Thursday, January 30, 2014

Financial Review - January, 2014

January was an ugly month for my investments.

Net worth fell due to the sharp declines in the equity portfolio which were only partly offset by the combined effect of dividends, favourable FX movements, rental income and a small end-of-year balance received from my employer. Expenses were low.

Here are the details:

1. my Hong Kong equity portfolio took a beating during latter stages of the month, giving up the gains in early January and a bit more. The only dealings this month were a large investment in CNOOC (HK:883) and a very small one in China Starch (HK: 3838);

2. my AU/NZ equities declined - with most shares being down a bit. I made a small investment in Grange Resources (ASX: GRR); equity ETFs were down in line with the local markets. There were no new purchases;

4. my commodities were flat. Silver is my only position;

5. all of my properties were occupied with all tenants paying on time. There was one minor repair bill on the Hong Kong properties this month and will be several in February (either related to buildings which received notices for a mandatory window inspection or remedial work on a change of tenancy). One tenant has given notice to terminate her lease effective mid-February and a replacement tenant has signed up at the same rental. Another property will become vacant in mid-March;

6. currency movements were positive, with a small increase in the NZD outweighing a small fall in the AUD. I converted some HKD into AUD this month;

7. my position in bonds remains small. I purchased some short term CDs denominated in RMB;

8. expenses were low.

My cash position fell slightly. I currently hold 48.9 months of expenses in HKD cash or equivalents. This is now calculated on a different basis from last year - I have included the principal component of the mortgage on our home and added some additional near cash items to the calculation.

For the one month period, my net worth fell by 0.74%. The year to date decrease is 0.74%.

Thursday, January 23, 2014

CNOOC purchased

Yesterday I made a further investment in CNOOC (HK:883). My rather simplistic view is that the sell off in response to news that reserves are growing at a slower pace than previously predicted is overdone. The company has a very strong balance sheet, is selling on a single digit PE and offers an acceptable trailing yield of  3.6%.

I paid HK$12.84 for the additional shares.

Tuesday, January 21, 2014

Random thoughts on the barbarous relic

Okay, so Keynes was referring to the gold standard rather than gold itself, which is something I have been thinking about. While I am a long way from being a gold bug, the sell-off in the price of gold combined with gold getting an increased amount of press coverage for various reasons got me wondering whether it might be time to allocate more than a token amount of capital to this asset.

A collection of observations:

Potentially bullish factors:

1. the ability of banks to import directly into the PRC has the potential to enable more PRC investors to buy gold - in simple terms, more people in China will have access to gold distribution channels. As a matter of policy, I can see the PRC government encouraging this as a means of diverting money from both an over heated property market and away from shadow lending activities. Increased gold imports also have the effect of lowering China's trade surplus (gold is an imported commodity for these purposes) and effectively substitutes onshore gold for offshore USD securities (which is where the bulk of China's trade surplus ends up);

2. global demand has been partly suppressed by India imposing import restrictions (now joined by Pakistan) which may or may not have reduced Indian imports by eighty(?) percent (less however much is being smuggled in through one means or another). At some point, there will be an element of catch up;

3. the pick up in demand for physical bars and coins when gold dropped below USD1,200 per oz was huge;

4. COMEX inventories continue to fall - this is not something that can continue for ever;

5. ETF holdings continue to fall - this cannot continue for ever;

6. unexplained delays in returning Germany's gold are a cause for concern;

7. current gold prices may be low enough to render some current and future production uneconomic.

Potentially bearish factors:

8. gold has no fundamentals which can be analysed;

9. gold has few uses other than as a store of value and therefore no more than a very limited intrinsic value (silver is better in this respect);

10. historically it can be argued that gold has more or less provided no substantial real return and, if that is correct, the current price is (depending on where you start the analysis) above its long term trend;

11. the rise in nominal yields on debt securities increases the opportunity cost of holding gold;

12. the ready availability of unbacked paper gold products and the absence of restrictions on the creation and issuance of such products divert some buying interest away from physical gold;

13. the buy-sell spreads on physical are very large;

14. there is a non-negligible risk of fake gold;

15. there is a risk of government confiscation which I view as being extremely low in Hong Kong (but devastating if it happens);

16. banks in Europe and the US are reducing their involvement in non-trade commodities businesses . While this is largely due to regulatory pressures making it more difficult and expensive for banks to take on the risks involved (i.e. it is not part of some conspiracy to manipulate the price of gold), the practical effect is to reduce the accessibility of gold and gold related products by clients of these banks. Put differently, banks will be selling different products to their clients.

