Monday, January 31, 2011

Monthly Review - January 2011

January was a month of positive financial progress. Equities appreciated slightly with gains at the beginning of the month marginally outweighing the end of month sell off. Commodities declined. FX movements were neutral with the AUD falling against the HKD/USD and the NZD and RMB both rising. Cash flow on the properties was positive now that we are back to 100% occupancy. Savings were excellent as I received my bonus at the end of the month and expenses were low.

Here are the details:

1. my Hong Kong equity portfolio appreciated slightly. This month I purchased shared in China Metal Recycling, Specialty Fashion and added to my position in Tai Sang Land. I also made a very small (and stupid) speculative investment in some call warrants on China Merchants Bank;

2. my ETFs were flat with gains in Russia, Vietnam and Hong Kong being about the same as declines in India, China and Taiwan;

3. my commodities fell slightly with silver falling by enough to outweigh the small gains in my commodity ETF and ETCs HOGS and NICK;

4. all of my properties are now occupied, the tenants are paying on time and there were no repair bills (I will have at least one next month);

5. currency movements were neutral, as the decline in the AUD was offset by gains in the NZD and RMB against the HKD/USD;

6. my position in bonds remains small. There were no purchases this month;

7. I have written a put option against the HKD/NZD;

8. savings were very strong with high income due to payment of my bonus and low expenses.

My cash position is now high with 26 months of expenses in cash or equivalents. This is much more cash than I need and one of my current tasks is to find somewhere to invest at least half of it. I have transferred some of it to mrs traineeinvestor.

For the month, my net worth increased 4.08%. The year to date increase is 4.08%.

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 - it's possible that I may be handing in my notice a year from today.

Portfolio review #8 - things I don't invest in

Posts 1-7 in this series reviewing the private portfolio sumamrised the assets which I own. This post deals with some things which I do not hold.

1. collectibles: while I do have a few cases of Bordeaux sitting in a bonded warehouse in England, I do not view collectibles (art, stamps, wine, jade, antiques, race horses, comic books, gem stones etc) as suitable investments. They are highly specialised markets, characterised by massive bid-ask spreads, limited transparency, negative cash flows, asymmetrical information, a number of unique risk characteristics and other features which make them difficult and dangerous places to rely on for retirement income. I'll enjoy my wine collecting as a hobby and an investment in future drinking (maybe), but treat the cost as an expense rather than an investment;

2. life insurance: the words "insurance" and "investment" do not go together. Whole of life and investment linked insurance plans are among the very worst investments you could possibly make. That said, I have a very small policy which my parents took out in my name. By the time I had educated myself on the evils of the life insurance industry it had been running long enough that I was better off keeping it than crystallising the losses;

3. time shares: while there are stories of people who enjoy and use their time share, there are many more stories of people who have good reason to regret their purchase. Time shares are generally a very bad idea;

4. gold: I do not understand why gold is a popular investment. It produces no cash flow, has only limited practical uses and is only valuable because people believe it to be valuable. I really don't understand the attraction;

5. holiday homes: I've done the maths over and over again. It makes far more sense to invest the money elsewhere and rent serviced apartments or stay in hotels when and where I want. This is true in terms of the financial aspects, flexibility and the hassle factor;

6. small businesses: I am simply not the entrepreneurial type. I don't have the time and I view owning your own business as risky - especially if you are unable or unwilling to devote 24x7 to making it prosper. I would consider putting money into small angel investments or venture capital situations - maybe;

7. hedge funds, private equity funds etc: historically the track record of hedge funds has been very mixed. It's an increasingly crowded space characterised by very high fees and (often) short lifespans for unsuccessful funds and diminished returns for successful funds. The high minimum investment would require me to overweight any investment which is not acceptable to me (put differently, I'm not rich enough);

8. leveraged FX, futures etc: I do not like investing in anything where the use of leverage or other issues could result in losses greater than my initial investment. That said, I can think of two exceptions. The first is real estate which is positively geared (i.e. there is an expectation that rents will meet the mortgage payments). The second would be IPO financing which would be limited to new issues that I have considerable confidence in - so far I have not done this but I have the facility available should I wish to;

9. property development, timber, farms etc: these are things that I am interested in. I just haven't spent much time looking at anything other than timber (where I did not find anything of interest). Generally the costs and limited (or negative) cash flows combined with the high cost of entry have put me off;

10. actively managed funds and structured products: generally not worth the costs - it is cheaper to use simple products (options/warrants) or do it myself. I have commented elsewhere about abandoning ELOs as an asset class and keeping some CLO exposure as a means of generating better than zero returns on cash but that is about it.

Did I miss anything?

Sunday, January 30, 2011

Portfolio Review #7 - other assets

In addition to the asset classes reviewed in previous posts (property, direct equities and ETFs), I also hold some miscellaneous assets.

Cash (and cash equivalents): as long as I am earning and my income exceeds my living expenses by a significant margin, I do not like cash as an asset class - it is just too hard to earn enough to beat inflation and there are better opportunities elsewhere. The only rational for holding cash pre-retirement is that I haven't identified a suitable place to invest it. Once I transition into retirement, this changes and I will need enough cash or near cash to ensure that I do not need to sell assets to meet expenses. Depending on how I feel about my position at the time, this should be at least one year's expenses and possibly as much as two or three years' expenses. The issue is how to try and wring at least a token return from whatever cash I am holding. I currently hold a mix of HKD, CNY, AUD, NZD and a small amount of USD;

Bonds: generally speaking I am not a fan of bonds. While they carry less risk of nominal loss than equities, they also carry the guarantee of limited maximum returns. I view holding bonds as a a means of supplementing the necessary holding of cash. That said, I do recognise that a balanced portfolio of cash, bonds and equities comprises a classical retirement portfolio for good reason and the rebalancing and simplicity benefits are very real. I currently hold USD and CNY denominated bonds. I will add some more short term CNY denominated bonds as part of my cash/near cash holdings;

ELO/CLO: in general these are lousy propositions for the investor. My experiments with ELOs have produced modest profits but I all cases, if the ELO was worth entering into the underlying would have been a better investment. I have no plans to enter into any more ELOs. CLOs are a slightly better proposition and I intend to do some on an on-going basis in an attempt to generate better than zero returns on my cash position. My only open position is a HKD/NZD position;

Commodities: this is the largest component of the other assets. I currently hold silver, a commodity ETF and two much smaller positions in ETCs for nickle and lean hogs. The former have been excellent investments. The latter have been a lesson in how the contango effect makes these poor investments for all but short term trading and should be disposed of (as soon as I reactivate the dormant account in which they are held);

Investment in employer: I have some money invested in my employer which I will get back when I retire.

