1. like many other developed countries, America is living beyond its means. History has shown that no country can continue to spend more than it earns indefinitely. Sooner or later there will be adverse consequences. At a federal or other government level, there are only three ways to deal with the issue - tax increases, spending cuts or asset sales. Most likely, all three will be needed. So far we've seen a lot of rhetoric and not much action to address the issue;
2. the word "fair" has no place in the debate. It is a subjective term and what is, or is not, "fair" will depend on your perspective;
3. higher taxes have consequences. A person faced with a higher tax bill will either save less, spend less or borrow to maintain spending. Spending less has a negative impact on the goods and services being purchased or charities supported - which will be a negative for the economy and tax receipts from the businesses involved. This does not mean that higher taxes are not appropriate or are not needed, only that higher taxes are not a free lunch for everyone other than those paying the additional taxes;
4. America already taxes wealth. Taxes on dividends are, in reality, a wealth tax - the company has already paid tax on the earnings (profit) and paying a dividend is merely transferring part of those tax paid earnings to the real beneficial owner. Taxing those earnings again is a tax on wealth. The same can be said for capital gains taxes (at least in part). To the extent that capital gains reflect an increase in value arising from tax paid profits being retained by the company, the capital gains tax is a tax on wealth. Likewise, a reintroduction of estate duty will be a tax on (tax paid) wealth;
5. too much of the debate over America's deficit and debt problems is resembling class warfare for my liking. One of the problems America faces is that the number of people paying meaningful amounts of tax is much smaller than the number of benefiting from taxpayer funded support. While this can be taken as evidence of growing income/wealth inequality, it also has other implications. Everyone wants someone else to bear the burden and will support proposals that have that effect, either through public debate or at the ballot box. This is not a healthy situation as the resulting proposals and actions too often end up being an exercise of power by a majority over a minority. It also isn't an answer as the the number of "wealthy" people represent a sufficiently small minority that no amount of tax increases on them is going to come even close to addressing the underlying problem;
6. if Mr Henderson's writing is indicative of his teaching standards, I don't want him teaching my children.
With the exception of item #6, these issues are not unique to America. Many other countries face similar issues. Few countries are dealing with them in an effective manner.
There's not much to add to the extensive criticism of Mr Henderson or the very limited support he has received. However, a few random thoughts:
1. like many other developed countries, America is living beyond its means. History has shown that no country can continue to spend more than it earns indefinitely. Sooner or later there will be adverse consequences. At a federal or other government level, there are only three ways to deal with the issue - tax increases, spending cuts or asset sales. Most likely, all three will be needed. So far we've seen a lot of rhetoric and not much action to address the issue;
2. the word "fair" has no place in the debate. It is a subjective term and what is, or is not, "fair" will depend on your perspective;
3. higher taxes have consequences. A person faced with a higher tax bill will either save less, spend less or borrow to maintain spending. Spending less has a negative impact on the goods and services being purchased or charities supported - which will be a negative for the economy and tax receipts from the businesses involved. This does not mean that higher taxes are not appropriate or are not needed, only that higher taxes are not a free lunch for everyone other than those paying the additional taxes;
4. America already taxes wealth. Taxes on dividends are, in reality, a wealth tax - the company has already paid tax on the earnings (profit) and paying a dividend is merely transferring part of those tax paid earnings to the real beneficial owner. Taxing those earnings again is a tax on wealth. The same can be said for capital gains taxes (at least in part). To the extent that capital gains reflect an increase in value arising from tax paid profits being retained by the company, the capital gains tax is a tax on wealth. Likewise, a reintroduction of estate duty will be a tax on (tax paid) wealth;
5. too much of the debate over America's deficit and debt problems is resembling class warfare for my liking. One of the problems America faces is that the number of people paying meaningful amounts of tax is much smaller than the number of benefiting from taxpayer funded support. While this can be taken as evidence of growing income/wealth inequality, it also has other implications. Everyone wants someone else to bear the burden and will support proposals that have that effect, either through public debate or at the ballot box. This is not a healthy situation as the resulting proposals and actions too often end up being an exercise of power by a majority over a minority. It also isn't an answer as the the number of "wealthy" people represent a sufficiently small minority that no amount of tax increases on them is going to come even close to addressing the underlying problem;
6. if Mr Henderson's writing is indicative of his teaching standards, I don't want him teaching my children.
With the exception of item #6, these issues are not unique to America. Many other countries face similar issues. Few countries are dealing with them in an effective manner.
Wednesday, September 29, 2010
Does luck really matter?
Yahoo carried this article on the role of luck in successfully retiring.
The article makes valid points that the time at which you start saving and investing and the time you retire have a material impact on the success of your financial plan. This is not exactly new. Sam Savage (among others) has made this point before.
While the effect of return on investments in the early years of retirement (in particular) can have a dramatic effect on the success of a financial plan, I disagree with the notion that luck has any bearing on the matter because, while we cannot control the markets, we can control our own actions.
In very simple terms the risk of bad "luck" derailing a financial plan can be addressed through proper planning over the life of the plan:
1. reduce equity exposure when values are materially above historical averages - you may miss the end of a bull market but you will also miss the fall in values afterwards and you are cashed up ready to pounce when values get cheaper again;
2. increase equity exposure when values are materially below historical averages and are cheap in absolute terms - sure markets can go down further but history suggests that buying in times of adversity will pay off, it's merely a question of how long you have to wait;
3. plan on retiring a few years earlier. Not only do you have the possibility of spending a few extra years on the golf course if things go well, but you have the flexibility to keep working if things go badly or you want a bit more security.
Points #1 and #2 apply to any asset class, not only equities.
Is it that easy? Possibly not. It requires standing aside from the market when others are boasting about how much money they have made and jumping in when the financial media is spending most of its time showcasing the prophets of doom. It also requires the discipline to save at a higher rate. But if you can manage these three things, at least this component of the luck element can be managed.
