Tuesday, April 26, 2011

Book review: How to Get Lucky

Max Gunther's How to Get Lucky was published in 1986 and represents and attempt to identify character traits and habits that differentiate the "lucky" from the "unlucky". Gunther identifies 13 such techniques:

1. knowing the difference between planning and luck - understanding that all the planning in the world does not make an investment a sure thing, especially where random chance has a role to play

2. finding the fast flow - the importance of widespread contacts and weak social links in generating opportunities

3. risk spooning - only taking risks which are appropriate and avoiding risks which offer only limited upside to the the amount risked or ventures which have potentially disastrous consequences

4. run cutting - not expecting lucky streaks to run forever, or even for a very long time

5. luck selection - cutting losses and walking away from situations which offer limited upside

6. the zig zag path - goal orientation is not always a good thing. Changing course, sometimes often, can be a good thing

7. constructive supernaturalisim - religion, superstition and the occult do not determine outcomes, but if they can help moving from a state of indecision they can be helpful

8. worst case analysis - knowing the downside and how to deal with it if it eventuates

9. the closed mouth - bad mouthing people or committing to a position unnecessarily can be damaging to future prospects

10. recognising a nonlesson - understanding that just because something worked once, does not mean it will do so again. In other words, correlation does not equal causation

11. accepting and unfair universe - life is not fair. Accept it and move on

12. the juggling act - having multiple ventures will keep you busy but increases your potential opportunities

13. destiny pairing - finding the right partner, mentor etc is sometimes critical

While Gunther does rely more on anecdotes than statistical data than I would prefer, he does in places support his thesis by reference to experts in various fields. While it falls short of being definitively persuasive, How to Get Lucky certainly makes for interesting and entertaining reading.

Thursday, April 21, 2011

China Vanadium purchased

This morning I added China Vanadium (aka China VTM) (HK:893) to the private portfolio, paying HK$3.72 per share. The share price overran my limit resulting in my order being only partially filled.

The company is selling at well below market averages in terms of forward looking PE and operating cash flow (comparable to much larger international miners such as BHP (which I also hold) and Rio Tinto. The physical location of the company's operations should also make it a beneficiary of the industrialisation and development of China's west.

The company has a meaningful amount of net cash on the balance sheet to fund future expansion.

The only negative is the rather low dividend yield (1.6% trailing).

Wealth surveys - a consistent picture

There are a number of publicly available surveys of wealth. Some of the better known examples include:

1. the Merrill Lynch Cap Gemini World Wealth Report - focusing on global HNWIs and UHNWIs using thresholds of USD1.0 million and USD30 million in investable assets

2. the Barclays UK Wealth Map - focusing on UK HNWIs and UHNIs with thresholds of GBP1.0 million and GBP5 million in investable assets

3. the US Trust Insights on Wealth and Worth - focusing on "wealthy Americans" with USD3 million in investable assets

Although each of these reports focuses on a different segment of the market and uses data prepared at different times, they do present some consistent themes:

1. although the wealthy took substantial financial losses during the financial crisis, they have recovered well. This suggests (and there is some useful data in the Merrill Lynch Cap Gemini report) that the wealthy have considerable exposure to risk assets and/or income streams which considerably exceed their living expenses;

2. while the number of HNWIs and UHNWIs is growing (in spite of the dip caused by the financial crisis) and is expected to grow further as the developing world plays catch up with the developed world, the absolute number of HNWIs and UHNWIs as a percentage of the total population remains relatively small, stressing just how difficult it is to achieve that status. As and aside, this should make it pretty obvious that higher taxes on the rich alone cannot close the spending deficits that a number of countries currently face;

3. as a generalisation, very few of the HNWIs and UHNWIs are young. It takes time for most people to accumulate that kind of wealth. Those who manage to amass a fortune at a relative young age are very much a minority. For most of us, it will take many years of perseverance and self discipline to get to HNWI status;

4. a million dollars isn't what it used to be. Inflation is very real, so it is no surprise that the number of people who are, on paper at least, HNWIs is growing. The reality is that, absent additional income streams, a net worth of USD1.0 million will probably only generate a perpetual inflation adjusted income stream of around USD30-40,000 (before tax). Even if you already own your own home outright, in most developed markets that level of income puts you firmly at the bottom end of the middle class. If you want to live a lifestyle comparable to the millionaires of popular imagination you will need an awful lot more than that.