As a general statement the main benefits of holding alternative asset classes are diversification and liquidity. I anticipate holding larger positions in these assets as I transition into retirement.

Portfolio Review #6 - ETFs

I hold positions in several ETFs. ETFs offer diversification benefits without the cost and performance issues associated with actively managed funds (which I will not voluntarily buy any more). That said, the costs of the products available out here are still higher than the ultra low cost products available in the US (which I either cannot buy at all or cannot buy at present due to personal circumstances or which are subject to taxes that negate the lower costs).

In principle I am attracted to ETFs as a means of investing in markets which are either difficult or inconvenient to access directly or where I do not want to spend the time doing the research. They also provide diversification benefits (both from the HK market which is my primary focus, and within their respective markets) at relatively low cost.

All of the ETFs I hold are for emerging markets (except for a commodity ETF to be reviewed in #7). In practice this means that while I have achieved diversification across companies and industries, I would still expect a significant degree of correlation between these investments.

Quite frankly, I do not spend too much time thinking about these investments once I have made them.

I currently hold ETFs investing in:


Hong Kong

China A shares




My positions in Hong Kong and India ETFs are significantly larger than my positions in China A shares, Vietnam, Russia and Taiwan. Of these, India is the only one that I am considering reducing my position. As dynamic and youthful as the Indian economy is, I expect the high levels of volatility to continue and am aware that on trailing fundamentals it is far from cheap - and a high level of future growth is effectively priced in.

The obvious omission of any developed market ETFs is something I should look at - again the objective would be diversification and risk reduction. Hopefully an additional benefit would also be reducing the expected degree of correlation between investments.

Portfolio Review #5 - directly held equities (part 3)

This is the third and final part of the review of my positions in directly held equities and deals with what I call Group C - positions that are valued at less than 0.8x a standard weighting. Given the relatively small amounts of money involved and that a small investment has at least the potential to require as much time and effort as a larger investment, I need a reason to justify buying and holding these investments. For most of them, I should either increase the investment to a more meaningful amount of

In no particular order the seven Group C positions are:

Daisho Microline (HK:576): is a small company that specialises in PCBs for the telecommunications industry. It incurred substantial losses in 2009 and 2010 during which time it retooled to cater for developments in the industry. For 2010H1 the company returned to profit. This was the first small speculative position I purchased in 2009. Only a small position was taken to reflect the fact that the shares are very illiquid and, at the time of purchase, the company was losing money;

Allan International (HK:684): this small company manufactures and distributes electrical appliances. Purchased largely for its attractive yield (currently around 5.8%), this ended up being a small position due to an order being partially filled when the share price advanced past my limit. I decided not to chase the stock;

Kenford (HK:464): is another small manufacturer of electrical products. Based on trailing earnings it is cheap and offers a good yield of 5.9%. The investment was kept small due to the limited liquidity at the time of purchase;

Perennial (HK:725): another small manufacturing stock, specialising in power cords, cables and wires. Again, the company looks cheap on fundamentals and yields 6.4%. The investment was kept small due to limited liquidity at the time of purchase;

China Merchants Bank (HK: 3968): I purchased a small number of warrants instead of a larger position in the underlying shares. This is pure speculation and I am currently down aver 40% on my investment - fortunately a very very small position;

Automotive Holdings (ASX: AHE): an Australian car retailer offering good fundamentals, including a nice dividend yield, and a focused and coherent plan to expand the business;

Specialty Fashion (ASX: SFH): an Australian retailer which has been marked back due to economic conditions generally and intensified competition. In buying this stock, I have attempted to pick the bottom of the retail cycle and buy a company with a solid balance sheet, a growing business and which offers attractive fundamentals (including a good dividend).

In relation to AHE and SFH, these ended up being relatively small investments due to the availability of AUD at the time of purchase. In both cases, if more money had been available I would have taken a standard sized position.

With all of these positions (except the CMB warrants), while there is no need to sell as all six companies appear to be doing well (famous last words), as the portfolio has grown in value and number of positions, going forward I should make an effort to only invest in companies that I am willing to take a standard sized position in - it's not really worth the effort otherwise.

Portfolio Review #4 - directly held equities (part 2)

With directly held equities I have standard weighting or amount which I aim to invest in each company. An amount sufficiently large for the investment to be meaningful but not so large as to incur significant company specific risk. The following 21 companies are the Group B list, currently valued at between 0.8x and 2.0x the standard weighting.

