Friday, August 31, 2012

Vodone sold - loss taken

Vodone (HK:82) has been one of my worst performing investments. Overnight the company released its interim results - not only did the results fail to meet my expectations, they were well below what the market was expecting. I was particularly concerned to see the huge drop in gross revenue, failure to grow the cash balance by more than the placing proceeds and the adverse impact of PRC government policies. While the company still has a large cash balance and no debt, I lack the confidence to continue with this investment and have sold my position. Time  to admit that I got this one wrong and move on.

With a sale price of HK$0.68, my net loss will be a little bit over 40% (assuming a very small cheque from the spin off).


Tuesday, August 28, 2012

Sinotrans Shipping purchased

Yesterday I added some more shares in Sinotrans Shipping (HK:368) to the portfolio. Reasoning is in my earlier post.

I paid HK$1.64 for the additional shares.

Monday, August 27, 2012

What could cause my retirement to fail?

Like many people, I tend to worry about things. As I get closer to bringing the working-for-a-living phase of my life to an end and the time at which I will no longer see my remuneration hitting the bank account at the beginning of each month, retirement related concerns have loomed large. The following is my review of the things which could cause my retirement to fail (either by forcing one or both of us to keep working or to take a material cut in our standard of living):

1. Illness, disability and infirmity: these things can happen to anyone. If I live long enough they probably will. The main safeguards here are (i) the financial over engineering built in to our finances (ii) we will have medical insurance for a time after I retire (shifting to a plan offered by my wife's employer if needed) (iii) Hong Kong's public health system is reasonably good (iv) hiring a full time domestic helper with experience in looking after invalids is both affordable and realistic and (v) the sorts of conditions which will result in increased spending on medical and support services will most likely result in reductions in spending elsewhere;

2. Children: we have two relatively young children and anticipate supporting them through to at least their mid-twenties. This is in the budget. They could end up costing us more than expected, especially if they have difficulties finding a good job after they complete their formal education. Our safeguards in this respect are (i) teaching them the value of good money management - being prepared to say "no" as and when appropriate (ii) we have not made any provision for the cost of our children to fall away. In effect, we have proceeded on the basis that we will have something of a windfall when the eventually fall off the family payroll;

3. Divorce: a major issue for some. I have no concerns at all on this front;

4. Financial misfortune: I have probably spent more time thinking about our finances than is healthy. While there are obviously a number of things that can go wrong and there is no way to make our finances proof against all possible forms of adversity, we have concluded that the combination of investing in a variety of risk assets (mostly property and equities), reliance on cash flow to meet expenses, 20% gross up on anticipated expenses and a degree of self-discipline on our spending should see us through most economic cycles, moderate inflation, moderate deflation and market volatility. There is less that can be done about hyperinflation, natural disasters and social dislocation events but I do intend to add a little bit more physical gold to the portfolio. Although completely unnecessary from a financial perspective, I will have an additional six months of work next year and Mrs Traineeinvestor wishes to continue her part time job - in effect we will not need to begin touching our savings until some time in 2014;

5. Boredom: The thought of mentally dying of boredom is something that causes real concern. It was, in fact, Mrs Traineeinvestor's only reservation about my intention to retire early (although I do not consider 47 an early age to retire). I have my bucket list so I can have no excuses in this department.

Did I miss anything?

Friday, August 24, 2012

Sinotrans Shipping purchased

Today I purchased shares in Sinotrans Shipping (HK:368). The shipping industry is facing a very poor operating environment characterised by excess supply, unfavourable conditions for international trade and increasing cost pressures. As a result earnings have declined and share prices have followed. Sinotrans is no exception and its shareholders have been sharing the pain.

However, the company is is sitting on approximately USD880 million in cash which is slightly higher than the market capitalisation - in effect the shipping fleet is being valued at zero. This strikes me as excessively bearish even if the company does end up losing money in the second half of the year (it made a small profit in the first half). I am not expecting any dividend in the current year.

I paid an average of HK$1.68 per share.

As an aside, I spent some time looking at the PRC gold mining companies but could not get comfortable on the mine life issue so will not be purchasing.

Politics just got even more surreal than usual

The FT carried a story about the Republican party setting up a commission to consider putting America back on a gold standard.

While this is obviously a sop to the Ron Paul supporters and, even if Romney wins and even if such a commission is established, it won't mean anything since the commission will only have the power to make recommendations. As any student of economic history can point out, the gold standard almost certainly contributed to exacerbating the depth and duration of the Great Depression and other economic contractions that preceded it). While the chances of America readopting a gold standard are about zero, the mere fact that the issue has been raised at all speaks volumes about the politics of the party that puts such a proposal on its agenda.

I maintain that "none of the above" should be an option on all elections.

