Home > Archive: February, 2007

Archive for February, 2007

It's Nice to have some Market Insurance

February 28th, 2007 at 08:48 am

Well, a correction was well-overdue, so a one-day drop of around 3% in the stock market was no great surprise, although the alleged "trigger" for the event (the Chinese market taking a hit) was a surprise, as is normally the case. On the up-side it makes the $5K I spent on buying 3 Index Put Option contracts on 9 Feb look more like sensible insurance, rather than simply throwing money down the drain.

I'd need to be holding 12 5500 ASX Put contracts to fully cover any losses to my stock portfolio due a bear market (or severe correction), so I'm not fully insured yet. I was hoping to pick up some additional ASX 5500 Dec Put Options as the market continued it's bull run - on Friday the Australian market had closed over 6000 for the first time and the cost of the Put Options had dropped as low as $0.98 at one stage (I had bought the previous 3 contracts for $1.58 on 9 Feb). Although I thought about buying some more Put options last Friday, in the end I didn't bother. (If I had I'd be thinking how great I was at market timing! Wink

Unfortunately the price for the options probably won't be as attractive even when/if the market recovers back to the 6000 level as the increased volatility will make the options more expensive.

Zero Balance Transfer CC Arbitrage Update

February 27th, 2007 at 08:55 am

HSBC sent my new CC yesterday. When I checked my everyday CC account the $13,500 balance transfer had already gone through into the account on the 19th, so I withdrew $10K and deposited it into my Credit Union account where I can leave it in the high interest account until the 0% balance transfer period ends on 1 October. As part of the balance transfer was used up on the current months accumulated charges on my everyday CC, I'll deposit the remaining $3,500 into the Credit Union account next month instead of having to make a CC payment.

I should earn around $480 interest on the $13,500 "free" loan from HSBC by 1 October, and the only cost was a $10 cash withdrawal fee from my everyday CC account and about 10 minutes work all up to apply for the card and shift the $10K cash from one bank to another.

I'll just have to remember to cancel this HSBC CC once I've repaid the balance transfer amount in October, otherwise they'll start charging an annual card fee next year (this particular card only waived the annual fee for the first year).

Uni has Started and the Bills follow soon after

February 26th, 2007 at 01:16 pm

Autumn Semester started last week. I'm taking two courses for the Graduate Diploma in Secondary Education I've just commenced, and one course for the Master of IT I'm halfway through. The fees are similar for both - around $800 HECS (I pay in advance, rather than accumulate a tax debt) for the two Education subjects and $800 fee for the one IT subject. I also had to purchase a textbook for the IT course ($111.55 even with the Co-op bookshop member discount!), so the total education costs for this semester are around $1710. Luckily there are too many students enrolled as Distance Education students in the Education at CSU this year, so the Uni cancelled the one week residential school in Bathurst. That would have cost another couple of hundred dollars for little benefit, so I'm glad it's not on anymore.

I worked out that if I quit my current position to start teaching in about three years, I'd have to work two extra years as a teacher to make up for the reduction in annual pay. I've no idea yet if I'll actually enjoy being a High School teacher, so I can't tell if I'd want to work longer as a teacher compared to my current job. Then again, I should have enough for a comfortable retirement whether I work to 61, 65 or 68.

House Hunting with a Difference

February 25th, 2007 at 11:15 am

A few years ago had a scottish manor house (Merton Hall) for sale for around A$1m (it was before the recent boom in UK house prices, and was in need of renovation as it had been used as a boarding house for a boy's school). I was keen enough to go to the trouble of getting my father to join me in making a bid on the property, although in the end we were not the winning bid. I've always fancied buying an "estate" with an historic house and grounds, although it's currently still way out of my price range, and country houses have never really been much of an investment in the long term (although if we had succeeded in buying Merton Hall it would have done well in the past three years due to the real estate boom in the UK).

So, I still browse around what is available, looking for bargains and being amazed at some of the massive prices asked for some modern "estates". Recently two extremes caught my eye - the world's most expensive house (at A$138M), and a real "fixer-upper" in Poland that is going for around A$62K:

What I'd like is somewhere between these two extremes, but, when I'm in a more sensible mood I realize that I'd be much better off investing my money and just staying in a castle of manor house on my holidays.

