Back on the 12th of August I

posted my thought that it might be a good time to buy some stocks for DS2. At that time the All Ords Index had dropped sharply to 5,965.2 - since then it has rebounded at today was at a new all time high of 6,808.2 (a gain of 14%). Goes to show that you never can tell which way the market will move in the future, but you can be 100% certain where it has been. Looking at a long term plot of the stock market accumulation index, buying when the market had dropped 15% below its recent long-term trend line would almost always turn out to be a good buying opportunity.



However, there are a few problems with this as an investment strategy:

1. When the market has rapidly dropped more than 10-15% you're always worried that it's the start of a bear market that could last several years. As in this case - I delayed buying any stocks for DS1, and could very well never get another opportunity to buy in at those prices.

2. You have to have some spare cash to invest when such opportunities arise - this generally would either mean that you've been sitting on a large cash allocation during a bull market (which would have cost you significant profits), or you'll need to borrow more to invest. And increasing your margin loans when the market has dropped is often very difficult, as it the time when you are most likely to be close to getting a margin call.

Looking at the chart the other thing that comes to mind is that I need to buy some more XAO put options when my current ones expire in December! Although the p/e of the Australian stock isn't out of line with historic averages, and company profits are continuing to grow, the chart does look remarkably similar to previous bubbles - and even just thinking "this time it's different" sends a shudder down my spine.

Copyright Enough Wealth 2007

With the 4% drop in the Australian stock market on Friday the "correction" is now about 8%. While there could be further drops in the coming weeks, even if this is just a correction rather than the start of a bear market, I think it may be time to start looking at stocks to buy for DS2's portfolio. DS2 turns 1 next month and I'd like to buy him a couple of stocks to establish an investment portfolio - perhaps some

CSL or COH. I'm looking for stocks that over the long term should have good growth prospects but don't pay out large dividends - getting too much "unearned income" results in punitive childrens tax rates.

Copyright Enough Wealth 2007

The graph below shows how well my portfolio of around 30 Australian stocks has tracked the All Ordinaries Index since 1 June 2007. As you can see there is fairly strong correlation between my portfolio and the Index (red and blue lines respectively). The chart also shows the effect of gearing (via margin loans) to amplify gains and losses (green line).



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Enough Wealth 2007

I usually get a large dividend payment from my CDF holdings at this time of year, and use it to repay the margin loan interest pre-payment that I've made in late June. Most years I initially pay the interest using my Citibank Redicredit Line-of-credit account and then pay off the citibank debt using my CDF dividend, but this year I chose to capitalise the margin loand interest payment. This means that the $8,416.63 dividend that was paid into my Credit Union account yesterday can be used to make other investments.

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Enough Wealth 2007

Yes, I know that's not news to anyone. So, why all the kerfuffle about a drop of a couple of percent? The Australian stock market even managed to out-drop the US market - falling 174 pts (2.8%). On paper this knocked $15,000.00 or so off my net worth in one day, but I'm a long-term investor with an "aggressive" risk tolerance, so I should expect this to happen once or twice every few years. If it keeps going down another 10% we might even have a genuine "correction".

I can't decide which headlines are more amusing - the ones that say that this is a market "bloodbath" and the start of a bear market, or those that think a 2% decline is a "correction" and a buying opportunity...

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Enough Wealth 2007

Just in case anyone is interested in what stocks are in my Australian Share Portfolios, here's the latest update. Don't take this as any sort of stock recommendation though - a lot of these stocks have been sitting in my portfolio for over a decade, and I'm just too lazy to go through the entire portfolio and try to work out which stocks are worth keeping and which should be ditched. Aside from laziness there are a few other reasons not to tidy up my portfolio:
* Selling stocks would realise capital gains, which would not only reduce the amount of capital invested, but would reduce the amount of family allowance DW gets this year by boosting our combined taxable income.
* The number of stocks in my portfolio means that I'm pretty much diversified out individual stock risk and am left with market risk. These days I tend to think that stock selection is too hard (even most professional fund managers don't beat the index most years) and when I want to add to my portfolio I just buy some more CDF shares (a low-cost index ETF). I do occasionally get bored and buy a particular stock, such as my recent dabble in IPE options, but the amount is trivial and is more to alleviate boredom that to try to boost my portfolio performance.

Current holdings:[font=courier]
Leveraged Equities Account (loan balance $158,711.04, value $314,560.04)
stock qty price mkt value margin
AAN 295 $15.17 $4,475.15 70%
AEO 1,405 $1.95 $2,739.75 65%
AGK 510 $16.00 $8,160.00 70%
AMP 735 $10.41 $7,651.35 75%
ANN 480 $12.48 $5,990.40 70%
ANZ 1,107 $29.47 $32,623.29 75%
BHP 748 $38.17 $28,551.16 75%
BSL 781 $11.55 $9,020.55 70%
CDF 6,943 $1.83 $12,705.69 70%
CHB 118 $51.08 $6,027.44 70%
DJS 2,000 $5.52 $11,040.00 70%
FGL 3,751 $6.31 $23,668.81 80%
LLC 481 $18.58 $8,936.98 75%
NAB 323 $40.08 $12,945.84 75%
QBE 983 $30.70 $30,178.10 75%
SGM 830 $28.57 $23,713.10 70%
SUN 963 $20.52 $19,760.76 75%
SYB 2,880 $4.12 $11,865.60 70%
TLS 5,000 $4.67 $23,350.00 80%
TLSCA 3,000 $3.19 $9,570.00 80%
VRL 1,500 $3.24 $4,860.00 60%
WDC 783 $19.69 $15,417.27 80%
WDCNB 68 $19.10 $1,298.80 80%

Comsec Account (loan balance $109,743.99, value $232,038.86)
stock qty price mkt value margin
AGK 240 $16.00 $3,840.00 70%
AAN 139 $15.20 $2,112.80 70%
APA 4,644 $4.28 $19,876.32 70%
ASX 200 $51.20 $10,240.00 70%
CBA 130 $55.95 $7,273.50 75%
CDF 43,997 $1.89 $83,154.33 70%
IPEO 59,000 $0.06 $3,540.00 0%
IPE 8,000 $1.06 $8,480.00 60%
IFL 1,300 $10.70 $13,910.00 60%
LDW 1,350 $8.30 $11,205.00 0%
NCM 300 $24.35 $7,305.00 60%
OST 2,000 $6.99 $13,980.00 70%
QBE 607 $30.73 $18,653.11 75%
RIO 60 $97.50 $5,850.00 75%
THG 4,000 $1.115 $4,460.00 50%
WBC 300 $26.40 $7,920.00 75%
WPL 220 $46.54 $10,238.80 75%
{/font]

Copyright

Enough Wealth 2007

I had planned on selling off my portfolio of Australian stocks during the next financial year to reinvest the proceeds within our SMSF, but I've decided against this course of action as the realized capital gains would minimize the benefits of shifting the investment into the tax-sheltered SMSF. Instead I'll just salary sacrifice a large part of my salary into super each year (up to the A$50K deductible contributions limit). Since I'm not planning on selling off my portfolio in the next year I've decided to prepay 12 months interest on the bulk of my margin loan balances, so that I can take the usual tax deduction this financial year. For my Comsec loan I've sent in the paperwork to prepay $100K out of the $116,612.16 loan balance, at an interest rate of 8.75%. If I have any spare income during the year (eg. from takeovers) I'll pay off the remaining $16K of variable rate loan remaining. I'll also prepay $120K of the $150K loan balance on my Leveraged Equities margin loan before the 30th June.