And the alternative is what? Just taking your chances? Buying bonds only - at today's yields? Personally, I would rather make the attempt to deal with the issue than ignore it.
The article makes valid points that the time at which you start saving and investing and the time you retire have a material impact on the success of your financial plan. This is not exactly new. Sam Savage (among others) has made this point before.
While the effect of return on investments in the early years of retirement (in particular) can have a dramatic effect on the success of a financial plan, I disagree with the notion that luck has any bearing on the matter because, while we cannot control the markets, we can control our own actions.
In very simple terms the risk of bad "luck" derailing a financial plan can be addressed through proper planning over the life of the plan:
1. reduce equity exposure when values are materially above historical averages - you may miss the end of a bull market but you will also miss the fall in values afterwards and you are cashed up ready to pounce when values get cheaper again;
2. increase equity exposure when values are materially below historical averages and are cheap in absolute terms - sure markets can go down further but history suggests that buying in times of adversity will pay off, it's merely a question of how long you have to wait;
3. plan on retiring a few years earlier. Not only do you have the possibility of spending a few extra years on the golf course if things go well, but you have the flexibility to keep working if things go badly or you want a bit more security.
Points #1 and #2 apply to any asset class, not only equities.
Is it that easy? Possibly not. It requires standing aside from the market when others are boasting about how much money they have made and jumping in when the financial media is spending most of its time showcasing the prophets of doom. It also requires the discipline to save at a higher rate. But if you can manage these three things, at least this component of the luck element can be managed.
And the alternative is what? Just taking your chances? Buying bonds only - at today's yields? Personally, I would rather make the attempt to deal with the issue than ignore it.
Monday, September 27, 2010
Negative real interest rates
Hong Kong's official CPI for August 2010 showed a year-on-year increase of 3.0%. This means that the weighted basket of items that make up the index increase 3% over the preceding 12 months. If your cost of living went up at the same rate as the CPI, then it costs 3% more to live in Hong Kong today than it did a year ago. (Of course, very few people's personal cost of living will fluctuate at the same rate as CPI.)
This compares with:
1. very close to zero for call and short term bank deposits (HSBC is offering 0.015% for a one month deposit)
2. less than one percent pa to borrow money on a residential mortgage (all my mortgages are currently costing my less than 1% pa)
3. a little bit more than 3% pa for a good quality HKD corporate bond with about 10 years to maturity
Given these factors, I am amazed that the level of deposits held by banks in Hong Kong is so high (especially when non-HKD deposits are taken into account). Why on earth would people would so many people leave so much money sitting in bank accounts losing real value for so long? If the answer is risk aversion, then this behaviour amounts to embracing a small certain loss and sacrificing any possibility of avoiding loss altogether in order to avoid the possibility of a greater loss. While I can understand the wish to avoid a loss, the possibilities that ready cash offers to take advantage of opportunities and the need to have enough cash on hand to meet short term needs, I just do not understand why people would be prepared to adopt loss making behaviour when there are so many other alternatives available.
That said, at one level I am grateful - all that cash sitting in the banks and not being more productively invested is available for people like me to borrow at negative real interest rates.
This compares with:
1. very close to zero for call and short term bank deposits (HSBC is offering 0.015% for a one month deposit)
2. less than one percent pa to borrow money on a residential mortgage (all my mortgages are currently costing my less than 1% pa)
3. a little bit more than 3% pa for a good quality HKD corporate bond with about 10 years to maturity
Given these factors, I am amazed that the level of deposits held by banks in Hong Kong is so high (especially when non-HKD deposits are taken into account). Why on earth would people would so many people leave so much money sitting in bank accounts losing real value for so long? If the answer is risk aversion, then this behaviour amounts to embracing a small certain loss and sacrificing any possibility of avoiding loss altogether in order to avoid the possibility of a greater loss. While I can understand the wish to avoid a loss, the possibilities that ready cash offers to take advantage of opportunities and the need to have enough cash on hand to meet short term needs, I just do not understand why people would be prepared to adopt loss making behaviour when there are so many other alternatives available.
That said, at one level I am grateful - all that cash sitting in the banks and not being more productively invested is available for people like me to borrow at negative real interest rates.
Friday, September 24, 2010
Magic Holdings sold
As a shareholder in Hua Han (587), I received and took up a small allocation of shares in Magic Holdings (1633) which listed today. Magic Holdings' business and fundamentals looked appealing so I gave some thought to the price at which I would be prepared to buy more. The shares opened at $4.36 which compares to an issue price of $3.30. Since I regarded the issue price as being at the high end of what I was prepared to pay, I sold my small entitlement at an average of HK$4.38. Net of transaction costs, I made a profit of 29%. Sadly, the amounts involved were relatively small.
Wednesday, September 22, 2010
Everybody wants a weak currency
While the logic of having a weak currency to benefit exporters has general acceptance, the reality is that this is a comparative measure - one currency against other currencies and it simply not possible for all countries to have comparatively weak currencies. If one currency falls, others must rise.
In this context, the efforts of central banks to weaken their nations' currencies is getting quite intense. As examples:
1. the US Federal Reserve's asset buying programme has the effect of selling dollars;
2. the European Central Bank's asset buying programme has the effect of selling Euros
3. Japan made a big effort to talk about it's intervention in the currency markets to stem the rise of the yen
4. Brazil and South Korea (among others) have taken action to weaken their local currencies
5. China operates a fixed exchange rate which is widely viewed as making the RMB undervalued.
Not every currency can be weak relative to other currencies. At the moment, the biggest loser in the battle to have a weak currency would appear to be Japan and the biggest winners would appear to be China and some of the major exporters in the Euro zone (e.g. Germany).
Of course a weak currency also has other consequences, including the cost of imports and the impact on inflation.
