September 2021 Report

This month world stock markets finally declined. But we gained a little in AUD terms,* showing the value of our alternative assets strategy. In Australian Dollar terms we haven't had a losing month since March 2020. This is an 18 months run so far. The previous longest runs were the 10 months ending in September 2019 and the 10 months ending in April 2013. It could be that one of my late reporting investments comes out negative enough to overturn the positive result, but I'm not expecting that.

The MSCI World Index fell 4.09%, the S&P 500 by 4.65%, and the ASX 200 by 1.49%. All these are total returns including dividends. The Australian Dollar fell from USD 0.7314 to USD 0.7227. We gained 0.11% in Australian Dollar terms or lost 1.08% in US Dollar terms. The target portfolio is expected to have lost 1.27% in Australian Dollar terms and the HFRI hedge fund index is expected to fall 1.86% in US Dollar terms. So, we outperformed all benchmarks, which is exactly opposite to what happened last month (again). The most important reasons for outperformance were the gains in hedge funds. Here is a report on the performance of investments by asset class (currency neutral returns):

Futures had the best performance but hedge funds contributed the most to performance followed by private equity. Australian large cap had the worst performance and detracted by an equal amount to gold.

Things that worked well this month:

• Regal Funds (RF1.AX) gained AUD 30k, Pengana Private Equity (PE1.AX and the spin-off of PCG.AX shares) gained AUD 17k, and Tribeca Global Resources (TGF.AX) gained AUD 15k.
  

What really didn't work:

• Gold lost AUD 18k, Cadence Capital (CDM.AX) AUD 18k, and Fortescue Metals (FMG.AX) AUD 12k.
  

The investment performance statistics for the last five years are: 

The first two rows are our unadjusted performance numbers in US and Australian Dollar terms. The following four lines compare performance against each of the three indices. We show the desired asymmetric capture and positive alpha against the ASX200 index. We are doing a bit worse than the median hedge fund levered 1.6 times. 

We maintained about the same distance from our desired long-run asset allocation while the allocation to hedge funds rose. Real assets equity is the asset class that is now furthest from its target allocation (3.6% of total assets too much). Our actual allocation currently looks like this:

Roughly two thirds of our portfolio is in what some consider to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. We receive employer contributions to superannuation every two weeks. In addition we made the following investment moves this month:

• USD 35k of Ford bonds matured.
• I sold 5k RF1 shares as their price spiked.
• I bought 20k TGF.AX shares based on insider buying and thinking that the price was about to break out above the IPO price. It didn't yet.
• I bought 31k CDM.AX shares following the IPO of TMC. TMC promptly tanked. So neither of these hedge fund purchases was a good idea so far.
  

* The first version I posted of this month's accounts showed a small loss because I accidentally included an AUD 14k margin loan in our Australian Dollar cash, making it smaller than it should have been. I knew there was a mistake somewhere because the implied change in the value of the portfolio due to exchange rate movements was much too big.

Moominmama's 2020-21 Taxes

I finished Moominmama's taxes for this financial year. I still need the details of my venture capital investment tax offset to complete mine. The post about last year's taxes is here. Here is a summary of Moominmama's tax return:

Her salary was down steeply as she went back to work part time after being on maternity leave at full time, though the full time pay was only paid for part of the year she took off. Dividends managed fund distributions, and foreign source income were all up steeply. A quirk of the system is that foreign gains are treated as income and losses on trading foreign instruments are recorded as deductions. Capital gains were up 148% and dominated her income. This was largely due to recording capital gains on investments that we transferred into our SMSF. On the deductions side, other deductions includes interest for foreign source income and trading losses.

Net income increased 55% and tax 110%. The latter is my estimate of the tax she owes. You don't need to calculate this number on an Australian tax return. Her average tax rate was 20%. Remember, that there are no state income taxes in Australia. Only AUD 2,808 was withheld from her salary. We paid AUD 3.886 in quarterly installments. I calculate that we still owe AUD 11,203.

FI or FIRE?

 

I wrote about FIRE (Financial Independence Retire Early) at least once before. The Retire Early bit is the problematic bit. It makes much more sense for people to use financial independence to do what they want to do rather than just stop working.

