Annual Report: Investments and Trades

I've already reported on annual investment and trading cash flows and rates of return. Today, I break things down into how much was made or lost on each security, fund, future etc. I invested in or traded. It's all in this table, which is an annual version of the ones in my monthly reports.



Last year's results for comparison. Again, there are more investments towards the top of the table and trades towards the bottom of the table. As last year the largest amount of money was earned by the Colonial First State Conservative Fund and Option (option is the retirement version of the fund). But the second best investment last year - EBB and EBI - is the worst this year. Platinum Capital was also a good performer last year and a poor one this year. I made decent money trading US stock indices but lost on the Australian index. I made a really dumb trade in Salesforce.com. Last year, Newscorp and Hansen featured as dumb trades. Trades in Apple contributed nicely in both years (but I should have invested in Apple instead!). There are contributions from trades exploiting the housing-credit disaster - IYR, Toll Brothers. Lehman, and Beazer - all winners. My investment in HCBK and the TIAA Real Estate Fund worked out as plays on the best in real estate, while Newcastle Investments, decidedly did not work out.

Well all the rest is there for you to see in the table.

December 2007 Report

All figures are in US Dollars (USD) unless otherwise stated. This month saw a fall in net worth in US Dollar terms partly due to the fall in the Australian Dollar and partly to poor investment performance due to the continuing decline in global stock markets this month. Both these trends were milder than last month. Net worth also decreased in Australian Dollars terms. Trading results were bad and I stopped active trading to focus on improving my trading performance using simulated trading.

Income and Expenditure



Expenditure was $3,547 - there were no exceptional expenses. There were $315 of implicit car expenses - depreciation and interest - so actual cash expenditure was $3,212.

Non-investment earnings ($5,924) included another refund of work-related expenses from Snork Maiden's employer. She also again got paid by her previous employer. We've told them to stop paying and we may need to pay this money back, but for the moment I am counting it as income. Snork Maiden's retirement contributions from her employer were $559.

Non-retirement accounts lost $6,052 with $1,414 of the loss resulting from the fall in the Australian Dollar. Retirement accounts lost $1,731 but would have lost only $405 if exchange rates had remained constant. This gain is due to the strong exposure to bonds in our retirement accounts and the stronger exposure to equities in our non-retirement accounts. Trading contributed around half the loss in the non-retirement accounts, but actually came out slightly positive in my Roth IRA.

Net Worth Performance
Net worth fell by $US4,759 to $US448,556 and in Australian Dollars fell $A1,161 to $A511,233. Non-retirement accounts were at $US237k. Retirement accounts were at $US211k.

Investment Performance



Investment return in US Dollars was -1.72% vs. a 1.08% loss in the MSCI (Gross) World Index, which I use as my overall benchmark and a 0.69% loss in the S&P 500 total return index. Non-retirement accounts lost 2.51%. Returns in Australian Dollars terms were -0.88% and -1.70% respectively. In currency neutral terms the portfolio lost 1.11%,. Summing up the year, we gained 18.35% (USD) vs the MSCI with 12.18% and the SPX with 5.5%. Our non-retirement accounts are up 21.68%. Australian Dollar returns were competitive with the SPX. In currency neutral terms we gain 9.8% for the year.



The contributions of the different investments and trades are as follows:



The returns on all the individual investments are net of foreign exchange movements. Foreign currency gains appear at the bottom of the table together with the sum of all other investment income and expenses - mainly net interest. Trading resulted in some of the biggest losses - QQQQ/NQ and ES. Otherwise, no clear story emerges this month except that EBB.AX and EBI.AX continue to perform poorly.

Progress on Trading Goal

I lost $2,003 in trading . The loss is 6.92% of trading capital. The NDX was down 0.2% for the month. For the year, trading generated $9,749 or a gain of 35% vs. an NDX gain of 18.4%. So in the end I beat the market, but with a lot more risk and volatility.

