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Owen Caterer

How having a plan helps during volatile times.

Posted on February 6, 2019 Facebooktwittergoogle_pluspinterestlinkedinrss

It’s been a while since our last post, but watching the reaction to recent volatility has given us inspiration.

The big stock sell-off in quarter 4 of 2018 illustrated, yet again, why forecasters and traders get things wrong. The error was the hidden assumption that market participants (in this case, the US Federal Reserve) won’t react to the observed trend. That the US Federal Reserve will continue to raise interest rates on “its schedule” even if the US economic growth has slowed. It is however better to look at how participants, like the Fed might react, and where that will lead.

This is a lesson that is useful to investors as well as economic forecasters. Here are some examples and discussions from famous investors and then practical ideas on how to improve investment returns, particularly in extreme conditions.

1. Be greedy when others are fearful.

One of Warren Buffett’s best quotes (and he has many) is “Be fearful when others are greedy and greedy when others are fearful”. If you could summarize a good investment strategy in just one sentence, then this is one of the best. Most retail and even many institutional investors fail quite badly to invest when the headlines scream “stock market falls”, but the key to remember is that you are looking at the prices today (lower than before) and the profits in the future (99.99% certain to rebound).

 

2. Soros’s Investment Philosophy – Reflexability.

China Expat Money - Reflexivity creates virtuous and vicious cycles - George-SorosYou may know billionaire George Soros as an incredibly successful investor, but may not be aware he fancies himself as a philosopher. He even wrote a philosophy book “Reflexability and Economics” which, like much philosophy isn’t an enjoyable light read: so here’s our summary because Reflexability works far better as an investment theory than philosophy. Essentially Soros argues that extreme market conditions and people’s observation and reaction to them contain the seeds of their own rebound/continuation. That “observation of the economy leads to ideas that change behavior, which in turn changes (is directed back upon) the economy itself”. To give a recent example, that the interest rate rises are causing a slowing economy, which the Federal Reserve notices, and then changes course. Are you still worried that the Chinese government won’t react to a poor Chinese economy?

 

3. Observations and Reactions aren’t always a good thing.

Participants reacting to a change doesn’t always lead to a bounce-back. Sometimes it creates a negative spiral or doom loop. Worse, a lot of investment theories and algorithms based on efficient market hypothesis, which is very good during normal market conditions, can get it badly wrong during extreme conditions. Here are just a couple of examples.

a. For example the assumption that correlations (or lack of correlation) is a broadly stable factor was a big part of the reason that one of the most famous, and previously successful hedge funds, (Long Term Capital Management) went bust in the late 90’s. A Russian bond default turned investors against all emerging markets and risk assets, changing unrelated assets to correlated, almost overnight. Yet experienced investors have long had the expression, “when times are tough, correlations turn to 1 (aka everything falls together).

b. Another hidden assumption is that markets will always trade and a willing buyer and seller can always be found. Yet in bad times, more obscure markets can sometimes fail and trading stops. For example during the financial crisis the multi-billion dollar mortgage backed security market turned from a huge industry to a ghost town in the blink of an eye. Trading had all but ceased by October of 2008 when there were only sellers and no buyers. Stop loss orders don’t work when no-one’s buying.

In both of these cases, and many others, the market level can go far beyond a normal rational level. People who bought US property at the bottom of the crisis did very well in most (although not every city), in the same way those brave few who bought stocks in early 2009 quickly made strong returns that year.

That is nothing however compared to a few hardy investment managers who bought mortgage backed securities in early 2009 for a handful of cents on the dollar. Despite the historic levels of mortgage default still managed make 500-2,000% returns as the market for these securities gradually returned over the following years. Still, you need knowledge and a very strong stomach to buy at the bottom. But how can you stiffen your spine when the media is screaming doom?

 

4. Create a plan to avoid being driven by emotions.

It’s an uncomfortable but important truth that investment decisions, aka decisions under uncertainty, are made in the emotional center of the brain, called the pre-frontal cortex (google it). All of us aren’t as rational as we think, or hope. Our brains work against our goals by going to “flight or fight” at the wrong time.

Planning ahead what your investment approach will be during times of market stress is thus vital. It means that the decision has already made. Thus “if the stock market falls 15% then sell x% of bonds and buy stocks/equities” you simply need to execute the plan rather than decide. This will help you tune out the noise of the media and market and focus on your goals. Staying rational whilst others go emotional is an advantage. Or as Buffett’s sidekick Charlie Munger described his advantage as “I’m rational”. Planning will help you become more rational too.

China Expat Money - Pre frontal cortex

5. Periodic Rebalancing – A rational plan.

There are two main ways an investor can create a rebalancing plan. The first is conditional rebalancing as mentioned above, where a portfolio holdings are rebalanced back to the intended level when a pre-set benchmark is breached. Thus if equities rise strongly and are now 75% of the portfolio, rather than the intended 70%, then some equities are sold and bonds are bought. Or vice versa.

This often has the effect of selling equities at a high level and buying a cheaper asset at a lower level. When markets reverse and fall, and equities fall to say 60%, instead of the intended 70%, then bonds are sold and equities are bought. Again, this often means you are buying low.

 

China Expat Money - Mpt-and-balancing

 

The second approach is similar but the decision making is based on timeframe to consider rebalancing rather than waiting for a threshold to be breached. Thus a portfolio could be rebalanced annually or bi-annually, depending on what you decide. Both approaches are fine, but the key is decide and then stick to your approach, no matter what happens in the controversy driven media of today.



About Caterer Goodman Partners
Caterer Goodman Partners is a Shanghai based wealth management firm established with a clear vision to provide a new level of personalized financial planning services for expatriates in Asia. Our financial advisors provide guidance for our clients in all areas of investment, specialising in managed accounts, money-market funds, retirement planning and alternative investments. At Caterer Goodman Partners, we offer our advice and experience to provide low cost, tax-effective and simple solutions to match our clients' interests.
About Owen Caterer
Since graduation Mr Owen Caterer has worked with the Queensland Premier's Department in Trade Facilitation and then as a financial adviser in Shanghai from 2005 until 2010. He then rose to Senior Adviser, then Business Development manager and then to Chief Investment Officer responsible for portfolios to a value of US$280 million across Asia. Following that Mr Caterer left to found his own firm with a partner in the financial advisory and wealth management area.   This focused on developing China and Asia's first fee-based financial advisory (rather than commission-based). This has grown to now have 8 staff and and managing almost US$35 million for clients throughout Asia. This business success was recognized as a finalist in the 2013 ACBA in the Start Up Enterprises category and are one of a small number of foreign managed firms to have a full asset management license in China.  Owen has also been active in the community volunteering for the Australian Chamber of Commerce in Shanghai and acting as the Vice-Chair of the Small Business Working Group (2012-2014) and as the Co-Deputy Chair of the Financial Services since 2013 until the present. They have continued to grow their business and havenow been selected as a small group of companies who are platinum members of the Australian chamber of commerce. The achievement they are most proud of is their efforts to reform the financial planning industry in China and push it away from a hard-sales commission driven model to a more ethical management fee and long term customer service model. Owen has a Graduate Diploma of Applied Finance from the Securities Institute of Australia of which he was a member as a Fellow of Finance for many years and also has an undergraduate degree from Griffith University in International Business.  Owen's interests are tennis, running and his wife and two children.  He speaks fluent Chinese, first arriving in China in 1997.
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Owen Caterer

Investment Focus – Why ‘buy and hold’ beats stop loss orders.

Posted on April 13, 2018 Facebooktwittergoogle_pluspinterestlinkedinrss

Since early February volatility has returned to the stock market. Many people are shocked. They shouldn’t be, because this sort of volatility is actually normal. Far more normal in fact than the steady markets we saw in 2017. This sort of volatility however reminds us of why a patient buy and hold approach is the recommended by the doyen of investing, Warren Buffett.
Let’s explore why.

CatererGoodmanPartners_WarrenBuffet

Why using a stop-loss produces a poor investment strategy.

Several people have asked us why we refuse to use stop-loss orders. Many inexperienced investors consider stop-loss orders to a quick fix in preventing a portfolio meltdown. In essence they are right, but stop loss orders come with a lot of costs that hut performance in ways people don’t seem to recognize until they’ve tried to use them in practice.

Here’s how things proceed when you use stop loss in the real world.

1. The big question is where do you set a stop-loss level? Do you set it at say only 3-5% below current levels or further down say 15% below current levels.

2. If you set it close, say 3% then there is a good chance you’ll hit that level with normal stock price variation. So what happens after you hit a stop loss? Do you wait to see if the stock starts to rise and you buy back? What happens if you choose to wait and the stock rises back to its previous level? You’ve just locked in a loss. What happens if the stop-loss sells your shares and the price bounces back, in the SAME trading day so you don’t have a chance to buy back in. That sort of price movement happens a lot.

3. If you set it further away, say 10-15%. You haven’t really protected your portfolio and you are selling low. Selling at a time when you probably should be considering to buy, rather than sell. Remember the goal is to buy low, sell high. Not the other way around.

4. Let’s say you buy back after the stop-loss order hits, thinking it’s normal volatility. But then the stock decides to fall again. Do you set yet another stop-loss, and where do you set it? Take another 5% loss? And so on.

You can see how some investors end up falling into the never ending conversation about trading strategy and forget the biggest challenge is picking the right company stock. One that will grow for the future.

Your strategy : Pick something great, and then just hold.

Warren Buffett and his mentor Benjamin Graham were fond of using the metaphor that the market as a bi-polar person. Sometimes manic and over-excited and happy to pay big money for shares not worth that much. And then sometimes depressed, willing to sell shares for far less than they are worth. This metaphor is a pretty apt description for a lot of the silly headlines you’ll see at extreme times. The dot-com boom and financial crisis were examples of each end of the spectrum. Be greedy when others are fearful in other words. This week we saw a lot of fear, so what does that tell you?

Waiting is the hardest thing.

So rather than worrying about your trading tactics, it’s better to go back to basics about your investment strategy. The better strategy is to buy something wonderful, a company with a great big competitive advantage that is growing, well run and profitable at a good price. Then simply just hold and forget about the headlines. Warren Buffett’s preferred hold time is “forever”.

That doesn’t mean you stop paying attention. Something a lot of people don’t understand is that you should be reading and following your existing holdings. Not as a fan boy sense. But with a critical eye trying to discern if the company is failing, changing or management has started doing something stupid. So if you are paying attention and a good company is now selling at a great price, you know you should buy some more.

There were some good prices going for some great companies this week and worth buying. But only those who ignore the temporary screaming headlines were able to do this. But for those with existing holdings, sometimes doing nothing is the hardest thing of all.


About Caterer Goodman Partners
Caterer Goodman Partners is a Shanghai based wealth management firm established with a clear vision to provide a new level of personalized financial planning services for expatriates in Asia. Our financial advisors provide guidance for our clients in all areas of investment, specialising in managed accounts, money-market funds, retirement planning and alternative investments. At Caterer Goodman Partners, we offer our advice and experience to provide low cost, tax-effective and simple solutions to match our clients' interests.
About Owen Caterer
Since graduation Mr Owen Caterer has worked with the Queensland Premier's Department in Trade Facilitation and then as a financial adviser in Shanghai from 2005 until 2010. He then rose to Senior Adviser, then Business Development manager and then to Chief Investment Officer responsible for portfolios to a value of US$280 million across Asia. Following that Mr Caterer left to found his own firm with a partner in the financial advisory and wealth management area.   This focused on developing China and Asia's first fee-based financial advisory (rather than commission-based). This has grown to now have 8 staff and and managing almost US$35 million for clients throughout Asia. This business success was recognized as a finalist in the 2013 ACBA in the Start Up Enterprises category and are one of a small number of foreign managed firms to have a full asset management license in China.  Owen has also been active in the community volunteering for the Australian Chamber of Commerce in Shanghai and acting as the Vice-Chair of the Small Business Working Group (2012-2014) and as the Co-Deputy Chair of the Financial Services since 2013 until the present. They have continued to grow their business and havenow been selected as a small group of companies who are platinum members of the Australian chamber of commerce. The achievement they are most proud of is their efforts to reform the financial planning industry in China and push it away from a hard-sales commission driven model to a more ethical management fee and long term customer service model. Owen has a Graduate Diploma of Applied Finance from the Securities Institute of Australia of which he was a member as a Fellow of Finance for many years and also has an undergraduate degree from Griffith University in International Business.  Owen's interests are tennis, running and his wife and two children.  He speaks fluent Chinese, first arriving in China in 1997.
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Owen Caterer

The new tax rule all expatriates must know TODAY.

Posted on August 14, 2017 Facebooktwittergoogle_pluspinterestlinkedinrss

We usually avoid talking about the details of tax laws, but this week there is a good reason to delve into those murky waters.  Why?  Because this is a tax law that is going to affect pretty much every expatriate no matter where they live.  It’s known by the bland name, Common Reporting Standard or the acronym CRS.  Don’t be fooled – it’s the biggest rule change for expatriates we’ve ever seen.  The reason for this is simple.