A while back I heard that Mr Money Mustache got divorced. Seems his wife wanted to spend more money given their high income. But that wouldn't fit with his frugality message. Now here is a FIRE blogger who retired with a small nest-egg - so-called "lean FIRE". His wife got tired of not spending much either and of having too much leisure time and not making "progress" in life. And here is another blogger who is tired of not having enough money. Many FIRE bloggers who supposedly retired actually work on their blogging business. They stopped being an employee and became self-employed. This is great.

With a net worth of approaching AUD 6 million we are financially independent by any reasonable definition. But I'm not planning on retiring. As I mentioned before, I like my job, at least the research part. I am hoping to not ever teach more than one course a year again. I am sacrificing more than AUD 40k to take long-service leave next year to reduce my teaching load. After that I am planning to take on a "leadership role" for a while and once I turn 60 I hope to go part-time. Also, I don't want to sacrifice the "prestige" and become a nobody. Unless we plan on moving somewhere else, it seems to make sense to do my very flexible job.

And actually I am thinking that our money isn't enough. Our older child is going to private school and the younger one probably will too. The alternative is to move to a top public school catchment area. My wife isn't happy with the public schools here, though I think they are fine. With the way the property market is going that means an AUD 2 million + house price. Or maybe move to Sydney because the best public schools in Sydney are better than the private schools here. My wife puts a big weight on education. I thought Jewish parents like my parents and me were into education. Chinese parents are at another level.

And, actually, I did the retire early bit already. I just wasn't financially independent.

August 2021 Report

It was another month of increases in world stock markets. The MSCI World Index rose 2.53%, the S&P 500 by 3.04%, and the ASX 200 rose 2.75%. All these are total returns including dividends. The Australian Dollar fell from USD 0.7350 to USD 0.7314 We gained 0.51% in Australian Dollar terms or  0.01% in US Dollar terms. The target portfolio is expected to have gained 1.89% in Australian Dollar terms and the HFRI hedge fund index is expected to gain 1.23% in US Dollar terms. So, we underperformed all benchmarks, which is exactly opposite to what happened last month. The most important reasons for underperformance were losses in Tribeca Global Resources (TGF.AX), Fortescue Metals (FMG.AX), and Hearts and Minds (HM1.AX). Here is a report on the performance of investments by asset class (currency neutral returns):

Hedge funds had the best performance and contributed the most to performance despite the bad performance of TGF.AX. Large cap Australia stocks were the only asset class with a negative performance.

Things that worked well this month:

• Cadence Capital (CDM.AX) was the top performer, gaining AUD 16k (or 9%) with good performances from Pershing Square Holdings (PSH.L), Regal Funds (RF1.AX), Unisuper, PSSAP etc.
  

What really didn't work:

• The worst performers were Tribeca Global Resources (-AUD 22k or -10%), Fortescue Metals (-AUD 16k, -17%), and Hearts and Minds (-AUD 11k, -5%). The latter two have regained most of their losses so far in September.
  

The investment performance statistics for the last five years are: 

The first two rows are our unadjusted performance numbers in US and Australian Dollar terms. The following four lines compare performance against each of the three indices. We show the desired asymmetric capture and positive alpha against the ASX200 index. We are doing a bit worse than the median hedge fund levered 1.6 times.  

In Australian Dollar terms we haven't had a losing month since March 2020, which must be a record. It feels like this can't continue, but on the other hand, Central Banks continue to print money. I long projected that we would reach a net worth of AUD 6 million by my 60th birthday. We are now at AUD 5.7 million and the projection has gone up to AUD 8 million. This seems pretty crazy. But the way house prices are going and the probability that we might want to move means that I will continue to work full time for now. As long as my job doesn't stop us doing something else we want to do, I might as well do it, I think.

We moved closer to our desired long-run asset allocation by buying RF1 shares (a listed hedge fund) and investing in pre-IPO company IPS (see below). Private equity is the asset class that is now furthest from its target allocation (3.6% of total assets too little). This problem will solve itself as Aura Venture Fund II calls more capital. Our actual allocation now looks like this:

Roughly two thirds of our portfolio is in what some consider to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. We receive employer contributions to superannuation every two weeks. In addition we made the following investment moves this month:

• I bought 100,000 Australian Dollars by borrowing US Dollars.
• I invested AUD 100k in a pre-IPO company, Integrated Portfolio Solutions.
• I bought back 46,871 shares of Regal Funds (RF1.AX) after the price fell to a lower premium to NAV. I sold 20,000 shares of MOT.AX to help fund it.
• I bought 1,000 shares of PMGOLD.AX, a gold ETF.
  