However, I really have to wonder how it will end when so many major countries are all attempting to have their currencies trade relatively lower than their major trading partners? At the very least, there has to be some basis for arguing that the competition to achieve comparative devaluation of a number of currencies will result in absolute devaluation of paper currencies generally. This would certainly be consistent with the historical track record of paper money (aka fiat currency) depreciating over time. It would also suggest that either inflation or biflation looks more likely than deflation over the longer term.
As an investor, the issue is what are the implications for my portfolio. I continue to believe that cash and low yielding notes and bonds are a poor store of wealth. I have never been a fan of gold (a point on which I concede to being very wrong over the last few years), but do believe that investing in assets which have the potential to appreciate over time at an acceptable rate of return (say a real rate of 3% pa) is critical to long term financial success. From this perspective, competitive devaluation does not change my approach to investments. However, the possibility of seeking greater diversification between asset classes and along geographical lines is something to consider.
In this context, the efforts of central banks to weaken their nations' currencies is getting quite intense. As examples:
1. the US Federal Reserve's asset buying programme has the effect of selling dollars;
2. the European Central Bank's asset buying programme has the effect of selling Euros
3. Japan made a big effort to talk about it's intervention in the currency markets to stem the rise of the yen
4. Brazil and South Korea (among others) have taken action to weaken their local currencies
5. China operates a fixed exchange rate which is widely viewed as making the RMB undervalued.
Not every currency can be weak relative to other currencies. At the moment, the biggest loser in the battle to have a weak currency would appear to be Japan and the biggest winners would appear to be China and some of the major exporters in the Euro zone (e.g. Germany).
Of course a weak currency also has other consequences, including the cost of imports and the impact on inflation.
However, I really have to wonder how it will end when so many major countries are all attempting to have their currencies trade relatively lower than their major trading partners? At the very least, there has to be some basis for arguing that the competition to achieve comparative devaluation of a number of currencies will result in absolute devaluation of paper currencies generally. This would certainly be consistent with the historical track record of paper money (aka fiat currency) depreciating over time. It would also suggest that either inflation or biflation looks more likely than deflation over the longer term.
As an investor, the issue is what are the implications for my portfolio. I continue to believe that cash and low yielding notes and bonds are a poor store of wealth. I have never been a fan of gold (a point on which I concede to being very wrong over the last few years), but do believe that investing in assets which have the potential to appreciate over time at an acceptable rate of return (say a real rate of 3% pa) is critical to long term financial success. From this perspective, competitive devaluation does not change my approach to investments. However, the possibility of seeking greater diversification between asset classes and along geographical lines is something to consider.
Monday, September 20, 2010
Financial house keeping update
Of the items on my financial house keeping list:
1. all management fees for our properties are now on auto-pay. I will still have to pay the fees for September and, for one property, October manually but the end is in sight;
2. of the four trivial investments in Australia and New Zealand, two have been sold, one is subject to an executed limit order (it seldom trades) and the fourth requires me to dig out a shareholder identification number which, for some reason, is different to all my other shares;
3. the two trivial investments in ETCs remain unactioned. I need to reactivate the dormant account before I can do anything with them;
4. the idle cash sitting in Australia has been transferred to my broker where it can earn interest in a money market account;
5. I have not taken any action on the idle HKD sitting in my company's account in Hong Kong. I have several leases falling due between September 2010 and March 2011 as well as a raft of incoming repair bills and would like to maintain a larger than usual float until I am past the vacancy risk.
1. all management fees for our properties are now on auto-pay. I will still have to pay the fees for September and, for one property, October manually but the end is in sight;
2. of the four trivial investments in Australia and New Zealand, two have been sold, one is subject to an executed limit order (it seldom trades) and the fourth requires me to dig out a shareholder identification number which, for some reason, is different to all my other shares;
3. the two trivial investments in ETCs remain unactioned. I need to reactivate the dormant account before I can do anything with them;
4. the idle cash sitting in Australia has been transferred to my broker where it can earn interest in a money market account;
5. I have not taken any action on the idle HKD sitting in my company's account in Hong Kong. I have several leases falling due between September 2010 and March 2011 as well as a raft of incoming repair bills and would like to maintain a larger than usual float until I am past the vacancy risk.
Saturday, September 18, 2010
How not to cool an over heated market
The Hong Kong government has been considering ways in which to address the growing sandwich class - the group of middle class people whose incomes are too high to qualify for public housing programmes but who are struggling to save a a deposit to buy a home without assistance.
Most of the ideas which have been put forward for discussion are either silly or morally inappropriate. They also demonstrate that a lot of people (including sections of the media) have learned absolutely nothing from America's housing problems.
it all comes down to supply and demand. If you want to make housing more affordable, you either need to increase the supply or reduce the demand. Many of the proposals focus on providing people with either a taxpayer funded subsidised entry to the housing market (e.g. a first home buyer grant) or some other form of financial assistance (e.g. buy to rent programmes). There are two major issues with these proposals.
The first is that they represent a transfer of wealth from an already very narrow tax base to an already too large pool of people who take support from that very narrow tax base. While there is a legitimate case for providing support to people who cannot afford housing at all, there is no legitimate case for the taxpayer to be required to upgrade the financial position of people who are able to support themselves.
The second issue is that these forms of financial support have the effect of increasing demand. You don't need an advanced degree in economics to understand that increasing demand is likely to put upward pressure on property prices making the situation even worse.
If the government does introduce a buy to let scheme or a first home buyer grant, I suspect I would not be the only investor who would consider buying some of the properties in the target price range (HK$2-3 million) in anticipation that the increased demand would lift prices. After all, I might as well get some benefit from how the government spends my tax dollars.