China Expat Money_Change is coming
The days of paying tax locally on your salary income whilst ignoring any potential tax on investments placed overseas say in Hong Kong, Singapore or elsewhere are over.  Dead. Gone.

CRS goes live in September 2017 and it means that data sharing between countries and your offshore bank and your country of residence suddenly got a million times easier.  The OECD describes it as “automatic”.   Hiding money and investments offshore and avoiding taxes just got a lot harder and maybe impossible.  So, we found a few tax experts to ask them what they thought of the Common Reporting Standard (CRS) changes.  We have Borys Priadko, an Aussie CPA in Shanghai and Ishali Patel from Buzzacotts in Hong Kong, a licensed tax agent for Brits and Americans to tell us what it all means.

 

Owen Caterer: Does the CRS apply to me?

Borys Priadko – Shanghai

CRS and FATCA apply to me – this is irrelevant as these regulations apply to financial institutions (FI) who must report information required according to account holder’s passport details. Individuals in fact do not have a choice apart from not having accounts with financial institutions. This is why the system works as it is the financial institutions who will suffer should they not provide the data e.g. loss of ability to use USD for instance. If a person fails to provide information to the FI it is not clear what will be the outcomes at this stage.

Ishali Patel – Hong Kong

The CRS requires Financial Institutions operating in participating jurisdictions to report the details of account holders who are resident in another participating jurisdiction.  The definition of Financial Institution (FI) for these purposes is drawn widely and will include certain family owned investment companies, trusts or other types of entity as well as banks and wealth managers.  However, some types of FI are exempt from CRS reporting, for example, certain types of tax favored accounts and certain pension funds or government bodies.

Around 100 jurisdictions have signed agreements to participate and have local legislation and guidance in place to implement the standard.  Some jurisdictions began their participation in 2016 with the first reports filed in 2017.  Others, including China and Hong Kong, joined the CRS a year later.

So, for example, a Financial Institution in the PRC will be required to report the following details to the Chinese tax authorities in respect of all account holders who are resident outside of the PRC in another participating jurisdiction (e.g. those resident in Hong Kong):

  • name
  • address
  • jurisdiction of residence
  • date and place of birth
  • Tax Identification Number or equivalent

Note that account holders of a PRC Financial Institution who are only resident in the PRC and not in any other participating jurisdiction, will not have to be reported to the PRC tax authorities by that FI.  However, if the same person also has an account with a Hong Kong FI, their details will be collected by that FI in HK and reported to the HK tax authorities, who will then provide that information to the PRC tax authorities.

So, basically, it affects anyone who is resident in one CRS participating tax jurisdiction but has an account with a Financial Institution that is resident in another jurisdiction.

 

Owen Caterer: How do you find your TIN (Tax Identifier Number)?

Borys Priadko – Shanghai

To find your TFN in China it depends if you are a foreigner or a Chinese national.  For Chinese nationals, it is simply their ID number.  For Foreigners, it shouldn’t be difficult because their employer should have their TIN which was generated when they paid taxes.  If you are self-employed or not working then your passport number is your TIN.  See this guide for further information.

Ishali Patel – Hong Kong

Hong Kong does not issue TINs.  Instead the Hong Kong Identification Card number (located in the bottom right-hand corner of the HKID card) must be provided.

For entity account holders, the Business Registration number (located in the middle of the BR certificate under the heading “Certificate Number”) should be provided.

 

Owen Caterer: What happens if you don’t provide your TIN for a fund investment or stock market account?

Borys Priadko – Shanghai

Should you fail to provide required information to the financial institution then your new account may not be opened. For existing accounts the financial institution may try to bring pressure to bear you’re your account to be suspended until relevant details are provided. There is no requirement but there is an obligation to supply all the information required under CRS. The FI may also inform the relevant authorities that you have failed to provide the information and that may cause authorities to look at your accounts more closely. Until the whole process is implemented it is not 100% clear what will be the outcome. There are sure to be more changes as they tighten the net.

Ishali Patel – Hong Kong

If the account holder does not provide their TIN and the Financial Institution does not have it already, then the FI would just report all the other details that it has on record, including the name and address.  The FI must then continue requesting the TIN from the account holder in order to meet its compliance obligations but would not usually be required to close the account.

 

Owen Caterer: So, are jurisdictions really sharing data?  Will fishing expeditions still be banned?

Borys Priadko – Shanghai

Yes, the jurisdictions who have signed and agreed to participate are all sharing the data based on when they agreed to start etc. Basically, fishing by tax authorities is no longer required as tax authorities get all the data so it is just then how they use this data to review individuals as per their own review policies for people who come under their regulations e.g. passport holders. Then how that passport holder fits into their regulations and has complied or not may lead to request from various authorities for more data – this is not fishing any more it is targeted information gathering based on the CRS data.

Ishali Patel – Hong Kong

The first exchange deadline for the CRS for most jurisdictions has not arrived yet so it is unlikely that much information has been exchanged as yet but the local legal framework is in place for the participating jurisdictions so there is every reason to expect that the data exchanges will take place.

It is expected that fishing expeditions will be banned but in some jurisdictions the ban may be difficult to enforce.

 

Owen Caterer: What penalties will apply?

Borys Priadko – Shanghai

There are as far as I understand no penalties on individuals for non-compliance as it is financial institutions who need to comply with regulations and penalties for them are very severe in terms of being able to use foreign currencies in their operations etc.

Individuals will be subject to the review of the tax regulations applicable to them as CRS data on their FI accounts is revealed. E.g. a person has an off-shore bank account with large amount of funds and cannot correctly account for tax being paid on the funds. Thus, they will be subject to tax regulations not CRS regulations.

Ishali Patel – Hong Kong

Financial Institutions will be subject to a penalty regime under local law, so this will be different in each jurisdiction.  In Hong Kong, the tax authorities will have the power to enter and search the premises of Financial Institutions that are suspected of non-compliance and to seize documents that contain the relevant information.  Financial penalties can be levied in varying degrees, depending on the extent of the compliance failure.  In some cases, custodial sentences may also be used to punish responsible persons representing a non-compliant FI.

The account holders themselves cannot normally be penalized for non-compliance with the CRS rules as the burden of responsibility falls on the FIs they have accounts with.  However, if the exchanges of information reveal that an account holder has taxable income or gains in a participating jurisdiction that they have not reported or paid tax on, they are likely to be approached by the relevant tax authorities and may be penalized under the laws of that jurisdiction.

 

Owen Caterer – Final Comments

So, the time to get your tax affairs in order has arrived.  Paying tax could be a better and cheaper approach than paying penalties to the country where you live.  CRS goes live in September which means that data sharing is about to start.  While some countries may not be quick to use it, we suspect many in Asia such as China will all too ready to plug budget gaps by looking at the data and seeing what they find.  The “Google for tax authorities” is not yet here, but with the raw data is about to become readily available then it is simply a matter of time.  So get your affairs organized enough that you could run for public office.  Yup, this time it’s serious.

Thanks to Ishali and Borys for taking the time to answer our questions.  If you have more on this topic please email us on admin@caterergoodman.com and we can answer them in a follow up post.

 

 

Borys Management Services

Borys Management Services provides interim management, CPA tax advice, audit and bookkeeping services as well as company set up in China, liquidation services and management consulting for medium and large multinationals’ China operations. We work closely with PKF in China as Borys is a partner in a PKF firm as well as having his own consulting practice. Borys has extensive experience and for the past 17 years has lived and worked in China with the last 9 year in his own businesses.  Find Borys on (021) 6253 1800.

Buzzacotts

Although Buzzacott is a modern firm, we are incredibly proud of our rich history and the success that we have achieved over nearly 100 years of business. We have over 330 staff working with 30 partners in specialist teams. Being under one roof is a real advantage because we can communicate with each other easily, work co-operatively and provide a full service to our clients. That knowledge, gained through front-line experience as well as individual training, is applied by “specialist teams” who combine niche expertise in international and regulation-intensive sectors – expatriates, charities, LLPs – with excellence in mainstream tax and financial management services. The quality of their advice explains Buzzacott‘s growing reputation.


About Caterer Goodman Partners
Caterer Goodman Partners is a Shanghai based wealth management firm established with a clear vision to provide a new level of personalized financial planning services for expatriates in Asia. Our financial advisors provide guidance for our clients in all areas of investment, specialising in managed accounts, money-market funds, retirement planning and alternative investments. At Caterer Goodman Partners, we offer our advice and experience to provide low cost, tax-effective and simple solutions to match our clients' interests.
About Owen Caterer
Since graduation Mr Owen Caterer has worked with the Queensland Premier's Department in Trade Facilitation and then as a financial adviser in Shanghai from 2005 until 2010. He then rose to Senior Adviser, then Business Development manager and then to Chief Investment Officer responsible for portfolios to a value of US$280 million across Asia. Following that Mr Caterer left to found his own firm with a partner in the financial advisory and wealth management area.   This focused on developing China and Asia's first fee-based financial advisory (rather than commission-based). This has grown to now have 8 staff and and managing almost US$35 million for clients throughout Asia. This business success was recognized as a finalist in the 2013 ACBA in the Start Up Enterprises category and are one of a small number of foreign managed firms to have a full asset management license in China.  Owen has also been active in the community volunteering for the Australian Chamber of Commerce in Shanghai and acting as the Vice-Chair of the Small Business Working Group (2012-2014) and as the Co-Deputy Chair of the Financial Services since 2013 until the present. They have continued to grow their business and havenow been selected as a small group of companies who are platinum members of the Australian chamber of commerce. The achievement they are most proud of is their efforts to reform the financial planning industry in China and push it away from a hard-sales commission driven model to a more ethical management fee and long term customer service model. Owen has a Graduate Diploma of Applied Finance from the Securities Institute of Australia of which he was a member as a Fellow of Finance for many years and also has an undergraduate degree from Griffith University in International Business.  Owen's interests are tennis, running and his wife and two children.  He speaks fluent Chinese, first arriving in China in 1997.
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Owen Caterer

Investment Spotlight – Property with rising rates

Posted on March 22, 2017 Facebooktwittergoogle_pluspinterestlinkedinrss

Property investments have been such a strong investment for such a long time that it can be hard to remember a few facts.

•   That property should be priced, in large part, to reflect the income (rent) it can collect.
•   That property should move upwards over the long term in line with income.
•   That property can fall in price.

Looking at figures over the last 35 years however, you’d be hard pressed to remember those three facts.  Here are some graphs from the Economist that we highly recommend that illustrate how removed from the fundamentals property has become.

Housing Affordability

Falling interest rates: the missing factor.

Valuations of property have benefited from tax benefits, emotions and a general belief in the safety of property as an investment.  All can be reversed more easily than you think.  The factor often missed is interest rates, which have generally been on a general trend downward over the last 35 years.  Bond investment giants like Bill Gross call it the great bull market.  Bonds benefit as rates fall.  Lower interest rates alongside the broadening and loosening of the banking system generally have allowed many people to bid property prices ever further upward.

Interest: The Biggest Variable Cost

Now many forecasters use measures like property prices as a multiple of income and while that’s useful, it misses something fundamental and practical about how people decide what their budget is for a property.  The average person looks at how much they can afford to pay each month in repayments, with a margin for error (that’s if they are smart).  Assuming they buyer can afford a stable $40,000 in interest per year, you can see how reducing the interest rate can increase the demand for property.  The process will also work the same in reverse.

What goes down must go up

As we are now seeing in the United States is that interest rates can rise again.  This isn’t yet a wide ranging phenomenon with Japan and Europe still with negative rates and Britain with ultra-low rates.  Sooner or later however other countries are going to raise interest rates, either to prevent excessive capital leaving and/or to reduce inflationary pressure as this cycle continues.  That it will cool the property market also seems quite certain.  It’s easier to achieve a good return when the cost of finance is so low.  It’s the biggest variable cost after all.

Caterer Goodman Partners_US Interest Rates

US Federal Reserve – Return to 3% by  2020

With apologies for the poor hand-drawn trend line, it seems clear that the trend is firmly up when you look at the US Federal Reserve “dot plot”.  Even if rate rises so far have been slower than forecast, trend is clear and a Federal Reserve interest rate of 3% or thereabouts seems a fairly certain estimate.

Caterer Goodman Partners_US Federal Reserve Plot Forecast

US Rising Rates: Lifts rate pressure everywhere

If you thought that higher US interest rates would not affect your home country, then you are probably in for a surprise.  There were two little noticed moves that shows how the world financial system will be forced to respond to higher  US interest rates.  The first was China, which lifted its interest rates within hours of the US announcement.  The second was two of the four biggest Australian banks, Westpac and National Australia Bank, who both raised rates without any movement from the Australian Reserve Bank.  The link between these movements might not be obvious to some, so let’s spell them out.

The Chinese move was done to protect the RMB.  If the US were to have higher interest rates, then this would encourage movement of money out, thus putting further downward pressure on the Yuan at a time when the Chinese government would prefer to avoid further outflows.   Although many countries right now may seem to think that a weaker currency is good for the country, due to export promotional effects, this is likely to end soon.  A weaker currency with resurgent inflation could help cause capital flight and crunch, typically in an emerging market country with a poor balance of trade.  But they aren’t the only ones competing for flighty capital.