For the next two years I'll be supplementing my salary income with the $34K I withdrew from my superannuation account. This will allow me to salary sacrifice at a high rate for those two years. After that time I'll look at slowly selling some of my Australian stock portfolio each year to allow me to continue salary sacrifice into our SMSF. If I get enough pay rise in the next couple of years to offset the amount I wish to salary sacrifice, I'll retain the existing stock portfolio holdings until I retire, at which time I'll have a very low assessable income (under the new Simpler Super rules pension income isn't taxed after you turn 60) and I could then sell off a portion of my holding each year without accruing much CGT liability. Until 75 I would still be able to contribute the proceeds into super while drawing a pension. After 75 I wouldn't be able to contribute into my own super, but I could start to contribute any excess funds into the super accounts of DS1 and DS2. Under current rules up to $150K a year of undeducted contributions could go into each of their accounts each year. As they will be in their 30s by that time I don't expect that they would be contributing that much into their super accounts yet.

All this planning assumes that the superannuation tax rules don't change much in the next 30 years - a most unrealistic assumption! This plan will obviously have to be updated as the rules and our financial situation changes over time.

Current holdings:
Leveraged Equities Account (loan balance $150,000.00, value $316,303.73)
stock qty price mkt value margin
AAN 295 $15.22 $4,489.90 70%
AEO 1,405 $2.04 $2,866.20 65%
AGK 510 $15.32 $7,813.20 70%
AMP 735 $10.01 $7,357.35 75%
ANN 480 $12.00 $5,760.00 70%
ANZ 1,107 $28.78 $31,859.46 75%
BHP 748 $31.06 $23,232.88 75%
BSL 781 $11.27 $8,801.87 70%
CDF 6,943 $2.02 $14,024.86 70%
CHB 118 $51.01 $6,019.18 65%
DJS 2,000 $5.13 $10,260.00 65%
FGL 3,751 $6.27 $23,518.77 75%
LLC 481 $19.82 $9,533.42 70%
NAB 316 $42.40 $13,398.40 75%
QAN 2,175 $5.06 $11,005.50 70%
QBE 983 $31.56 $31,023.48 75%
SGM 830 $27.08 $22,476.40 70%
SUN 963 $21.16 $20,377.08 75%
SYB 2,880 $4.37 $12,585.60 70%
TLS 5,000 $4.78 $23,900.00 80%
TLSCA 3,000 $3.31 $9,930.00 80%
VRL 1,500 $3.20 $4,800.00 60%
WDC 783 $20.77 $16,262.91 75%

Comsec Account (loan balance $116,612.16, value $229,848.59)
stock qty price mkt value margin
AGK 240 $15.32 $3,676.80 70%
AAN 139 $15.23 $2,116.97 70%
APA 4,644 $4.22 $19,597.68 70%
ASX 200 $48.39 $9,678.00 70%
CBA 130 $55.03 $7,153.90 75%
CDF 43,997 $2.02 $88,873.94 70%
IPEO 54,000 $0.019 $1,026.00 0%
IPE 8,000 $0.995 $7,960.00 60%
IFL 1,300 $10.25 $13,325.00 60%
LDW 1,350 $7.81 $10,543.50 0%
NCM 300 $21.68 $6,504.00 60%
OST 2,000 $6.52 $13,040.00 70%
QBE 607 $31.60 $19,181.20 75%
RIO 60 $94.55 $5,673.00 75%
THG 4,000 $1.02 $4,080.00 50%
WBC 300 $26.03 $7,809.00 75%
WPL 220 $43.68 $9,609.60 75%


Changes to portfolio since last update:

I sold my Qantas shares on the market for $5.39 on the last day before the takeover offer closed. I guessed correctly that the APA offer would fail to reach the required acceptances to proceed, and over the next few days the QAN share price dropped, as had been expected. However I had expected the price would drop to under $5.00. In fact the stock price has since increased after the Qantas management released an upbeat assessment of their prospects, and is now trading around $5.60. The proceeds of the sale reduced my loan balance below the $150K I had prepaid interest on for this financial year, so Leveraged Equities automatically moved the surplus amount into the linked Cash Management Account so I'm at least getting some interest on this bit of borrowed money.

My AMP holding increased by 15 shares due to a dividend reinvestment. I no longer enrol in DRP for new stocks I buy as there is little if any price discount and the hassles of keeping records for CGT calculation outweighs the benefits. I simply use dividends to help pay the interest on my margin loans.

My QBE holding increased by 17 shares due to a dividend reinvestment.

My SUN holding increased by 113 shares due to a Share Purchase Plan offer I took up.

My SYB holding increased by 32 shares due to a dividend reinvestment. This company is currently subject to a take over offer, which pushed the price up from $3.70 to $4.37. As the offer is a cash plus stock mix I may decide to sell my holding on the market rather than accept the offer.

I'm still not sure if selling my Qantas shares last Friday for $5.39 was a great move, or a real dud. QAN has been in a trading halt all day today. The company which mounted the takeover (APA) has apparently not decided what they're going to do, or if their takeover bid really did fail to make the 50% control required for the bid to get a two week extension. Initially they announced on Friday night that they had failed to get 50% acceptances by the deadline. Then they convinced a US hedge fund to sell at least half their stake, pushing APA over the 50% mark, but after the deadline for acceptances had passed. Over the weekend the takeover review board didn't allow an exception to the deadline, so the bid appeared to have definitely failed. Then today there was talk that apparently the offer document included a clause stating that partial acceptances were not allowed, and would be deemed to be a full acceptance, so the takeover *might* have actually achieved the required 50% before the deadline - but no-one is sure, and applying this clause would probably end up in the courts.

Meanwhile, the Australian government has sent Qantas a "please explain" memo regarding a possible breach of the legislation that requires foreign ownership of Qantas to be less than 50%. Apparently with all the share trading in the past few days, much of it controlled by foreign hedge funds, this rule may have been broken. If so, Qantas has to go through all the transactions and reverse out enough done by foreign parties to get back to the 50% limit.

Hmmmm... no matter what does eventually happen to the takeover bid and the listed share price, I think I am better off having sold out after all.