Asset Allocation
Using the simple method of adding up the betas of each individual investment weighted by their portfolio allocation, at the end of the month the portfolio had an estimated beta of 0.47. Using a regression on the last 36 months of returns gives a beta of 0.81 to the MSCI or 0.60 to the SPX. Alphas are 0.55% and 6.44% respectively. A more sophisticated time series method yields a beta of 0.97 and alpha of 7.6% for the MSCI index. The extra beta generated by these methods is due to the correlation between equity returns and the Australian Dollar in recent times as a result of the "carry trade".

Allocation was 29% in "passive alpha", 66% in "beta", 6% allocated to trading, 3% to industrial stocks, 7% to liquidity, 3% to other assets (including our car which is equal to 2.8% of net worth) and we were borrowing 14%. Our currency exposures were roughly 60% Australian Dollar, 30% US Dollar, and 10% Other (mainly global equity funds).

August 2007 Report

All figures are in US Dollars unless otherwise stated. This month again saw negative investment performance in USD terms, though this was due to the sharp fall in the Australian Dollar and underlying performance was positive. Trading results were positive but volatile and spending was very high. At the end of the month I merged my finances with Snork Maiden for purposes of reporting net worth etc. The income and expenditure figures for this month are mine alone, but the final net worth figure is our joint figure. Net worth fell in US Dollar terms and rose in Australian Dollar terms post-merger. Both figures fell on a pre-merger basis.

Income and Expenditure



Expenditure was $7,959. More than half the figure was moving expenses and more than a quarter the cost of my new computer. Other expenses totalled only $1625. Yes, there is a retirement contribution ($901) there though I am no longer employed.

Non-retirement accounts lost $11,332 but would have lost only $2214 if it were not for the sharp decline in the Australian Dollar. Retirement accounts lost $4151 but would have gained $2693 if exchange rates had remained constant. Net worth declined by $23k on a pre-merger basis. At one point in the month it was down around $50k.

Net Worth Performance
Net worth fell by $US5755 to $US439,155 and in Australian Dollars gained $A20817 to $A538,576. Non-retirement accounts were at $US242k. Retirement accounts were close to $US197k.

Investment Performance
Investment return in US Dollars was -3.75% vs. a 0.23% loss in the MSCI (Gross) World Index, which I use as my overall benchmark and a 1.29% gain in the S&P 500 index. Non-retirement accounts lost 5.13%. Returns in Australian Dollars terms were 1.36% and -0.02% respectively. YTD I'm up 12.9% vs the MSCI with 8.3% and the SPX with 5.1%. My non-retirement accounts are up 17.4%. So I'm not too concerned about this month's performance, especially as we gained in Australian Dollars!

The contributions of the different investments and trades are as follows:



The returns on all the individual investments are net of foreign exchange movements. Foreign currency losses appear at the bottom of the table together with the sum of all other investment income and expenses - mainly net interest. The biggest positive contribution came from the CFS Conservative Fund which has a 30/70 equity/fixed income mix. Interactive Brokers began to rebound this month. Voltality (of the right sort) should help the stock. The investment in Hudson City Bankcorp also began to pay off as it is seen as a solid bank in a shaky environment. Something similar could be said about Berkshire Hathaway. Trades in IYR, Lehman, Toll Brothers, Beazer, and the S&P 500 made nice contributions. All three of my earnings plays (AAPL, GOOG, DELL) did not work out and neither did NDX trading this month. The quant fund meltdown resulted in a huge loss in the hedge fund of funds management company Everest, Brown and Babcock and to a lesser degree in their fund of funds EBI.AX. The latter is very undervalued at the moment.

Progress on Trading Goal.

Asset Allocation
At the end of the month the portfolio had a beta of 0.50. Allocation was 35% in "passive alpha", 63% in "beta", 4% allocated to trading, 5% to industrial stocks, 10% to liquidity, and we were borrowing 17%. My Australian Dollar exposure fell to 59% partly due to the fall in the Aussie and partly due to the merger which brought in $US17k in US Dollars. The merger also increased "liquidity". We will keep this very high level of cash through the move to Australia. We'll spend quite a lot more in the process and then reallocate our cash when things have settled down in October.