The Australian bank’s higher rates reflects this pressure also.  These two banks, like many internationally, rely in part on wholesale funding.  This means they borrow money from other banks.  As US interest rates rise, the cost of this funding also rises, even though both banks are rated AA-, which is one of the higher ratings in the post financial-crisis banking world.   Many other banks around the world, particularly in developing economies will face higher costs and will need to manage it either by raising their lending costs or eating the loss of margin that it entails.  Either way, borrowing and lending money will become tougher as the US raises interest rates.

The Property – Interest Rate Conundrum.

Australia is a good case in point.  Currently it has historically low rates at 1.5% which has helped support the economy through a slower period whilst inflating a rather hot property market in Sydney and Melbourne even further.  This has led to a large increase property prices as well as personal debt, mostly in the form of mortgages.  It has seemed to go well, with the average Australian net worth being some of the highest in the world, up there with Switzerland.  Much of Australia’s personal wealth however is based on equity of several investment properties and is attached to a lot of debt.  It could largely evaporate if property prices fell 20%.  Many Australians rely on government tax subsidies for loss making property investments, called negative gearing.  Those rules too are continually being debated too.

There is a good chance that many property buyers would be impacted with interest rates even 1% higher than now which is still well below the Australian long term average.  The property market would probably retreat noticeably if rates rose 2%.  Analysts estimate that a rate rise would have triple the impact that a similar rise would have in the 1990’s.  Knowing this, the Reserve Bank will need to be very careful in raising interest rates since falling property prices, lead to construction job losses and a general collapse in consumer confidence and spending.

The choice for the Australian Reserve Bank thus becomes, triggering a recession through higher rates or avoiding higher rates and allowing conditions to get further misaligned, have higher inflation and a declining currency and delay reckoning to another day.  This is a choice that central banks around the world will increasingly face in coming years.  Still, the wholesale funding that many banks use, may mean that it is out of their control.   If you own Australian property, a 1.5% interest rate rise is something to consider.

Property Price Falls Really Hurt

If the world learnt anything from the US financial crisis of 2007-10 is that general residential property price falls hurt the real economy via the banking system in severe and prolonged ways.  The recent example is far from the only one from history.  Economists like Hyman Minsky, who died in 1996 have made careers out of studying property/banking/financial collapses, how they occur and what to do about them.  A quick Amazon book search can find you quite a catalogue of previous banking catastrophes.  So does that mean a collapse is coming?

Lesson: Factor in rate rises

The lesson today isn’t that the world is going to end.  Far from it.  A good crisis is a wonderful investment opportunity.  The lesson is that debt should always be used carefully and worst case scenarios should be understood and planned for because these cycles repeat.  Now that interest rates are starting into their upward swing, debt reduction should be a priority.  The cycle continues to turn.  It is a good idea to plan for higher rates and ideally be ready to invest and pounce on bargains when, eventually, the inevitable crisis happens again.

For that opportunity you should thank low interest rates that enabled millions of property speculators to over-confidently leverage themselves excessively over the last 35 years.

 

 

About Caterer Goodman Partners
Caterer Goodman Partners is a Shanghai based wealth management firm established with a clear vision to provide a new level of personalized financial planning services for expatriates in Asia. Our financial advisors provide guidance for our clients in all areas of investment, specialising in managed accounts, money-market funds, retirement planning and alternative investments. At Caterer Goodman Partners, we offer our advice and experience to provide low cost, tax-effective and simple solutions to match our clients' interests.
About Owen Caterer
Since graduation Mr Owen Caterer has worked with the Queensland Premier's Department in Trade Facilitation and then as a financial adviser in Shanghai from 2005 until 2010. He then rose to Senior Adviser, then Business Development manager and then to Chief Investment Officer responsible for portfolios to a value of US$280 million across Asia. Following that Mr Caterer left to found his own firm with a partner in the financial advisory and wealth management area.   This focused on developing China and Asia's first fee-based financial advisory (rather than commission-based). This has grown to now have 8 staff and and managing almost US$35 million for clients throughout Asia. This business success was recognized as a finalist in the 2013 ACBA in the Start Up Enterprises category and are one of a small number of foreign managed firms to have a full asset management license in China.  Owen has also been active in the community volunteering for the Australian Chamber of Commerce in Shanghai and acting as the Vice-Chair of the Small Business Working Group (2012-2014) and as the Co-Deputy Chair of the Financial Services since 2013 until the present. They have continued to grow their business and havenow been selected as a small group of companies who are platinum members of the Australian chamber of commerce. The achievement they are most proud of is their efforts to reform the financial planning industry in China and push it away from a hard-sales commission driven model to a more ethical management fee and long term customer service model. Owen has a Graduate Diploma of Applied Finance from the Securities Institute of Australia of which he was a member as a Fellow of Finance for many years and also has an undergraduate degree from Griffith University in International Business.  Owen's interests are tennis, running and his wife and two children.  He speaks fluent Chinese, first arriving in China in 1997.
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Owen Caterer

How to get wealthy: book a date with your finances

Posted on March 3, 2017 Facebooktwittergoogle_pluspinterestlinkedinrss

It is around this time of year people begin booking their summer holiday. Rest and refreshment is important so people block their schedule. They prioritize it. Those who have successful marriages do the same by making sure they have a date night weekly. Home finances including your plan, budget and even routine work are probably just as important, but do you treat it with the same respect? Do you plan a time to work on your financial plan? You probably don’t, but you should.

Doesn’t it make sense to treat your money, the fruits of your efforts of 2500+ hours a year, with incredible respect?  The effects are amazing, but practically no-one actually does even the bare minimum.

In our experience perhaps only 5-10% of people are truly organized.

Date-Night-Logo-for-Facebook

Here is what we see the organized do:

  •  They have a one page plan listing their goals for short term (1-2 years), medium (2-5) and long term (5 years+).  This includes a basic action plan.
  •  They have a spreadsheet that lists current investments and accounts which they update quarterly to track performance.
  •  They block time in their schedule to do financial paperwork as required.
  •  Have a basic budget they review every 6 months or so.
  •  They have all their key financial documents in a specific organized file such as passwords, policy documents, wills, statements.

None of that sounds hard, does it?  Yet so few do, perhaps because they see it as a chore.

We are all busy – it’s a question of priorities.

Practically every client or prospect I’ve ever met who isn’t organized has said they are too busy to get organized.  These include people who should know better including investment bankers, partners in Big 4 consultancy firms all the way to entrepreneurs, engineers and teachers.  The most organized however are also these same types of people.  What they do different is they simply block their schedule.  They treat it like any other work activity: plan it, schedule it, get it done.

Get organized; get wealthy

Practically every single one of my clients who has shown signs of being organized as mentioned above is also in the top 5% of wealthiest clients.  It’s not a coincidence.  You don’t accidentally accumulate wealth and retain it.  You spend time and work at it.  A small amount regularly still adds up to less than 25% of the time you are likely to spend eating out with friends during a given month.  Almost every client I have with more than $2 million in net assets could tick off 3 of the 5 (or more) from the list above.  Can you?

Being busy is an excuse

What is interesting to me is how the most organized people also tend to be the most successful in their career.  They are often country and regional CEO’s and are people who have a million responsibilities and good reasons not to be organized in their finances, yet they are.  That’s down to a simple thing – they book a time to get organized.  That’s their habit for everything.  They schedule their time to plan and do paperwork and simply get it done.  They use the same principles with their career, probably their family as they do with their finances, and the long-term effects are amazing.

12

Not having money is an excuse

People often say I don’t have money so I don’t need to be organized or have a plan, but in our opinion that’s all the more reason to get organized.  Clearly there is a problem!  Ignoring it might make you feel better temporarily but ultimately awful in the long term.  Every month I meet a 40+ person with minimal assets who still can’t face the issue.  Don’t let this be you.  The longer it goes, the deeper the rut you need to climb out of.  Start with a budget and a few dot points for goals including an amount to save each month and how much you will accumulate by the end of the year.  Start small and step by step you will get somewhere amazing.  As Mao said, “a journey of a thousand miles starts with a single step”.  The investment equivalent would be “a million dollar account starts with a single cent”.

Book a date night with your finances.

So, when you are discussing your summer holidays with your significant other over the next few weeks, also book a time during your holiday to talk family finances.  It might just be an two hours during an afternoon, but see how many of the big 5 you can tick off including a regular schedule of maintenance say one Sunday night a month.  An on-going date night with your finances if you will.  It won’t be much time really, but it will ultimately be very rewarding.

 

About Caterer Goodman Partners
Caterer Goodman Partners is a Shanghai based wealth management firm established with a clear vision to provide a new level of personalized financial planning services for expatriates in Asia. Our financial advisors provide guidance for our clients in all areas of investment, specialising in managed accounts, money-market funds, retirement planning and alternative investments. At Caterer Goodman Partners, we offer our advice and experience to provide low cost, tax-effective and simple solutions to match our clients' interests.
About Owen Caterer
Since graduation Mr Owen Caterer has worked with the Queensland Premier's Department in Trade Facilitation and then as a financial adviser in Shanghai from 2005 until 2010. He then rose to Senior Adviser, then Business Development manager and then to Chief Investment Officer responsible for portfolios to a value of US$280 million across Asia. Following that Mr Caterer left to found his own firm with a partner in the financial advisory and wealth management area.   This focused on developing China and Asia's first fee-based financial advisory (rather than commission-based). This has grown to now have 8 staff and and managing almost US$35 million for clients throughout Asia. This business success was recognized as a finalist in the 2013 ACBA in the Start Up Enterprises category and are one of a small number of foreign managed firms to have a full asset management license in China.  Owen has also been active in the community volunteering for the Australian Chamber of Commerce in Shanghai and acting as the Vice-Chair of the Small Business Working Group (2012-2014) and as the Co-Deputy Chair of the Financial Services since 2013 until the present. They have continued to grow their business and havenow been selected as a small group of companies who are platinum members of the Australian chamber of commerce. The achievement they are most proud of is their efforts to reform the financial planning industry in China and push it away from a hard-sales commission driven model to a more ethical management fee and long term customer service model. Owen has a Graduate Diploma of Applied Finance from the Securities Institute of Australia of which he was a member as a Fellow of Finance for many years and also has an undergraduate degree from Griffith University in International Business.  Owen's interests are tennis, running and his wife and two children.  He speaks fluent Chinese, first arriving in China in 1997.

 

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Owen Caterer

What to do when the market finally turns

Posted on February 23, 2017 Facebooktwittergoogle_pluspinterestlinkedinrss

In investing it always pays to plan ahead on how you will react in a given scenario.  Being removed from situation helps you plan your actions rationally.  So the best time to consider how to handle a falling market is while stocks are hitting record highs.  For the US markets, this is true right now.

Now this isn’t a prediction that the US markets will collapse: although valuations are getting stretched there seems little reason for a collapse.  The economy in the US is humming and even Europe is showing less signs of stress than the last decade.  So we are talking about an unexpected scenario of a short or long term market fall.

Short-term or long term protection?

The first thing to consider is whether you are worried about a sudden temporary fall, like during Brexit style event or whether you are planning for a longer downturn like 2000-2002 or the slump of 2008-09 that wiped 40-70% off markets globally over a 9 month period. What can you do for either scenario?

1. Wait it out.  Most market falls are only a short time or less than 2 years.  Only on rare occasions like the 1970’s or the 1930’s have slumps lasted several years.  This strategy might be fine for a short fall, but what if you suspect something longer term?

2. Have a discount stock account.  Most fund platforms only have a range of long equity or bond funds.  At best, you’ll be able to move to cash, which might protect you from downside but provide no upside.

3. Go to US dollar cash.  In turbulent or falling markets investors flock to the US dollar or US treasuries to wait out the storm.  This was true in 2008 and will be true until the US government’s debt gets completely out of control, which will likely take at least another decade, President Trump notwithstanding.

4. Short sell individual stocks or ETF.  This means borrowing an individual stock to sell immediately and then buy back later.  This tactic works best for more sophisticated investors who wish to take more risk.

5. Buy an inverse ETF.  This does the work of shorting for you plus you have the diversification of an index so you avoid the problem of a positive surprise in your choice of stock.  You simply buy the ETF such as Proshares Short S&P 500 (SH) so you can simply hold the fund rather than paying fees to find stock borrow to short.

StockPrices_1789toDate

6. Buy Put Options.  The favored tool of most investigative short sellers, a put option is the right but not the obligation to sell something at a price.  As a derivative it provides a potentially big bang for your buck.  Say you have shares trading at $105 per share and worry they may fall, so you buy an option to sell your holdings (and more) to sell at say $100 per share.  If the price has dropped to $80 USD per share you have made $20 per share or protected yourself from a severe fall.  Options however have an expiry date and have a cost to purchase.  So they work best if you are worried about protecting yourself in a sharp short down-turn, in a Brexit style event.

Remember: The market will be against you most of the time.