Of course, if it did happen, the price of gold (as measured in dollars) would skyrocket, gold mining shares would go through the roof and the pace of environmental destruction would accelerate as more mining projects become economically viable, there would be the inevitable rounds of regulation as countries competed to build their gold reserves and, most likely, regulations restricting ownership and export of gold and, possibly, outright confiscation.

Thursday, August 23, 2012

Retirement - getting closer

After a series of discussions with my immediate boss, we have agreed that I will retire either end of March or end of June 2013. Previously, I had been thinking about either end of 2012 or early 2013 but have been more or less persuaded that early 2013 makes more sense for a variety of reasons which I will not go in to here.

This means that I will be earning and saving for an additional 3-6 months. I was already going to be in a position where I would have too much cash at the commencement of my retirement and now I will have even more. Leaving more cash in a bank account than is needed to ride out potential periods of poor investment returns is a bad idea in an inflationary environment. So, what to do with the additional money? I could, of course, simply add to the portfolio or knock a hole in one of the mortgages, but where is the fun in that? Besides, the mortgages are only costing us 1% pa and I expect zirp to be with us for some time.

I have already decided to allocate some to physical gold. I am also considering a few other options: more wine (prices for first growths have fallen in recent times), old maps (prices have gone up a lot), stamps (ditto), rare books (ditto) and art (ditto). With the possible exception of gold, I can't really regard any of these as proper investments - not only is my knowledge limited but their markets are neither transparent nor efficient and suffer from asymmetric information issues. There is also a storage issue for some of them. That said, I would expect whatever I buy to provide both an element of interest and act as a possible long term store of wealth.

I have considered increasing my support of some charities but feel more comfortable delaying that until I am more settled into the retirement and have got past the initial sensation of no longer having a pay cheque coming in each month.

A small confession....

I have made no secret that I am not a fan of gold as an investment. No cash flow. No real fundamentals to speak of. It just looks pretty and it endures.  But I have been buying small amounts of physical gold (1 oz Maple Leafs) every now and again for some time as part of a "just in case" strategy. I purchased again this morning. The total amount is not large - only the equivalent of one of the smaller positions in individual equities and about a fifth of the value of the paper silver - and, to date, it has been kept off the balance sheet (like my bonded wine and a few other things).

Why blog about this now?

With retirement now quite close (updated post to follow) I have realised that I expect to retire with slightly more than my financial needs require and am looking for some assets that provide either a "just in case" degree of protection or an element of interest (like the wine does). I can see myself adding a bit more every now and again not because I believe it is going to be a great investment but to provide a little more diversification and a small degree of insurance in case things go badly wrong elsewhere.

Wednesday, August 22, 2012

China Blue Chemical purchased

China Blue Chemical (HK:3983) shares took a tumble this morning after the release of interim results that were viewed by the market as being disappointing. Based on my read of the results, the company is still in very good shape - the annualised PE is at or little below 10x, the cash from from operations is still very good and the balance sheet is very robust (the company has a large amount of net cash). While some of the factors which contributed to the decline are likely to remain relevant for some time, others would appear to be cyclical. Lastly, the company is operating in an industry which should be supported by government policies.

I paid HK$4.59 for the additional shares.

Friday, August 17, 2012

China Construction Bank purchased

This afternoon I also added a few more shares in China Construction Bank (HK:939) to the portfolio.  It offers a 5%+ yield and is selling on multiples (price to book, PE and dividend yield) which are well below long term averages - in effect assuming NIM compression, slow down in loan growth and/or write downs will be material.

I paid HK$5.39 for the additional shares.

As an aside, I need to start looking for some additional shares to add to the portfolio and (work permitting) hope to spend some more time reading annual reports etc over the next few weeks.

China Metal Recyling purchased

Today I placed several orders for small numbers of additional shares in some of the existing portfolio companies. So far, the only order which got filled was for China Metal Recycling (HK:773). A combination of a strong balance sheet, a good story (national expansion and industry consolidation) and a good yield make the stock attractive. I do expect some margin compression to show when the next results are released.

I paid HK$5.86 for the additional shares.

Monday, August 13, 2012

Annuities just became less attractive

The UK's Daily Telegraph carried this article explaining why a court ruling will mean that men will get smaller annuities going forward.

Leaving aside the legal and social issues, the implication is very simple: if you are a man, then when you buy an annuity which falls under the new rules, you are effectively subsidising the women who buy annuities. This is because men (on average) will die at younger ages than women (on average) and annuities are priced based on the average life expectancy of the people in the relevant demographic. In effect, male purchasers who buy annuities will be paying for something that they will not be getting.

Since buying an annuity was always a somewhat marginal decision effectively involving accepting lower investment returns as the price for longevity insurance, the additional cost may well be enough to tip the balance against purchasing annuity. If I ever get to the point where I would consider an annuity, I will be asking some very pointed questions about the basis on which the quotes given to me are made.

Put simply, annuities just became even less attractive.