Tuesday, April 19, 2011

Standard and Poor's behind the curve - again

Yesterday, rating agency Standard & Poor's lowered the United States' long term outlook to "negative" from "stable", citing concerns over the growing deficit. S&P said there was a one in three chance that the United States would lose its top investment grade rating for long and short term debt within two years.

This comes after years of debate in the media and over the longer term impact of the massive deficits and ballooning debt levels, ineffectual and largely meaningless political debate over the ways and means to cut the deficit and a very noticeable rise in global inflation as the Fed continues to debase the world's reserve currency by printing money to fund the politically insatiable demand for unsustainable spending programmes.

S&P is doing no more than acknowledge a reality that the rest of the world has been talking about for years.

America has a spending problem (as do many other countries), not a revenue problem. So far, they have failed to take any meaningful steps to address the problem. The token steps taken so far are largely at the expense of those with limited political power - future taxpayers who will be tasked with the burden of paying for past and present promises made to today's voters - and the very small minority of citizens who pay meaningful amounts of tax. Quite frankly, I feel very sympathetic towards the younger generations who will start life burdened by ridiculous student loans, the higher taxes necessary to pay for the debt and entitlements incurred up by previous generations and the lack of many of the benefits to which their elders have become entitled.

At some point, the perpetual debt system will come under pressure and that pressure will come in the form of either rising interest rates as lenders become increasingly reluctant to invest in a depreciating currency or higher inflation as the country the real value of its current obligations and future commitments continue to be devalued as a matter of policy.

Quite frankly, I'd like to see America's credit rating decline - nothing else has sent the politicians the message that they cannot keep writing empty cheques forever.

Saturday, April 16, 2011

Money getting a little less cheap

Friday saw HSBC and DBS join the ranks of banks raising the interest rate on new mortgages. The new benchmark for HIBOR linked mortgages is now around HIBOR plus 1.75 per cent, making the effective interest rate 1.95 per cent.

Funding pressures have been blamed for the increase - apparently banks are having difficulty in attracting deposits. Given that I have seen zero evidence of deposit rates increasing and the banking industry is still showing a healthy loan to deposit ratio, this explanation is, at best, somewhat hard to accept.

In any event the rates have gone up but:

1. The increase has no bearing on existing loans - HIBOR itself has not changed

2. Borrowing is still cheap. With inflation (as measured by CPI) still well above 3 per cent, the real cost of funding is still negative

3. The availability of funding is a greater constraint on investing than the price paid for debt - banks are using valuations which are generally below market and require both high deposits and a healthy margin of safety when evaluating borrowers' ability to repay

4. The increase in borrowing costs will help improve banks' NIM, but given that the increase will only apply to new loans, it will be a while before there is a meaningful impact on bank profits

5. There will be no impact for the well heeled cash buyers who make up a sizable part of the market.

The bottom line is that the interest rate increase is unlikely to have much impact in and of itself. Of greater significance is the question of whether this is the beginning of both a trend of rising interest rates and other measures which will make property less attractive as an investment asset class. With the former, events in the US will have as much, if not more,impact than local events. As to the latter, the biggest issue is the government controlled supply of land, with other government initiatives such as increased stamp duty and the continued demand from PRC investors.

So far, I see no reason to change my strategy of holding my properties for the longer term. The incentive for not paying off mortgages early just got stronger.

Thursday, April 14, 2011

Positive credit sharing

Hong Kong has finally adopted a regime allowing banks to share positive credit data - essentially the details of each loan or credit facility taken out.