The most important thing to remember is that the stock market tends to rise in the long term.  Have a look at the history dating back to the beginning of the US market.  Yes, there were times short sellers would have done well.  But remember that short-biased funds managed only $5.5 billion in assets, a tiny fraction of the roughly $3 trillion the hedge fund industry.  Even professionals find it tough to make money when the main trends are against you.  How is that for a counter-factual proof of why investing in stocks is a good investment decision?

 

About Caterer Goodman Partners
Caterer Goodman Partners is a Shanghai based wealth management firm established with a clear vision to provide a new level of personalized financial planning services for expatriates in Asia. Our financial advisors provide guidance for our clients in all areas of investment, specialising in managed accounts, money-market funds, retirement planning and alternative investments. At Caterer Goodman Partners, we offer our advice and experience to provide low cost, tax-effective and simple solutions to match our clients’ interests.

About Owen Caterer
Since graduation Mr Owen Caterer has worked with the Queensland Premier's Department in Trade Facilitation and then as a financial adviser in Shanghai from 2005 until 2010.  He then rose to Senior Adviser, then Business Development manager and then to Chief Investment Officer responsible for portfolios to a value of US$280 million across Asia. Following that Mr Caterer left to found his own firm with a partner in the financial advisory and wealth management area. This focused on developing China and Asia's first fee-based financial advisory (rather than commission-based). This has grown to now have 8 staff and and managing almost US$35 million for clients throughout Asia. This business success was recognized as a finalist in the 2013 ACBA in the Start Up Enterprises category and are one of a small number of foreign managed firms to have a full asset management license in China. Owen has also been active in the community volunteering for the Australian Chamber of Commerce in Shanghai and acting as the Vice-Chair of the Small Business Working Group (2012-2014) and as the Co-Deputy Chair of the Financial Services since 2013 until the present. They have continued to grow their business and have now been selected as a small group of companies who are platinum members of the Australian chamber of commerce. The achievement they are most proud of is their efforts to reform the financial planning industry in China and push it away from a hard-sales commission driven model to a more ethical management fee and long term customer service model. Owen has a Graduate Diploma of Applied Finance from the Securities Institute of Australia of which he was a member as a Fellow of Finance for many years and also has an undergraduate degree from Griffith University in International Business. Owen's interests are tennis, running and his wife and two children. He speaks fluent Chinese, first arriving in China in 1997.
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Owen Caterer

Offshore brokers: putting clients second?

Posted on February 15, 2017 Facebooktwittergoogle_pluspinterestlinkedinrss

Lost in the hullaballoo around travel bans is the less noticed Donald Trump order to delay implementation on the fiduciary duty rule for retirement accounts. This is rather sad news for investors. In essence it means that US brokers won’t be obligated to put clients first when helping them invest for retirement. But how do offshore IFAs and brokers stack up? Given the number of websites and promotional material boldly proclaiming that “we put clients first” are they all really trying to live up to a fiduciary level rule?

Handshake

As any long-term expatriate can tell you, nothing could be further from the truth. Offshore brokers don’t have a fiduciary rule or even anything like it. In fact the vast majority don’t even disclose the details of their commissions. Even if they wanted to, which is unlikely, most offshore insurance companies and investment companies ban the release of this information. There is a clearly stated threat that terms of business would be terminated if this were to happen. Given it would destroy their business, you can imagine few brokers want to test the rules here. Despite that positive trends have emerged in recent years.

Surprisingly it is low tax centers like Hong Kong, Singapore and Dubai that seem to be leading the way. Waves of complaints can waken even the sleepiest regulator it seems. It’s not a revolution mind you. It’s not a requirement for fiduciary duty or even for mandatory commission disclosure, something that happened in UK and Australia years ago. The progress is merely a ban on the “indemnified commissions” which is like a cap on upfront commissions paid for starting a regular savings investment account. It’s a blunt rule, but it’s definitely progress.

Even this small change however has led to a backlash from some in the industry forced to improve their practices and change their business models. This has been too much for many brokerage companies and individual brokers in Hong Kong and UAE based brokers are living in fear the same is in store for them. When you are reliant on a $20K USD commission for selling a three thousand a month savings plan so you can pay for your team of cold callers and your snazzy office, it can often seem difficult to see another way. Sales of insurance linked investments in Hong Kong collapsed after the commission ban.

Still let’s not kid ourselves that our competitors will suddenly be clean with these welcome changes. Indeed, there has been some unexpected negative consequences, which we might discuss in a future post. Even in the US where considerably more protections are in place, the roll-back of the fiduciary rule show how progress is far from certain and how far it has to go elsewhere. Keep in mind that the fiduciary rule was to be for only retirement accounts, not ordinary accounts.

Even that small change had brokers up in arms because it would expose the gap between sales spin when a broker was forced to use two different standards for two different accounts. The uncomfortable reality as John C Bogle, founder of Vanguard put it in a recent New York Times opinion piece.

The now-endangered fiduciary rule is based on a simple — and seemingly unarguable — principle: that in giving advice to clients with retirement funds, stockbrokers, registered investment advisers and insurance agents must act in the best interests of their clients . . . It simply doesn’t seem like a good business practice for Wall Street to tell its client-investors, ‘We put your interests second, after our firm’s, but it’s close.’

Can you imagine what a truthful statement would look like for most offshore IFAs? We put clients fourth! After ourselves, our company and the investment company providing the product! Sign up now!

Bottom-line: Get your adviser to manage your money in an online discount brokerage account for a management fee. Insist on complete transparency and no lock-ins or if you can’t find anyone, simply do it yourself. It might not be a fiduciary rule but given it aligns the interests of your broker with yours, it works like one. Your investment account will do far better as a result.

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Owen Caterer

Why flexible is best

Posted on February 11, 2017 Facebooktwittergoogle_pluspinterestlinkedinrss

Today I had yet another reminder why flexibility is best, when it comes to investing.  Before we get to today, let’s go back to November last year.

It was a cold drizzly Shanghai day, the sort London is famous for, as I found my place upstairs at Element Fresh at the Shanghai center for a coffee.  A friend invited me out to pick my brain about investing.  It turns out he had been offered an investment in a property deal.  Unlike most opinions I’m asked for, this actually was a good investment.  Still I cautioned him against it.  Even though he was a successful entrepreneur with 15 staff in two businesses in Shanghai that were quite profitable I wasn’t sure it was a good idea.

flexible-personMy reasoning was he would need more flexibility than he thought.   Although profitable, the investment might take 5-8 years to be realized.  That’s a long time when you are doing business in China.  Several business waves have come and gone in that time.  Even successful entrepreneurs need considerable cash reserves.  He took my advice with a confident smile and said he had ample cash reserves.  Despite my advice, he went ahead.

Flash forward barely 6 weeks and I get another phone call.  Her business has a big partnership opportunity and she needs to help fund it, but she is a million RMB short, even after her accessing working cash.  She was desperate. Was there anything I could do to help her get her investment back?  Her broker couldn’t help her.  Rarely have I been proven so right so quickly with without feeling the need to say “I told you so!”

Lock-ins are for brokers benefit.

Sadly, it’s not an uncommon story.  You’d think that access to your investment would be a given in today’s globalized world for stock and mutual fund investing.  I’m approached possibly dozens of times per year, with requests to help people “access their money”.  Even now, most brokers in Asia who help expatriates with their money love to lock investors into for long periods.  “This is for retirement, so you don’t need access, do you?” they ask with their leading sales questions.

Well, it’s possible you’ll use it for retirement.  It is good, of course, to put money away.  But that doesn’t mean you should put it on a desert island where it is untouchable by all, except those financial institutions who wish to charge fees.   The stock market trades every day, Monday to Friday except for the odd public holiday.  The assets are easily sold, so why have the lock-ups?

The bottom line is that locking your money up is not for your benefit.  It’s for your brokers and the investment company.  It allows them to charge fees and pay off the commissions paid to your broker paid at the beginning.   Anything they say otherwise is just sales nonsense.

Does anyone know where they will be in 5 years time?

Very rarely have any clients or potential clients answered with confidence “where will you be in 3 years time?”  So why invest like you plan to be a wage slave for your entire life?  Will you be an entrepreneur?  Will you be offered a ground floor investment chance in the next Google or Uber?  Or a discounted property purchase from a distressed seller?  Will you have to say no because you’ve safely put away your entire life savings in somewhere you can’t touch?  The chance of missing the once-in-a-lifetime opportunity because of decisions such as these, happens more than you could imagine.  In Asia, it happens literally every day.

Be Flexible

Don’t miss your lucky chance.

So when investing in the stock market, as you should, there is no reason to lock up your money.  Use a discount brokerage account that gives 100% access all the time.  Either manage it yourself, or find someone like us to do it.  But whatever you do, don’t sign a multi decade contract obligating your money to stay put like a sitting duck.

Not everyone will be as lucky as my friend – we have managed to find a buyer for his investment at short notice so they’ll still be able to go ahead with the partnership and expand.  Not everyone has that sort of luck.  Avoid the lock ups so you can take opportunities when they come.

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Owen Caterer

What Trump might mean for the markets

Posted on February 2, 2017 Facebooktwittergoogle_pluspinterestlinkedinrss
Donald-TrumpGiven Donald Trump’s efforts to live up to nominative determinism as much as possible in his first 100 days, we have much to discuss in the markets that goes beyond normal market commentary which we usually try to avoid.   So let’s focus on the first few days of the Trump Presidency and what it might mean and then examine the possible market and economic impacts.

Section 1: Understanding President Trump

Appearances Matter Most

The first week of the Trump Presidency saw many gestures to various groups of his political base.

  1. Rejecting the TPP negotiations. Despite the fact they wouldn’t have passed congress.
  2. Stop cooperation with Obamacare. A real replacement is long way from ready.
  3. Avoid funding Non-Government Organizations that promote abortion.
  4. Start construction of a wall with Mexico. The specifics were vague.
  5. Approve some oil pipelines and suggest US components that were likely to be anyway.
  6. The 90 day ban on people from 7 mainly Muslim countries. What happens after 90 days?

None of this excuses Trump’s approach, but if you look closely, all of these, even the last one with its rapidly expanding number of exceptions is designed to be a high profile play to the political base that elected him. Further, the huge surge in condemnation, correct as it is, will desensitize the wider population to protests over future moves that will take longer to execute.

There is likely to be a careful but low key climb-down in the border ban (that already seems to have commenced) that may ultimately devolve into simply greater vetting of nationals of these countries. The announcement and outcry however will be long remembered by Donald Trump’s political base which had until now become restless. Further the fact that the shocking travel ban was implemented also gives Trump’s words a power they were starting to lose, and this explains part of his unique approach to power and bargaining.

A Bully in the Bully Pulpit

The Election campaign certainly revealed Donald Trump to be different and since taking the Presidency there has been no change in his approach. He is who he said he would be. Therefore it makes sense to understand the background to his unique style. The answer goes back to Donald Trump’s lawyer in the 1970s and early 80s, Roy Cohn. The essence of his counsel, a man who served Senator McCarthy for 13 years, was a simple formula: attack, counterattack and never apologize. M Stanton Evan’s book on Joseph McCarthy might help understand the present.

Change the Playing field before negotiations

When entering a negotiation Trump likes to change the perception of where the edge of negotiations are and this changes idea of where the “middle ground” actually is. Witness the mooted idea of a 20% tariff on Mexican goods. Suddenly a 2% tariff seems like not a big deal and would calm rather than agitate the market. A 2% tariff would in fact be enough to fund by a VAT style “border adjustment” tax within just a few years. Donald Trump may seem insane at times, but it is important to remember that he isn’t stupid. How Mexico and others respond however may yet determine whether America, and the world gets a good deal.

America First Protectionism

Although Donald Trump is famous for his contradictions in public statements, his statements around protectionism and nationalism date back more than a decade. They seem a real belief. Expect a Trump Presidency to involve trade spats with his normal bullying approach.

Market Confidence Matters to Trump

An overlooked factor of the uproar over the travel ban was Donald Trump’s reaction when it became clear that the financial markets were reacting poorly. He immediately tried to change the focus and promote his deregulation of the banking and finance sector as well as making a new announcement in removing red tape for business. In a sense, it was as close as Trump will get to a position walk-back. He was seeking to calm the markets.

Donald Trump is famous for his consumption of media and reacting to the conversation. He doesn’t stand above, aloof. He is proud of the stock market gains since he came to office and is clearly trying to keep confidence in the market. This may not be an ideal policy making process, but the lift in confidence by consumers and business has been real. Confidence may be intangible but it leads to spending and hiring decisions that do drive the real economy.

Section 2: Investment Ideas

Understanding Donald Trump then helps us to understand the impact of his statements and possible policy positions as we move forward.

Construction

tollsWe aren’t just talking about the Mexican wall, but also about infrastructure. Donald Trump is a builder and developer after all, and if there is one part of the government he can be expected to understand fully and attract investment, it is in infrastructure. Although the received wisdom is that government spending would be hard to come by (and probably is), the actual plan relies heavily on private sector funding. More toll roads appear to be in America’s future.

Banking and Finance

One of the best performers since Donald Trump was elected has been the banking industry. This is due to two reasons. Firstly increasing inflation expectations which will help give banks a better net interest margin and thus profit. Secondly there are growing expectations of deregulation of the banking and finance industry which has crimped profit and lending.