Most People Think They are Financially Average

Well not quite. But people think they are more average financially than they are, on average.

But the strange thing is that most people think they are more intelligent than average. Was just chatting with someone on Twitter who stated that the norm in Australia is to get paid weekly and most people don't own a house. In fact, 67% of homes are owner occupied and getting paid every two weeks is most common. On the other end of the spectrum, my wife thinks our financial situation is "normal", when according to the statistics we are in the top few percent.

Effect of Updates on Reported Returns

The final numbers are now in for the first half of this year with the report of a venture capital fund for June. I was curious how different the final monthly returns were to the ones I reported after each month on the blog:

There is a big change for the final month, mostly because of the strong return of the venture capital fund.

Top Baggers

Meb Faber refers to the total gain on an investment over time in terms of "baggers". If you invested $1,000 and made $9,000 then that is a 10-bagger.

I was wondering what my best investment measured this way was. I previously calculated this using internal rate of return. But it is easier to get a high IRR on an investment held for a short time than one held for the long term. Which of my investments gained the most over time?

If you invest $1,000 and now have $1,000 of profit it is easy to see that this is a 2-bagger. This is the way venture capital firms typical report the value relative to what they put in. But what if you added more to the investment over time? What if you sold out for a while and then bought back? Or traded in other ways?

I realized we could get an approximation in these cases using the following pseudo-formula in Excel:

Bags = (1+IRR)^(COUNT(X:Y)/12)

IRR is the internal rate of return I already have. The count formula counts how many cells have an entry in them. I created a column with the following formula in it:

=IF(Z=0,"",1)

where Z are cells with the number of shares held each month. It returns a blank if the number is zero. We then apply the previous formula to this column (i.e. the range X:Y). 

I've now applied this to all my currently held investments. The median investment is 1.42 (gold). The worst is 0.80 (PSTH) and the best is CFS Developing Companies at 9.69. I think my best ever investment is Colonial/Commonwealth Bank which scores 13.01. I bought Colonial shares at the demutualization. I haven't computed this for all past investments yet. Gold is also my current median investment by IRR (12.4%).

So here are the top ten current investments using "bags", IRR, and total AUD gain :

There is some overlap between the columns. Regal Funds and Pershing Square show up in all three. The IRR column though highlights several recent investments that have done well like WCM Global Long-Short (WLS.AX) and WAM Strategic Value (WAR.AX). The top two in the last column are our two superannuation funds that also appear in the bags column and have a lot invested in them.

Local Housing Market is Red Hot

This morning I got a text from a real estate agent offering to send me an updated appraisal of our house's value because "prices are spiking". Then, on the way home from work I noticed a sale board in the neighboring development advertising an upcoming auction. In the corner, a small sticker had been stuck: "sold". When I tried to search for this house online, I found another one in the same development that sold last weekend pre-auction.

P.S. 14 August 2021

The price the second house sold for has now been posted. AUD 900k. That is a 100% increase on the original price, a new neighborhood record. It pushes the estimated value of our house to just over AUD 1 million.

P.P.S. 31 August 2021

Domain are now reporting that the first house (pictured) sold for AUD 976k or 124% above the original price! That would add another 6% to the estimated value of our house.

New I Will Teach You to be Rich Podcast

 

 

Ramit Sethi has started a podcast titled of course: "I Will Teach You to be Rich" and subtitled: "Real money stories from behind closed doors".  It's like a couples therapy session with Ramit as counsellor. It's great, but often the numbers don't seem to add up. For example, this couple makes USD 250k between them. Let's take off 1/3 for taxes etc. They say they spend just over 10% on housing and save 20%. They have "very low expenses". The guy scrimps and saves on everything. But, apart from what I listed, they would have to have another USD 90k in expenses. That's near what our family of four spends on everything including housing and private school and daycare. So, what is really going on here? Does the woman spend a lot of that on her own outside the household budget stuff? So this doesn't sound like "very low expenses" to me.