Most of the ideas which have been put forward for discussion are either silly or morally inappropriate. They also demonstrate that a lot of people (including sections of the media) have learned absolutely nothing from America's housing problems.
it all comes down to supply and demand. If you want to make housing more affordable, you either need to increase the supply or reduce the demand. Many of the proposals focus on providing people with either a taxpayer funded subsidised entry to the housing market (e.g. a first home buyer grant) or some other form of financial assistance (e.g. buy to rent programmes). There are two major issues with these proposals.
The first is that they represent a transfer of wealth from an already very narrow tax base to an already too large pool of people who take support from that very narrow tax base. While there is a legitimate case for providing support to people who cannot afford housing at all, there is no legitimate case for the taxpayer to be required to upgrade the financial position of people who are able to support themselves.
The second issue is that these forms of financial support have the effect of increasing demand. You don't need an advanced degree in economics to understand that increasing demand is likely to put upward pressure on property prices making the situation even worse.
If the government does introduce a buy to let scheme or a first home buyer grant, I suspect I would not be the only investor who would consider buying some of the properties in the target price range (HK$2-3 million) in anticipation that the increased demand would lift prices. After all, I might as well get some benefit from how the government spends my tax dollars.
Friday, September 10, 2010
RMB bonds - are they worth it?
Bond issues denominated in RMB have been very popular. In fact bond issues are popular generally. There are no shortage of stories about investors pulling out of stocks to invest in bonds. I put some relatively small sums into a few RMB issues over the last two years and a slightly larger sum into HSBC's 6.8% due 2038. The latter has been a good investment and the former haven't done me any harm.
The latest "hot" offering is by BOCHK which is offering two tranches by way of public offer - Tranche A due in 2012 paying 2.65% and Tranche B due in 2013 paying 2.9%.
Should I buy these bonds?
Looking at the Tranche B issue, the annual yield is less than a lot of stocks pay (including the dividend on BOC's own shares). The only real case for buying on yield is that the bonds are of sufficiently short duration to be viewed as an alternative for cash. If I had meaningful amounts of RMB, I would be happy exchanging bank deposits paying zero for bonds paying 2.9%.
Since I don't have meaningful amounts of RMB sitting around, the comparison between RMB bank deposits and the RMB bonds is not valid for me. I have to compare the HKD cash that I would convert to RMB with other things I could put those HKD into.
If one accepts the often voiced opinion that the RMB is undervalued against the HKD (which is pegged to the USD) and arbitrarily assume that the RMB will appreciate by 20% over the three year life of the bonds then the total return is 2.9+2.9+2.9+20 = 28.7% less the FX conversion spread and bank charges on the receipt of each semi annual interest payment. There is no compounding of the interest received given that deposit rates are near enough to zero. This is is roughly 8.4% compound p.a. (depending on fees and spread) which is a very decent rate of return - if the FX appreciation actually happens (a point on which I am agnostic). As alternatives, one can find no shortage of shares listed in Hong Kong with higher yields and the potential for capital gains which may or may not be larger than the potential for appreciation of the RMB. There is no certainty that the RMB will appreciate against the HKD by 20% - or at all.
Of course, there is less downside risk investing in bonds than in equities. Safety favours the bonds.
Lastly, buying some more bonds would make my portfolio more diversified which would not be a bad thing.
In the end, it is unlikely that I will buy these bonds (at least not in any great quantity). If I can buy equities with better yields (which have the potential to grow) and which have the potential for greater appreciation, then I will take that over the relative safety of bonds and the more limited potential for currency appreciation.
Note: once I retire I will allocate a part of my investments to cash and short term interest bearing products. At that time the case for short dated bonds like this becomes stronger.
The latest "hot" offering is by BOCHK which is offering two tranches by way of public offer - Tranche A due in 2012 paying 2.65% and Tranche B due in 2013 paying 2.9%.
Should I buy these bonds?
Looking at the Tranche B issue, the annual yield is less than a lot of stocks pay (including the dividend on BOC's own shares). The only real case for buying on yield is that the bonds are of sufficiently short duration to be viewed as an alternative for cash. If I had meaningful amounts of RMB, I would be happy exchanging bank deposits paying zero for bonds paying 2.9%.
Since I don't have meaningful amounts of RMB sitting around, the comparison between RMB bank deposits and the RMB bonds is not valid for me. I have to compare the HKD cash that I would convert to RMB with other things I could put those HKD into.
If one accepts the often voiced opinion that the RMB is undervalued against the HKD (which is pegged to the USD) and arbitrarily assume that the RMB will appreciate by 20% over the three year life of the bonds then the total return is 2.9+2.9+2.9+20 = 28.7% less the FX conversion spread and bank charges on the receipt of each semi annual interest payment. There is no compounding of the interest received given that deposit rates are near enough to zero. This is is roughly 8.4% compound p.a. (depending on fees and spread) which is a very decent rate of return - if the FX appreciation actually happens (a point on which I am agnostic). As alternatives, one can find no shortage of shares listed in Hong Kong with higher yields and the potential for capital gains which may or may not be larger than the potential for appreciation of the RMB. There is no certainty that the RMB will appreciate against the HKD by 20% - or at all.
Of course, there is less downside risk investing in bonds than in equities. Safety favours the bonds.
Lastly, buying some more bonds would make my portfolio more diversified which would not be a bad thing.
In the end, it is unlikely that I will buy these bonds (at least not in any great quantity). If I can buy equities with better yields (which have the potential to grow) and which have the potential for greater appreciation, then I will take that over the relative safety of bonds and the more limited potential for currency appreciation.
Note: once I retire I will allocate a part of my investments to cash and short term interest bearing products. At that time the case for short dated bonds like this becomes stronger.