Carry Trade Unwinding

The "carry trade" is where investors borrow in low interest currencies and invest in currencies with high interest rates, pocketing the spread. The main low interest rate currency has been the Japanese Yen and one of the main high interest currencies the Australian Dollar (AUD). In recent months the Australian Dollar soared higher and higher and the Yen mostly lower. In the current financial crisis the process is reversing and the Aussie has fallen around 10 US cents from its peak. It's down 3.5 US cents overnight, which is a massive move in a currency:



This is having a massive impact on my net worth measured in US Dollars as around 2/3 of my net assets are in AUD related investments. At this point in the month my rate of return on investment is -9.7% and net worth has fallen $US 47,000 from last month. In AUD terms, though, the return is -1.6% and net worth is off only $A 12,000. In USD terms this is the worst drawdown since the big bear market in the early part of this decade. But in Australian Dollar terms it is nothing remarkable. I lost more in June 2006 for example: -3.3%.

I am sufferring some big losses on investments, however, especially in the Everest Brown and Babcock Hedge Fund of Funds (EBI.AX) and the management company (EBB.AX). The latter has halved from its peak. I really should have sold some when it was so overvalued. I guess irrational exuberance and a dislike of paying taxes overtook me.



As for the fund of funds itself - it trades as a closed end fund on the Australian Stock Exchange and so the stock price can trade at a discount to NAV which is only announced monthly. Undoubtedly some of the hedge funds in the portfolio have suffered losses in the current market conditions. But I doubt this justifies the steep fall in price relative to the end of July net asset value. NAV was $A4.06 on July 31st. Yesterday, the fund traded as low as $A2.48 before ending up.

Many people claim they wish to emulate Warren Buffett and buy like crazy when prices are below intrinsic values. I have been doing some of that in recent weeks but have been wary that prices could fall lower. So I haven't been "buying like crazy". It's hard in practice to actually put such a plan into action when the time comes.

EBI Management Ponder a Buyback

I'm not the only one who thinks this investment is a bargain:

7 August 2007

ASX RELEASE

Everest Babcock & Brown Alternative Investment Trust (EBI)

EBI applies to ASIC for relief to conduct buy-back

Following the announcement of an unaudited net tangible asset backing per unit (NTA) of $4.06 as at 31 July 2007, the responsible entity of EBI announces that it is considering conducting an on-market buy-back of EBI units. It has today applied to ASIC for the appropriate relief.

As at close of 6 August 2007 the market price of an EBI unit was $3.18 being a 22% discount to the July NTA and EBI believes that a buy-back would be an efficient use of capital which would generate unitholder value.

Any buy-back is subject to ASX consultation, ASIC relief and potentially (depending on size) unitholder approval. At the time ASIC relief is obtained, the responsible entity of EBI will review the discount between the EBI unit price and its NTA and will determine its next course of action.

************************************************************************************************

The current undervaluation started with the botched capital raising in April. The capital raising raised the desired funds but resulted in a loss of net asset value to those who did not participate. This included me - I wasn't allowed to participate because I was a foreign investor. The loss of value as a result of the capital raising was very unfair. The stock price plummeted even further. More recently as hedge funds have changed from being the investment du jour to being very out of favor the discount to net tangible assets (NAV) has widened considerably.

Buying at a 28% Discount to NAV

Just bought another 2000 units of EBI - the listed Australian fund of hedge funds - at $A2.92. Today the manager announced that NAV for the end of July was $A4.06 per unit and the fund lost 0.25% in July. They also emphasized that they don't have any investments in mortgage funds. I guess investors might be concerned that the fund is structured using a total return swap. But otherwise this 28% discount to NAV seems a bit overdone.

Borrowing

I still need to cover the trading, liquidity, and borrowing categories in my asset allocation series. Liquidity is pretty boring - I have checking and savings accounts in the US and overseas - and I have covered trading extensively. Borrowing on the other hand is worth covering as my borrowing arrangements are rather different to most pf bloggers and a lot of investment bloggers too. In particular, a lot of real estate bloggers seem to be unaware of the possibilities of borrowing against stocks.