Business with overseas assets

The trillions of dollars stashed abroad by American multinationals may indeed be allowed to be brought back to the US at a discounted rate. Although this may take more congressional support, the Republican majority may be enough to get this across the line and support a change.

US Manufacturing

Although a difficult segment to target with any precision given the global nature of most significant operators, Donald Trump is clearly a vocal fan of US manufacturing.

Short Bonds

Protectionism in the form of tariffs combined with a rapidly warming economy that is approaching its limits on lifting employment further leads inevitably to inflation. Higher inflation with a stronger economy means higher interest rates and that means the great bull run in bonds might be coming to an end. It might be lumpy and require patience, but shorting bonds is the type of trade that goes no-where and then suddenly turns strongly profitable unexpectedly when pension funds, as a herd, start to reduce their bond holding exposure. Look to 1994 for what happened during the last bond sell-off.

India and Russia

Both India and Russia have obvious strengths and weakness. Both have suffered in recent times due to their own weaknesses. Both however can claim to be recipients of Donald Trump’s affection on the campaign trail and since then. Of the two, Russia has the most obvious chance to gain ground with a reduction in sanctions being relatively straight-forward.

Words of Caution

Instability from negative positions and policy outcomes in President Trump’s approach are easy to see given his rather unique approach and negotiating style. Here is a list of the more obvious examples.

  1. Chinese exporters were frequently targeted by Donald Trump on the campaign trail.
  2. American companies dependent on their China business, because every action will likely have a reaction. American farmers can’t just sell their China business like Yum just did.
  3. South China Sea is a potential flashpoint if Rex Tillerson’s idea of a blockade is a guide.
  4. United States tourism industry is nervous. Mexico which provided 18.4 million visitors is just one example of a country likely to send fewer tourists.
  5. Middle East is likely to continue being unstable now that the US is close to energy independence and the Trump administration is keen to reduce involvement.

Screen Shot 2017-02-01 at 14.51.51

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Bill Longstreet

The Secret Formula To Build Wealth

Posted on January 24, 2017 Facebooktwittergoogle_pluspinterestlinkedinrss

At least a couple of times a year I get approached by someone in their mid-40s who is in panic mode. They suffer nightly from cold sweats and can’t sleep because it just dawned on them that they have, despite earning a good expat salary, failed to build any wealth at all…

Unfortunately, I don’t have a secret formula for instant wealth. Wealth, for the most part, is built gradually over time by people who spend less than they earn and invest wisely. It can be this simple.
Whether you’re living paycheck to paycheck or have been blindsided with unexpected expenses, hitting the big 4-0 with nothing in the bank isn’t ideal.
To make you feel a bit better, many other people are in the same predicament. Based on a study done in the US, almost 35% of Americans in their 40s had no financial plan for retirement, and have less than $1,000 saved for their post-work years.
Regardless of your why, it’s not too late to take a hard look at your finances, devise a plan and get some money in the bank. Here are some steps you can take to turn your financial situation around.

Step One: Analyse The Numbers To Outline A Basic Retirement Plan

ChemwareTo create a plan that will guide you going forward, you’ll need four key numbers:
  • The age at which you want to retire
  • The number of years you’ll depend on your retirement savings
  • An annual estimate of living expenses in retirement
  • Your current savings.

Since these numbers are a vital part of your plan, let’s talk about how to identify them. While many people think of 65 as the “normal” retirement age, it’s not a definitive age. As people live longer, some choose to work into their late 60s and beyond. Taking into account your age, salary, expenses and how long you’re likely to live, you can figure out what age is a realistic retirement target.

Remember to consider any potential income you might have at retirement. Will you have a personal or company pension, or will you depend on your country’s social pension?

Now run your numbers through one of the many online retirement calculators. Enter your age, salary and lifestyle details, and it should create a graph that shows your estimated retirement income and projected living expenses, as well as any gap between the two. Adjusting your planned retirement age helps show how working an additional year or two could affect your savings.

How much money should you be saving? Morningstar’s Retirement Calculator uses your age, salary and current savings to determine how much of your annual income should go toward retirement savings. Be prepared for a wake-up call: a 40-year-old earning $150,000 should aim to save 10 per cent of his/her annual income and that’s assuming he or she already has $10,000 in the bank.

Step Two: Assess And Trim Your Living Expenses

Seeing a gap between your estimated retirement income and living expenses can be sobering. To start closing that gap, let’s take a hard look at your spending.

Categorise your expenses into “needs”, “wants” and “savings”. Needs are basic essentials like food, housing and utilities. Wants are less necessary expenditures like clothing, travel or entertainment — and they’re your first targets for cuts.

Slash spending from your “wants” category by identifying and cutting out unnecessary expenditures.

Don’t be too harsh, since eliminating everything you enjoy is unsustainable, but be as ruthless as possible. You might want to quit your daily Starbucks coffee, or maybe start taking the subway instead of a daily taxi. A couple of years ago, I analysed my own expenses and realised I spent around $10,000 on taxis per year. I managed to save most of this by moving closer to work and now take the subway more often. Also, instead of taking two or three long international holidays a year, like many expats do, eliminate one or travel in China.

Next, target your “needs” to see what can be trimmed. Consider other small changes too, as those can add up to a big difference. What about eating out less and cooking at home more often? Do you really need your Ayi to come everyday? Maybe you can get away with her cleaning only 3 days a week instead.

Consider moving to a smaller apartment or house. A $400 to $600 change in your monthly rent can make a big difference over the long run.

Total the amount you’ll save each month from these changes. This is your first wealth building retirement contribution.

Step Three: Choose And Strengthen Your Investments

Wondering what to invest in? Since you’re only about 20 or 25 years away from retirement, you won’t want to invest as aggressively as a 20-year-old might, but you should still find a good mix of options. Index funds are often a good choice (as I have mentioned previously).

Since you’re contributing to your accounts each month, help them grow more quickly by adding as much extra cash as possible. Add any windfall money like a birthday gift or a tax return to your retirement accounts to boost your bottom line. If any of your investments pay dividends, reinvest them so your money grows faster.

All set? You’re not quite finished; it’s time to check your work…

Step Four: Test Your New Retirement Plan

Now that you’ve put a retirement plan into action, put it to the test to make sure you’re on the right track. Update your estimates on your preferred retirement calculator. If you’ve closed the gap between your estimated retirement expenses and income, congratulations! If not, spend a month or two adjusting to your initial plan, then revisit step two to identify additional saving and earning opportunities.

 

Bill Longstreet has been a financial advisor since 2003 and prior to this were a institutional business development director, specializing in fixed income and foreign exchange markets. Bill has a Master in Business Administration with a concentration in Finance (1999) from the Olin School of Business at Washington University in St. Louis and am a candidate for the CFP (Certificate Financial Planner) qualification. He also holds a Bachelor of Arts with a Major in Economics from Denison University. In his last position before joining Caterer Goodman he oversaw $350 million in client funds across a range of currencies and risks profiles.

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Owen Caterer

2017 – Investment Ideas

Posted on January 21, 2017 Facebooktwittergoogle_pluspinterestlinkedinrss

US Dollar Strength

The US Federal Reserve put up interest rates over night and according to their statement, another 3 rate rises could be in the mix for 2017.  If only 2 happen then a great big sucking sound of money rushing from negative rates in Europe and Japan, and zero rates in the UK would become deafening.  The obvious winner is the US dollar, whose strength will make President Trump’s job in kick-starting manufacturing, just that bit harder.  Given that a higher dollar might make corporate profits tough, it might make sense for a simple US cash currency holding.

Bond Yields

Short Bonds

The other side of rising rates is that means the price of bonds must fall. If inflation continues to firm and the US Federal Reserve keeps to its schedule then shorting US government bonds is one of the few safe bets around.  Look at ETFs that do the work for you, like PST and TMV.

Banks and Financials

The surprising winner so far from President Trump is the banking and finance sector, and policy developments in line with his post-election rhetoric will continue to support this sector.  Unlike other sectors, higher rates means profits and the stock prices will surely follow.

Beware Overheated Markets

Given the specter of higher rates the US markets have been on something of a sugar rush high since the election.  History however suggest that higher rates crimp profits and therefore the share market, so it pays not to greedily chase the market too hard.  Remember, be greedy when others are fearful and fearful when others are greedy.  Others are greedy right now, so worth picking your moments to enter the market.

Long Term Winners

Some companies can grow and benefit no matter the macroeconomic environment.  Look at the gains that McDonalds delivered Warren Buffett for decades that included the awful 70’s and difficult 80’s.  Long term plays should be bought in market corrections and could include Google, Amazon, Microsoft (yes, really) and Starbucks.

Get your tax affairs sorted

Yes, we do realize this is not technically an investment trend, but certainly something to watch.  The “Google of Tax” is coming in 2017.  Expect to hear more from us on this in future posts, because trust us, this is possibly the biggest news in the whole newsletter.  We hid it here to see who makes it this far.  In future tax authorities from practically every major country, including China, will have complete access to their citizens bank holdings globally with merely the click of the mouse.  Call it the “Google for Tax Authorities” or the “Facebook of Finance” but whatever it is, it will be a game changer.

If you want to learn more, look up Common Reporting Standards (CRS).  It’s essentially the global version of the US FATCA legislation.  It would be a good idea to talk to your accountant about how to report your unspoken bank or investment accounts properly.  You have nothing to worry about if you have nothing to hide.  But best get organized now because even the Chinese authorities will be able to find your offshore bank account next year.  Talk to us if you want a referral to a good tax accountant.  There are strategies you can still use to minimize your exposure, but you best start soon, because the system goes live in June 2017.

timeline-crs

Three Contrary Picks with potential.

  • European equities markets have lagged the US markets the last few years due to the obvious problems in the Euro-zone.  Valuations are relatively low and the lower Euro is helping.  Any unexpected good news, or merely an absence of bad news could see good gains.
  • Vladimir Putin SmilingRussia: With a friend in the White House and in the State Department the rebound of Russian equities off the floor could well continue.  The market is still (next to Iraq) the cheapest in the world and still down heavily from 5 years ago, so it has plenty of room to run.  The removal of even some sanctions could see a market run.
  • Pharma and Healthcare: The most unpopular sector in the US in 2016 may have all the bad news priced in.  Trump focusing his deal marketing acumen attention elsewhere would be enough for the market to remember that demographics is a huge tailwind for the sector.

 

About Caterer Goodman Partners
Caterer Goodman Partners is a Shanghai based wealth management firm established with a clear vision to provide a new level of personalized financial planning services for expatriates in Asia. Our financial advisors provide guidance for our clients in all areas of investment, specialising in managed accounts, money-market funds, retirement planning and alternative investments. At Caterer Goodman Partners, we offer our advice and experience to provide low cost, tax-effective and simple solutions to match our clients’ interests.

About Owen Caterer
Since graduation Mr Owen Caterer has worked with the Queensland Premier's Department in Trade Facilitation and then as a financial adviser in Shanghai from 2005 until 2010.  He then rose to Senior Adviser, then Business Development manager and then to Chief Investment Officer responsible for portfolios to a value of US$280 million across Asia. Following that Mr Caterer left to found his own firm with a partner in the financial advisory and wealth management area.   This focused on developing China and Asia's first fee-based financial advisory (rather than commission-based). This has grown to now have 8 staff and and managing almost US$35 million for clients throughout Asia. This business success was recognized as a finalist in the 2013 ACBA in the Start Up Enterprises category and are one of a small number of foreign managed firms to have a full asset management license in China.  Owen has also been active in the community volunteering for the Australian Chamber of Commerce in Shanghai and acting as the Vice-Chair of the Small Business Working Group (2012-2014) and as the Co-Deputy Chair of the Financial Services since 2013 until the present. They have continued to grow their business and have now been selected as a small group of companies who are platinum members of the Australian chamber of commerce. The achievement they are most proud of is their efforts to reform the financial planning industry in China and push it away from a hard-sales commission driven model to a more ethical management fee and long term customer service model.   Owen has a Graduate Diploma of Applied Finance from the Securities Institute of Australia of which he was a member as a Fellow of Finance for many years and also has an undergraduate degree from Griffith University in International Business.  Owen's interests are tennis, running and his wife and two children.  He speaks fluent Chinese, first arriving in China in 1997.

 

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Owen Caterer

The Art of Doing Nothing

Posted on December 15, 2016 Facebooktwittergoogle_pluspinterestlinkedinrss

1466_MO_TAODN_deluxe_jewel_bklt.inddThe hardest thing for the average or new investor to learn is patience.  I’m not saying that professional investors are perfect.  They aren’t.  Still new investors fall into this trap more than the professionals since they don’t even consider it.  Here is what you need to know about patient investing.  And no, I don’t want to talk about meditation.

 The New Account Rush

Let’s say you have opened a share account or investment account.  The first thing new investors do is to, straight away, invest all their money.  That’s what you opened the account for right?  Leaving it sitting there is just wasting time, right?  What’s the point of leaving it mostly in cash?

 What happens if the market drops 10%?