Thursday, September 09, 2010
Some overdue financial house keeping
One of the things which has been on my "to do" list for a long time is cleaning up some very small matters, some of which should have been dealt with a long time ago. I have finally kicked myself into action and begin the process. Here is the list:
1. Auto-pays to implement: I have three properties in Hong Kong where the management fees are not on auto-pay. This means I have to sit down and manually transfer funds or write a cheque each month. My previous attempts to get these three payments on auto-pay failed. One management company acknowledged receipt of the bank instruction but failed to do anything with it - and then had the cheek to send me an overdue notice. For the other two properties, the management company sent me the wrong forms which I have successfully sat on since early this year;
2. Trivial investments to sell #1: I have very small parcels of shares in four companies listed in Australia or New Zealand. Two of the shares were allocations by insurance companies, one was a spin off from another company I held shares in and the fourth is a company which has teetered on the verge of insolvency for a long time (and serves as a hard lesson about the need to cut losses when things start to go wrong). I will sell all of these. For at least one of the shares, this will require reactivation of a dormant account with a local broker;
3. Trivial investments to sell #2: a couple of years ago I made some small investments in commodity ETCs. The amounts are not meaningful. I need to either dispose of these or increase the investment to a meaningful amount. In either case, the account is now dormant and needs to be reactivated;
4. Idle cash #1: I have some cash sitting in a bank account in Australia earning zero. It's not a lot but I will be sending this to a broker for future investment;
5. Idle cash #2: one of the Hong Kong accounts into which my tenants pay rent and I use to pay mortgage balances has built up to a modest sum. Absent any better ideas, at the very least I should make a partial early repayment of one of my mortgages. Around 1% (being the cost of the mortgage) is better than zero and it will either improve cash flow or reduce the term of the mortgage by a meaningful amount.
I have set myself a goal of getting all of these resolved by the end of November. Reactivating the dormant accounts will take the longest.
1. Auto-pays to implement: I have three properties in Hong Kong where the management fees are not on auto-pay. This means I have to sit down and manually transfer funds or write a cheque each month. My previous attempts to get these three payments on auto-pay failed. One management company acknowledged receipt of the bank instruction but failed to do anything with it - and then had the cheek to send me an overdue notice. For the other two properties, the management company sent me the wrong forms which I have successfully sat on since early this year;
2. Trivial investments to sell #1: I have very small parcels of shares in four companies listed in Australia or New Zealand. Two of the shares were allocations by insurance companies, one was a spin off from another company I held shares in and the fourth is a company which has teetered on the verge of insolvency for a long time (and serves as a hard lesson about the need to cut losses when things start to go wrong). I will sell all of these. For at least one of the shares, this will require reactivation of a dormant account with a local broker;
3. Trivial investments to sell #2: a couple of years ago I made some small investments in commodity ETCs. The amounts are not meaningful. I need to either dispose of these or increase the investment to a meaningful amount. In either case, the account is now dormant and needs to be reactivated;
4. Idle cash #1: I have some cash sitting in a bank account in Australia earning zero. It's not a lot but I will be sending this to a broker for future investment;
5. Idle cash #2: one of the Hong Kong accounts into which my tenants pay rent and I use to pay mortgage balances has built up to a modest sum. Absent any better ideas, at the very least I should make a partial early repayment of one of my mortgages. Around 1% (being the cost of the mortgage) is better than zero and it will either improve cash flow or reduce the term of the mortgage by a meaningful amount.
I have set myself a goal of getting all of these resolved by the end of November. Reactivating the dormant accounts will take the longest.
Wednesday, September 08, 2010
Vodone purchased
This morning I added handset manufacturer Vodone (82) to the private portfolio paying HK$2.36 per share. At first glance the stock appears rather expensive, selling on a trailing PE of around 44x. However, this is misleading. A crude annualisation of interim result, drops the PE for the current year to around 26x (which is still expensive). However, revenues and earnings are expected to increase significantly following the completion of a recently announced acquisition of a mobile handset design house (Shenzhen Tastech) through a JV.
The balance sheet is clean with no material debt as at the last accounts date.
The balance sheet is clean with no material debt as at the last accounts date.
The decoupled property world
A selection of headlines and quotes from today's SCMP Property Post show just how much divergence there is in property markets around the world:
Hong Kong: "fierce bidding at land auctions shows developers are expecting the market will maintain its [upwards] momentum"
Thailand: "Huge demand sustains Bangkok boom"
Singapore: "Singapore prices to keep rising"
Malaysia: "Property mania brewing in Malaysia"
Canada: "Canada's cooling market may avoid crash"
United States: "US faces grim choice over owners as home sales and prices plummet"
Britain: "British prices fall quicker than expected and building slows"
It's also fair to say that the markets which are experiencing property price increases are those where the governments have spending under control to a far greater degree than those which are suffering. Of course, there are other factors at work as well.
Hong Kong: "fierce bidding at land auctions shows developers are expecting the market will maintain its [upwards] momentum"
Thailand: "Huge demand sustains Bangkok boom"
Singapore: "Singapore prices to keep rising"
Malaysia: "Property mania brewing in Malaysia"
Canada: "Canada's cooling market may avoid crash"
United States: "US faces grim choice over owners as home sales and prices plummet"
Britain: "British prices fall quicker than expected and building slows"
It's also fair to say that the markets which are experiencing property price increases are those where the governments have spending under control to a far greater degree than those which are suffering. Of course, there are other factors at work as well.
Monday, September 06, 2010
A series of repairs and some leases up for renewal
After a relatively charmed run, in the last few weeks I have been hit by a series of repair bills:
1. replacing two airconditioning units
2. replacing a hot water cylinder
3. fixing a broken water pipe that was leaking into the common areas
4. cleaning four airconditioning units
5. a leak in the kitchen - source unknown
I have already paid for #1 and #4 and expect to pay the rest this month.
I also have two leases expiring soon - one at the end of September and the other in late October. Both tenants are looking at alternatives so the possibility of some vacancies is there which would bring to an end a very long series of months with positive cash flow. One of the tenants who is looking at other properties to rent has asked for an extension for a "month or two" which I have refused. I either want them to be out by the end of October or to commit to remaining in place until at least the end of March - finding tenants around Christmas time and around Chinese New Year has, in the past, been problematic. If I must have a vacancy, I would prefer a short one.