My borrowing capacity is split between credit cards and margin accounts. I have a credit line of about $21,000 on the three credit cards I actually use. I have a zero percent balance of about $6500 on one of them and rotate it to wherever there is a good deal. My credit limits are low because my credit history is short as far as FICO is concerned. Anyway, I think that's the reason. I don't aggressively try to up the limits either. The balance transfer is very cheap financing and worth doing I think.

My main borrowing capacity is in my three margin enabled brokerage accounts. If you have a brokerage account I can't think of a reason not to ask for the ability to borrow on margin. Well, actually I pay some extra fees in Australia in my margin account. But that's not the case in my US accounts. Here's the current rundown on one of my US accounts (the other one just has about $15k in cash in it at the moment - so I can't actually withdraw more than the cash in the account without first buying some stocks):



I could immediately withdraw $19,982, $4,772 of which would be a loan secured by the stocks in the account. You don't need an emergency fund sitting in cash when you have a margin account. I could also spend that much on options or non-marginable stocks (e.g. stocks under $5 in price). But the interesting thing about margin is that if use a loan to buy stocks you can then borrow more money against the stocks you buy. So if I use my borrowing capacity to buy stocks I can borrow another $37,092. Intraday, I can borrow even more - this is so-called "day-trading buying power". The only problem is that my interest rate is currently 10.5%. Larger accounts pay lower rates. So I only borrow for short term trades on the long-side.

My Australian account is much bigger and so are my borrowing capacities:



All the figures are converted to US Dollars. My interest rate is 8.9% and I have an outstanding loan of $33k. I could withdraw or buy non-marginable securities of up to $62k. I really, really, don't need an emergency fund :) But if I buy marginable stocks I could buy more than $200k more of stocks. Recently I bought an extra 4000 shares of EBI.AX using my loan capacity. BTW, EBI.AX is already a levered product.

I often wonder if I should be more aggressive and borrow more. There are lots of potential sources of leverage which are cheaper than margin loans. So until I exhaust those options (no pun intended :)) my borrowing is likely to be very conservative.

Everest Brown and Babcock

This is my first post on a specific investment in my asset allocation series. Well, actually two investments: Everest Brown and Babcock (EBB.AX) and Everest Brown and Babcock Investment Trust (EBI.AX). EBB is an alternative investment manager. Mainly they manage funds of hedge funds. EBI is a closed end fund of hedge funds that trades on the Australian Stock Exchange. You can learn all about the company and their funds here. I want to discuss why I bought this investment - most readers won't be able to buy into this specific investment and so the rationale is probably of much more interest than the specifics.

EBB originally floated on the ASX in early 2005 as a stapled security that included one share in a fund of hedge funds and one share in the investment management company. The idea was that the investment manager charges, like most hedge fund managers, a performance fee. By also investing in the investment manager you would get part of the fee rebated back to you. As you'll know by now, I like hedge funds and other alternative investments, and I especially liked the idea of getting some of the fee rebated. On top of that, when I invested in August 2005 the shares were trading at a discount to net asset value. That meant you were getting the management company practically for free! Also the managers were invested in the shares as well as in the management company (only part of the management company was floated in this transaction). I like to see this in the "passive alpha" investments I make. The founders also had the backing of Babcock and Brown - an upcoming global investment bank headquartered in Australia.

The shares continued to trade at a discount to NAV. In August 2006 it was decided to destaple the securities and let the management company and the investment trust trade separately. This was a brilliant move. The value of the management company shares has since soared. Looking at the two securities as a single investment my annualized rate of return has been about 54% since investing (pre-tax)! Total profit is now over $A13k. I originally invested $A9350 and in August 2006 invested an additional $3400 in the management company shares to double my holding. Yesterday I bought $A15,000 more of the investment trust to almost triple my holding of that stock.