But consider this from another perspective.  What makes today so special as the day you want to invest everything?  Are the choices you made sufficiently special?  Or are they simply the first that came to mind?  Once you buy something, other opportunities are no longer available.  What will you do if the market unexpectedly stumbles next week by 10% because of chaos in Greece Debt/Syria/France Downgrade/US Congress?  Will you sell or wish you had some cash still around ready to buy?  Many people sit on cash for months and years before they invest, then rush to put all their money into the markets in the first week.  Why the sudden hurry?  Portfolios can and should be diversified not just by shares and asset classes, but also across time.

Staged Entries are best

I recall a client who invested a lump sum in late July 2008, against our advice insisted it all go into the market (March-June had been good if you recall and the rumors on property were still only that) and then disappeared on business travel.  They spent ALL their cash and had nothing left when the markets tumbled and nose-dived.  By the time we found them, they were down by 35% and by then it was probably better to leave them go through a full cyclic recovery.  A staged entry over 3-4 months could have avoided this scenario.  Sadly this is a far more common instinct that you’d expect.  Many turn off from the markets forever.  Better to get a strategy and stick to it.

Sticking to the strategy

A few years ago I read a book that consisted of in-depth personal interviews with about 12 successful and experienced hedge fund managers.  The most common regret was “I sold my position too soon – I was too impatient”.  Taking the first 30% in profit seemed good, but they left then next 50-150% on the table.  When you have a strategy or good idea you should stick to it.  Academic research has consistently shown that portfolios that are traded less, outperform.  Once you bought it, keep it until your strategy has played out.  Warren Buffet’s maxim of “I invest forever” is said with reason.  It’s the sole reason he avoids ETFs since they are “too easy” to trade.  Getting bored is a huge danger.  So how to keep disciplined?

Keep a trading diary

One of the good tips I got years ago is to keep a trading diary.  It helps keep you honest with yourself on why you bought something, and why you should sell, when the time comes.  How long you expect to hold something.  Often, you can convince yourself that you’ve achieved your goal, when you haven’t.  It can be quite eye-opening.  Keeping this trading diary significantly improves performance, and helps remind you on your strategy.  Its your conscience and because it is written down – infallible.  Memories are remarkably poor after a few weeks.  Big hedge funds and managed funds use it with their traders and it has shown to improve performance.

Is it worth telling Grandma?

There is a client (Steve) I speak to maybe 1-2 times per year who now lives in the Philippines.  He prefers not to be bothered.  “Call me only if it is really important and a great trade”.  We only make purchases or sales, at most, twice per year on his portfolio.  This discipline has proved wonderful for Steve since I’ll call him if it one of the best opportunities of the year.  He hasn’t had a losing trade yet.  These are usually only the very best trades and opportunities.  Being patient and ignoring the average opportunities is one of the hardest things to do investing, since there is a constant urge to “just do something”.  If it isn’t good enough to call home to your parents or grand parents, then is it good enough for your portfolio?

mark-owen-the-art-of-doing-nothing-artBe picky – wait

This advice is the most vital when you are first investing a new account.  Buying something because “it is doing pretty decent lately with profits” is not a strategy, although this is the most common basis for the home trader.  It has no basis in fundamental valuation or any recognized investment strategy.  Either do the proper research to find the right share, pay a trained/trusted professional to do it for you, or simply stage your way into an index fund.  But picking a company who is growing and hot now is, at best, a highly variable strategy.  You’ll end up with the next Enron or Blackberry more often than you buy the next Apple.

So what’s our advice in summary

  • Be patient
  •  Stage into the market
  • Be picky about what you buy
  • Have a strategy and keep a trading diary
  • Stick to your strategy
  • Do nothing unless your strategy says otherwise (this is the hardest of all)

We’ve found that the best way to keep ourselves engaged is to keep doing research and reading financial statements to find the next diamond in the rough.  If you want spend your time “just doing something”, just do that, and leave the trading passwords alone.  Even better, keep the passwords hard and written down somewhere safe where you rarely look.  When sitting on your hands, any help you get is useful.

 

About Caterer Goodman Partners
Caterer Goodman Partners is a Shanghai based wealth management firm established with a clear vision to provide a new level of personalized financial planning services for expatriates in Asia. Our financial advisors provide guidance for our clients in all areas of investment, specialising in managed accounts, money-market funds, retirement planning and alternative investments. At Caterer Goodman Partners, we offer our advice and experience to provide low cost, tax-effective and simple solutions to match our clients’ interests.

About Owen Caterer
Since graduation Mr Owen Caterer has worked with the Queensland Premier's Department in Trade Facilitation and then as a financial adviser in Shanghai from 2005 until 2010.  He then rose to Senior Adviser, then Business Development manager and then to Chief Investment Officer responsible for portfolios to a value of US$280 million across Asia. Following that Mr Caterer left to found his own firm with a partner in the financial advisory and wealth management area.   This focused on developing China and Asia's first fee-based financial advisory (rather than commission-based). This has grown to now have 8 staff and and managing almost US$35 million for clients throughout Asia. This business success was recognized as a finalist in the 2013 ACBA in the Start Up Enterprises category and are one of a small number of foreign managed firms to have a full asset management license in China.  Owen has also been active in the community volunteering for the Australian Chamber of Commerce in Shanghai and acting as the Vice-Chair of the Small Business Working Group (2012-2014) and as the Co-Deputy Chair of the Financial Services since 2013 until the present. They have continued to grow their business and have now been selected as a small group of companies who are platinum members of the Australian chamber of commerce. The achievement they are most proud of is their efforts to reform the financial planning industry in China and push it away from a hard-sales commission driven model to a more ethical management fee and long term customer service model.   Owen has a Graduate Diploma of Applied Finance from the Securities Institute of Australia of which he was a member as a Fellow of Finance for many years and also has an undergraduate degree from Griffith University in International Business.  Owen's interests are tennis, running and his wife and two children.  He speaks fluent Chinese, first arriving in China in 1997.
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Owen Caterer

Trump is Right: China Manipulates the RMB.

Posted on December 12, 2016 Facebooktwittergoogle_pluspinterestlinkedinrss

Donald Trump is completely correct that the Chinese authorities are manipulating the level of the Renminbi.  The only problem is that he is exactly incorrect on the direction.  China is supporting its currency to a scale rarely seen having spent $1 trillion US dollars since 2014. How much longer can this support continue?  Is a currency collapse on the cards?  What is going to happen in 2017?

Early this year we wrote that we expected the Renminbi to reach 7.2 to a US dollar.  This was more bearish than most forecasters who were expecting 6.7 by year end.  We still have a few weeks left in the year but right now it looks likely the currency currently settled comfortably at 6.9 in one of its temporary pauses the final result is likely to be in the range of 6.9 to 7 to a US dollar by year end.

 

What is the Chinese Government thinking?

This is always the tricky million dollar question. So let’s start with what they aren’t thinking and narrow down from there. Here is what the government probably isn’t thinking:

•   Renminbi liberalization – doors and windows to getting currency out are being slammed shut.

•   Free floating RMB – that would be a loss of control the government.

•   The economy is strong, let’s see how the economy stands by itself without infrastructure stimulus.

•   Volatility is good and helps strengthen risk management.

 

CatererGoodmanPartners_ChinaForeignReserves

 

So is a collapse on the cards?

No, and let’s get this straight, the Chinese economy is doing pretty well right now with e-commerce growth rocketing and consumer confidence still pretty good.  Hotels and restaurants that we know all report a stronger environment than last year, which was pretty weak.  Growth is still probably in the 5% range and property owners probably feel pretty ebullient given their 20-30% gain in net value over the last year.

The unbalanced property market and government infrastructure investment continue to mask deeper issues.  Government nervousness in policy response betrays the confident words of their statements.  Local government, property and personal debt all continue to increase.  Factories in many labor driven sectors have already moved to Bangladesh and elsewhere years ago, and now other factories are slowly joining them as costs continue to rise quickly.  It is rare to meet a sophisticated Chinese investor who hasn’t at least considered getting a portion of their savings to a foreign currency, just in case.  The government however is ready and able to take any step necessary to prevent an untidy retreat.

 

An infinite number of fingers in the dyke.

Some foreign commentators believe that effectively blocking outbound currency flows is impossible to do with 100% perfection.  Perhaps, but 99% effectiveness is good enough if you are quick to find any leak and plug it.  The government merely has to prevent any sizeable channel in a timely fashion.  Unlike other emerging markets China has an efficient bureaucracy (when they want to be) that has a well practiced hand around the choke points of the banking and financial system.  The government owns all the major banking and payment players like UnionPay after all.  They have shown the motivation and ability to do this.  There are dozens of examples, but here are a few recent cases in the last week or so:

1.   Macau ATM’s no longer allow withdrawals.

2.   New restrictions on outbound investments.

3.   Foreign country profit repatriation restrictions.

We could go on and on.

Now of course the combined weight of these rules is likely to severely curtail China’s international engagement and damage the economy in the longer term, but right now the Chinese authorities seem quite ready to wear these risks.

 

Outflows will continue.

The problem with trying to manage a stable decline in the region of 6-8% per annum is that the predictability gives many companies and individuals the motivation to get money out.  Guaranteed gains have that effect.  Large government supported outbound investors like Hainan Airlines are paying eye-watering prices for overseas assets based on the assumption of continued currency falls.  It sure helps pay the interest bills and keep debt to equity ratios under control.  Many individuals who can find their own way around the great capital control wall of China will almost certainly use it.  Meanwhile capital controls will continue to scare away investment that might have otherwise flowed.

 

So what’s going to happen in 2017?

In 2017 the government will continue to do whatever it takes to protect the currency.  There are 3 trillion dollars to support this conclusion.  Foreign currency reserves combined with capital controls and a uniquely motivated and capable bureaucracy will likely mean further declines of 6-8% in 2017.

That shouldn’t be a reason for complacency for Chinese policy makers however.  The solutions required to safely manage the Renminbi’s decline are unnecessarily squandering China’s trillions and will almost certainly create other problems for the future.  That’s always true when a government tries to fight a market reality of this size.  So far those consequences seem manageable and will likely remain so in 2017.  The longer term consequences, however, are growing more sizeable than many would be willing to admit.  Donald Trump himself can tell you stories about what happens when you use too much debt to invest.

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Owen Caterer

Why your assumptions are hurting your returns.

Posted on November 29, 2016 Facebooktwittergoogle_pluspinterestlinkedinrss

Here we delve deeper into Behavioral Finance which we kicked off recently.  Today we are going to look at how your assumptions and mental accounting hurt your investing, caused by a thing called Representativeness Bias

Humans are built to analyze and classify.  To put a label on things.  Labeling, you see, has benefits: it provides a short-cut to making a decision rather than thinking things through.  But when investing, those short-cuts are often, most of the time, way off the mark.  If you fail to double check your assumptions or labels, you are suffering from Representativeness Bias.  Many people, even when asked to stop and consider, aren’t good at looking at the probabilities because their brain and its habits makes assumptions and races away.  This is a cognitive bias, meaning it is often an error in logic, which makes it easier to correct.  I’m going to provide some clear examples and then relate it to situations you can apply for yourself.

Try this question.

Question: Jim is an ex-minor league basketball player. After he graduated from university, Jim became a physical education teacher. Jim has three sons, all of whom are excellent athletes. Which is more likely?

a. Jim coaches a local junior basketball team.

b. Jim coaches a local Little League team and plays with the local men’s basketball team.

Which do you think?

Answer: Many people would pick “b,” which is the predictable answer, are likely to suffer from base-rate neglect representativeness bias. It is possible that Jim both coaches and plays basketball, but it is more likely that he only coaches Junior basketball.  Here is the graph that helps explain.

pie chart

The problem is people jump to the conclusion that “he is a basketball person, so he is more likely to be involved in basketball in every way possible”.  The graph above also illustrates the unspoken choice – Jim only plays basketball.  B refers to the small slice of both coaching and playing.  We made up the numbers, but you can see it must always be the smaller slice since only a portion of junior coaches, also play themselves.

The second is ‘sample size’ neglect.  This often appears when people are considering the market or an individual fund manager’s returns.  But first let’s look at tennis to illustrate our point.

If you are the better tennis player, should you prefer a 3 set match or a 5 set match, assuming that you both equally fit?  Have a think about it.  Most people would be indifferent thinking that they are both equal measures of ability.  But think about it in a smaller scale.  If you are the better player, would you prefer 21 points or 3 points?  Obviously 21 points since any player can hit a couple of lucky shots, or under the pressure you throw in a bad shot and you lose in 3 points.  So the correct answer is 5 sets.  Men’s tennis is more predictable than women’s at Grand Slam tournaments, and it is no accident that Men play 5 sets versus only 3 for Women.

In finance, sample size neglect leads people to consider small amounts of evidence as being significant.  We just don’t have a good feel for it.  It could however be random chance or a fluke.   Is the last 6 months of a fund manager’s outperformance really meaningful?  Not statistically speaking.  Here is what often happens.  Make sure it doesn’t happen to you.