In no particular order:

Jiangsu Express (HK:177): one of four PRC toll road operators in the portfolio. I like these companies for their yield (4.2%) and view them as a less volatile way to gain exposure to the growth of private car ownership in the PRC;

Fairwood Holdings (HK:52): an operator of low cost restaurants in Hong Kong. Sells at considerable cheaper metrics than its much larger peer (Cafe de Coral) and offers a 4.2% dividend yield;

Hang Seng Bank (HK:11): a partly owned subsidiary of HSBC focused on operations in Hong Kong. It offers a very nice quarterly dividend (4% yield( as well as exposure to the growing offshore RMB business in Hong Kong;

Anhui Express (HK:995): another PRC toll road operator offering a 3.4% yield;

Vodone (HK:82): on line gaming and services. This company is growing rapidly both organically and through acquisitions - the share price assumes modest growth in its business and will suffer if that growth is not delivered. Conversely, if it delivers then an upwards rerating could be expected. Fairly risky by my standards given the trailing PE of 48 and yield of 0.2%;

CMOC (HK:3993): China's largest molybdenum producer (it also produces other materials). Growth notwithstanding, this is still an expensive stock by most measures - and continuing to hold this company requires faith in both continued high growth in production and that prices for the underlying commodity will remain high. Trailing PE is a sky high 63x and yield is 1.2%;

Herald Holdings (HK:114): a toy manufacturer whose management has a practice of investing shareholders' funds in unrelated investments. I originally purchased this company as an asset play. It still offers an excellent dividend yield of 7.2% but I have some concerns about margins in the main business as well as the impact of the side investments;

China Gas (HK:384): gas distribution. The share price fell hugely in the month before two senior executives were arrested. The shares have been suspended since early January and the company's management has done an excellent job of keeping shareholders blissfully ignorant of developments since then. I will review as and when there are any announcements;

Cheung Kong Infrastructure (HK:1038): Controlled by Cheung Kong this company invests in infrastructure assets in a number of countries, mostly power generation, and offers a 3.1% yield;

Tai Sang Land (HK:89): one of Hong Kong's smaller property developers and investors. It sells at a very substantial discount to NAV and offers a 6.1% yield. The negatives are family control and entrenchment within management and the lack of liquidity;

Aupu Group (HK:477): this manufacturer of bathroom fittings and other home appliances has benefitted from the PRC's mass urbanisation. Current yield is 7.4%;

Tai Cheung (HK:88): another small Hong Kong property developer and investor selling at a substantial discount to NAV and offering a dividend yield of 4.2%;

V Tech (HK:303): this manufacturer of consumer electronics offers a 6.9% dividend yield;

Shenzhen Express (HK:548): unlike the other PRC toll road operators this one offers a relatively light 2.5% yield. My expectations are that this will grow as the company continues to expand operations;

GDI (HK:270): controlled by the Guangzhou government, in spite of the modest 2.7% yield, this is essentially a value based investment. The biggest part of GDI's business is water;

Varitronix (HK:710): this LCD manufacturer incurred significant losses in 2009 but appears to be back on track after a profitable interim result in 2010. If the interim results can be replicated in the second half the company will look cheap;

China Metal Recycling (HK:773): another example of a company expanding nationally as a fragmented industry starts to consolidate. Higher prices are also expected to contribute to growth in revenues. It remains to be seen whether the yield will reach meaningful levels;

China Blue Chemicals (HK:3983): at first glance this company looks expensive and the investment case rests on a resurgence in the price of and demand for its fertiliser products.

Nufarm (ASX: NUF): this fertiliser company is one of two stocks to survive from the small portfolio I held during the 1990s. While it is still well above my entry cost, the last 12-18 months have been a disaster for shareholders as bumbling management and adverse market conditions have pummelled the share price. Í should have sold when things started to go wrong. That said the damage is done and with refinancing now secured (I think) and a return to better trading conditions, I am hopeful for something of a turn around. It will take very little to see me heading for the exits at this point;

Caltex (ASX: CTX): a refiner and distributor of petrochemical products. The company has a strong balance sheet but suffered a setback last year from a combination of an unfavourable ruling from Australia's competition regulator and a squeeze in margins. I'm not sure what to do about this one;

BHP (ASX: BHP): the world's largest listed mining company with a diverse portfolio of quality long life assets and a very strong balance sheet. In spite of the modest yield, I could see myself holding this company for a long time.

There are two comments I should make about the portfolio. The first is that I have been trying to buy more shares outside of HK/PRC in an effort to achieve greater diversification. BHP, AHE and SFH were part of that effort and I expect to add more overseas shares in the future. The second point is that, on review, there are at least a couple of companies which, while I am comfortable holding them, I may be better off recycling the capital into other investments.

Portfolio Review #3 - directly held equities (part 1)

I currently hold positions in 35 different companies. That's a lot given that I had to do at least some research on each company before opening the position and that I monitor each position once it has been opened. So far it seems to be working - no doubt helped by the fact that I enjoy it as a hobby and that the markets have been favourable to me for the last two years. Given the wish to avoid meaningful company specific risk, holding a large number of companies is a necessary part of my investment strategy and I anticipate continuing to hold 30+ positions going forward. Once I retire, I will take a little "diworsification" in exchange for a corresponding reduction in risk levels.

I have broken the 35 positions into three groups based on the current market value of the securities.

Group A (the largest positions): these 8 shares represent about 45% of my directly held equities. Each of them is valued at more than twice the "standard" amount I look to invest in each position. In no particular order:

Hutchison Whampoa (HK:13): this is my biggest holding, valued at more than twice as much as the next largest position. HWL is essentially a turn around (3G) and global recovery situation. I am happy holding but probably should reduce the weighting given the large exposure and the fact that it is starting to look a little bit expensive on fundamentals;

China Construction Bank (HK:939): One of China's big four banks. It offers a nice yield and recently completed a rights issue (rather than a value destroying placing) to increase its capital base. Tightening monetary conditions are not of concern at this stage;

Sichuan Express (HK:107): Sichuan Express is a toll road operator. I expect this company to benefit from China's inland/western provinces playing economic catch up, rebuilding efforts after the Sichuan earthquake and the general increase in private car ownership. Pays 4% dividend;

CNOOC (HK:883): one of China's big three oil and gas companies and the one most focused on upstream assets. Given the company's track record in growing its asset base and production levels and my long term views on oil prices I am comfortable holding even though the trailing multiples look a little high. The strong debt free balance sheet is also a positive factor;

Hua Han (HK:587): a pharmaceutical company. This is an industry which is expected to grow rapidly in response to demand from China's growing middle class. The only negative is the rather anemic 1% dividend yield;

Sinopec (HK: 386): another one of China's big three oil and gas companies and the one most focused on downstream operations (refining and distribution). Although often marked down to reflect state imposed price controls and vulnerability to margins being squeezed, it is still cheap and offers upside through growing its distribution network;

Westpac Bank (ASX: WBC): one of Australia's big four banks. This is one of only two shares to remain from a small portfolio I had during the 1990s (prior to taking a job where I was not allowed to deal in shares). It has been a steady performer for well over a decade offering a growing dividend (more than 4%) as well as share price appreciation;

Yanzhou Coal (HK:1171): one of China's largest coal producers. I continue to like this company which offers exposure to the continued consolidation of China's coal mining industry. The trailing earnings multiple is a bit high and the dividend yield is low, however both metrics are expected to improve substantially over the next few years.