Predicting the Market

February 24th, 2007 at 02:09 pm

No matter whether you've been investing for a day or a decade, there's always the niggling thought that someone out there knows the "secret" to timing the market. So you may give your money to a professional to manage (eg. Actively Managed Funds), or read books or take courses on a technique to boost your returns above the market average. All these things will cost you time and/or money. Occasionally one method you try for a while (day/month/year) will actually produce good results, so you'll tend to think you've discovered the "secret" and stick to that method until it ultimately fails (and in the meantime possibly blog about it, tell your friends, write a book, or teach your "secret" in seminars).

I must admit that I've done this over the years, and I still will invest a portion of my money using particular techniques in attempt to boost returns - for example my "Little Book that Beats the Market" US Stock Portfolio (Value Investing), and toying with the idea of moving some of my domestic stock investments from my geared personal stock portfolio (stock picking) into a professionally managed individual stock account (with Direct Portfolio) within a self-managed super fund (SMSF). But my preference over time has shifted towards low-cost index funds where available (I'm thinking of moving my retirement account from my employer's default fund (Westpac/BT Employer Super) into a SMSF where I can invest in Vanguard Index Funds or ETF such as the Commonwealth Diversified Share Fund (CDF)

One of the main reasons I've drifted towards a preference for Index Funds is that although I recognise that some actively managed funds outperform for extended periods (eg. Berskshire Hathaway), most funds that outperform for a while (up to a decade) can be simply put down to "luck" or random chance. Similary, techniques such as charting, while always able to explain stock movements in hindsight, don't appear to have any real predictive power. If you ever need reminding that a LARGE component of stock price variations (and market variations) is purely random, despite the appearance of clear patterns or "trends" in the charts, just do a simple random walk simulation in excel.

For example, just as a reminder to myself, I ran a simulation in excel to model the coming year in the ASX All Ords using a few basic parameters and a random number generator:

Simulation Period: Daily Index Value for next 250 days
Starting Value: 5800 (around the current Australian market level)
daily movement formula: new value=P+(10%/250)*P+RAND()*200-100
where P=previous cell's value (eg. B4, if calculating value for cell B5)
I picked an overall 10% pa ROI as a typical stock market trend and a daily random move of + or - up to 100 points as a fairly "typical" market movement.

It's amazing how realistic the "chart" for this simulated market is every time you press F9 to recalculate the random numbers. For example, just from random numbers, you can get a continuing "bull market", a sudden "crash", a "bear market", or a "correction":
Bear Market:

Bull Market:


Crash: (just a little one)

Of course the market (and individual stock prices) isn't purely random - but key events that will shift the market in a particular direction by a significant amount aren't known in advance (otherwise the effect would already reflected in the price by other investors trades adjusting the price level).

Ultimately, I think the time spent trying to uncover "secret" techniques to predict the market would be better spent by a novice investor in a second job earning more funds to invest, and for a more seasoned investor with a significant amount already accumulated, just concentrate on diversification, asset allocation, tax-effective investment structures and try to avoid high fees, churning or other return-diminishing behaviours.

Free DayRunner inserts

February 21st, 2007 at 11:36 am

I remember when having a DayRunner or Filofax (preferably leather) was a status symbol for all the "executive types". Then it was a PDA, and now a BlackBerry is the cool executive toy (soon to be replaced by the iPhone ?).

Work was clearing out some old stationery items, so I grabbed half a dozen packets of DayRunner inserts they no longer used (receipt envelopes, finance pages, and calendar pages). The original prices marked on them totalled $45 -- goes to show how fast a trendy or fashionable item can depreciate! I noticed that they weren't giving away any rulers or pencils. Wink

You Call That a Ship? Now, That's a Ship.

February 21st, 2007 at 11:35 am

The QE2 Cruise Ship arrived in Sydney today. It's a magnificent ship which DW and I had the pleasure of sailing on from New York to Plymouth on our honeymoon back in 1999. However, it was positively dwarfed by it's "big sister" the QM2 which also happened to be in Sydney Harbour today!