Enough Wealth

The Qantas takeover offer by APA closed a little while ago (7pm AEST). The offer price was $5.45 cash per share, but I chose to sell my shares on market this morning for $5.39, even though this also meant having to pay $128.95 brokerage (1.1%). My reasoning is that there is a risk that the offer will lapse, as it requires 70% to succeed, and at least 50% by 7pm tonight in order to be able to extend the offer period a further 2 weeks. As of this morning APA reported having 35% of Qantas. They might make their target (they'll announce the final figure during this weekend), but, if they fail there's no guarantee that a higher offer would be forthcoming. If that happened the share price could easily drop back to under $4. As I was happy to take the offer price, I prefer a bird in the hand to a bird plus 12c that might get away...

Sell QAN QANTAS Airways 09/05/2007 2,175 $5.39 -$11,594.30

Enough Wealth

An Interim Dividend of $160.00 fully franked (franking credit $68.57) arrived from Onesteel.

I also received the confirmation notice for the 113 Suncorp shares I'd bought for $15.50 in the recent share entitlement offer. As expected the stock price for Suncorp didn't drop very much from the dilution (probably not everyone took up their entitlement). They're currently trading at $21.60, so the offer price turned out to be a bargain.

Enough Wealth

My Networth as at 31 Mar totalled $1,070,988 (AUD), an overall increase of only $4,210 (0.39%) for the month. My stock leveraged stock portfolios increased by a net 3.52% during March, and the estimated valuations for my share of our home and investment property increased 1.42% compared to last month, which is encouraging. The property gains were slightly offset by our mortgage loan balances increasing by a net $1,084 (0.30%) due to our monthly redraw of $3,500. We're redrawing some of our advance mortgage payments to help with our repayments while DW is on maternity leave.

The biggest negative for the month was a sharp drop in the valuation of my retirement account, which wasn't recovered fully by the stock market recovery - possibly some fee or tax liability was paid out during the month. The retirement account balance ended down $6,628 (2.00%) for the month. I'll have to check all the transactions for the month online to confirm exactly what was going on, but the online transactions are a pain to analyse - having half a dozen investment options (mutual funds) in my retirement account, each and every transaction is split into a separate transaction for each investment option. The easiest method is to download the relevant date range and import it into excel, then sort by transaction type and description and total up all the related items for each date to work out the total amounts being deducted for fees, insurance premium, fee rebate, tax etc.

Enough Wealth

A couple of dividend statements arrived today - $403.23 from Foster's Group and $324.08 from Australian Pipeline Trust. The Foster's dividend is fully franked (ie. carries a tax credit for the 30% company tax that has been paid), so on my tax return I'll declare both the dividend and the franking credit as income, but get a tax credit for the amount of the franking credit ($172.81). This basically means that I'll only have to pay additional personal income tax on this dividend if my marginal tax rate ends up higher than 30% (ie. in the 40% or 45% range). As I usually reduce my taxable income considerably via the tax deductible interest paid on my margin loans, I'll probably not have to pay any additional tax on this dividend. If my marginal tax rate was lower than 30% I'd get a tax refund for the excess franking credit.

The Pipeline Trust dividend was actually a combination of unfranked dividend of $185.76, a capital return of $69.66 which is not taxable (but which reduces the cost basis of the shares when they are eventually sold and capital gain is calculated), and a trust distribution of $69.66 which gets reported under a different tax item from dividends and has different tax treatment - I don't know exactly what, the details will be in the end of financial year taxation statement from the trust. Overall I prefer the simplicity of a straight dividend to trust distributions, even if they have favourable tax treatment!

I filled in an online application for a self-managed superannuation fund (SMSF) account with esuperfund.com. As its nearing the end of the 2007 tax year (30 June 2007), and a SMSF has to report each year to the tax office, eSuperFund has an offer of $0 annual fee (as well as the usual $0 establishment fee) for the 2007 fund paperwork. This is good, as it lets me get the fund established this financial year and have everything in place to transfer most of my existing superannuation account balance into the SMSF asap. I'll probably leave a small balance in my existing super fund with BT Employer Superannuation, just to keep my existing life and TPD insurance in place. I may even leave my employer 9% SGL contributions and salary sacrifice amounts going into the BT account as the 1% admin fee on these small amounts will not be material. I can always transfer additional amounts into the SMSF later on. My wife will probably transfer her entire balance and arrange for future contributions to go into the SMSF as she has a smaller balance and won't be doing any salary sacrifice while working part-time for the next few years (until DS2 starts school).

Finally, I didn't do much spending today - $39.64 for some grocery shopping, and $26.60 for petrol. I normally fill up the car on a Tuesday as that is generally the bottom of the weekly price cycle, but as there is often an early increase in petrol prices immediately before the Easter long weekend, I decided to fill up today instead.

Enough Wealth

Having done a rough risk estimate on Friday night as to whether or not Qantas shares were worth a punt at $5.06, and concluding that they were. I proceeded to second guess myself this morning when I checked the share price half an hour after the market had opened. QAN was trading down at around $5.03, while the general market had shot up at the open. This of course meant that either QAN was an even better buy, or that, with QAN continuing to head south while the market was trending up, I'd misread the prospects for the QAN share price. As I lack the "killer instinct" a successful trader requires (the same instinct that also made Leason loose 827 million pounds), I proceeded to dither and decided against placing an BUY order with a $5.00 limit.



Of course, after dipping briefly below $5.00, QAN shares ended the day up 1.8% from there at $5.09. If I buy some tomorrow the market is certain to drop a bit, and QAN shares will dip back below $5.00. And if I do nothing, they'll continue upwards and eventually they'll exceed the takeover price of $5.45...

This indecision is why I'm tending more towards geared investments in the market index. And, as many wiser investors than I have said before me, I hate losing money more than I enjoy making it.

Enough Wealth

I haven't posted an update of my Australian Stock Portfolio for a while. I don't have much turnover in my Australian stock portfolio as I generally follow a "buy and hold" strategy.

I'm tending more towards index investing these days, although at the same time I've started experimenting with direct stock picking for my US stock portfolio. My excuse for the US portfolio is that it gives me something interesting to do, and, once I'm fully invested with 18 US stocks it will be pretty well diversified and track the index reasonably well anyhow - I'm just hoping for some outperformance.

I've been sorting through my old records to get my transaction logs up to date for calculating how much capital gains tax I'd be liable for if I sold off my stock holding so I could invest my money in a tax-sheltered superannuation account (SMSF). It's interesting to be reminded of what "might have been" when going through these old transactions

- the purchase of Southern Pacific Petroleum as a long-term oil-price play, which ended up being worthless when the company went broke and sold off all the oil shale assets to a texas oil billionaire! If only they'd raised some more capital from the existing shareholders and hung on for another year or two the spike in oil prices would have made the stock skyrocket!