A firm called DALBAR conducted a survey into investor behavior in 2003.  The title was Quantitative Analysis of Investor Behavior. It showed that investors tend to buy funds that had recently showed a rapid price rises. But by buying then, at the top part of the cycle, they found tends to shortly precede a subsequent fall in the fund’s performance. When prices go down, many investors quickly dump their holdings and search for the next hot fund.

The study found that the average equity investor during this period earned over 1984-2002 a return of 2.57% per annum.  During the same period inflation was 3.14% and the S&P 500 did a rock solid 12.22% per annum.  Losing to inflation over that period was a pretty poor result, and most of it was due to

The moral of the story is threefold.

a) When investing in the market – a large chunk should be in a low-cost index fund.

b) Chasing hot performing funds/managers with a good 12 month return is a statistically poor strategy and,

c) Jumping around a lot usually hurts investment returns.

Further ways to improve – practice on others

When it comes to finance and economics, here are some common fallacies that are keep popping up in recent times.  Keep in mind, when everyone else get’s it wrong, it creates opportunities for you.  Challenge your (and the media’s) assumptions when it comes to investing. So trying to understand where others are wrong (or yourself) is a profitable hobby.

Assumptions: Most Americans think American property is a poor investment. Most Australians think Australian property is a wonderful investment.

The facts however are against both assumptions.  Rental yields in the US are far higher (around 7-15%) and property prices are far cheaper compared to income than most markets globally due to large falls in 2007-2010.  Australia is the reverse, where rental returns are often poor (3-5%) after years of price rises and most average Australian’s struggle to afford a property.

Assumption: Chinese people think that property prices can never fall.

That assumption is being tested right now.  There has never been an asset, anywhere in the history of the world, that went up consistently without significant dips.  Usually speaking the bigger the run, the bigger the dip.

Assumption: The US financial media believes that all property bubbles lead to banking crises and therefore China’s big property bubble will make the Chinese banks collapse.

This ignores the rather large differences in the financial and government systems in China when compared to the United States.  All banks are government owned in China.  Personal levels of leverage or borrowing are quite low in China, with high levels of savings and high levels of deposits for all property purchases.  There might be problems, but they appear manageable.

guy-with-binocularsAssumption: Printing money always leads to inflation.

All else being equal, that assumption holds.  The problem in the US, Europe and the UK that all else isn’t equal.  When an economy is deleveraging, and loans are repaid, money is destroyed (yup – it doesn’t sound true, but it is).  Also consider the case of Japan, where printing money has been tried several times in the last 25 years but inflation has never moved at all.  In fact the Yen often strengthened.  Of course if you run the presses like crazy, then things can get away, but it is interesting that inflation hasn’t budged since quantitative easing started in 2008, already 6 years ago, despite what gold bugs have been predicting, endlessly, the whole time.  They might be right eventually, but the statistics show no sign of it being anytime soon..

What are your assumptions when it comes to investing? 

Perhaps write them down, and then consider them like a scientist.  What basis in research or hard numbers can you find?  Discuss them with your partner or your adviser, since it is always easier to see the illogic in other’s arguments, rather than your own.


About Caterer Goodman Partners
Caterer Goodman Partners is a Shanghai based wealth management firm established with a clear vision to provide a new level of personalized financial planning services for expatriates in Asia. Our financial advisors provide guidance for our clients in all areas of investment, specialising in managed accounts, money-market funds, retirement planning and alternative investments. At Caterer Goodman Partners, we offer our advice and experience to provide low cost, tax-effective and simple solutions to match our clients’ interests.

About Owen Caterer
Since graduation Mr Owen Caterer has worked with the Queensland Premier's Department in Trade Facilitation and then as a financial adviser in Shanghai from 2005 until 2010.  He then rose to Senior Adviser, then Business Development manager and then to Chief Investment Officer responsible for portfolios to a value of US$280 million across Asia. Following that Mr Caterer left to found his own firm with a partner in the financial advisory and wealth management area.   This focused on developing China and Asia's first fee-based financial advisory (rather than commission-based). This has grown to now have 8 staff and and managing almost US$35 million for clients throughout Asia. This business success was recognized as a finalist in the 2013 ACBA in the Start Up Enterprises category and are one of a small number of foreign managed firms to have a full asset management license in China.  Owen has also been active in the community volunteering for the Australian Chamber of Commerce in Shanghai and acting as the Vice-Chair of the Small Business Working Group (2012-2014) and as the Co-Deputy Chair of the Financial Services since 2013 until the present. They have continued to grow their business and have now been selected as a small group of companies who are platinum members of the Australian chamber of commerce. The achievement they are most proud of is their efforts to reform the financial planning industry in China and push it away from a hard-sales commission driven model to a more ethical management fee and long term customer service model.   Owen has a Graduate Diploma of Applied Finance from the Securities Institute of Australia of which he was a member as a Fellow of Finance for many years and also has an undergraduate degree from Griffith University in International Business.  Owen's interests are tennis, running and his wife and two children.  He speaks fluent Chinese, first arriving in China in 1997.
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Owen Caterer

Can I tax deduct my trip home?

Posted on November 28, 2016 Facebooktwittergoogle_pluspinterestlinkedinrss

Question: I have an investment place in Sydney which I visit each year.  Can I tax deduct my travel costs for my trip home?

Answer: If you’re an Australian expat with a portfolio that has property at home you may often find yourself going back to back to Australia to carry out inspections and maintenance, as well as visiting friends and family. The ATO allows you to claim a range of travel expenses when flying internationally and although most things can be considered expenses, there are a few rules and intricacies that you should know and be aware about.

655342-australian-taxation-officeWhat won’t the ATO let me claim on?

The Australian Tax Office has the approach of anything is allowed, provided it is not of a ‘capital nature’ and provided it’s done in order to aid the gain of assessable income. This means that anything that changes the base value of your property like travelling to go monitor a loft conversion can’t be claimed and anything like going to collect rent or deal with maintenance issues is claimable. Another good example of where this extends to is a claim for a plane ticket to go and rent your property versus a plane ticket to go and sell your property; the former being claimable and the latter not.

Duality of purpose

The ATO also looks at whether or not you can prove what is called ‘no duality of purpose’, i.e. if you visiting the property is only incidental to your trip to Australia. So claiming an airline ticket to go to Australia to go on holiday and to inspect your property on the side is not deductible.

So does that mean I can only claim on flights specifically to go see my property?

If your visit does happen to be of a dual nature, worry not as deductions directly related to the property can still be made. This now falls under the category of domestic claims and is treated like any other normal claim you’d make on ‘income costs’. This means that if you visit Sydney but your property is in Perth, you can claim travel expenses from Sydney to Perth. This holds if you travel by aeroplane, motor vehicle, or camel (a joke of course).

So then how are my deductions calculated and how do I prove these claims?

There are a few methods for the calculation of these by car costs, such as the cents per kilometre method or the logbook method. Details can be found here.

In order to prove this the ATO requires documentation in the form of either receipts or a written travel diary (if your travel domestically is more than 6 days) that logs your daily activities. This diary should include the date, time, duration, and a brief description of your activities. It’s also advisable to keep all receipts and invoices throughout your visit, even receipts for items used in your property maintenance as small as paint.

Great. Anything else I should know?

Yes. Accommodation where it would otherwise be unreasonable to not stay on your visit is claimable. This means hotel accommodation, but try not to push the taxman’s buttons and go all out at a 5 star with your family as this deduction only applies to whoever actually owns the property. If this is you and your partner both have joint ownership, you both can claim half the expenses each.

You should also know that food expenses are deductible, from a bottle of water on the way, to a restaurant meal(s). Again, it’s important to keep a record of these events in the form of receipts and some sort of travel log should the taxman decide to audit you and your claims.

 

About Caterer Goodman Partners
Caterer Goodman Partners is a Shanghai based wealth management firm established with a clear vision to provide a new level of personalized financial planning services for expatriates in Asia. Our financial advisors provide guidance for our clients in all areas of investment, specialising in managed accounts, money-market funds, retirement planning and alternative investments. At Caterer Goodman Partners, we offer our advice and experience to provide low cost, tax-effective and simple solutions to match our clients’ interests.

About Owen Caterer
Since graduation Mr Owen Caterer has worked with the Queensland Premier's Department in Trade Facilitation and then as a financial adviser in Shanghai from 2005 until 2010.  He then rose to Senior Adviser, then Business Development manager and then to Chief Investment Officer responsible for portfolios to a value of US$280 million across Asia. Following that Mr Caterer left to found his own firm with a partner in the financial advisory and wealth management area.   This focused on developing China and Asia's first fee-based financial advisory (rather than commission-based). This has grown to now have 8 staff and and managing almost US$35 million for clients throughout Asia. This business success was recognized as a finalist in the 2013 ACBA in the Start Up Enterprises category and are one of a small number of foreign managed firms to have a full asset management license in China.  Owen has also been active in the community volunteering for the Australian Chamber of Commerce in Shanghai and acting as the Vice-Chair of the Small Business Working Group (2012-2014) and as the Co-Deputy Chair of the Financial Services since 2013 until the present. They have continued to grow their business and have now been selected as a small group of companies who are platinum members of the Australian chamber of commerce. The achievement they are most proud of is their efforts to reform the financial planning industry in China and push it away from a hard-sales commission driven model to a more ethical management fee and long term customer service model.   Owen has a Graduate Diploma of Applied Finance from the Securities Institute of Australia of which he was a member as a Fellow of Finance for many years and also has an undergraduate degree from Griffith University in International Business.  Owen's interests are tennis, running and his wife and two children.  He speaks fluent Chinese, first arriving in China in 1997.

 

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Owen Caterer

Why you shouldn’t look for a ‘pension’?

Posted on November 27, 2016 Facebooktwittergoogle_pluspinterestlinkedinrss

I want a pension plan.

I want an individual pension.

With governments in huge and growing debt, and the population aging, it makes sense to save for your own independent retirement. But what sort of pension should you get? Investing, however, is not like going to the supermarket. It is usually a huge mistake to look for a product that has “Pension Savings Plan” on the wrapper. Why?

saving-for-retirementThe reason is that insurance and investment companies simply use this title as part of their sales approach to you. Forget the titles and pay far more attention to the terms of the investment. Usually these “investments” (in many cases we use the term very loosely) are highly restricted so you can’t get your money out if you need it. They are also very expensive with layer upon layer of fees. There will be a very limited chance you will ever make money. The only reason your friendly local adviser is so keen on his recommendation is the large commissions he will receive once you start investing. If you achieve a return of 1% per annum, you’ll be doing well. That’s not even close to the best deal around.

What’s the real need? More Money

When you are saving for retirement (or for children’s education), the primary goal is to build the biggest pot of money you can. That’s it – don’t get distracted.

A few more % equals a lot more

Increasing your return from 1% each year to even just 4% will have a tremendous effect on your eventual result. Often that will mean doubling your money or more, instead of a barely noticeable gain. Furthermore, restrictions on accessing your money aren’t for your protection. They suit the investment company which then has a client’s money hostage. Special structures don’t “lock in its tax free nature for when you go home”. That is just an untrue sales line peddled by hard-selling brokers.

It’s the details that matter, not the marketing spiel

Any investment account with a discount broker is going to be miles better. Yes, they might not have invested money in glossy brochures of elderly couples walking along the beach. Possibly there will be a yacht or a luxury convertible driving along a ocean-side road in there too. You know the ones. They might not have pension plan or education plan on the tin, but a good deal often seems simple, because it is. In complications, fees usually hide.

Buy direct ETFs in a discount broker

You can reduce costs by investing directly into low cost funds traded on an exchange called ETFs. You can do it yourself, or get others to manage for you – either way. If you go even close to matching the market return of around 8% per annum and you’ll do very nicely over the long term, provided you stick to your plan. Your returns, and pension pot are almost guaranteed to be far far healthier than with a dedicated “pension plan”.

You can call a Managed Account anything you want.

managed accountsWe use managed accounts to accumulate wealth for our clients, whether the underlying need is build up wealth for retirement or to pay for their children’s education. Interactive Brokers is our preferred platform since the only management fee is ours and the trading costs are 90% lower than the next lowest in the market. Also, you can get your money within 2 days’ notice and the structure is clean, simple and transparent. But don’t let the boring name of “managed account” fool you. It can be called a pension fund, savings plan, rainy day fund, education plan, boat saving fund or whatever you want. It will still be better than any “tailored” solution you will find.

Bottom-line: It’s the investment deal that matters. Not the name.

 

About Caterer Goodman Partners
Caterer Goodman Partners is a Shanghai based wealth management firm established with a clear vision to provide a new level of personalized financial planning services for expatriates in Asia. Our financial advisors provide guidance for our clients in all areas of investment, specialising in managed accounts, money-market funds, retirement planning and alternative investments. At Caterer Goodman Partners, we offer our advice and experience to provide low cost, tax-effective and simple solutions to match our clients’ interests.