EBB.AX now has a P/E of 52. Though I expect the firm to continue to grow, that does seem rather pricey and so I don't plan to add to my holdings. Anyway, I already have 3% of my net worth invested which is more than I really am comfortable to invest in a single stock that isn't a closed end fund. The only US listed hedge fund manager so far is Fortress Investment Group (FIG). Of course firms like Goldman Sachs are also in this business. FIG's pricey and I'm not looking to invest in it. But I'm not planning to sell EBB yet, either. The EBI.AX fund of hedge funds is undervalued at today's closing price. It in fact has had quite a high beta to the stockmarket. That might decline a little when the newly raised funds are deployed in other less correlated investments. There are no such investments listed on US stock exchanges yet, to the best of my knowledge.

Ex-Rights Price Correction

That's the reason for the halt in trading in EBI.AX:

"Everest Babcock & Brown Alternative Investment Trust (EBI) requested a trading halt in relation to its units earlier today following an irregularity in the theoretical ex-rights price published this morning. The price published was $3.785. EBI confirms that the theoretical ex-rights price of EBI units is $4.165 based on the close of 3 April 2007 price of $4.26 and the entitlement issue price of $4.07."

So my bet was correct. I didn't see this theoretical price. But I thought the market price was too low. A nice $A1600 in profit as a result with very little downside risk. Seems trading has restarted and the price is still at $A3.85. Hmmm.

Passive Alpha

I promised a series on asset allocation, here is the next installment. I'll cover the investments I call passive alpha first. As I mentioned before, it's a bit of a misnomer. This category includes all actively managed funds that aren't broad bets on stocks or bonds or aren't strongly correlated with an underlying benchmark index as well as all other financial stocks. The individual investments are as follows:



There is a mix of Australian and US investments here. Though the Australian investments won't be of direct interest to most readers, the reasons why I invested in them may be. I hope to discuss that in more detail in future posts.

Real Estate TIAA Real Estate, Challenger Infrastructure, and Newcastle are three different sorts of real estate funds. Hudson City Bank Corp can also be thought of as a real estate fund. Both it and Newcastle have mortgages as their primary assets though Newcastle is a REIT and HCBK a bank.

Closed End Funds Clime Capital, EBB Investment Trust, and Platinum Capital are all exchange traded closed end funds but they are all rather different. Clime is a long-only stock fund, EBI is a fund of hedge funds, and Platinum Capital is a long-short hedge fund.

Hedge Funds TFS Market Neutral and Hussman Strategic Growth Fund are mutual funds that employ quite different hedging strategies. Platinum Capital and EBI are also of course hedge funds - and as they charge incentive fees they are more traditional ones. Challenger Infrastructure also charge a performance fee. Is it a hedge fund?

Management Companies Everest Brown Babcock is a hedge-fund-of-funds management company that among other things manages EBI.AX. Clime Wealth Management is also a fund management firm and included in its managed funds is Clime Capital.

Insurance Berkshire Hathaway is an insurance conglomerate. But clearly, people don't invest in it just to invest in insurance, or even the many unrelated subsidiary businesses BRK owns outright. Money management by Warren Buffett is a big part of the attraction.

As you can see it is a little tough to exactly classify all the entities in this category. But none of them is your traditional long only stock or bond mutual fund. And that is why I've placed them here.

P.S. 9:03pm

I just bought 4000 more shares of EBI.AX @ $A3.75 taking my holding up to 4.73% of net worth - financed by an increase in my margin loan. Today is the ex-date for a rights issue that is part of a capital raising. The price of shares under the rights issue is $A4.07 while institutional investors are paying $A4.29. The price today opened at $A4.1 and then plummeted as low as $A3.65. Now it is true that the rights offer also includes 1 EBB share (the management company) for free for every 4.5 EBI shares bought. But from my understanding the rights offer and placement doesn't reduce the net asset value of the fund per share at least not below $A4.07. The NAV at the end of February was $A4.29 at the end of February. So this seems irrational. Even if there is something I don't understand here I can't see that I am paying more than NAV. Therefore, the purchase this evening. I am not allowed to participate in the rights issue because I am not resident in Australia. This is one of the pitfalls of direct international investing.