- the purchase of CSL stock at $2.50 which I sold off at $3.40 less than a year later for a quick 40% profit. I was quite pleased with that trade. Unfortunately the company has continued to appreciate over the years and is now worth $83.70 a share!

Current holdings:
Leveraged Equities Account (loan balance $155,620.68, value $307,620.68)
stock qty price mkt value margin
AAN 295 $14.15 $4,174.25 70%
AEO 1,405 $2.00 $2,810.00 65%
AGK 510 $15.80 $8,058.00 70%
AMP 720 $10.37 $7,466.40 75%
ANN 480 $11.51 $5,524.80 70%
ANZ 1,107 $29.52 $32,678.64 75%
BHP 748 $29.18 $21,826.64 75%
BSL 781 $9.94 $7,763.14 70%
CDF 6,943 $1.85 $12,844.55 70%
CHB 118 $50.00 $5,900.00 65%
DJS 2,000 $4.68 $9,360.00 65%
FGL 3,751 $6.66 $24,981.66 75%
LLC 481 $19.76 $9,504.56 70%
NAB 316 $40.54 $12,810.64 75%
QAN 2,175 $5.06 $11,005.50 70%
QBE 966 $31.95 $30,863.70 75%
SGM 830 $22.89 $18,998.70 70%
SUN 850 $20.65 $17,552.50 75%
SYB 2,848 $3.70 $10,537.60 70%
TLS 5,000 $4.47 $22,350.00 80%
TLSCA 3,000 $3.02 $9,060.00 80%
VRL 1,500 $3.25 $4,875.00 60%
WDC 783 $21.23 $16,623.09 75%

Comsec Account (loan balance $106,302.53, value $219,712.40)
stock qty price mkt value margin
AGK 240 $15.80 $3,792.00 70%
AAN 139 $14.15 $1,966.85 70%
APA 4,644 $4.19 $19,458.36 70%
ASX 200 $42.90 $8,580.00 70%
CBA 130 $50.27 $6,535.10 75%
CDF 43,997 $1.92 $84,474.24 70%
IPEO 54,000 $0.048 $2,592.00 0%
IPE 8,000 $0.985 $7,880.00 60%
IFL 1,300 $10.10 $13,130.00 60%
LDW 1,350 $7.70 $10,395.00 0%
NCM 300 $23.56 $7,068.00 60%
OST 2,000 $5.08 $10,160.00 70%
QBE 607 $31.95 $19,393.65 75%
RIO 60 $76.85 $4,611.00 75%
THG 4,000 $0.925 $3,700.00 50%
WBC 300 $26.15 $7,845.00 75%
WPL 220 $36.96 $8,131.20 75%


Enough Wealth

Just as well I didn't believe the CMC Markets Rep on Friday when he said that if I transferred the initial $1000 into my new account that day, an "automated" email with my login details would arrive on Monday... we'll see if the account email arrives tomorrow. I won't make an intial CFD trade until next month, but I'd like to install and "play" with the trading software asap.

Meanwhile some dividends were deposited into my account today, $442 from SUN, $144.60 from ASX, and $326.25 from QAN.

And I finally got around to setting up the automated payments of the minimum monthly amounts due on the HSBC and BankWest Credit Card accounts that I've taken 0% balance transfers from. I set up the minimum amounts ($300 for BankWest on a $12,500 balance transfer, and $270 for HSBC on a $10,000 balance transfer) to happen a few days before the due date each month to allow for when the due date falls on a public holiday or weekend. I'll still double check each months statement to make sure the payment will happen before it's due - I've previously had experience of a CC company changing the monthly due date without notice!

Aside from this I'm making slow progress sorting 2,000 rows of portfolio transaction data from my old Quicken backup into a capital gains transaction log. I'm 75% done so I should be able to finish it off tonight and merge it with my CGT spreadsheet I'd already setup with transactions since 2000. Hopefully the calculated final stock holdings will mostly reconcile with my current CHESS and margin loan account statements, so I won't have to go fishing through filing cabinets to verify 20 year old broker statements.

If I get everything reconciled by the weekend I'll be in a position to evaluate a few pending decisions around stock buy-backs, selling stocks and realising capital gains so I can move the funds into a SMSF, and what end-of-financial year arrangements I'll need to make regarding tax deductible loan pre-payments etc. in order to manage my taxable income and hence Capital Gains tax rates for this year.

Enough Wealth

Both BHP-Billiton and Foster's Group have sent out the paperwork for an off-market share buy-back. It's a bit hard to calculate the exact benefit of taking up these offers as
* the number of shares accepted may be scaled back, leaving me with a smaller parcel of shares in the company
* the final buy-back price will be determined in the tender proces, and will be at a discount to the market price of between 10%-14% (BHP) and 5%-14% (FGL)
* the amount of the buy-back price subject to capital gains tax will depend on the final buy-back price, as the "capital component" PLUS an "excess tax value" equal to the difference between the "tax value" of the shares at the time of the buy-back (as determined by the ATO) and the final buy-back price
* the amount of the buy-back price assessed as a fully franked dividend will be the difference between the final buy-back price and the "capital component"

As I'll probably have a marginal tax rate of 30% this year (it depends what tax deductions I arrange through pre-payment of 12 months of my margin loan interest) the franking credit of 30% with offset the tax due on the "franked dividend component" of the buy-back. This will mean that I only have to pay 15% CGT on the amount by which the capital component and excess tax value exceeds the orginal purchase price of my shares. As I haven't got all the old paperwork sorted for my BHP and FGL share purchases I don't really know if I'll likely make a net capital gain or capital loss on these buy-backs, but in any case it will be a much lower CGT liability than if I sold these shares for full market price. Exactly how beneficial the buy-back is compared to selling the shares for full market price will depend on the popularity of the buy-back, and hence what the final tender price discount is.

I'll have to sort out the cost base my BHP and FGL shares this weekend so I can decide whether or not to accept the buy-back offers before the tender period closes (23 March for BHP, 5 April for FGL).

If the after tax proceeds of the buy-back look better than selling the shares on market I'll probably take up the offer for all my shares (3,751 FGL and 748 BHP) as I was planning on liquidating my stock portfolio of the next few years and reinvesting the funds in a DIY retirement fund (SMSF). I also have to do some estimates of how beneficial it will be to sell and reinvest the after CGT funds in stocks within a SMSF compared to retaining my current geared portfolio outside super and selling it off during my retirement when I should be able to restrict capital gains tax rate to around 10% anyhow.

Australian and the Asian Markets were all down again today - it looks like this may end up being a "real" correction of 10-15% rather than just a "blip" that we've had several times before during the past three years of bull run. It will be interesting to see what the US bloggers post tomorrow if the US Market also drops a couple of percent tonight - there were already some "newbie" stock investors posting comments about "crashes" or "corrections" after just dropping 3%!