July 2021 Report

It was another month of increases in world stock markets. The MSCI World Index rose 0.72%, the S&P 500 by 2.38%, and the ASX 200 rose 1.11%. All these are total returns including dividends. The Australian Dollar fell from USD 0.7500 to USD 0.7350. We gained 2.96% in Australian Dollar terms or  0.90% in US Dollar terms. The target portfolio is expected to have gained 2.31% in Australian Dollar terms and the HFRI hedge fund index is expected to lose 0.33% in US Dollar terms. So, we outperformed all benchmarks. Here is a report on the performance of investments by asset class (currency neutral returns):

Gold contributed the most to performance followed by real assets, Australian large cap, and private equity.

Things that worked well this month:

• Gold gained AUD 32k followed by WAM Alternative Assets (15k), US Masters Residential Property Fund (URF.AX, 14k). The latter gained 23% for the month.
  

What really didn't work:

• The worst performers, not surprisingly, were the two Pershing Square Funds: PSH.L (-AUD 12k) and PSTH (- 10k). The SEC stopped Bill Ackman's planned purchase of shares in Universal Music. Now the hedge fund, PSH.L, will have to buy more than planned and the SPAC, PSTH, will have to look for another deal. Third worst was, also not surprisingly, the China Fund (CHN, -7k).
  

The investment performance statistics for the last five years are: 

The first two rows are our unadjusted performance numbers in US and Australian Dollar terms. The following four lines compare performance against each of the three indices. We show the desired asymmetric capture and positive alpha against the ASX200 index. We are doing about the same as the median hedge fund levered 1.6 times. 

We maintained roughly the same distance from our desired long-run asset allocation. Hedge funds is the asset class that is now furthest from its target allocation (4.7% of total assets too little). Our actual allocation now looks like this:

Roughly two thirds of our portfolio is in what some consider to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. We receive employer contributions to superannuation every two weeks. In addition we made the following investment moves this month, which was a relatively quiet month:

• I bought 10,000 shares of Pengana Private Equity (PE1.AX) around its announcement of a good gain in NAV.
• I bought 1,000 shares of Scorpio Tankers baby bonds (SBBA).
• I closed a losing soybeans trade.
• I bought shares in another painting.
• I transferred my shares in the Macquarie Winton Global Alpha Fund to our SMSF.
  

Coinvestment, Revised Target Allocation, and Rights Issue

I'm making an investment in a pre-IPO company alongside a venture capital fund and other investors. I valued the company based on their forward projections for EBITDA and the multiples similar companies listed on the stock exchange have. Of course, the company could fail and so it is sensible to take a middle valuation between the extremes of zero value and the value if the company succeeds as planned. This still gave a good gain on the current valuation. In reality, total loss is unlikely as the company is already approaching profitability. The funding is for expansion. The worst outcome is more likely a sale for the current valuation or something less to a competitor. I am planning to invest about 2% of our portfolio in this company.

This means I will have to raise my target allocation to private equity and reduce my allocations to hedge funds and long-only equities. To also take into account my future commitment to a venture capital fund I am increasing the private equity allocation of gross assets from 10% to 15%. I am reducing the hedge fund allocation from 24% to 22%, Australian large cap from 9% to 8%, US stocks from 6% to 5%, and rest of the world stocks also from 6% to 5%. I would be happy to have an even higher allocation to private equity if I had access to enough diverse good quality opportunities. So, changing the target allocation isn't just like the US government raising its debt ceiling every time they hit it :)

By contrast, I am an investor in listed company Domacom (DCL.AX), which has been suspended from the ASX for a while, pending completion of a deal to effectively acquire a company called AustAgri. The ASX instructed them to raise more capital before relisting. I don't intend to participate in the rights issue, especially as the issue price is slightly above the last traded price of the shares on the ASX. Success of the company in the short-run really depends on this AustAgri transaction and it is still hard to be certain why it is so delayed and what will happen. Even after that transaction, the company will not be in anywhere near as good a position as this pre-IPO company.

Next Steps

We have now executed a major part of the financial plans I developed in 2018. We deployed almost all the inherited capital - we still have some Ford bonds, which were intended as a short term investment, we have completed the initial set up of the SMSF and set up accounts for our two children. We have a much more diversified portfolio. So, on the investment front it will now be more business as usual going forward. I explored trading and made a little money but haven't got to the stage of setting up a proper system. This is something I will need to revisit very soon. To decide once and for all if that is a direction I want to take. If I do it, it would be in collaboration with some other people I know. The other major thing we haven't done is estate planning. I wanted to get the SMSF done first. So, we should really look at that seriously soon too.