Although even a short cruise or trans-atlantic crossing in one of the cheaper cabins is not "cheap" by any stretch of the imagination, it is definitely value-for-money for the unique experience.

Free Money Comics for Kids

February 19th, 2007 at 12:23 pm

The comics I had ordered from the Federal Reserve Bank of New York's educational website (available for free) arrived today. When I got home from work DS1 was busy reading the first one and after dinner he wanted me to read through it and discuss some of it with him. He thought some of the jokes were quite funny, so it seems these are pitched just right for an intelligent 6 year old. He'll probably take one to his "news" day at school on Thursday to tell the other kids.

The ones I got seem the most useful:
The Story of Money
Once Upon a Dime
A Penny Saved
They arrived via airmail from the US (and cost the Fed USD3.70 in postage!). I can recommend these to anyone with 5-10 year old kids.

Long Term Tax Planning

February 18th, 2007 at 04:09 am

Although it's always risky to make long term plans based on the assumption of status quo - especially where tax laws are concerned - the recent changes to the Australian Superannuation rules bring some interesting long term tax planning ideas to mind.

Basically the new Superannuation rules are that any withdrawals (lumpsum or pension payments) from a "tax paid" superannuation fund will be tax free after age 60. One possible side effect of this change will be to make it more tax-efficient to realise capital gains on investments held outside of super once you are retired, over 60, and getting most of your income as an untaxed superannuation pension. The ATO information about the new rules states that "Individuals will not need to include lump sum superannuation benefits and superannuation pensions from a taxed fund made after 30 June 2007 in their tax returns. Superannuation funds will not need to report benefit payments made after 30 June 2007 to the ATO for RBL purposes." Presumably this would mean that such amounts are not taken into consideration when calculating capital gains tax for your personal tax return during retirement.

I'm thinking that I'll be able to live off my tax-free superannuation benefits during retirement, make use of margin lending to offset any non-superannuation investment dividends with tax-deductible margin loan interest, and thus have almost no taxable income during retirement.

This should mean that I could sell off, say, $100,000 worth of my non-superannuation portfolio each year during my retirement and have a fairly low capital gains tax liability each year (as the CGT calculation is based on the normal personal marginal tax rates applied to 50% of the realised gain for assets held more than 12 months).

For example, selling $100,000 worth of my portfolio during a retirement tax year, with say 75% of the amount being a "capital gain" would result in a CGT bill of:
75% realised capital gain = $75,000
50% discount applied = $37,500 taxable CG
tax on $37,500 = $6,600 (using 2007 tax rates)

I'm trying to do a spreadsheet comparison of holding my current non-superannuation geared stock portfolio until retirement and liquidating it during retirement using this technique, vs. liquidating the geared stock portfolio now (and paying considerable capital gains tax due to my taxable salary income) and contributing the after-tax amount into my superannuation account where concessional tax rates would apply to the investments. Regardless of what the modelling tells me is the more tax-efficient plan, putting all my investments inside superannuation may not be a wise choice due to the restrictions on accessing any superannuation investments prior to "retirement age". Although I do have an adequate undeducted, non-preserved amount within my superannuation account that could be withdrawn in an emergency.

I'll let you know if my spreadsheet modelling comes up with any useful insights.

US Stock Trade and Portfolio Update

February 16th, 2007 at 08:56 am

This month I selected VRGY from the MagicFormula listing to add to my "Little Book That Beats The Market" Portfolio of US Shares (100% geared). I bought 270 VRGY @ $18.29. My US Stock Portfolio currently stands as:
Symbol P/E Last Shrs Trade Date Paid Comm Value Gain
HRB 25.28 23.83 200 28-Jun-06 24.16 130 $6,074.43 -$ 214.12 - 3.40%
MOT 13.14 19.24 265 24-Jul-06 18.98 130 $6,498.34 -$ 42.18 - 0.64%
MSFT 25.13 29.46 200 21-Aug-06 24.64 130 $7,509.56 $1,098.65 +17.14%
ASEI 24.67 55.95 100 18-Sep-06 49.51 130 $7,131.02 $ 690.80 +10.73%
PWEI 4.11 33.10 150 13-Oct-06 33.29 130 $6,328.07 -$ 166.32 - 2.56%
OVTI 9.72 12.59 300 13-Nov-06 16.47 130 $4,813.92 -$1,613.56 -25.10%
EPIQ N/A 17.98 320 11-Dec-06 15.65 130 $7,333.16 $ 820.29 +12.59%
CRYP 12.23 24.91 200 10-Jan-07 23.92 130 $6,349.73 $ 122.36 + 1.96%
VRGY N/A 18.66 270 14-Feb-07 18.29 130 $6,421.36 -$ 2.67 - 0.04%
9 symbols Total(AUD): $58,459.61 $ 693.24 + 1.20%