If the market levels out after a 10-15% correction I may have to seriously consider whether to take a profit on my ASX200 Index Put Options, and hope the bull market resumes for the remainder of the year. Or whether to hold on to them, and possibly buy some additional Put Option Contracts so that I'm fully covered against a possible bear market (30%-50% drop?).

So far my Australian Stock Portfolio is down around $40,000 from the peak - it will be interesting to plot my stock portfolio "losses" vs. the "gains" on my Option Contracts that Comsec emails to me each day (based on the previous days closing "market price" for the Options Contract). In theory the 3 contracts should offset something like 25%-30% of my portfolio losses.

Enough Wealth

Moom asked what date the ASX200 Put Options that I mentioned in my previous post expire - they are the 5500 options which expire on 20-Dec (XJOQT). I bought them on 9-Feb at 158.00, so the 3 contracts (each contract is for 1,000 options) cost $4,795.77 (including brokerage).

For interest I looked up the ASX200 index (XJO) closing value and plotted it against the "market price" for the XJOQT options that Comsec has been emailing me each day since I opened my position. As you can see, the option price has a negative correlation to the ASX200 Index, but the correspondence isn't perfect as the market for the options is quite thin and the buy-sell spread is larger than you'd get trading stocks. As the Options don't expire until Dec-20 their current price is a combination of the strike price relative to the current Index value, and the "time value" of the option until expiry. At the moment it appears (from the graph of option price vs. index value) that each contract would be worth around $5,000 if the index dropped to the 5500 level (another 5.5% drop from current levels), but at the expiration date of 20-Dec the options would have no value above the 5500 level, and will be "cashed out" for $10 per 1 pt below 5500 on 20-Dec (if I hold them until expiry).



As my entire direct investment in the Australian stock market is around $600K each 1pt decline in the market costs me around $100. Therefore I'd have to be holding 10 of the Index Put Option contracts to be fully covered for losses below the contract strike price. With only 3 contracts I'd be making $30 profit on the contracts for each 1 pt decline to offset against the $100 loss on my stock holdings. As my stock portfolio is currently geared around 100% I'd need 5 contracts to make my portfolio losses match the actual % market decline below the 5500 level, and 10 contracts to be fully "insured" against any loss if the market drops below 5500 prior to Dec-20.

I'll buy another 5 or 7 contracts if the market resumes it's bull run and goes above the 6100-6200 level. Hopefully I can get fully "insured" against drops below the 5500 level for a total cost of around $10K (around 1.7% of my portfolio value, or around 3.3% of my equity). This would "cap" my exposure in a bear market to a maximum loss on my Australian stock portfolio to around $35K, or about 10% of my equity in AU stocks. I'd still retain my exposure to any upside if the market continues it's bull run. If the market gains another 10% by the second half of '07 (around the 6400-6500 level) I'll look to start selling off half my AU stock portfolio and use the proceeds to eliminate my gearing until the end of the next bear market is in sight (ie. All Ords back down to around the 4000 level).

Although this all smacks of an attempt to "time the market" I think it's prudent to make use of Put options when the market has gone up around 20% for each of the past three years, and to look at reducing my use of gearing when the market's p/e appears to be getting stretched at the end of an extended bull run.

I've finally bitten the bullet (gently) and bought my first real "derivatives" - I placed an order today to BUY 3 contracts for the S&P/ASX-200 index PUT option, 20-Dec-2007 expiry date. Each contract is for 1,000 'shares' (a strange terminology when you're buying index options) and the price range quoted when I placed the order was $1.44-$1.63. I started out telling the broker to set my buy price at $1.50 but he advised that this would take a long time to fill. I asked if the price varied more with time (ie. as we get closer to the expiry date the price should drop) or with the current value of the index (once you are "in the money" the contract is worth $10 per point at the expiration date). He wasn't terribly helpful, so I decided to bid $1.60 - so hopefully this order was filled.

The whole options trading thing is a bit of a pain - rather than just login and place an order with my normal online broking service, they have a special "power trader" application that provides live option pricing, charts etc. I looks really cool, but unfortunately I can't install it at work, and options trading is only available during market hours, so I can't use the software to trade options at home anyhow. So I have to phone the broker during business hours to trade options. Probably a good idea to start with, as I don't really know what I'm doing.

My geared stock portfolio is worth around $525,000 at the moment, with margin loans of $264,000. Hence my equity is around $261,000 at present. Although my portfolio doesn't exactly track the ASX-200 index, it does have a high correlation with the index. A change in the ASX index of 1 point is worth about $90 to my equity. Thus at my current gearing level a 2900 point drop in the index (just under 50%) would wipe out my equity entirely (but I'd be getting margin calls long before that!).

As each 1 pt decline below 5500 is worth $10 at the expiration date of an ASX200 5500 20-Dec-2007 PUT Option, I'd have to own around 9 of these PUT option contracts to offset the losses on my portfolio entirely below the 5500 level. I've started out by buying just 3 contracts today, as the market still seems to have upward momentum, and I might be able to buy additional contracts in future at a lower price (or ones with a higher strike price for the same cost). The three contracts will cost around 3*1,000*1.60 = $4,800 plus $100 brokerage. This equates to an "insurance premium" of 1.87% of my current equity. These contracts will reduce my losses below the 5500 level by around 1/3:

Full coverage for losses below 5500 up to 20-Dec would cost three times this amount (ie. 5.61%), so this strategy isn't sustainable indefinitely.

I'm only doing it now as the market seems to have reached dangerously high levels, plus the fact that I don't want to sell off significant holding and realise capital gains this tax year. I expect to start selling off some of my stock holdings after 1 July to reduce my gearing and start shifting my equity investments into a self-managed superannuation structure. This will mean that by the time the PUT options expire in December I won't have much of a geared exposure to shares (you can't directly use gearing within a superannuation account), and may have diversified some of this investment into other asset classes (eg. foreign stocks, commercial property, bond funds).

We'll see how this works out over the next 6-10 months.

The takeover of Mayne Pharma by Hospira was finalised last week and a cheque for $11,389.80 arrived in the post yesterday. I don't mind the price ($4.10 per share) as I made a decent profit on this stock, but compulsory takeovers are always a bit of a pain as they don't necessarily fit in with your ideal schedule for realising capital gains.

Anyhow, it could be a lot worse - a few years ago (before the commodity boom and oil price increases) I had a long-term view that commodities in general, and oil in particular, would go up in price over the medium to long term. To get maximum benefit for such a price rise I decided to buy some shares in an oil-share company (Southern Pacific Petroleum) that had a working test-scale oil shale plant in Queensland, and mining rights to a massive oil shale deposit. Unfortunately there were a few problems with the test plant (smelly emissions annoying the nearest townsfolk), and they ran out of money while trying to develop the pilot-plant stage of the project. The very low prices for oil at the time also didn't help. I'm still annoyed that they didn't try to raise further capital from the existing shareholders. Instead they simply sold off the entire company to a US investor who assumed their liabilities. The existing shareholders ended up with no return and no interest in the oil shale deposits. Now of course the company would be worth a fortune.