When reviewing my positions, I try not to look at the cost of each share as that should be irrelevant to decisions to hold, sell or buy more. However, I do keep the records and it is nice to note that all of these positions are currently valued at well above my entry cost.

The most noticable feature of the Group A list is that I failed to invest in one of the best performing sectors in 2009 and 2010 - PRC retail. This was a noticable bad call on my part.

As a side note, it is worth mentioning that China Gas (HK:384) was firmly in Group A prior to the share price falling ahead of the announcement that two senior executives had been arrested. The shares have been suspended for several weeks with no further announcements from the company which is source of concern. It is disappointing that the company has not seen fit to keep shareholders informed of developments.

I will deal with the Group B (21 companies with close to a standard weighting) and Group C (7 companies with materially less than a standard weighting) in separate posts.

Friday, January 28, 2011

Portfolio review #2 - real estate

Real estate is our biggest asset class. Almost all of the real estate is located in Hong Kong and, baring one small retail shop, it is all residential.

Good returns to date

Hong Kong real estate has been an excellent asset class to hold following the low point in 2003 during SARS. Asset values have appreciated significantly. Rental levels have risen at a more sedate pace but have still outpaced inflation. Returns have been compounded by using leverage - with interest rates having fallen during this period to the currently low levels of less than 1%. To repeat - Hong Kong real estate has been very good to us.

Hong Kong real estate is expensive

But it is now expensive both in absolute and relative terms by most (but not all) measures. We have no present intention to buy more Hong Kong real estate at this time. I do not see value there and, in spite of all the other investments made over the last three years, it is still our biggest asset class (with or without the gearing).

But rents are rising and cash flow is good

That said, I see no need to sell anything either. Rents are rising. Net rents more than cover the outgoings (including mortgage payments) and will do so even if interest rates rise and/or we have the occasional vacancy (as happened in Q4 2010). Over time the mortgages will fall away and we can start using the cash flow for living expenses. By the time the last mortgage is fully repaid, the net rents (on an admittedly aging portfolio) will be fairly close to our total budget for living expenses. Being able to meet living expenses out of cash flow in retirement is a very comfortable position to be in - no pressure to sell assets to make ends meet, much reduced reliance on capital gains and the required cash reserve can be smaller (freeing up more money for productive investments).

A long term inflation hedge

Also important is the fact that the combination of real assets and low cost debt (negative real interest rates) provide a very useful hedge against long term inflation.

Accordingly, I have no wish to sell any of our Hong Kong properties. If prices get seriously out of control I may revisit. I may also consider selling one or two with the intention of buying a better quality property.

Overseas property

In terms of the New Zealand property, the mortgages have been repaid already. While yields are low, the net cash flows will be enough to fund accommodation, car hire and living costs in New Zealand for a month or two each year. To the extent that the rents are not being spent, they are being reinvested (along with dividends from my Australian shares) into more Australian/New Zealand equities.

I generally like property as an asset class. I have spent a small amount of time looking at properties in other markets but keep running into a number of practical and other issues with making such an investment. The biggest issue is that identifying good properties being offered at attractive prices is very difficult without at least a reasonable knowledge of the local market and the time to do a lot of comparison shopping. The road shows being offered in Hong Kong are generally poor places to start looking. Other issues are needing to get on top of a new set of (usually complex) tax laws, the need to appoint an agent who is unlikely to give sufficient care and attention to a foreign owner with a single property to manage and generally being too far away to intervene should the need arise. The financial property centres of New York and London look superficially attractive but, for now at least, I will pass on buying properties in markets that I do not know very well. I would consider buying in Australia or New Zealand but not at this time. The yields are not there, prices are generally expensive and there is better value in the equity markets (where I do not need a mortgage either).


Most likely we will keep what we have, without either selling existing properties or buying additional properties. The combination of cash flow and inflation protection make a good case for continuing to hold long term. Valuations make a compelling case for not buying more property in Hong Kong at this time. The case for buying overseas property is not great but can be looked at.

Portfolio review #1 - overview

While I review my portfolio fairly often (almost continuously in some respects), it has been a long time since I have done a formal review and set out my thoughts in writing.


At present the private portfolio can be broken down into four categories of assets. From largest to smallest:

1. real estate;

2. directly held equities;

3. funds; and

4. other assets.

I will do a separate post on each category.

Risk concentration

In overall terms there are a number of conclusions which I can draw about the portfolio. The most important of these is that it is overwhelmingly comprised of risk assets and the vast majority of those are focused on Hong Kong/China. While this concentration (together with market timing factors) has contributed to the significant growth in the value of the portfolio in recent years, I have to recognise that it also constitutes a material risk to the financial security of my retirement. As I enter retirement, the objective shifts from seeking to earn good returns on my investments to accepting lower returns in order to reduce risks. It follows that I should look to reduce dependence on risk assets concentrated in one economy. Specifically, I should look to add investments outside of HK/China and add some more non-risk assets like bonds to the portfolio. Achieving this additional diversification is one of the key objectives for the private portfolio.


Another element of the portfolio is the use of leverage. All of the properties were purchased using mortgage finance. Most of the properties still carry a mortgage. There are no other borrowings - I do not trade equities, FX or anything else on margin.