As I intend to build up a portfolio of 18 stocks, and then start selling the oldest holding each month and replacing it with a new pick, I'm not doing much investigation of the individual stocks I pick each month. Basically I just run the MagicFormula filter and select half a dozen stocks that have the best looking stats. I exclude any stocks that I feel may have their performance temporarily boosted by the resources boom - ie. any railroad, oil or mining stocks. I then have a look at the 1-yr chart for each of the stocks on my short list, and exclude those that appear to be in a downtrend or starting to drop. With a total holding of 18 stocks I think I'll have enough diversification to basically just pick a random selection of the stocks thrown up by the MagicFormula search tool. After all, it's only supposed to list stocks that have met its "Value" criteria.

My US Stock Portfolio now has the following composition:



And the Poor Shall be made Millionaires.

February 16th, 2007 at 08:53 am

Imagine a world in which every man, woman and child had their income increased 10-fold overnight. You'd think that while the rich would be even richer, the poor would also become quite well-off - having ten times their current income would let them pay off their debts, buy a new car, send their kids to college, and so on... But you'd be wrong. The poor would still be poor, and they'd be just as many poor people as there are now.

Don't believe me? Well, just consider this quote from an article today regarding a study by the United Nations Children's Fund on wellbeing in more than 20 countries :

"Nearly 12 per cent of Australian children fell below what the UNICEF report considered the poverty line - a household where the total income is less than half of the country's median."

The way UNICEF (and social welfare lobby groups) measure "poverty" is in purely relative terms. So it doesn't matter how high a household's income becomes, if their income is less than half the median household income then they're classed as "poor".

While I agree that poverty is relative to some degree (ie. a family in a developed country may have enough income for all the basics of life, yet still be considered "poor" if they cannot afford expenses that are normal for the society they live in, such as a colour TV), logic dictates that there must be some absolute level of income above which a family living in an affluent society is no longer really "poor" just because their income is considerably lower than the typical (median) income.

Otherwise there is no relationship between GDP, incomes and poverty - and the only way to "reduce" poverty is to have everyone on nearly the same income levels.

Zero Balance Transfer CC Arbitrage Update

February 13th, 2007 at 10:49 am

I currently have a total of $18,000 on two CCs (Virgin Money and Coles/GE) as 0% balance transfers, which has been invested in an online account earning around 6% pa. Both these cards mature soon ($6K next week and $12K in March), so it was very timely that one of my other CC accounts (from Bankwest, which I originally opened in order to get a free $100 credit on the account, but don't normally use) sent me an offer to do a balance transfer of up to 95% of my credit limit at 0% for 6 months. I'll take out a $13,500 balance transfer on this card and invest the funds at 6% for the next 6 months, earning $405 for about ten minutes "work".

I still haven't sent in the other new CC app that arrived from HSBC a few weeks ago - I need to complete the application form and send it in tomorrow. I only requested a $10K balance transfer on the application as I don't know what credit limit they'll give me.

Assuming the new card is approved I'll have a total of $23.5K invested at 6% for the next 6 months and I'll have earned around $1,250 interest on OPM in 12 months. Even after paying tax at my marginal rate it will have been worth the small amount of time and trouble involved in getting the cards, applying for the balance transfers, setting up automatic payments of the card minimum payments each month, and shifting funds around at the start and end of the balance transfer period. As I keep the balance transfer amounts invested in an online bank account available at call there's no significant risk involved.

Link Page

February 13th, 2007 at 10:47 am

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