One lesson from that debacle is to not try to be too "smart" (aka. greedy) - rather than investing in a small, speculative oil-related mining company, I should have just invested the money in an established oil company, such as Woodside, or an oil refiner, such as Caltex Australia.

yet another case of "what might have been" - just like the time I invested in a pre-IPO internet company (called Global Entrepreneurs Network "GEN") in the late 90s, rather than in Amazon.com

The past month provided more good gains in my stock portfolio and retirement account, offset only slightly by a small drop in the valuations of my real estate assets:
* Average property prices were slightly down, dropping my property equity by $4,146 or 0.58%. We also had to redraw $3,500 from our home loan prepayments to meet our repayments as DW is on maternity leave and not earning any income at the moment.
* My stock portfolio equity went up another $19,568 (5.50%) this month and my retirement account also increased significantly, although it was boosted a bit by some extra contributions being deposited by my employer this month - up by $12,561 to $324,598 (up 4.03%).

My Networth as at 31 Jan now totals $1,058,372 (AUD), an overall increase of 2.48% for the month.

As discussed in a previous post, I'm looking into either buying Index Put options to protect against significant losses if the market drops, or else selling off some of my stocks to repay my margin loans and eliminate my gearing while the market is at the current high level. I'm leaning towards the Put Options idea as I don't want to realise capital gains this financial year, and most of my margin loans have had the interest prepaid until 30th June, so I should keep my investments until then (and keep my fingers crossed that the market goes up a bit more until then).

Although my preferred strategy is a "high-growth/high-risk, buy-and-hold, stick to your asset allocation" one, there comes a time when the market starts to look a bit too high to any dispationate observer. The pundits are still saying that the Australian stock market isn't cheap but isn't too expensive either, based on historic p/e ratios and company profitability outlook. Then again, they're saying that after three consecutive years of total returns of 20%+ the best they expect this year is around 10%, so the upside seems limited, while the downside risk has obviously increased from what it was four years ago. Looking at the chart for the All Ordinaries Accumulation Index since 1980 the current market rise looks a lot like 1987 - and we all know how that ended up!



Anyhow, the Superannuation (retirement) account for my son was invested with the following asset allocation:
80% Geared Australian Share Fund
20% International Shares Fund
This allocation has performed very well since I opened his account four years ago, with returns of:
FY 04/05 25.3%
FY 05/06 42.0%
I figure that having gotten off to such a good start DS1 can now afford to move to a more conservative, high-growth asset mix (even though at age 6 he has another half century before he reaches retirement age), so today I sent in the paperwork to change his investment mix to:
30% Australian Share Fund
10% Australian Small Co Share Fund
20% International Shares Fund
20% Property Securities Fund
20% Australian Bonds Fund
This is still a high-growth, high-risk allocation (with 60% in stocks) so it should provide a good rate of return over the next 50 years, but at lower volatility than the previous asset mix. If there's ever a significant (30%-50%) correction in the Australian Stock Market I'll think about moving some funds back into the geared Australian Share Fund again. I think this weak form of market timing is called "dynamic allocation" - but it's still just a guess no matter what you call it.
* * * *
The current market also has me a bit nervous about my Australian Share Portfolio. I have two margin lending accounts holding $540K of Australian Shares, with a loan balance of $263K, so a severe market correction would have a big impact on my Net Worth! I'm toying with the idea of buying some PUT options on the ASX200 Index as insurance against a major market correction occurring between now and the options expiry date (21 June 2007). For $12K I could buy enough Options to offset any losses where the market drops below 5500 (it's currently at about 5750). The simpler option (excuse the pun) would be to just sell off enough of my portfolio to pay off the margin loan balances - but the interest has been pre-paid until 30 June 2007, so I'd be throwing five months of interest payments down the drain if I paid off the loans now. I also have reasons for not wanting the realise a capital gain prior to 30 June.

I received a couple of dividend statements today for my investments in the Commonwealth Diversified Share Fund [ASX code: CDF] - a sort of ETF that aims to replicate the S&P/ASX200 Accumulation Index. I was interested to see how the Annualised Net Return (change in net asset value per unit after fees, taxes and expenses, assuming all distributions are reinvested) compared to the ASX200 Accumulation Index:

1 Year 3 Year 5 Year
Net Return 23.27% 24.31% 14.78%
S&P/ASX200 24.22% 25.00% 15.35%
Difference 0.95% 0.69% 0.57%

This shows that the effective "fee" for using this "Index" fund is around 0.57% - 0.95% (it varies as in some years they outperform or underperform the index by a slight amount - aka. "tracking error").

This compares favourably to investing in, say, Vanguard Australia's "High Yield Australian Shares" Index Fund, which invests in the S&P/ASX200 stocks (excluding LPTs) which has a management fee of 0.90% for the first $50,000 invested (0.60% for the next $50,000 and then 0.45% for the balance of your investment in this fund over $100,000).

The buy-sell spread of 0.30% for the Vanguard Fund is slightly higher than you'd pay in brokerage costs for buying a parcel of over $10,000 of CDF stock.

The only substantial difference between these two methods of investing in the ASX200 index that I can spot is that the CDF shares occasionally trade at a small discount to the ASX200 index (XJO), so you could save yourself the buy-sell spread and a couple of year's worth of management fees by timing your purchase carefully:

While I was feeling bored at lunchtime the other day I searched the 'net for info about how my old employer, Hi-com International, was going. It might seem odd that I care, since they retrenched me after more than ten years service, but I quite enjoyed working on the engineering research projects there and would like to see how they've progressed since I left them in 1998. Well, blow me down, if the company hadn't gone broke (put into "administration") and been bought out by a listed company (Ludowici) last September! I checked out this company and they seem to be doing quite well out of the commodity boom, and plan to expand cautiously overseas, so their prospects seem OK. I decided to buy a parcel of shares in Lucowici so I can watch what they do with Hi-com International now that they own it.

Well, maybe, maybe not. I've seen a few articles about the resources boom that hold the view that when the Chinese economy and World economy takes breather (next year?) commodity prices will drop back down to their pre-boom prices as new production (stimulated by the recent profitability of resources companies) comes on stream.

A contrary view is that exploration and development was at very low levels between 1998 and 2003, so the push for increased production has only just begun. Couple this will a typical lead-time of up to 10 years to get a new mine into production and the picture for commodity prices looks somewhat more rosey.

Today's Australian Financial Review also had some interesting facts about the concentration of commodity production - a handful of big resources companies control the lion's share of production, and therefore are in a good position to maintain high commodity prices in the medium term:

Commodity % output from big-5
Produced in each industry
Platinum 94%
Iron Ore 85%
Nickel 82%
Alumina 55%


I think I'll hold on to my BHP and Rio Tinto stocks for a while longer - especially as they've already come back considerably from the peaks earlier in the year.