As a general proposition, as long as interest rates on the properties remain negative in real terms and lower than the yields on my investments, I should be happy to carry these mortgages into retirement. If interest rates start rising then it will be time to revisit this position. The exception may be the mortgage on my home. I keep changing my mind on the comparative advantages (opportunity to earn positive carry) and disadvantages (cash flow and risk of rising interest rates) on keeping the home mortgage in retirement.

Management time

There are more than 50 individual components to the portfolio - individual equities, bank accounts, bonds, commodities, properties, mortgages and other assets. This raises the obvious question about the amount of time needed to manage the portfolio. Do I have enough time to do it properly and do I want to spend that amount of time?

The short answer is that I seem to be finding the time much of the time (even while I am still working) although there are periods when heavier than usual workloads mean that portfolio management time gets cut back or stopped altogether. To date the consequence of the periods when I couldn't find the time has been suspending the search of new investments - inconvenient but hardly a cause of concern. In terms of time spent looking after the existing investments, the properties require very little work, maybe a couple of hours a month checking receipts and making payments with small amounts of additional time being spent dealing with tax forms and issues such as repairs and vacancies. I check for news on my equities almost daily. For the larger holdings, I also read the annual and interim reports in detail. For the rest, I at least read the headlines and will read the full reports if either I have time or there is a potential concern. For the funds and other investments management is more ad-hoc but hardly significant. In short I sort of have the time now and will obviously have more time once I retire. As a final point on the time spent, I find that I actually enjoy reading through the materials - it's more of a hobby than a chore.

Another way of looking at this issue is that having a large number of individual investments is also a risk management tool - the consequences of any single investment suffering a substantial or permanent diminution in value are materially reduced. This is important to me.


As a general proposition I do not pay anyone to manage my assets or to provide advice. All my funds are passive and I do not have a financial adviser. The exceptions are one part of the portfolio under professional management (a legacy of the years when I could not deal in equities) and my MPF fund. The former is not doing me any real harm (returns are modest but still positive) and I will leave it as is. The MPF fund is wealth destroying but since it is mandatory, there is nothing I can do about it.

I see no need to engage a financial adviser. It helps that Mrs Traineeinvestor is financially savvy and supportive.


In short, I am happy with the composition of the portfolio but recognise that there is a need to reduce dependence on HK/China risk assets. I also need to resolve the home mortgage issue.

Wednesday, January 19, 2011

Random musings about inflation

Inflation is back. Inflation expectations are back. However, neither inflation nor inflationary expectations are being reflected in deposit rates (still close to zero), mortgage costs (still below 1%) or bond yields.

If one could expect this state of affairs to continue indefinitely, the obvious strategy would be to borrow money and invest in assets which show yields higher than the interest rate being paid on the borrowings (with a suitable buffer to guard against disruptions to the inward cash flow). Of course, negative real interest rates will not be with us forever. At some point monetary and economic conditions will change. The most likely change is the US Federal Reserve ending its protracted stimulus programme and adopting a tighter monetary stance to combat inflation. Another possibility is rising interest rates in other countries leading to outward capital flows from Hong Kong.

Rising nominal interest rates would obviously impact on the cash flows of investors (like myself) and affect valuations of real estate, equities and bonds. In effect, they will result in reduced cash flows as floating rate mortgages are reset at higher rates and may result in lower asset prices - a bad combination. They may - historically there have been periods when this has happened and there have been periods when this has not happened. Other factors can and do also influence asset values. Over the longer term, I would expect risk assets (real estate and equities) to be better preservers of wealth than less risky assets such as bonds and bank deposits.

Since I can't predict what will actually happen or when it will happen, I intend to continue my strategy of holding mostly risk assets and not making accelerated repayments of my mortgages. I will continue to be a mostly value investor in the equity markets - buying where I see value. If I can't find value then I shouldn't buy (historically, I have not been very good at holding myself back).

Once I transition into retirement, I will of course need to keep 2-3 years of living expenses in the form of cash or near cash to avoid putting myself into a position where I have to sell assets to meet expenses. If the market takes a dive I can always use some of this money to invest.

The harder issue which I am grappling with is whether to pay off the home mortgage or not. As long as the interest rate is less than the rate of return on investments, then I am better off keeping the mortgage. Given how low the interest rate is (less than 1%), this is a very low standard to meet. That said, the mortgage will have to serviced every month and once I stop working that introduces an element of risk to my retirement plan.

One of the most important lessons I have picked up from my reading and retirement planning is that having a financially successful and low stress retirement does not involving attempting to maximise the return on assets but avoiding unnecessary risks. This principle suggests that, while paying off the mortgage is likely to involve a loss of potential gains in wealth, it is more important to remove the risk associated with carrying that mortgage.

Inflation and inflationary expectations rising

Hong Kong's CPI is expected to have rising 3.0% year on year in December 2010. Expectations are that year on year CPI increases will increase further are now widespread. At least one economist has stated that CPI could reach 5% this year.

Leaving aside the issue of whether CPI is an accurate proxy for either inflation or cost of living, it does not take much investigation to understand where the increased CPI numbers come from. Food prices, airfares, entertainment, rents and school fees have all gone up noticeably over the last year. Utilities have gone up, but not by as much. Management fees and a number of other items have also risen, but in some cases the increase is from levels last set more than a year ago. I can't think of anything that has gone down.

Bank deposits still yield close to zero. Mortgage interest rates are still below 1%. You have to go a long way out in terms of maturity to beat inflation on HKD bonds (or sacrifice credit quality). It's not hard to see that it pays to be a borrower and not a lender in this environment.

Longer term, if I have to raise the expected inflation rate used in my retirement plan I must either (i) delay retirement so that I can accumulate a bigger pool of assets or (ii) raise the nominal expected rate of return on my investments. The former would be disappointing and the latter is only partly within my control. While I need to do some more research, my understanding is that in the short run rising inflation can be negative for companies although in the longer run they tend to survive inflation better than bonds. In both time frames, other factors can outweigh the inflation effect.