About Owen Caterer
Since graduation Mr Owen Caterer has worked with the Queensland Premier's Department in Trade Facilitation and then as a financial adviser in Shanghai from 2005 until 2010.  He then rose to Senior Adviser, then Business Development manager and then to Chief Investment Officer responsible for portfolios to a value of US$280 million across Asia. Following that Mr Caterer left to found his own firm with a partner in the financial advisory and wealth management area.   This focused on developing China and Asia's first fee-based financial advisory (rather than commission-based). This has grown to now have 8 staff and and managing almost US$35 million for clients throughout Asia. This business success was recognized as a finalist in the 2013 ACBA in the Start Up Enterprises category and are one of a small number of foreign managed firms to have a full asset management license in China.  Owen has also been active in the community volunteering for the Australian Chamber of Commerce in Shanghai and acting as the Vice-Chair of the Small Business Working Group (2012-2014) and as the Co-Deputy Chair of the Financial Services since 2013 until the present. They have continued to grow their business and have now been selected as a small group of companies who are platinum members of the Australian chamber of commerce. The achievement they are most proud of is their efforts to reform the financial planning industry in China and push it away from a hard-sales commission driven model to a more ethical management fee and long term customer service model.   Owen has a Graduate Diploma of Applied Finance from the Securities Institute of Australia of which he was a member as a Fellow of Finance for many years and also has an undergraduate degree from Griffith University in International Business.  Owen's interests are tennis, running and his wife and two children.  He speaks fluent Chinese, first arriving in China in 1997.
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Darren Cox

American Real Estate Purchased by non-US investors

Posted on November 26, 2016 Facebooktwittergoogle_pluspinterestlinkedinrss

US propertyMost will say that the United States has served as a beacon for foreign investments and business opportunities for many decades. Growing up in rural Connecticut, I would take the one and half journey to New York City at least twice a month. When the meadows vanish in the rearview, and the buildings start to grow taller and taller, you know you’re in the center of it all when you reach your destination. People from every corner of the world are attracted to America, a relatively strong economy with political stability. The result has been a steady increase in foreign investment. America coupled with strong technological innovation has created a robust consumer demand. After the financial crisis, capitalism has been restored and the U.S. is once again a beacon of safety. However, most foreign investors are generally not able to find useful information about legal structuring for property purchases when they are ready to diversify to America.

The devil is in the detail

Like everyone else, I’m overwhelmed when I hear 7,000 taxing authorities rule the United States, from the Internal Revenue Service down through all fifty states to the thousands of local jurisdictions. Each has its own rules – the only thing in common among them is their lack of consistency and coordination. In my opinion, foreign investors that decide to hold a piece of US real estate directly may opt to structure it as a business entity for the added legal protection.

A tale of two tax regimes

IRS FIRPTAWhen I bump into experienced investors, they will always tell you about two tax regimes that apply to them as foreign investors. The regimes solely depend on whether the property generates ‘passive’ income or ‘effectively connected’ income.

Passive income you can consider as fixed income. It is subject to 30% tax withholding on gross income unless reduced by some special tax code. Always check your local government for details. Effectively connected income is income that can be shown to be connected to a trade or business, and is taxed on a net income, or after expenses – so it is lower than passive. The tax rates change with higher income and apply to US citizens and foreigners. In almost every situation, it is the foreigner’s best interest to make the effectively connected election when structuring an income-producing real estate transaction. Now let’s get on with the real impact on foreign real estate investors: FIRPTA. Congress passes the Foreign Investment in Real Property Tax Act.

FIRPTA

Before this law was passed in 1980, capital gains taxes – the big payout of the sale of property – could be avoided (like in some countries). This was done through legal structuring that configured the transfer of assets as a mere corporate stock transfer. FIRPTA closed this loophole in order to ensure that the sale of US real property interests by foreign investors remained subject to US taxes. Therefore we need to structure properly. And yes, the government requires full disclosure of the citizenship of the person holding the title to the property.

6 Common Structures for Investment by Non-US Investors in Real Property

03_ramp-up-trainingAs a non-US investor, the most practical structures with respect to FIRPTA and the tax regimes are if you own less than 5% outstanding shares of a publicly traded real estate investment trust (“REIT”) or if you hold shares in a privately-held REIT. REITs are good, but they are often riddled with management fees that really “eat” into the investors’ returns. REITs are a good way to indirectly own U.S. medical offices, multifamily apartments, and specific areas of the U.S. You could also own member interests in Joint Venture that holds REIT shares. Another structure is when you are a shareholder of a wholly owned Delaware corporation or if you co-own property with other investors through a Delaware partnership. Delaware is a popular place for business entities because it is owner-friendly and strongly protects the rights of shareholders. And don’t worry, the state you register a legal entity does not necessarily have to be the same state where the real estate is located. Lastly, making an investment through a debt instrument is a viable option for you as a foreign investor.

Keep in mind as the investor you should be protected both in the US and in your home country. Some structures are more expensive to create and maintain, but if your investment portfolio is large enough, the tax savings can more than offset the setup cost and tax filing requirements.

Caterer Goodman Partners can help you understand these different options. For effective and personal tax planning, it is best to consult a lawyer specialized in real estate and in that specific geography where you will be buying. Caterer Goodman Partners works with several professionals across America, from New York to San Francisco, to advise and execute your real estate investment in the United States.


About Caterer Goodman Partners
Caterer Goodman Partners is a Shanghai based wealth management firm established with a clear vision to provide a new level of personalized financial planning services for expatriates in Asia. Our financial advisors provide guidance for our clients in all areas of investment, specialising in managed accounts, money-market funds, retirement planning and alternative investments. At Caterer Goodman Partners, we offer our advice and experience to provide low cost, tax-effective and simple solutions to match our clients' interests.
About Peter Okrasa
I have been a financial advisor for busy expats in China and their families since 2014. I have also been actively consulting private mainland investors since 2012 to help them buy real estate in the USA and other overseas markets. My area of expertise is educating clients to diversify, earn stable income, and grow their capital in accordance to their medium and long term financial objectives. Before coming to Asia in 2011, I lived in the USA and managed commercial property investments worth $30 million in the east coast. In 2007, I graduated from the University of Connecticut with a B.A. in economics.
 
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Owen Caterer

How to avoid Alternative Investment frauds, always

Posted on November 25, 2016 Facebooktwittergoogle_pluspinterestlinkedinrss

Working in investment management in Asia we get asked all the time about investment strategies by our friends.   Often the question is these days is about alternative investments since many people are looking for something else besides and in some cases instead of, their stock portfolio.   Our advice is in the anti-Nike, “just don’t do it”.  Just don’t.

We realize, this simple announcement might need some explaining since the case for an investment that doesn’t follow the stock market can seem like a good idea.   We consider alternative investments to be a category of real assets outside the world of funds and direct stocks that was popularized by storied investors such as of the Yale Endowment.  Things such as wine, stamps, precious metals, diamonds, forestry plantations, art and collectibles are all alternative in our view.

Our negative advice puts us at odds with quite a few of our friends but we aren’t writing this advice to make friends (or commissions).  It also seems to fly in the face of the convincing stories and beautiful pictures and those wonderful graphs that go up towards the horizon, with barely a pause for breathe.

Practically all alternative investments sold by a broker ends in a loss.alternative_investment

Not every investment ends in complete loss of capital its true,   But the failure of programs and strategies that we have been
pitched, and avoided, is so regular from what we can see, that your hit rate might be as low as 2 in 10.  Yup, that’s an 80% chance of losing money and sometimes the loss is 100% of your money.  This makes the stock market look positively low risk.  Not that you’ll ever see this risk reflected in the sales material of alternative investment salesmen.  Even worse we think that perhaps as many as one third of investment programs are borderline fraudulent if not a complete scam.  Sometimes it is difficult to tell the difference between the frauds and merely incompetent, but is that truly a useful distinction?

The only time to buy an alternative investment.

If you know more about something than anyone else you know and could be considered an expert in your area because you have been working or studying your area for years, or even better, a decade, then, maybe, just maybe you are qualified.  We don’t mean that you have been drinking a glass or two of wine per night since you were 21 and going to the odd wine dinner.  That you once visited Bordeaux on holiday and visited a few wineries.  We mean work in the industry selling, growing and producing wine.   It is similar to the old poker story.  If you can’t tell after the first 5-6 rounds who the dupe is in a game of poker; then the dupe is you. The same goes for alternative investments.

Why are alternative investments so risky?

Once you move outside market traded assets like the stock and bond market, a lot of the protections in place vanish.

  1. There are no cu56307091-C77D-267E-D892-8DF979A62815stodian accounts built into the system to protect theft from your asset manager. Think about that for a second – there is nothing stopping your wine broker, loading up a case your valuable wine in the back of his van and selling it and later telling you that it had been “lost or broken”.  Of course, that can give him a bad reputation, but by that time, the fraud has happened, and, if done in a small way on enough people, the perpetrator has disappeared somewhere with his illicit gains.
  2. The valuation methodologies on alternative investments can become divorced from reality, thus meaning you are paying overinflated prices for assets. These methodologies often must be devised because trading happens so rarely (unlike stocks), but they can be abused to pretend you are making gains in your fund when you are not.  Often this starts innocently to smooth a bad month, but sooner or later the manager will be relying on this most months to show strong growth and attract assets that the difference might be 20-40%.  Independent valuation experts are paid by the manager, so how independent are they truly?  We have seen this happen to property funds like student accommodation funds for example, that whilst otherwise solid, ended up with problems unloading their assets that had overinflated prices and thus locked up their client’s assets for years whilst they waited for reality to catch the model.
  3. There are no protections in place against self-dealing. This is where your helpful broker buys at the market at a lower price and then sells to you for a higher price.  For example your wine broker might pick up a case of Chateau Lafite for $10,000 and then sell it to you for $14,000 USD. Would you ever know that your wine broker quietly pocketed $4,000 completely risk free?  Later the broker can just say that “demand isn’t that strong right now, so we suggest you hold for another 2 years while we charge you a management fee for crossing our fingers and hoping that the market bails out our poor deal”.  Sounds like an awesome deal, right?  Protections against this were put in place in securities markets more than 100 years ago, but they don’t exist in these unregulated markets.
  4. Understand you are betting on future fashions which are unpredictable. We aren’t talking about buying vintage clothes here, but the simple fact that some things go in and out of fashion.  Witness the collapse in Bordeaux prices as Chinese investors moved on from buying bottles of wine to buying Burgundy wineries.  Who knows what the hot trend in art will be in 10 years?  Investing is about buying an asset that can deliver a future income stream, like a company that pays dividends or a property that pays rent.   Picking a future hot fashion you need a lot of luck.
  5. Fear the word ‘guarantee’ and you’ll avoid the worst of the worst. Whenever my partners and I hear the word ‘guarantee’ from an investment provider, we go running immediately.  There is no better predictor of investment failure in my opinion, than investment providers who use that word.  Look for a good risk on a company that is growing to the  future and making money now (think Facebook and not Tesla) and you are likely to do far better than looking for a safe haven that is anything but.

Don’t be the patsyimages (2)

So, our simple rule of thumb is, if you don’t know how to engage in your preferred market without a broker and you don’t know all the right people, the tricks, the history, the strategy and the market players BEFORE the broker turns up.  Then you should turn the broker away.  If you need entry to the market via a broker (who might also call himself an IFA or financial adviser) because you don’t know enough, then you shouldn’t be playing the game; because the patsy at the poker table is you.

 

About Caterer Goodman Partners
Caterer Goodman Partners is a Shanghai based wealth management firm established with a clear vision to provide a new level of personalized financial planning services for expatriates in Asia. Our financial advisors provide guidance for our clients in all areas of investment, specialising in managed accounts, money-market funds, retirement planning and alternative investments. At Caterer Goodman Partners, we offer our advice and experience to provide low cost, tax-effective and simple solutions to match our clients' interests.
About Owen Caterer
Since graduation Mr Owen Caterer has worked with the Queensland Premier's Department in Trade Facilitation and then as a financial adviser in Shanghai from 2005 until 2010. He then rose to Senior Adviser, then Business Development manager and then to Chief Investment Officer responsible for portfolios to a value of US$280 million across Asia. Following that Mr Caterer left to found his own firm with a partner in the financial advisory and wealth management area.   This focused on developing China and Asia's first fee-based financial advisory (rather than commission-based). This has grown to now have 8 staff and and managing almost US$35 million for clients throughout Asia. This business success was recognized as a finalist in the 2013 ACBA in the Start Up Enterprises category and are one of a small number of foreign managed firms to have a full asset management license in China.  Owen has also been active in the community volunteering for the Australian Chamber of Commerce in Shanghai and acting as the Vice-Chair of the Small Business Working Group (2012-2014) and as the Co-Deputy Chair of the Financial Services since 2013 until the present. They have continued to grow their business and havenow been selected as a small group of companies who are platinum members of the Australian chamber of commerce. The achievement they are most proud of is their efforts to reform the financial planning industry in China and push it away from a hard-sales commission driven model to a more ethical management fee and long term customer service model. Owen has a Graduate Diploma of Applied Finance from the Securities Institute of Australia of which he was a member as a Fellow of Finance for many years and also has an undergraduate degree from Griffith University in International Business.  Owen's interests are tennis, running and his wife and two children.  He speaks fluent Chinese, first arriving in China in 1997.
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