My stock portfolio ended up 7.25% this month. $6000 of my Telstra Installment Warrant purchase has appeared in my Leveraged Equities Margin Loan account, the other $4000 worth ended up being issuer sponsored (I had expected them to be part of my Comsec Margin Loan account) - I should have looked more closely at the "personalised" offer documentation I filled in for this allocation. It doesn't really matter - I have low gearing level on my comsec account, so the extra equity isn't required. If I transferred this allotment to my Comsec account I would lose out on the 10c discount on the second payment (due in 2008) and the 1:25 "loyalty" bonus share issue. So I'll leave this allotment as issuer sponsored until after the final payment and bonus share allotment is completed.

Current holdings:
Leveraged Equities Account (loan balance $155,585.68, value $287,540.31)
AAN Alinta Mergeco Ltd 295 $10.220 $3,014.90 70% $2,110.43 1%
AEO Austereo 1,405 $2.150 $3,020.75 65% $1,963.49 1%
AGK AGL Energy Limited 510 $15.500 $7,905.00 70% $5,533.50 3%
AMP AMP 720 $9.450 $6,804.00 75% $5,103.00 2%
ANN Ansell 480 $11.300 $5,424.00 70% $3,796.80 2%
ANZ ANZ Bank 1,107 $28.100 $31,106.70 75% $23,330.03 11%
BHP BHP Billiton 748 $25.930 $19,395.64 75% $14,546.73 7%
BSL Bluescope Steel 781 $8.130 $6,349.53 70% $4,444.67 2%
CASH Adelaide Bank CMT 14 $1.000 $14.94 100% $14.94 0%
CDF C/wealth Divers Fund 6,700 $1.750 $11,725.00 70% $8,207.50 4%
CHB Coca Cola Hellenic 118 $44.250 $5,221.50 65% $3,393.98 2%
DJS David Jones 2,000 $3.770 $7,540.00 65% $4,901.00 3%
FGL Foster's Group 3,751 $6.550 $24,569.05 75% $18,426.79 9%
LLC Lend Lease Corp 481 $17.300 $8,321.30 70% $5,824.91 3%
MYP Mayne Pharma Ltd 2,778 $4.120 $11,445.36 70% $8,011.75 4%
NAB National Aust Bank 309 $38.600 $11,927.40 75% $8,945.55 4%
QAN QANTAS Airways 2,175 $5.060 $11,005.50 70% $7,703.85 4%
QBE QBE Insurance 966 $25.250 $24,391.50 75% $18,293.63 8%
SGM Sims Gp Limited. 830 $19.600 $16,268.00 70% $11,387.60 6%
SUN Suncorp-Metway 850 $20.170 $17,144.50 75% $12,858.38 6%
SYB Symbion Health 2,848 $3.510 $9,996.48 70% $6,997.54 3%
TLS Telstra Corp 5,000 $3.730 $18,650.00 80% $14,920.00 6%
TLSCA Telstra (T3) 3,000 $2.300 $6,900.00 80% $5,520.00 2%
VRL Village Roadshow 1,500 $2.900 $4,350.00 60% $2,610.00 2%
WDC Westfield Group 783 $19.220 $15,049.26 75% $11,286.95 5%

Comsec Account (loan balance $94,108.28, value $191,706.31)
AGK AGL ENERGY LIMITED 240 15.560 $3,734.40 70.00 % $2,614.08
AAN ALINTA LIMITED 139 10.220 $1,420.58 70.00 % $994.41
APAR AUSTRALIAN PIPELINE TRUST 1,032 0.410 $423.12 0.00 % $0.00
APA AUSTRALIAN PIPELINE TRUST 3,612 4.160 $15,025.92 70.00 % $10,518.14
ASX AUSTRALIAN STOCK EXCHANGE 200 36.130 $7,226.00 70.00 % $5,058.20
CBA COMMONWEALTH BANK OF AUSTRALIA. 130 47.120 $6,125.60 75.00 % $4,594.20
CDF COMMONWEALTH DIVERSIFIED FUND 43,997 1.752 $77,082.74 70.00 % $53,957.92
IPEO ING PRIVATE EQUITY ACCESS OPT. 54,000 0.075 $4,050.00 0.00 % $0.00
IPE ING PRIVATE EQUITY ACCESS 8,000 0.970 $7,760.00 60.00 % $4,656.00
IFL IOOF HOLDINGS LIMITED 1,300 10.230 $13,299.00 50.00 % $6,649.50
NCM NEWCREST MINING LIMITED 300 25.670 $7,701.00 60.00 % $4,620.60
OST ONESTEEL LIMITED 2,000 4.500 $9,000.00 60.00 % $5,400.00
QBE QBE INSURANCE GROUP LIMITED 607 25.250 $15,326.75 75.00 % $11,495.06
RIO RIO TINTO LIMITED 60 74.520 $4,471.20 75.00 % $3,353.40
THG THAKRAL HOLDINGS GROUP 4,000 0.910 $3,640.00 50.00 % $1,820.00
WBC WESTPAC BANKING CORPORATION 300 23.900 $7,170.00 75.00 % $5,377.50
WPL WOODSIDE PETROLEUM LIMITED 220 37.500 $8,250.00 75.00 % $6,187.50


stocks

I received a thick wad of information in the post yesterday about a 2 for 7 renounceable rights issue from Australian Pipeline Trust. The rights are to purchase additional APA shares at $3.75 (a discount of around 15% to the current share price). Sounds OK, doesn't it? Well, yes, for most investors it's OK, even if not the windfall some may think. (As the new shares issued at this reduced price tend to make the share price drop for your current holding, so it all generally averages out - the only real benefit is that the company is getting funding at a better rate than it could get elsewhere).

However, while I'm OK with having to fork out around $3,800 to take up the rights issue (in fact I sent it on to my margin lender today, so the amount will simply be added on to my margin loan balance, so it won't affect my cashflow), some smaller shareholders may find themselves losing out. If they do not take up the offer, then the rights expire with no value, and the underwriter will, in effect, purchase the relevant number of shares that would have been issued. In this case the small shareholder will get no immediate benefit from the rights issue, and will suffer from having the share holding interest in the company diluted by the new shares issued to other shareholders and the underwriter.

Theoretically any shareholders who don't want to take up the rights issue can sell their rights on the market and get a benefit that way. But there are a couple of obstacles facing the smaller shareholders:
* the trading of the rights ends on Monday, and the offer document only arrived in the post yesterday. Any small shareholders who are unsure what to do, or don't currently have a relationship with a broker, doesn't have much time to take action.
* A small shareholder with, for example, $1000 worth of APA shares (around 235 shares) would have received rights to purchase an additional 67 shares at $3.75 - a cost of $251.25. But, if they didn't want to buy more APA shares, then they'd have rights worth AT MOST $33.50. Even at discount brokerage rates it would be hard to sell such a parcel for more than the brokerage costs!