Monday, January 17, 2011

Specialty Fashion purchased

Non-emerging market retail stocks are somewhat out of fashion which is understandable given the impact of the current financial crisis on employment and consumer confidence generally. (China and other emerging markets are a very different story.) In the expectation that consumer spending will recover, I have been looking for a consumer stock which I felt comfortable buying and holding as a cyclical investment. My main criteria were confidence in the management, a coherent and focused business strategy, a clean balance sheet and positive cash flow. A reasonable dividend would be nice but was less important than the other criteria. In other words, I am more concerned about making sure I invest in a company which has the ability to ride out a further deterioration in trading conditions than I am about capturing the greatest possible upside exposure.

Specialty Fashion (ASX: SFH) met my criteria. In particular, the company has no net debt and strong cash flow. The major negatives are (i) margin compression and (ii) the short term impact of the Queensland floods. The company's earnings guidance released last week was also supportive. Accordingly, I added some shares in SFH to the private portfolio today paying AUD1.20 per share.

Friday, January 14, 2011

Book Review: The Frugal Millionaires

The Frugal Millionaires is a short book which based on interviews by author Jeff Lehman with 70 "frugal" millionaires conducted with the objective of identifying characteristics and habits which millionaires have in common. The material is neatly organised under headings such as investing, savings, health and other topics. The content is presented in the form of a short introduction to each topic followed by a series of short quotes from the anonymous interviewees supplemented by definitions of key terms and some additional remarks by the author.

While I did not get anything new out of the material presented, it would be a useful read for people who think of the typical millionaire as a flashy, high spending super consumer (the reality is that they usually are not). That said, The Millionaire Next Door provides a more detailed and comprehensive coverage of much the same material with considerable additional analysis and (IMHO) is much the better book.

Thursday, January 13, 2011

A small day trade

OK, it wasn't a "day" trade as such. More like a week. I purchased shares in Fulbond Holdings (HK:1041) at HK$0.019 each last week and sold them today at HK$0.02 each. The net profit (after transaction costs) was 4.06%. Needless to say, this was pure speculation and only a small amount of money was wagered.

Wednesday, January 12, 2011

The ugly side of property ownership

My biggest asset class is Hong Kong residential property. For the last six years it has been a good place to invest - the recovery from the Asian crisis and SARS, abundant liquidity, negative real interest rates, tight supply, rising demand and high confidence levels have resulted in reasonable growth in rental incomes and stronger growth in capital values. All good for the investor.

The down side is events like this which has happened to one of my properties:

  • the tenant complained about a leak. On investigation, the leak was coming from a water pipe belonging to the the unit immediately above mine
  • the owners of the leaking pipe denied that it was anything to do with them and refused to act
  • the building manager said that they had no power to intervene
  • the buildings department eventually inspected the premises and confirmed that the leak was coming from a poorly maintained pipe that belonged to the upstairs unit (fortunately it is fresh water)
  • the upstairs unit owners refused to do anything until several rounds of legal demands and threats had been exchanged
  • they claimed to have fixed the leak before Christmas. It is still leaking but they deny that the leak has anything to do with them
  • legally, I cannot touch their pipe to do the repair myself without committing a criminal offence

The current position is that I expect the tenant to walk. I also expect that the accumulated water damage will require a significant part of the kitchen fit out to be replaced (but this cannot be done until the leak is fixed). I have told the owners of the upstairs unit that I will sue to recover every cent (and I will do so). I have also pointed out that, as a lawyer, it does not cost me very much to commence proceedings.

This is only the second time in 16 years of property ownership that I have had to deal with a significant problem. In that sense, I suppose I have been lucky.

Monday, January 10, 2011

Book review: The Pledge

From time to time I read books on productivity, self help and similar topics. Last weekend I read Michael Masterson's "The Pledge: your plan for an abundant life". While there were some useful takeaways from, on the whole I was disappointed.

The book is short, an attribute which I generally rate as positive for this genre. Masterson covers a number of topics such as productivity, personal choices, relationships and the mental attitudes needed for success. Most of these topics get covered in more depth in single books by other authors. While people who have no read anything on these topics may find the relatively high level summary type coverage a useful introduction, having read a number of books on all of the topics covered, I found nothing new. At times I felt I was skim reading the Cliff Notes version of a more detailed book. Part of Masterson's commentary on prioritising work was openly lifted straight out of "The Seven Habits of Highly Effective People".

There were some things which I regarded as very wrong and/or unworkable. To give two examples:

1. the suggestion that you should only look at your e-mails once a day and at the end of the day. If I did that I would lose most of my clients. I am paid to be responsive (as are most professionals). Also, a lot of the e-mails I receive require either same day action or delegation. Waiting until the day is over before actioning them is inefficient and sends a very wrong message to clients and colleagues alike. While I am sure that there are some people for whom this approach works and agree that constantly looking at e-mail damages productivity, this is not a solution that is viable for most people;

2. the use of monthly and daily folders for tasks. Not viable in my opinion. I would end up spending more time dealing with the folders than I would save by using them. I'll stick with my three task lists (clients, office and personal) divided into short term and longer term completion targets.

I did laugh when his schedule showed a fixed time slot for speaking with his wife.

Some things I did like:

3. Masterson partially calls bull on Tim Ferris's "The Four Hour Work Week" (which I rate as a nice fantasy with some good ideas but generally non-viable for most people);

4. Masterson calls bull on the "Think and Grow Rich" school of thought which holds that all that is necessary to achieve success is to visualise it - scientific studies show that dreaming about success without doing more is actually counterproductive.

In summary, an average read for people new to productivity and self help books with several good ideas (and a few bad ones), but offers nothing new for those who have read other books on these topics.

Tai Sang Land purchased #3

On Friday I made a further purchase of shares in Tai Sang Land (HK:89) paying HK$3.70 per share. As mentioned in earlier posts on this company, I am buying largely on the basis of the steep discount to NAV.