Since a lot of other goods and services effectively involve averaging risk across different groups of people (e.g. health insurance), I don't actually have an issue with the court decision itself - it's only the implications for myself as an investor that I am concerned with.

Thursday, August 09, 2012

Tontine Wines purchased

This morning I purchased a few more shares in Tontine Wines (HK:389) to the portfolio. Although I expect some margin contraction during the current financial year, the company is still growing its output and expanding its distribution capabilities. The balance sheet is strong (although cash will be run down as the company expands) and I am optimistic that the 4.2% trailing dividend yield can be at least maintained. Although the company will not be a major beneficiary of the latest policy initiative (which focuses on red wine), there may still be some support from the policy.

I paid HK$0.69 for the additional shares.

Cheering for Standard Chartered

Having read a considerable amount of the press coverage on the allegations being made by a US regulator against Standard Chartered Bank, one can only conclude that this is yet another example of American politics in action - a series of allegations made which are either completely unsubstantiated or blown wildly out of all proportion even before a proper investigation has been made. The spirit of McCarthyism is alive and well.

Hopefully Standard Chartered Bank will continue to vigorously defend themselves (unlike HSBC which tamely rolled over) and all the non-US governments and regulators which failed to stand up to intrusions on their sovereignty like the PATRIOT Act.

I don't own shares in SCB but am very tempted to go and buy a few to show moral support for the latest victim of the US regulators and politicians.

It is long past time that the rest of the world told America's political grandstanders to foxtrot oscar.

Wednesday, August 08, 2012

The impact of inflation (again)

I found this handy calculator for showing the impact of inflation on asset values, expenses etc. There is also lots of other useful data on the site.

From a retirement perspective, I am somewhat paranoid on the effects of inflation on my ability to sustain our desired standard of living over what I hope will be four decades of not participating in the work force. Several years of watching governments print ridiculous amounts of money to cover their unsustainable spending can do that to anybody.

Extrapolating backwards and assuming that the next forty years will collectively be a repeat of the last forty years (who knows?) would suggest that I can look forward to 449% cumulative inflation over that time period. Put differently, in forty years time, I will need $5,489, 904 to have the equivalent purchasing power of $1,000,000 today. That's actually a number that I find quite scary and explains my preference for tangible and risk assets and dislike for perpetually depreciating paper.

The calculator uses as US data and inflation in many other places has averaged a bit higher (there is also a series of data for Hong Kong on the HKMA website but it does not go back as far) AND uses CPI numbers which represent a basket of goods and services which will be different from my own expenses. Accordingly, I have used different numbers when doing my own projections.

Thursday, August 02, 2012

Monthly Review - July 2012

July was a month of solid financial progress with value of the portfolio increasing with gains in my Hong Kong equities and favourable FX movements accounting for most of the increase. Positive cash flow from the properties and positive savings added to the increase in net worth.

Here are the details:

1. my Hong Kong equity portfolio appreciated. I made small additions to my positions in CCB, China Blue Chemical, Hang Seng Bank, Sinopec and China Metal Recycling. I sold my shares in Varitronix;

2. my AU/NZ equities appreciated; ETFs rallied in line with the local markets;

4. my commodities were flat with a small gain in silver being offset by falls in NICK and HOGS;

5. all of my properties were occupied with all tenants paying on time. There were two small repair bills and one tenant reported a leak during the typhoon which will require some sealing work to be done;

6. currency movements were positive, as the NZD and AUD rose against the HKD/USD;

7. my position in bonds remains small. I purchased some RMB sovereign bonds;

8. There were no open derivative contracts;

9. savings were solid with good income and moderate expenses. A family holiday in Thailand came in under the accrued expenditure.

My cash position increased due to new investments being less than savings, cash flow from properties and dividends received. I currently hold 43 months of expenses in HKD cash or equivalents. This is above my target floor of 24 months.

For the month, my net worth increased by 2.5%. The year to date increase is 15.0%. I remain on track to retire at the end of 2012.

China Metal Recycling purchased

This morning I added a few more shares in China Metal Recycling (HK:773) to the portfolio. The company offers a reasonable balance sheet, good operating cash flow, nice dividend yield on around 5.5% and has a good story to tell (industry consolidation and national expansion). I also like that the controlling shareholder has been topping up his investment either by new purchases or through the dividend elections.

I paid HK$5.77 for the additional shares.

RMB sovereign bonds purchased

Having been on the road for most of the last two and a half weeks on a very hectic schedule (three countries, four cities and more air miles than I care to think about), I took a short break from a few things, including updating this blog. That said, there wasn't much to report.

The only investment related activity (apart from a few dividends hitting the bank account) was the subscription for a small quantity of RMB sovereign bonds. These will not be a great investment (2.38% is a negative real return) but it's better than putting the money on deposit with a bank in Hong Kong and, although I could get a bit more if I opened an account across the border, the additional costs and the inconvenience of doing so would outweigh any benefits.