APA has chosen to restrict the rights offer to Australian and New Zealand shareholders, as it would be too expensive to print relevant documentation for other foreign shareholders, given the different laws and regulations applicable to such an offer in other countries. For FOREIGN shareholders, APA will sell the relevant number of rights on market, and send the proceeds to such foreign shareholders.

If APA had the best interests of small shareholders in mind, they would have used the money obtained from the underwriter for all expired rights to make similar payments to any Australian or New Zealand share holders who didn't sell or accept the rights offer.

My direct share investments in Australian Shares as at 1 October. The stock market performed strongly in October and my Portfolio has increased by $17,882.11, or 8.69% (after adjusting for a $5,000 share purchase during the month).

These shares are held in accounts with two margin lenders (Comsec Securities and Leveraged Equities). My overall gearing ratio decreased from 121.4% to 109.2% - I don't intend to borrow any more against the existing equity as it is important to have a more conservative LVR as the market gets overpriced and more likely to suffer a significant correction.




During the month I purchased an additional 1,112 shares in Australian Pipeline Trust for $5,000 through a company share purchase offer. This was an average
price of $4.50 per share - currently APA is trading at 4.60.

I also have paid for another $10,000 worth of Telstra shares via the T3 installment issue, but these shares haven't been listed yet. Allocations and pricing will be finalised during November.

personal finance, investment, stocks

No, it's not the Terminator. Here in Oz the big investment buzz at the moment is regarding the government sell-off of their controlling stake in our telecom monolith - Telstra. They'd previously sold off chucks in the "T1" and "T2" offers several years ago. Unfortunately, T2 was sold at the peak of the dot.com bubble, so all the "mum and dad" investors who had made money buying T1 (at $3.30 a share in 1997), then lost a bundle buying T2 (at $7.40 a share) - unless they managed to sell at the peak of around $8.00. With Telstra currently around $3.65 a share, it'll be interesting to see how successful the T3 float is. The government isn't selling off it's entire remaining 51.8% stake in T3 - the base offer is 2.15 billion Telstra shares, or one-third of the Government's remaining 51.8 per cent stake, with the remainder to be dumped in the Future Fund (setup to eventually pay for unfunded public service pensions).

I bought T1, and then skipped T2 (I'd read enough about Dutch Tulips to avoid the dot.com frenzy). I've now applied for $10,000 worth of T3 shares. The first installment will cost $2 per share, with the remainder (based on the institutional book-build price, minus a 10c per share retail discount, plus a 1 per 25 bonus share issue when the 2nd installment is paid...) due in 18 months time. Telstra is currently paying a large dividend, so the ROI on the initial $2 installment is around 14% pa (plus tax credits due to dividend imputation). With the 10c discount and bonus share issue, the final cost of T3 shares should be around $3.25-$3.50 a share, although the final price won't be known until after a three-day institutional book-build set down for November 15 to 17.

Telstra is currently rapidly losing revenue as customers abandon the old landline phones in favour of mobile phones, and the mobile phone business is highly competitive. Whether T3 is a "cheap" buy at even $3.25 a share will all depend on how Telstra's cost cutting program works out, and how well they funnel cash flow into new business areas.

ps. It's interesting to read some of the misinformation that gets printed in the mainstream press - The Australian newspaper (one of our major national papers) printed on 10 Oct that T3 retail customers "will receive loyalty shares - a bonus issue of 25 shares for each 100 shares they retain". A pity that the prospectus actually states that the loyalty share issue is 1 share for each 25 shares retained until then final installment is paid. Just a little difference of a 4% discount vs. a 25% discount!

stocks

My direct share investments in Australian Shares as at 1 October.

These shares are held in accounts with two margin lenders (Comsec Securities and Leveraged Equities).

Ticker % of my 12-mo Margin
(code) Company Name Portfolio Gain Account
------ --------------------------- ---------- ----- -------
AEO Austereo 0.56% 13.70% LE
AGL Aust Gas Light 3.53% 47.20% LE,CS
AMP AMP 1.39% 28.30% LE
ANN Ansell 1.11% -5.40% LE
ANZ ANZ Bank 6.51% 17.10% LE
APA Aust Pipeline Trust 2.67% 43.10% CS
ASX Aust Stock Exchange 1.44% 24.30% CS
BHP BHP Billiton 4.21% 16.30% LE
BSL Bluescope Steel 1.11% -30.20% LE
CBA Commonwealth Bank 1.31% 25.10% CS
CDF CDF Stock Fund 18.59% 5.50% LE,CS
CHB Coca Cola Hellenic 1.13% 23.60% LE
DJS David Jones 1.53% 44.60% LE
FGL Foster's Group 5.25% 12.50% LE
IFL IOOF Holdings 2.64% 30.70% CS
IPE ING Private Equity 1.68% -44.90% CS
IPEO IPE Options 0.65% -44.90% CS
LLC Lend Lease Corp 1.69% 19.30% LE
MYP Mayne Pharma Ltd 2.62% n/a LE
n/a CFS Geared Global Fund 1.21% n/a CS
NAB National Aust Bank 2.48% 16.60% LE
NCM Newcrest Mining 1.46% 7.20% CS
OST Onesteel 1.85% 14.70% CS
QAN QANTAS Airways 1.87% 23.50% LE
QBE QBE Insurance 8.40% 35.70% LE,CS
RIO Rio Tinto 0.93% 22.80% CS
SGM Sims Gp Limited 3.75% 11.20% LE
SUN Suncorp-Metway Bank 4.09% 13.90% LE
SYB Symbion Health 2.09% -34.90% LE
THG Thakral Holdings 0.74% 16.10% CS
TLS Telstra Corp 4.06% -0.40% LE
VRL Village Roadshow 0.79% -12.20% LE
WBC Westpac Bank 1.51% 12.80% CS
WDC Westfield Group 3.23% 19.00% LE
WPL Woodside Petroleum 1.93% 11.90% CS
------ --------------------------- ---------- -----
TOTALS 100.0% 14.37%

Gearing Summary:

Margin Investment Loan My Gearing
Lender Value Balance Equity % LVR
------- ----------- ----------- ----------- ------- -----
Comsec $185,030.12 $94,108.28 $90,921.84 103.5% 50.9%
Leveraged $270,499.73 $155,626.48 $114,873.25 135.5% 57.5%

Overall $455,529.85 $249,734.76 $205,795.09 121.4% 54.8%



With my margin loans interest rate for the past year averaging around 7.5% pa, the average total return (capital gain + dividends) of 14.37% for my investments meant gearing added to my overall portfolio performance over the past year. This was a good year (bull market), giving a geared return of around 22%! In the longer term I'm aiming to average approx. 10% total return on the investments, giving a geared return of around 12.5%... we'll see how it works out