Issues which may be relevant, but on which I have no views:

17. storage risk - there is storage risk or equivalent with all asset classes;

18. Deutsche Bank withdrawing from the London fixing mechanism - which is a redundant throwback to the days when the price of gold was fixed and should have been done away with in the 1970s;

19. the emotional appeal of gold - undoubtedly one of the reasons why gold continues to be a popular investment but emotions are very fickle things;

20. digital currencies like Bitcoin diverting some money away from gold.

Issues which could be either bullish or bearish:

21. inflation;

22 deflation,

as much would depend on other circumstances at the relevant time (e.g. an inflationary environment which saw high interest rates could be either bullish or bearish for gold).

The real difficulty is that it is difficult to quantify most of these items (not all, obviously). FWIW, I am more bullish than bearish at this time (which means nothing because my track record is not so good either).

Portfolio movements

So far this week I have made four investments.

The first was an attempt to repeat last weeks small trade on China Starch (HK:3838). When I saw a small quantity being offered at HKD0.221 with a gap to the next seller asking HKD0.226, I took bought at HKD0.221 with the intention of reselling at around HKD0.226 for a quick small profit. Unfortunately, the market did not co-operate and the share price has dropped back to HKD0.212. I will have to wait a while for this one.

The second investment to purchase some shares in Grange Resources (ASX:GRR). Grange is a smallish iron ore producer which currently has no debt, a significant amount of cash and a single operating mine which is producing excellent cash flows at current prices. The unfranked dividend yield is above 10%. They also have a 70% interest a second much larger project which is intended to be funded by selling some of its interest to a new investor. I paid AUD0.26 per share.

The third investment was to convert some Hong Kong dollars into Australian dollars (at AUD1.00 = HKD6.8722). I am taking a close look at some of the larger Australian mining companies (e.g. BHP, RIO and FMG). They theory being that, not only has the AUD depreciated significantly, but the mining shares (which benefit from a weaker AUD) have not recovered much and are getting better prices than were anticipated by many. If the AUD weakens further then (in theory) mining companies should benefit somewhat.

The forth investment was to buy a few more shares in CNOOC (HK:883). CNOOC has been a disappointing investment and one that (at current prices) shows only a modest return. Hoping that today's sell off was over done and/or we will see a short term bounce, I added a few more shares to the portfolio at HKD13.20 per share.

As an aside, I am slightly kicking myself for missing an opportunity to sell my shares in K. Wah (HK:173) at above HKD7.00 yesterday. The difference between that and the current price of HKD6.25 would have been quite significant.

Thursday, January 16, 2014

A little bit of day trading

Okay, it was a bit more than a day and day trading is generally a dumb idea, but I'm a guy and every now and then the testosterone gets the better of me.

I have a very small position in China Starch (HK: 3838). Having watched the share price bounce around for the last several days, I sold my shares at HK$0.23 and repurchased them at HK$0.225. After netting off the transaction costs I made enough money from that half a cent spread to pay for a nice dinner out with the family.

Saturday, January 11, 2014

Fraud prevention is a pain

While I appreciate the efforts that banks take to combat credit card fraud, two different banks have now caused me inconvenience through poor handling of the issue:

Bank A: bounced a cheque because I did not pick up the phone when they called to query the payment as a suspected fraud. (I was on a plane at the time.)  What was not explained to me is why they thought it was a fraud in the first place? The cheque was payable to a reputable financial institution and to which I write several cheques of similar amounts each year so I do not understand why they would think it might be a fraud? At least they had the decency to reverse the dishonour fee.

Bank B: rejected a credit card payment. Sure the payment was to a new merchant and was for a meaningful amount. So I can understand the bank querying this one. BUT, if they can call me to tell me that they have stopped the payment why couldn't they have called me to query the payment before it was rejected (like Bank A does with cheques)? Bank B's approach of rejecting first and asking questions later is very unimpressive.

In both cases, I told the recipients that the bank thought payment to them was a fraud but I would rather they thought ill of the bank than questioned my financial standing.