1. replacing two airconditioning units
2. replacing a hot water cylinder
3. fixing a broken water pipe that was leaking into the common areas
4. cleaning four airconditioning units
5. a leak in the kitchen - source unknown
I have already paid for #1 and #4 and expect to pay the rest this month.
I also have two leases expiring soon - one at the end of September and the other in late October. Both tenants are looking at alternatives so the possibility of some vacancies is there which would bring to an end a very long series of months with positive cash flow. One of the tenants who is looking at other properties to rent has asked for an extension for a "month or two" which I have refused. I either want them to be out by the end of October or to commit to remaining in place until at least the end of March - finding tenants around Christmas time and around Chinese New Year has, in the past, been problematic. If I must have a vacancy, I would prefer a short one.
Another small speculation
On Friday I purchased a few shares in Midland IC&I (489) at HK$0.05. I sold the shares this morning at HK$0.05, netting a profit after expenses of around 1.5%. Given the small amount of money involved, the gain will just about cover my lunches for this week. Fun, but hardly of any financial significance.
Friday, September 03, 2010
A small day trade
I executed a small day trade, buying Solartech (1166) at HK$0.02 on Wednesday and selling it on Thursday morning at HK$0.021 for a profit after transaction costs of 3.2%. OK, this was only a very small amount of money, but the profit was still enough to cover my lunches for this week. Needless to say, I have no intention of committing more than relatively trivial sums to this sort of speculation.
Incidentally, if I had sold a few hours later on Thursday when the shares were trading at HK$0.023 and HK$0.024, the profit would have been much more impressive (12-17%).
Incidentally, if I had sold a few hours later on Thursday when the shares were trading at HK$0.023 and HK$0.024, the profit would have been much more impressive (12-17%).
Another nomination for "death of equities" headline
This article from USA Todayhas been picked up by a few bloggers.
While the article itself is not completely unbalanced (the quotes from Jim Paulsen give one view on what it would take to set off the next bull market), the most interesting (and depressing) reading was in the comments. The degree of negativity was enormous: repeated allegations of the market being rigged by the "big guys", allegations that the regulators do nothing to "protect the little guy" etc etc etc. The sentiment was either that people would never invest in stocks again or would only invest when things were better - overwhelmingly so. I really struggle to understand why people would prefer to invest "when things are better" - that amounts to a statement that people would rather pay higher prices than lower prices which defies all common sense.
While it will always be true that prices can go lower and it is very true that the American economy has some very serious issues (government debt, deficits, consumer debt, regulation that is strangling the small businesses that drive job creation, a misplaced entitlement mentality and a lack of political will to do anything to resolve these and other problems), it is also true that America has a great record of dealing with economic adversity.
Looking at a few facts - on both a trailing and a forward looking basis, American stocks are trading at below their long run averages, there are many world class companies with very strong balance sheets that are selling at prices which (IMHO) are attractive on a valuation basis and Americans also have the ability to invest in the world's lowest cost index tracking funds. I wish Vanguard would let me invest with them.
Looking at the alternatives, bonds are selling at very low yields. You have to get a fair distance out along the yield curve to match inflation and even further if you have to pay tax on the interest income. Bonds have done well but yields are now well below equity earnings yields. Real estate would have to be attractive given the number of forced sales going on (but clearly involves a lot of homework and more work generally than other investments). Bullion has also done very well but is more speculative given that the price largely depends on sentiment and there is an absence of valuation parameters which can be applied.
Historically, going against the crowd and investing in the most unwanted asset class has often turned out to be a sound move.
None of this is to say that equity prices cannot go lower. They can. But given current sentiment and current valuations and a willingness to ride out the volatility that is inherent in the equity markets (for years if necessary), equities look a pretty good bet at the moment.
Of course, since I am heavily invested in equities perhaps my perception is less than fully objective.
While the article itself is not completely unbalanced (the quotes from Jim Paulsen give one view on what it would take to set off the next bull market), the most interesting (and depressing) reading was in the comments. The degree of negativity was enormous: repeated allegations of the market being rigged by the "big guys", allegations that the regulators do nothing to "protect the little guy" etc etc etc. The sentiment was either that people would never invest in stocks again or would only invest when things were better - overwhelmingly so. I really struggle to understand why people would prefer to invest "when things are better" - that amounts to a statement that people would rather pay higher prices than lower prices which defies all common sense.
While it will always be true that prices can go lower and it is very true that the American economy has some very serious issues (government debt, deficits, consumer debt, regulation that is strangling the small businesses that drive job creation, a misplaced entitlement mentality and a lack of political will to do anything to resolve these and other problems), it is also true that America has a great record of dealing with economic adversity.
Looking at a few facts - on both a trailing and a forward looking basis, American stocks are trading at below their long run averages, there are many world class companies with very strong balance sheets that are selling at prices which (IMHO) are attractive on a valuation basis and Americans also have the ability to invest in the world's lowest cost index tracking funds. I wish Vanguard would let me invest with them.
Looking at the alternatives, bonds are selling at very low yields. You have to get a fair distance out along the yield curve to match inflation and even further if you have to pay tax on the interest income. Bonds have done well but yields are now well below equity earnings yields. Real estate would have to be attractive given the number of forced sales going on (but clearly involves a lot of homework and more work generally than other investments). Bullion has also done very well but is more speculative given that the price largely depends on sentiment and there is an absence of valuation parameters which can be applied.
Historically, going against the crowd and investing in the most unwanted asset class has often turned out to be a sound move.
None of this is to say that equity prices cannot go lower. They can. But given current sentiment and current valuations and a willingness to ride out the volatility that is inherent in the equity markets (for years if necessary), equities look a pretty good bet at the moment.