Friday, January 07, 2011

CMB Warrants purchased

Yesterday I made a small investment in warrants (HK:27619) over China Merchants Bank (HK3968). As these are warrants with a finite life this is a highly speculative investment and, accordingly, one in which I have made a proportionately small investment - if the warrants go to zero the impact on my financial position will be minimal. My purchase price was HK$0.196.

Thursday, January 06, 2011

Tai Sang Land purchased #2

Yesterday I made a small additional purchase of Tai Sang Land (HK:89), paying HK$3.45 per share. Like a number of the small local property companies, Tai Sang sells at a substantial discount to its NAV and my investment is being made on the basis that I expect part of that valuation gap to narrow over time. Unfortunately the stock is very thinly traded and I was not able to buy as many shares as I wished before the price ran away from me yesterday afternoon and today.

China Metal Recycling purchased (2)

This morning I added some more shares in China Metal Recycling (HK:773) to the private portfolio, paying HK$8.90 per share. This follows Tuesday's purchase at HK$8.75.

One of the reasons for increasing my weighting is that the number of shares in the portfolio has now reached the stage were I feel I have sufficient company specific diversification (which I appreciate is a very debatable subject). Since (i) I am still in the accumulation stage and (ii) I feel I have that additional comfort of holding a sufficiently large number of companies and (iii) I need to monitor each company to at least some extent, I have concluded that it is reasonable for me to increase the amount I invest in each company. While I am not planning on setting any target, maximum or minimum number of investments, I do need to remind myself that each investment needs to be watched and the amount of time available to do so is limited by factors such as my job, my family and sleep.

One of my tasks over the next few weeks (work permitting) is to review some of the other stocks in the portfolio and consider whether I should be adding to my positions.

Wednesday, January 05, 2011

NZD/HKD FX contract entered into

In December 2009, I ended up with some NZD after an option I had written was exercised against me. After sitting on the side lines for a few days, I entered into a short term (14 day) contract at a strike price of NZD1.00 = HKD5.954. If the NZD remains at or below 5.954, I will keep the NZD and earn more interest than I would putting the money on deposit. If the NZD rises above 5.954, I will receive HKD and the total amount received will be larger than my original investment last year. In the latter case the annualised return will be about 7.7% (ignoring compounding).

Since I am happy holding either NZD or HKD longer term, I do not view these contracts as unduly risky and am not overly concerned about the "fat tail" issue associated with writing options.

Tuesday, January 04, 2011

China Metal Recycling purchased

This morning I purchased added China Metal Recycling (HK:773) to the private portfolio paying HK$8.75 per share.

This is a stock which I looked at closely last year but initially declined to purchase in expectation that the company would need to raise more capital. I wasn't paying attention when CMR did make a substantial and dilutive placement and missed an opportunity to buy when the shares dropped in response to the placement announcement. In any event, I believe that the company offers sound fundamentals, a cohesive growth strategy focused on one industry. The investments made over the last few years are starting to show through in the company's earnings (see the interim report for the first half of 2010). Although not debt free, the balance sheet is sound. I am also attracted to the industry which I believe will benefit from higher commodity prices, continued green initiatives in China and industry consolidation.

Sunday, January 02, 2011

2011 - moving forward

I'll stick with the popular position of denouncing New Year resolutions and (as usual) will not make any for this year. However, as with previous years, I will take the opportunity to review a number of objectives and goals.

As there is a possibility that 2011 will be my last full working year, the objectives include a number of one-off items that need to be completed before I pull the trigger:

1. maintain a healthy savings rate. My savings rate for 2010 was above 50% (I don't have the exact numbers yet) and I will aim to beat that benchmark again this year;

2. start shifting the asset portfolio to be closer to my post-retirement structure. One change will be to have 2-3 years worth of living expenses in the form of cash or near cash. Bonds with less than three years to maturity count as near cash for these purposes and I am indifferent as to which currencies the cash is denominated in. At present I have less than half the target amount in cash/near cash. I would also like to achieve slightly greater diversification across asset classes as a means of reducing risk (rather than seeking better returns);

3. maintain my investment focus. I've had two very good years with the investments. While I lost money in 2008, it wasn't that much and was actually a decent result considering the extent of the declines in equity markets generally. I do not wish to delude myself that I am smarter than the market or any kind of investing "Warren Buffet next door" - that's a good way to lose focus and lose money;

4. decide what to do with the mortgage on our home. If I retire in early 2012, I will either need to carry a mortgage into retirement or sell some investments to repay it. I like the idea of having the home paid off when I stop working but I also like the idea of borrowing at less than 1% interest to invest in higher yielding assets as well;

5. keep monitoring expenses. Inflation made a noticeable impact on our expenses in 2010, mostly in the form of higher school fees, higher travelling costs, higher food costs and higher costs of high end Bordeaux. I can eliminate the Bordeaux with no impact on our lifestyle (it is mostly for investment), but there is nothing that can be done about either the school fees or the food and cutting the travel budget will impact our lifestyle;

6. get a full medical done. I had one done early last year. With the medical insurance possibly lapsing when I retire, I want the confirmation that I have no serious medical issues before I pull the trigger. (Continuation of the policy is at the discretion of the insurance company, and I won't find out until after I hand in my notice.) Target date for this will be either late 2011 or early 2012;

7. get the tech skills in line. I will lose the tech support my firm currently provides when I retire. While there are support services I can pay for, I really should teach myself how to do more of it myself. I'm keeping a list of things I need to be able to do and will work my way through the list during the year;

8. home renovation project. Our current home is now 11 years old. Parts of it need work now and the bits that don't might as well be done at the same time. The debate I am having with mrs trainee investor is whether to do it bit by bit while we are still living here or move to a serviced apartment for four months and get it all done in one go. The former is much cheaper and involves less inconvenience while the latter is less disruptive;

9. given my injury issues, I have not set myself any sporting objectives this year. I'll keep plugging away at it and see what happens. As an aside, a number of my planned post-retirement activities were based on physical activity levels that may now prove to be unrealistic. I will look to develop some other interests to fill the gap;

10. make some progress on the fantasy novel. Progress in 2010 was minimal (about 50 pages). I'd like to do better this year, but that will depend on how busy I am at work;

11. shift the focus of my social network from work related contacts to others.