Monday, January 06, 2014

2014 - Moving Forward

2014 has the potential to be an important year for a number of reasons:

  • it will be the first year in which I have to get used to having no employment related income. Not panicking as the cash goes out and the investments fluctuate will be a good test of my emotional discipline;
  • with no job to go to, I will be time rich for the first time since I was a student. Making sure I use that time well will be a good test of my time management skills;
  • I should have completed about three quarters of the post-graduate degree (more or less depending on which options I take). By that stage I should have a pretty good idea whether I have any potential as a writer.

In terms of objectives for the year:

Financial: as I have no control over what the markets do, I have limited ability to manage my investment returns in the shorter term. It would be really really nice if the broker forecasts for higher Hong Kong and China stock markets in 2014 proved accurate, but I am not holding my breath. Accordingly, the "don't do anything stupid" policy will apply and I will keep cash or near cash balances at reasonably high levels. I will continue to manage expenses without being excessively miserly;

Fitness: I was going to put the Hong Kong marathon down as the lead item for 2014, but I have done something to my foot/ankle and have not been able to do the training. There is a good chance I will not make the start this year. Just keeping up a regular exercise programme will be sufficient for 2014;

Degree: carry on with the post-graduate studies to the point where I have completed about three quarters of the degree by year end;

Novel: produce a complete first draft by year end. I don't care how rough it is and how many bits need to be redrafted - I just want to be able to say I've finished the first draft by year end;

Housekeeping: I have a number of housekeeping tasks (the list has a life of its own) such as updating my will (a hangover from 2013), redecorating our home (which we will do when we get a vacancy in our rental unit in the same development) and catching up on the backlog of photos to be printed for the album (most of 2013 needs doing). It's a long list;

Volunteer work: while I will continue to do some volunteer work, it may be a less than originally planned - the priorities are the degree and the novel.

Short. Simple. Focused. I don't need a lot of complexity in my life.

Friday, January 03, 2014

2013 - Year End Review

The year that was.

In terms of achieving the targets I set for myself at the beginning of the year, 2013 was successful without actually being satisfying.

1. Retirement: I retired on schedule at the end of September. Three months in to FIREd life, I am happy that I have mostly exited my career. Stress levels are down and I feel like I have plenty of time the get things done. I am still doing a small amount of consulting for a token amount of money, largely as a transitional exercise.

2.  Finances: After the fantastic results of 2012, my finances in 2013 were something of a disappointment. In terms of the item listed in my beginning of year post:

  • I didn't do anything too stupid. But I didn't do anything great either.
  • I largely failed to achieve greater diversification - I purchased on share listed in London (currently holding at a small loss), put some money into a US real estate syndicate (it will be a few years before I know whether this was a good move), unsuccessfully bid twice on properties in New Zealand, I struggled to replace maturing bonds with new ones and sent some money down to New Zealand at exchange rates higher than today's. All in all, diversification didn't work for me this year.
  • Although I am still waiting for one final number, living expenses were lower this year than last year - primarily because we did not take a very expensive Christmas holiday.
  • I worked for nine months (rather than the budgeted six month) and Mrs Traineeinvestor continued in her part time job with the result that we actually managed a savings rate around 50 percent of our combined incomes.
  • One of our HK properties became debt free. The new stamp duties eliminated the possibility of leveraging up to buy another property in Hong Kong (which probably would not have happened on valuation grounds anyway).  Unless we make early repayments (which does not make a lot of sense when the average cost is below 1 percent), it will be several years before the next one is paid off.
  • Our year end cash/near cash position remains high.
  • I purchased one painting (leased), a few ounces of gold and a few cases of en primeur wine. These alternative investments were not material.
The performance on my investments was decidedly average - which just about sums up the performance of emerging markets generally. Our Hong Kong properties ended the year with valuations close to those at the beginning of the year. In spite of the CMR fraud, my equities and ETFs generated positive returns for the year (but woefully lagged the US and European markets).

3. Lifestyle: This was something of a mixed bag:

  • Although I made some progress on the novel, I am a long way short of finishing a first draft.
  • I have started some post-graduate studies.
  • I have done some volunteering.
  • I completed both the Hong Kong marathon and the Oxfam Trailwalker this year (both in very slow times).
4. Miscellaneous: Another mixed bag:

  • I have not updated my will.
  • I did switch medical insurance to Mrs Traineeinvestor's work policy. Given the impact of Obamacare (the premiums almost doubled), this ended up being a huge saving.
  • I cancelled the life insurance policy which is another large saving.