Of course, since I am heavily invested in equities perhaps my perception is less than fully objective.
Tuesday, August 31, 2010
Monthly Review - August 2010
August was a poor month for financial progress with losses on the equity portfolio being compounded by adverse currency movements as the USD rose. While these losses were more than offset by positive cash flow on my properties, a reasonable savings rate and a small tax refund, I transferred some money to mrs traineeinvestor which resulted in an overall small decrease in net worth this month.
Here are the details:
1. my Hong Kong equity portfolio declined. I purchased some more shares in CNOOC and some shares in BHP
2. my ETFs declined in line with their respective markets (Hong Kong, Russia, Taiwan and India)
3. my commodities were mixed and netted out for a small loss (ETF, silver, HOGS, NICK)
4. all of my properties are let, are producing a positive cash flow and making a positive contribution to my net worth. Although there were no repair bills this month, I will be hit hard next month as two properties have suffered from leaks and a third requires an air conditioning unit to be replaced. On the positive side, one lease has been renewed for another two years at a slight increase in rent
5. currency movements were adverse, as the AUD and NZD depreciated against the USD
6. savings were positive with income being average and expenses also being average. Net savings were reasonably good
7. I transferred some money to mrs traineeinvestor for tax planning purposes. As this is an outright transfer it represents a reduction in the net worth of the private portfolio
My cash position was reduced due to the equities purchased and the transfer to mrs traineeinvestor and now represents about 9 month's worth of expenses.
For the month, net worth decreased 0.07%. The year to date increase is 11.1%.
My target retirement window remains sometime between early 2012 and the end of 2013
Here are the details:
1. my Hong Kong equity portfolio declined. I purchased some more shares in CNOOC and some shares in BHP
2. my ETFs declined in line with their respective markets (Hong Kong, Russia, Taiwan and India)
3. my commodities were mixed and netted out for a small loss (ETF, silver, HOGS, NICK)
4. all of my properties are let, are producing a positive cash flow and making a positive contribution to my net worth. Although there were no repair bills this month, I will be hit hard next month as two properties have suffered from leaks and a third requires an air conditioning unit to be replaced. On the positive side, one lease has been renewed for another two years at a slight increase in rent
5. currency movements were adverse, as the AUD and NZD depreciated against the USD
6. savings were positive with income being average and expenses also being average. Net savings were reasonably good
7. I transferred some money to mrs traineeinvestor for tax planning purposes. As this is an outright transfer it represents a reduction in the net worth of the private portfolio
My cash position was reduced due to the equities purchased and the transfer to mrs traineeinvestor and now represents about 9 month's worth of expenses.
For the month, net worth decreased 0.07%. The year to date increase is 11.1%.
My target retirement window remains sometime between early 2012 and the end of 2013
Monday, August 30, 2010
BHP purchased
This morning I added BHP to the private portfolio, paying AUD37.65 per share. No only does it add some further diversification to the portfolio (although, I suspect, still correlated to some extent with the local market here in Hong Kong), it also looks relatively cheap given the very significant free cash flow the company is generating, the relatively controlled capex and the undergeared balance sheet (the company would have net cash next year in the absence of the Potash bid succeding or a similar investment project). In my view, the market is at least partly pricing in the possibility of MRRT being introduced and/or taking a negative view on the Potash bid.
Contrary to some comentators I have, so far, been impressed by both the logic of the bid for Potash and the way in which the bid has been handled. While the possibility of a higher bid being made exists, I do not belive that BHP would pay a price which was not value accretive to BHP shareholders. If the Potash bid fails, the possibility of a share buy back or special dividend exists.
The dividend yield of 2.7% is rather modest by Australian standards.
Contrary to some comentators I have, so far, been impressed by both the logic of the bid for Potash and the way in which the bid has been handled. While the possibility of a higher bid being made exists, I do not belive that BHP would pay a price which was not value accretive to BHP shareholders. If the Potash bid fails, the possibility of a share buy back or special dividend exists.
The dividend yield of 2.7% is rather modest by Australian standards.
Thursday, August 26, 2010
Book Review - The Ascent of Money
The Ascent of Money is a brief history of some of the key moments in the development of the business of finance as we currently know it. The author is academic Niall Ferguson.
Ferguson's central theme running through the book is that finance was a key driver of at least a number of key developments and events in human history. In his own words:
"poverty is not the result of rapacious financiers exploiting the poor. It has much more to do with the lack of financial institutions, with the absence of banks, not their presence"
I very much agree with this proposition (but, for all practical purposes, he was preaching to the already converted when I picked up the book).
Ferguson's writing style is pleasant to read and sufficiently lively to make his account of the selected samples of history engaging. It took me about three days to read the book while I was on holiday.
As a whole I enjoyed the read and thought it was an excellent and well presented work on the subject.
However, I do have a few minor quibbles. The first is that, as someone who was already familiar with the subject matter, I would have enjoyed more detail and....well just more. It was very readable. Fortunately, there is a comprehensive list of source material in the book.
The second issue is that while the book is understandably focused on the causes and effects of financial crisis, I felt that insufficient attention was given to the role of politicians, regulators and governments generally in creating or facilitating the conditions in which financial disasters occurred.
The last point is that his attribution to the economic downturn which Hong Kong experienced beginning in 1997 to the resumption of PRC sovereignty over Hong Kong is simply wrong. The Asian crisis and an administrative decision to hugely inflate the supply of land for housing were two of the main factors which caused and exacerbated the downturn. Having lived through the experience, I saw nothing to suggest that changing the flags over government house had any bearing on the economic events at the time in the manner suggested.
Overall a great read and an important point which is well worth remembering when we consider how our financial lives should be regulated.