P.P.S. 10:55pm

And then EBI was put into a trading halt when the price was at $A3.85 pending an announcement from the company. It can't be anything very bad as shares in the management company EBB are up 5.23% on the day at this point and not in a halt. I am guessing they want to either: Calm the market and say there is no grounds for the price drop, or one of the hedge funds they invest in (there are around 20 in the fund) blew up and therefore some fall in price was justified in fact. Those are my guesses of best and worst case scenarios. We'll have to wait and see. They did a trading halt last week to announce that the placement was oversubscribed. These things are common in Australia. But I still remember when Croesus Mining went into a halt so it makes me nervous. But there has to be a floor to the share price for a closed end fund of this sort.

The Day After

At this point it looks like the market is shaping up for a sideways day after the rebound in Shanghai overnight and smaller losses in European trading than Wall Street experienced yesterday. I put on a hedge trade - long 2 ES and short 2 NQ which is biased to the long side, but exited it at a loss as I had a meeting at 9:30 and it didn't seem to be doing well. It would have been in the money by now. So I guess I am just jittery after yesterday though I made plenty of money in the US market, but got slammed of course in Australia. I don't know the full extent of damage there as mutual fund prices are reported with a delay. Worst are probably the losses in resource stocks affecting my CFS Global Resources Fund which has about 10% in each of RIO, BHP, and RTP (those are the US tickers). The more hedge fund like instruments mostly responded better, though EBI.AX fell 5% and hedge fund manager EBB.AX fell 8%. I reckon I was probably slightly up yesterday overall, though I don't know how the short-term Australian Bonds in the CFS Conservative Fund (my biggest holding) responded. The Aussie Dollar fell and US bonds rose.

But I'm not worried that I don't have a trade on. I don't have to have a trading position at all times. I used to think of my short-trades as hedging my long positions and felt nervous if I didn't have a short when I thought the stock market might fall. But now I think in a much more "alpha-centric" way. Alpha are returns that are not correlated with stock market returns while beta reflects returns that are correlated with the market. I divide my portfolio into three sections:

1. Hedge fund type instruments that hopefully generate alpha. Sometimes some of these seem to have a bit more beta than I was reckoning on.

2. Beta - mainly long-only mutual funds whose return is mostly correlated with market returns and may have a positive alpha. It's no big deal if their alpha is negative to a small degree (one reason I am not worried about expense ratios which tend to reduce alpha) because I can generate alpha elsewhere in my portfolio. I change my exposure to these funds over the 4 year stock cycle. At the beginning of the cycle my exposure to stocks would be much bigger. I don't have to get my market timing perfectly right. At the moment I am 50-50 in bonds and stocks reflecting the late stage of the cycle which maybe now is heading towards the bottom - assuming that we need to see a 20% correction before the cycle is over. At the beginning of the cycle I will use leveraged stock funds and margin.

3. Short-term trading - I regard this now also as a generator of alpha. The trades are in ETFs or futures and so have a +1 or -1 correlation to the market while the trades are on. But the stochastic model has a zero beta coefficient to the NASDAQ 100 index. So in the long-run the returns are all pure alpha.

And of course I am also diversifed across US and Australian Dollars.

I've arrived at this strategy after a lot of experience and seeing what works and what does not and what I can tolerate emotionally. It's much more sophisticated than the standard "buy and hold" long-only models. I know I can't tolerate the fluctuations that that leads to. It was interesting seeing the responses of some newbie investors yesterday to the drop in the markets - which in the Dow was significant for a one day drop but was really not that much of a decline off the highs yet. I wonder how many will throw the towel in when we are down 20%? I started investing and trading in 1997 and have been through the high volatility of the 1998-2002 period. I also remember very well the crash in 1987 though I wasn't invested (I did buy a little in some Israeli mutual funds before then and was an undergrad economics and geography student) and even dim memories of the 1970s. Even then I was interested in investing and would discuss things occasionally with my father who was a long-time stock and mutual fund investor though he certainly wasn't wealthy then (we were definitely lower middle class in Britain) and read the financial news.