Time-weighted Versus Dollar-weighted Returns

There was an interesting comment in the latest Millionaire Interview at the ESI Blog:

"I find it a bit silly how most people focus on their time-weighted returns instead of their asset-weighted returns... Your financial freedom is affected by your asset weighted returns, not your time weighted returns."

I have thought about this before, but not exactly in these terms. This is an interesting way of putting this idea. 

The way I thought about it is: When you start investing you will probably make mistakes. But you will have less money and so they matter less. What matters more is what your returns are when you have a lot of money.  So, you can afford to pay some tuition fees. I really paid too much tuition...

This graph shows an index of my returns in Australian Dollar terms starting at 1000 in 1996:

Initially, I did well. But then the dot.com crash came and I started losing, ending up below where I started. Then I rode the next bull market. I started getting out as the financial crisis began to appear. But I got back in again too early and crashed. I wasn't quite back to square one, but not far from it. Not much happened in the next few years following the crisis and then things took off from 2012 on. These are my time-weighted returns.

In the last 10 years, my rate of return has been 11.1% vs. 12.0% for the ASX 200. In the last 20 years it was 4.8% vs. 10.6% for the ASX 200. Since "inception" the numbers are 6.2% and 11.2%. I got through the COVID-19 crash a lot better than the previous bear markets. Hopefully, that improvement will be maintained in the future.

The following graph shows relative out-performance compared to the ASX 200 over every time horizon:

The way to interpret this is: If you invested with me in 1996 then you would have under-performed the ASX 200 by 4-5% p.a. since then. However, if you invested with me in some months in 2012 you would have matched or just beaten the ASX 200 since then. Similarly, investing in the year before the COVID-19 crash you would now be ahead of the ASX. Investing with me in the year after the COVID-19 crash you would be behind the ASX and so forth.

This graph shows my absolute profits in Australian Dollars:

A simple way of showing dollar-weighted returns. Basically, things went nowhere till 2012. All the gains have happened since then. So, I "wasted" 15 years learning to invest while saving.

Including Neighboring Development Sales in my House Price Model

This graph shows the increase as a fraction of the original when new sales price in two neighboring developments in our city since the beginning of 2015. The green dots are in our development and the red dots in the neighboring development, which was built by the same developer a year earlier:

The final red dot is the recent AUD 1.3 million sale. Using the increase above the initial price automatically adjusts for the different characteristics of each house sold. I only include free-standing houses. Our development also has row townhouses.

Prices are trending up over time in both developments but clearly houses are selling for greater premia in the neighboring development. By an average of 19%. But I think this is just because it was built earlier. When we use a logarithmic y-axis the two trendlines are almost parallel:

Therefore, I think it is valid to include the two developments in one model and just include a dummy variable for the neighboring development. Based on the analysis our house would be worth AUD 970k.

Sale in Neighbouring Development for AUD 1.3 Million

This house is in the sister development to ours on the other side of the hill. It borders the reserve just like ours. The house is a bit bigger than ours and so should sell for a higher price. But it sold for an 88% premium on its original 2007 price. Recent prices in our development have been for 25-35% premia on the original 2008 prices. I am valuing our house at a 31% premium to the 2008 price or 19% more than what we paid in 2014. I've been surprised at the sluggishness of prices in our development compared to the city as a whole. Maybe I should use prices from this neighbouring development too when estimating the value of our house?

 

If I do use data from this development as well, the current value of our house increases by about AUD 80k or 10%.

Career Plan

A couple of months ago I discussed my career decision making issues. I made a decision and will take long service leave next year and reduce my teaching load. I will drop my current courses and teach a new (for me) course in the second half of the year instead of teaching in the first half of the year. In the two years following that I plan to continue teaching the reduced load while taking on a "leadership" position. This takes me to the end of 2024 when I will 60. At that point I will either go half time or retire depending on the situation. Anyway, that's the plan at the moment. My immediate "boss" knows agreed to the plan for 2022 and the "boss" at the next level knows the 2023-24 plan. No-one has the full picture.