That's about it.

Saturday, January 01, 2011

Book Review: Debunkery

Having read and enjoyed Ken Fisher's "The only three questions that count", I picked up his latest offering "Debunkery" as something of an impulse buy to read on a long haul business trip I took in mid-December.

Fisher examines 50 of "Wall Street's Money Killing Myths" and rejects most or all of them either in whole or in part. A short chapter is devoted to each of the myths, explaining what each myth is, why people may believe it and why it is not correct (or, in a few cases, only partially correct). Devoting a short chapter (typically only about three pages) to each myth, combined with Fisher's (and co-author Lara Hoffmans') easy writing style made for easy reading and ready understanding.

That said, I didn't really get that much out of the book because:

1. I seriously doubt whether there are many people who actually believe some of the myths presented. As an example, is there anyone who expects to to achieve average returns (or anything close) in any given year? I hope not;

2. many of the myths have been well and truly debunked by a number of people or simply don't stand up to even the most basic scrutiny. Sell in May and go away? I can recall that one being rejected by brokers' reports in the 1980s. Low PEs mean low risk? Really? Again, the persistence and lack of resolution of the value v growth debate should be enough to contradict that myth. And so on.

Actually, there were only a few myths that I had not seen previously rejected. There were also a few that I hadn't heard of before.

In conclusion, while I personally didn't get that much out of the book, I still enjoyed reading it as a well written a succinct reminder that one should not accept anything passed off as common wisdom without careful examination. For relatively inexperienced investors, it would be a more valuable read.

Financial Review 2010 - another great year

2010 was another year of excellent progress towards my objective of achieving financial independence and early retirement. I remain on track to be able to retire sometime between early 2012 and early 2014. (The variation in potential retirement dates depends on market conditions and the on-going review of a number of assumptions which I have used to model the financial aspects of my retirement.)

Getting back to 2010:

1. equity markets delivered positive returns. As I am more concerned with absolute returns than relative returns, I do not track performance against a benchmark index. However, a quick look at my five biggest individual stock holdings (Hutchison, CNOOC, CCB, Sinopec and Hua Han) showed all of them outpacing the Hang Seng Index by a considerable margin. Of the other stocks, most gave positive returns. The four losers (China Gas, Nufarm, China Zhongwang and Amvig) had relatively little impact although I am somewhat annoyed with myself for not selling Nufarm when the problems began. Of the ETFs (all emerging markets), there were positive returns across the board;

2. Hong Kong real estate continued to do well. Hong Kong property prices continued to advance in response to demand from owner occupiers and investors, tight supply and interest rates that were very low in absolute terms and negative in real terms. (My net worth statements do not reflect changes in the values of real estate.) While I had some vacancies during the course of the year and more repairs than I would like, cash flow was still positive and the net margin between revenues and expenses was high;

3. currencies moved in my favour. The AUD, NZD and RMB all appreciated against the HKD/USD providing an additional uplift to asset values;

4. my overseas properties produced positive cash flow. My very small investment in property in New Zealand produced positive cash flows with 100% occupancy and few repair bills during the year;

5. commodities did well. My investment in silver soared. HOGS, NICK and a commodity ETF all gained during the year. I am still sitting on losses for the HOGS and NICK and learnt a lesson about the impact of contangos on commodity linked products which rely on roll over of derivative positions. I will take the loss on these shortly;

6. bonds produced positive returns. My very small allocation to bonds produced positive returns;

7. miscellaneous investments were largely a waste of time. I did a number of small investments in warrants, equity linked deposits and currency linked deposits. These either produced a small gain or a small loss depending on how you do the maths. While I will most likely continue to put small amounts of money into these, they are more for entertainment than serious investing;

8. my savings rate was excellent. I will have to wait a few months to get exact numbers (due to complexities on my tax returns, some still unknown expenses and the size of my bonus), but there is a good chance that I will have kept my savings rate above 50% for the year. The higher than expected savings rate was largely driven by income being higher than expected. Unfortunately, spending was also high than expected but most of the excess was due to "investing" in a few cases of over priced Bordeaux that I hope I am never silly enough to actually drink.

In terms of approach to investing, with inflation being higher than borrowing costs and much higher than interest rates on bank deposits and short term debt instruments, I stuck with my policy of keeping most of my money in either the property market or equities and not accelerating repayments on any of my mortgages.

My net worth grew in 10 out of 12 months in 2010. My investments generated positive returns in 8 out of 12 months (and two of the loss making months were very trivial). Ending with a gain in net worth of 29.55% for the year was a great result. (This result does not include changes in the values of my real estate.) As mentioned, 2010 represents excellent progress towards meeting my FIRE goal. The consolidated balance sheet, which reflects mrs traineeinvestor's assets and liabilities and changes in the values of our real estate, showed a greater percentage increase (about 37%) but I will have to wait for some additional data before finalising that number.

I remain cash light with only about 11 months of living expenses held in the form of HKD cash or near cash. Going forward, as and when I retire, I will need to build he cash or near cash buffer to between two and three years of living expenses. There is no need for it to be in HKD and I am in no hurry to get to that position.

There were three negatives for the year. The first is that it now looks unlikely that I will have the option of working part time for a couple of years to transition into retirement. That is unfortunate but, in the overall scheme of things, not that big a deal. The second is that a knee injury suffered early in 2010 may or may not have a long term effect. If it does, this will adversely impact a number of my retirement plans. The third negative is the return of inflation, in particular the increases in the cost of school fees and travel costs (which represent a meaningful chunk of our budget) are of concern and I will be paying close attention to these (and other) costs and adjusting the retirement budget as required to ensure that they are properly provided for.