Monthly Review - October 2009

October was yet another positive month for my investments. This is actually getting a bit scary - 9 out of 10 months this year have shown a positive return on investments and all ten months have produced an increase in net worth.

Here are the details:

1. my direct equities showed a modest improvement for the month. The Hong Kong portfolio was up sharply while the shares listed in Australia and New Zealand rose more modestly. The only investment made was at the end of the month when I purchased Tai Cheung Holdings;

2. my ETF's also showed a modest improvement with gains in Hong Kong and Russia overshadowing a small decline in India;

3. my commodities were up with recoveries in lean hogs and nickel combining with an increase in the commodities ETF to overshadow a small loss on silver. The only investment made this month was a small purchase of notional silver;

4. real estate was good. All tenants were paying on time and there were no unexpected expenses. My average interest cost remains below 1%. The renovation project is on schedule. The second installment is due next week;

5. FX movements were favourable with the rise in the Australian dollar making a positive contribution to a balance sheet denominated in Hong Kong dollar's;

6. income was average but expenses were high due to the cost of taking Mrs Traineeinvestor to Macau for a weekend to celebrate her birthday, paying the annual bill for the home contents insurance and buying a package of 30 personal training sessions.

The end result was a 2.9% increase in net worth. The year to date increase is 67.8%. I was expecting a good year - but nothing like this.

I am on track to hit my number by the end of 2011. As mentioned elsewhere, I will continue working for at least two years after that to create a safety buffer and to provide some fun money.

Tai Cheung Holdings purchased

Yesterday I came across a report on Tai Cheung Holdings from local broking house Tai Fook and was interested enough to do some further research.

Tai Cheung Holdings is a small cap property investor and developer. Assets comprise a mix of industrial and retail properties, a 35% interest in the Sheraton Kowloon and some luxury residential development projects. There are no unrelated side businesses or past history of departing from the core real estate investment and development business. The company's track record for the last several years has been steady. As far as I can tell from reading the last annual report, the balance sheet is clean - the company has a small amount of debt and capital commitments associated with development projects but net cash. The cash position is likely to improve dramatically in the near future as luxury residential development projects reach completion.

The shares are trading at around $4.50 which represents a discount to the net asset value showing in the accounts. Tai Fook has estimated the net asset value based on current market values at above HK$12 per share - which means that the shares are trading at a 65% discount to NAV.

While I would expect the value of the assets to be materially higher than book value (given what Hong Kong property prices have done since 2003, they would have to be), I am not in a position to confirm or quibble with Tai Fook's estimates. That said, the shares are clearly trading at a discount to NAV which is substantially higher than I would expect to see even for a small investor/developer. The fact that the company has a history of paying reasonable and rising dividends is also encouraging - the trailing yield is 5.1%.

I purchased some shares this morning, paying an average of $4.48 per share.

Bonus v Raise

Mighty Bargain Hunter picked up on the MSN article about the difference between not receiving a COLA this year and being paid a US$250 one off payment resulting in pensioners receiving US$10,000 less in total benefits due to the future compounding effect of the COLA in future years. While this is obviously bad news for pensioners, it is good news for taxpayers.

MBH also made the comment that, if faced with a choice between a raise and a bonus employees should always take the raise because the effect of the raise will (a) replicate itself each year and (b) will compound future the effect of future pay increases.

I'm not sure if the decision is that straight forward. While the maths may make it look like the pay increase is the better option (for the reasons given above), the decision is not that simple:

(i) the effect of returns on investing the bonus received today need to be taken into account;

(ii) tax bracket creep may start to affect numbers - as income rises you may get pushed into higher tax brackets in the future (or tax rates may go up or down);

(iii) you need to consider how long you will be working for that employer - if retirement is near there may not be much, if any, compounding;

(iv) it is not a given that future salary increases will be the same in percentage terms. Often, employees whose salaries lag their peers get larger percentage increases than equivalent workers on higher salaries - in effect the gap will often close substantially reducing the calculated benefits of taking the salary increase (alternatively, an underpaid worker may be able to change jobs);

(v) more expensive workers may be more vulnerable to being laid off if cost cutting becomes necessary;

(vi) a bonus is more likely to be invested than an increase in income (at least in my case).

Unless the numbers were very one sided, I would most likely prefer the bonus now than the possibility of enhanced future earnings.