Historically, banks were limited to providing negative credit data to the credit agency which meant that they had difficulty in verifying the true amount of existing indebtedness of loan applicants. The sharing of positive credit will (supposedly) allow banks to make better credit decisions. Also by making it harder for people to lie about their finances, the risk of default should go down which means that the cost of borrowing should be lower.

While the first argument has merit, it is puzzling that the initial submissions of positive credit data require the affirmative consent of the data subjects (borrowers). In effect, there is no compulsion to agree to disclosure at this stage. Given the duration of the average mortgage loan, this makes the entire exercise somewhat flawed. Going forward, presumably loans will granted only on the basis that the borrower consents to sharing of positive credit data.

The second argument has either limited or no merit. Interest rates are unlikely to go much lower. What is more likely is that the banks will use the data to start charging higher interest rates to borrowers perceived as being less credit worthy.

For my part, I have decided to consent to sharing of my credit data. Firstly, I have nothing to hide as full disclosure was made each time I took out a loan. Secondly, it is possible that failure to disclose will make obtaining future finance either more difficult or more expensive.

As to the process, the banks must have really tried hard to make it as difficult as possible:

1. the consent form does not state any information about the borrower or the loan. I had to fill all that in myself;

2. each loan requires a separate consent;

3. there was no free post envelope;

4. where loans were made to companies, the consent from the company was required but not from the guarantor.

Points 1 and 2 are matters of inconvenience - and an invitation for errors and omissions to create more work for everyone. Point 3 was dealt with by dropping the completed froms in the cheque deposit box at the bank on the way to lunch. Point 4 is clearly a mistake and creates a presumption that information about guarantors will not be included in the data base (which seems wrong).

Thursday, April 07, 2011

Xtep purchased #2

This morning I doubled my investment in Xtep (HK:1368) paying HK$5.42 per share. The reasons for purchasing are essentially the same as they were in mid March when I made my original purchase at HK$4.94 . Since then the company has reported its results for 2010 (excellent) which included an increase in dividend. My average purchase price is HK$5.17 (including costs).

Wednesday, April 06, 2011

Book review - The Great Super Cycle

The Great Super Cycle: Profit from the Coming Inflation Tidal Wave and Dollar Devaluation is a book in two parts. In the first part, author David Skarica makes the case for the current financial problems of many developed countries, in particular the United States, to play out with an inflationary end game. The inflationary case is supported by historical precedent and reference to regularly recurring economic cycles. While the former argument is persuasive, I was left with reservations about the cycle based argument. My doubts were not so much because I don't believe in economic cycles (I do), but because I struggle with the idea that such cycles are as regular and predictable as the author claims.

That said, I tend to agree with the conclusion that we should expect higher inflation going forward than we experienced in the last 10-20 years as cash strapped governments continue to print money to pay for expenses that they cannot afford.

The second part of the book consists of a review of various investments which the author expects to perform well during the expected period of inflation. The usual suspects of precious metals, emerging markets etc are covered. I took nothing new from this part of the book and material of that nature has, as one would expect, dated very quickly.

While the first half of the book was well worth reading, there were a few typos which detracted from my overall favourable impression.

For a contrasting view (that the deleveraging of public and private sectors will lead to deflation) Endgame: The End of the Debt SuperCycle and How it Changes Everything byJohn Mauldin and Jonathan Tepper is well worth a read.

Small cap top ups

This morning I placed orders for incremental additions to positions in some high yielding small cap stocks. Two of those orders were filled:

1. Perennial (HK:725): purchased at HK$1.00 per share. This compares with my original purchase price of HK$0.84 per share; and

2. AUPU (HK:477): purchased at HK$0.87 per share. This compares with my original purchase price of HK$0.99 per share.

The total size of my investment in each of these companies remains small.

HK Government pushes inflation higher

The good people who comprise the Government of Hong Kong have been under more than a bit of pressure to ease the burden of inflation on the Hong Kong people. Demands and plans for discounts on transportation for low income earners being one example and the proposed HK$6,000 cash grant being another.