Ferguson's central theme running through the book is that finance was a key driver of at least a number of key developments and events in human history. In his own words:
"poverty is not the result of rapacious financiers exploiting the poor. It has much more to do with the lack of financial institutions, with the absence of banks, not their presence"
I very much agree with this proposition (but, for all practical purposes, he was preaching to the already converted when I picked up the book).
Ferguson's writing style is pleasant to read and sufficiently lively to make his account of the selected samples of history engaging. It took me about three days to read the book while I was on holiday.
As a whole I enjoyed the read and thought it was an excellent and well presented work on the subject.
However, I do have a few minor quibbles. The first is that, as someone who was already familiar with the subject matter, I would have enjoyed more detail and....well just more. It was very readable. Fortunately, there is a comprehensive list of source material in the book.
The second issue is that while the book is understandably focused on the causes and effects of financial crisis, I felt that insufficient attention was given to the role of politicians, regulators and governments generally in creating or facilitating the conditions in which financial disasters occurred.
The last point is that his attribution to the economic downturn which Hong Kong experienced beginning in 1997 to the resumption of PRC sovereignty over Hong Kong is simply wrong. The Asian crisis and an administrative decision to hugely inflate the supply of land for housing were two of the main factors which caused and exacerbated the downturn. Having lived through the experience, I saw nothing to suggest that changing the flags over government house had any bearing on the economic events at the time in the manner suggested.
Overall a great read and an important point which is well worth remembering when we consider how our financial lives should be regulated.
Tuesday, August 24, 2010
Equity put option written
This afternoon I wrote some put options against Hutchison Whampoa (13). HWL is a stock I already own (in fact it is my largest individual stock holding) and am happy to acquire more of with a view to expecting continued turn around in 3G and continued growth in the other core businesses.
Here are the details:
Underlying: Hutchison Whampoa (13)
Strike: $59.55
Market: $60.40
Maturity: 21/09/2010
Annualised yield: 25.2%
Effective purchase price if exercised: $58.28
Effective discount to market price if exercised: 3.5%
Here are the details:
Underlying: Hutchison Whampoa (13)
Strike: $59.55
Market: $60.40
Maturity: 21/09/2010
Annualised yield: 25.2%
Effective purchase price if exercised: $58.28
Effective discount to market price if exercised: 3.5%
Monday, August 23, 2010
More proposals to cool the property market
The latest discussion on ways to cool Hong Kong's property market has now turned to limiting foreign ownership - in particular by requiring that buyers of Hong Kong residential properties hold Hong Kong permanent ID cards. A more watered down version of the proposal would impose the restriction on smaller flats only (possibly those under some arbitrary threshold such as 800 or 1000 square feet (gross)).
While not as silly as the suggestion to impose a short term capital gains tax, this is still a bad idea:
1. it takes seven years of residence to be eligible to apply for a permanent ID card. It is unreasonable to expect people to have to wait 7+ years to buy their own home
2. the proposal is blatantly inconsistent with the governments immigration scheme based on capital investment
3. the proposal is inconsistent with Hong Kong's free market approach to regulation (as far as I am aware only entities licensed under the Broadcasting Ordinance have a foreign ownership restriction)
4. it ignores the real problem - a lack of supply of smaller and medium sized homes. Recent proposals to increase the supply of land are a better solution (but it will take time before the new supply of land translates into new homes for people to move into)
5. given that a lot of people buy their properties through companies, enforcing such a requirement would be a nightmare - given the volume of transactions a regime similar to the Broadcasting Ordinance is not a realistic proposition.
While not as silly as the suggestion to impose a short term capital gains tax, this is still a bad idea:
1. it takes seven years of residence to be eligible to apply for a permanent ID card. It is unreasonable to expect people to have to wait 7+ years to buy their own home
2. the proposal is blatantly inconsistent with the governments immigration scheme based on capital investment
3. the proposal is inconsistent with Hong Kong's free market approach to regulation (as far as I am aware only entities licensed under the Broadcasting Ordinance have a foreign ownership restriction)
4. it ignores the real problem - a lack of supply of smaller and medium sized homes. Recent proposals to increase the supply of land are a better solution (but it will take time before the new supply of land translates into new homes for people to move into)
5. given that a lot of people buy their properties through companies, enforcing such a requirement would be a nightmare - given the volume of transactions a regime similar to the Broadcasting Ordinance is not a realistic proposition.
Friday, August 20, 2010
A bad idea to cool the property market
Following the Hong Kong government's second batch of measures to cool Hong Kong's (allegedly) over heated property market there have been suggestions that Hong Kong should further cool the market by introducing a capital gains tax on non-owner occupied properties which are sold within a relatively short period of time after being purchased. The theory is that it will discourage speculators from pushing up prices.
This ranks as one of the silliest suggestions have I heard for a long time. The most immediate effect is that owners of properties who would be hit by the tax will simply keep their properties off the market until the holding period has expired. In effect, the tax would reduce supply. If I understand basic economics correctly, reduced supply should (all other things being equal) result in higher prices.
History has shown that capital gains taxes tend to push prices higher: as an example, share and property prices in Australia both increased when capital gains tax was first introduced.
Conceptually the idea will also have the effect of further concentrating an already overly narrow tax base - the bulk of the tax would fall on the same middle class which already contributes a disproportionate amount of Hong Kong's tax base.
This ranks as one of the silliest suggestions have I heard for a long time. The most immediate effect is that owners of properties who would be hit by the tax will simply keep their properties off the market until the holding period has expired. In effect, the tax would reduce supply. If I understand basic economics correctly, reduced supply should (all other things being equal) result in higher prices.
History has shown that capital gains taxes tend to push prices higher: as an example, share and property prices in Australia both increased when capital gains tax was first introduced.
Conceptually the idea will also have the effect of further concentrating an already overly narrow tax base - the bulk of the tax would fall on the same middle class which already contributes a disproportionate amount of Hong Kong's tax base.
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