Anyway, here is what happened in one account, my account with Interactive Brokers:



You can see the big dip a couple of weeks back and then yesterday's recovery, followed by more erratic trading. My Ameritrade account would have a similar pattern. My z-score in NQ trading (total of 209 contracts traded) is now 2.03, which means that the probability that my performance is random or actually negative is something around 2%. The Kelly ratios though for both this and my weekly results in my IB account say that I should be taking on huge amounts of leverage. The Sharpe ratio for the weekly returns on my IB account is 1.68, which is a respectable number for a hedge fund.

Annual Report 2006: Part IV

This is the final part of the annual report where I review my current investment allocation and strategy:



This is a screen shot of part of the allocation spreasheet I set up each month to keep tabs on my investment strategy. 2/3 of my net assets are in Australian Dollar related investments. Australian based international investments that aren't hedged into the Australian Dollar are listed in the "Other" column. Yes, over half my net worth is in the CFS Conservative Fund - this fund is 30% invested in equities with the remainder in bonds and cash. I've listed it under Australian Bonds even though it also includes foreign bonds and equities and Australian shares. I have 1-2% of net worth allocated to any individual stock investment. Larger shares can be allocated to closed end funds or trading positions (e.g. 15% allocated to a SPY trade). Unlike the majority of PF Bloggers I don't have any index funds as investments. I use ETFs as trading vehicles.

Here is a different view of the portfolio:



My strategy is to invest 100% of my net worth and borrow against this to fund trading. At the end of 2006 my net trading position was long. The beta exposure column shows how much each category adds to the portfolio's beta (which measures its sensitivity to the S&P 500 index). The investment portfolio contributes a beta of 0.45. My trading positions added a beta of 0.553. So currently I have a very conservative investment portfolio. The overall portfolio's beta can range from 0.9 when I have long trading positions to -0.1 when I have short trading positions. IMO this is a much better approach to market timing than trying to swing an entire portfolio for and against the market. I developed this philosophy from Soros' approach as described in "The Alchemy of Finance".

The overall investment portfolio is conservative at the moment because the yield curve is inverted and there is a strong risk of a recession. Bonds do well in economic slow downs and recessions when the Fed cuts interest rates. So I do adjust the investment portfolio but over the course of years, trying to only incur long-term capital gains taxes. When I am bullish on the economy the beta of the investment portfolio will be above 1.

Breaking down the investment portfolio I have the following kinds of investments:

Core Investments (22%): Loftus Capital, Clime, EBB, EBI, Challenger Infrastructure, Berkshire Hathaway, HCBK, TFS Market Neutral Fund, Hussman Strategic Growth Fund, TIAA Real Estate, Newcastle, Platinum Capital. I don't intend to change these investments with changes in the economy. The investments are a mix of hedge funds, real estate funds, and investment management companies. I would like to have more of this type of investment.

Market Related Mutual Funds (71%): The four Colonial First State Funds, and CREF Bond Market Fund. In fact I have never adjusted the CFS Global Resources Fund since I bought it many years ago, but often wonder if I should. So maybe that too is a core investment. I hold onto positions in the CFS Future Leaders and Developing Company Funds because they are closed to new investors. In order to expand my holdings in the future I need to remain in them. I used to hold a much higher percentage in these funds. My holdings in these funds will change dramatically when I get bullish on the economy.

Industrial Stocks (9%): Ansell, Croesus, Symbion, Powertel, Telecom NZ. Croesus is probably worth nothing in fact (but has not been delisted). I have subsequently sold Telecom NZ. Ansell and Symbion are in the health related field and so I think will not be affected much by recession. Powertel is a small Australian telecom that has done very well and recently reached profitability. I will sell these when I think future gains don't look promising. I may buy new single stock investments when I see opportunities.