They have also made it a matter of policy to make home ownership more affordable.

So why did they increase rates (property tax) by 10%?

That 10% increase will hit home owners directly. It's inflationary and makes home ownership less affordable, not more. It also comes at a time when the Government is running a massive surplus and sitting on some of the world's biggest reserves (on a per capita basis). The Government needs less of our money, not more. It defies common sense.

PS - the 10% is on the rates before the concession is deducted. In effect this means that the percentage increase in the amount of rates actually paid is even higher.

Tuesday, April 05, 2011

Investor protection in Hong Kong - some changes needed

With the Lehman mini-bond saga showing signs of continued life in spite of the ridiculously overly generous latest settlement offer from the banks involved, I thought it would be time to set out my list of things which our government and our regulators could do to provide investors with better and more appropriate protection:

1. educate investors on taking responsibility for their own actions - if you don't read or don't understand the product, either don't buy it or don't complain when you lose money. For the most part, while I sympathise with anyone who loses money on their investments, there is no such thing as a risk free investment. If you want to invest you must accept the risk of loss - and this was clearly set out in the offering documents for the Lehman mini-bonds

2. ban derivative warrants - with the existence of the exchange traded options which offer better pricing for investors, there is absolutely no reason for the more expensive warrants to exist. Given the choice, no investor would choose to invest in warrants when options are available

3. require all investment products to have a clear statement of all fees and expenses which are paid in relation to the product - there are still far too many products where this information is not provided

4. abolish the MPF regime - the fees and expenses are simply too high for the current regime to be anything other than wealth destroying for investors. While a mandatory savings scheme is a good idea, it needs to offer more flexibility and lower costs than MPF. Something similar to the Australian or American regimes would be better for investors and, in the long run, taxpayers

5. ban insurance linked investment plans - there is no legitimate reason for such products to exist other than to hide the ridiculously high fees being charged. Why should a product which is demonstrably worse for investors than a combination of term life + a monthly contribution into a low cost fund be permitted to exist? At the end of the day only the ignorant, the stupid and those vulnerable to high pressure selling tactics would ever invest in such a product

6. ban placings by listed companies - placings are always done at a discount and always destroy value for existing shareholders. The inevitable fall in the share price after a placing is announced and the enthusiasm of institutional investors to participate in placings is conclusive evidence of the damage done to shareholders. Absent an insolvency situation, rights issues are the only acceptable way for listed companies to raise additional capital

7. confirm that rights issues by companies listed on overseas stock exchanges do not require registration under the Companies Ordinance - as a shareholder in a number of overseas listed companies I am fed up with some of those companies excluding Hong Kong shareholders from participating in those issues. Being excluded costs Hong Kong investors money

8. require persons selling overseas real estate to confirm that the prices being offered to Hong Kong investors are the same as those offered to local investors - the track record of properties being sold at higher prices in Hong Kong than in their local markets is pretty consistent and pretty awful

Any others?

CMB warrants sold - loss taken

A slightly late report. I sold my CMB warrants (HK:27619) on 1st April at HK$0.16 per warrant. This compares with thepurchase price of HK$0.196 paid back in January . The loss was about 19% (after costs). The primary reason for selling was the media reports about a potential need for CMB to raise additional capital. Capital raisings in Hong Kong are often done by way of a placement at a discount to market value which are detrimental and value destroying to existing shareholders.

Time to take the loss and move on. Fortunately, only a trivial amount of money was involved.

Saturday, April 02, 2011


I missed Perennial (HK:725) when I posted the scorecard for portfolio companies that reported their annual results for the December 2010 financial year end:

Perennial (HK:725): while it was a good result and the company looks very cheap on the surface in terms of trailing PE, trailing dividend I have some concerns. Although gearing is moderate, with small caps I am generally more comfortable with companies which have either very low debt or, better, none at all. Also, although the company actually managed to improve its gross operating margin, the margin is still relatively modest in the context of a company which is vulnerable to both inflationary pressures and RMB appreciation.