Getting back into gear(ing)

Selling our investment property provided enough net proceeds to pay off most of our home mortgage, and I was initially planning to use the cash flow freed up by the elimination of home mortgage repayments to start paying down some of my existing margin loans. But a side-effect of paying off the investment property loan and the larger of our two home mortgage loans was that our two 'portfolio loan' accounts (secured against our house title) of $250,000 each were cleared and available for investment purposes.

DW decided to draw down $50,000 from her portfolio loan sub-account and use it to fund a $150,000 stock portfolio (borrowing the other $100,000 on her Comsec margin lending account). She'll be able to 'pre-pay' 12 months of margin loan interest next June (just before the end of the Australian financial year), but will help reduce the capital gains tax payable on the sale of our investment property.

Helping her 'pick' stocks to invest in re-kindled my appetite for geared stock market investing, so I borrowed $96,000 from my portfolio loan sub-account and invested it in a dozen Australian stocks (about $8,000 worth of each stock). As I have a mediocre track record of 'picking' individual stocks (I'm a sucker for a 'good story' and have tended to believe the optimistic forecasts touted in company annual reports), I decided to apply a fairly rigid stock-picking formula and see how it works out over the next 5-10 years. The goal is (obviously) to out-perform the ASX200 stock index (otherwise I'd just invest in an index fund), and the 'hope' is that the worst of GFC/EFC period is pretty much over and that we'll get back to the long-run rate of return that the stock market has historically provided.

While many people feel that 'this time its different' and that post-GFC the global economy will remain subdued for many decades and stock market returns will remain well below the trend average, I think there's a good chance that stock market returns will 'revert to the mean' with the potential for some good years in the stock market in the coming decade, once the developed economies get back to more 'normal' growth rates.

My stock picking methodology for this particular portfolio of stocks was:
1. Take the current ASX200 list of Australian stock (ie. the biggest 200 by market capitalisation)
2. Wash these against the list of 100 or so stocks listed in the book 'Top Stock 2013' by Martin Roth (an annual guide that casts a critical eye over key financial indicators to, hopefully, eliminate 'dogs'). This reduced the list of 'possibles' to around 50 stocks.
3. Plot the 1-year chart of each of these 50 stocks against the ASX200 index, and eliminate stocks that hadn't outperformed the index. This left a final selection of twelve stocks to invest in:

Code	Description	Quantity
ANN.AU	ANSELL LIMITED ORDINARY FULLY PAID	392
BRG.AU	BREVILLE GROUP LIMITED ORDINARY FULLY PAID	890
CBA.AU	COMMONWEALTH BANK OF AUSTRALIA. ORDINARY FULLY PAID	109
CWN.AU	CROWN LIMITED ORDINARY FULLY PAID	512
FLT.AU	FLIGHT CENTRE LIMITED ORDINARY FULLY PAID	165
GWA.AU	GWA GROUP LIMITED. ORDINARY FULLY PAID	2658
MTU.AU	M2 TELECOMMUNICATIONS GROUP LIMITED ORDINARY FULLY PAID	1269
NVT.AU	NAVITAS LIMITED ORDINARY FULLY PAID	1348
RHC.AU	RAMSAY HEALTH CARE LIMITED ORDINARY FULLY PAID	221
SUL.AU	SUPER RETAIL GROUP LIMITED ORDINARY FULLY PAID	607
TRS.AU	THE REJECT SHOP LIMITED ORDINARY FULLY PAID	450
WBC.AU	WESTPAC BANKING CORPORATION ORDINARY FULLY PAID	241

After one year I'll sell these stocks (so any capital gains are 'long term' and taxed at half my marginal tax rate) and reinvest the account balance in a new selection of 10-15 stocks (the number will depend on the value of the portfolio at that time and the number of stocks 'short listed' using the same methodology). Barring major disasters (eg. GFC Mk II) I plan on sticking with this for 10-15 years until I get towards retirement age.

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Becoming a de facto piano teacher

After taking DS1 for his first 'lesson' with his new piano teacher yesterday (where she just had a look through his recent grade 5 piano exam report [he got a B+/credit], heard him play one of his exam pieces, and then spent some time evaluating how much/little theory he knew) I thought we had things sorted. Aside from not teaching 'piano for leisure' (she only teaches the more rigorous 'piano' course - whereas DS1 had been sitting both exams each year previously), and also only teaching 'musicianship' rather than the easier 'music craft' course, she seemed like a competent teacher, although a bit pricey (at $57 for a 45-minute lesson). Although she didn't have a timeslot free for DS2 to also have a lesson, I wasn't too fussed about that, as I feel capable to teach him for the next couple of years (at least through grades 1 and 2) since I studied piano myself up to grade 8 (although I never got around to doing the required grade 5 theory exam, so I never got the official 'certificate' from the AMEB), and did some Bachelor of Education course a few years ago while thinking of getting qualified as a high school science teacher as a redundancy/early retirement (lots of holidays) option, so I know a little bit about teaching in general. Also, having had to register with the AMEB as my sons' replacement 'teacher' in order for them to be able to sit their recent practical exams, this seemed a sensible option for DS1, as spending $38 for a half-hour lesson at grade 1 level seems like a waste of money at that level.

However, this morning the teacher phoned to advise that one of her existing pupils (that had dropped out due to a scheduling problem) had decided to continue with their lessons after all, and the only available (?!) spot was the one DS1 was supposed to have. So, once again, DS1 doesn't have a piano teacher...

Having already found out that one of the other two possible teachers in our area is a rank amateur, and the other wasn't taking on any new students, we're back to square one in the search for a new piano teacher for DS1. I'll have a look if any teachers are available close to DS1's selective school, in which case he may be able to go straight to his piano lesson after school, and then catch the bus home, or wait for me to collect him on the way home from work. However, if there aren't any suitable teachers available, I've discussed the possibility of him just picking the required 4 pieces from the AMEB grade 6 book and then learning them by himself, with me provided some critique and guidance along the way. He can learn the required grade 1-3 musicianship (theory) from the books I bought this morning (before learning that his new teacher was pulling the plug on him), and I've bought the grade 1 online exam for him so he can read through the online tutorials and do the practice exams during the school holidays before taking the actual grade 1 online exam under my supervision in a month or so.

While it wouldn't be ideal for DS1 to try working through grades 6-8 with only my assistance, it would be possible, as his results at this level will be mostly due to his application and amount of regular practice. And, overall, that would mean a saving of around 40 wks/pa x $57 /lesson x 3 years(grades) = ~$6,840! As DS1 is only learning the piano 'for fun' and doesn't intend having a career as a pianist/piano teacher, or even taking music as an HSC elective, he/we may be better off putting that $7K towards buying him a second-hand grand piano (I saw a decent 10-year old grand piano on sale for $10K today), or even just investing it or using it to help fund some post-graduate studies for him abroad...

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Free University Courses

I came across the Coursera site after reading that a couple of Australian universities had signed up to offer free courses via their platform. So far DS1 has enrolled in a couple of excellent computer program classes ('Introduction to Systematic Program Design 1', and 'Learn to Program: The Fundamentals') which are excellent, and I enrolled in 'Algorithms, Part 1' which was also very good - but I but dropped out after the first week as I didn't have enough time to do the exercises and assignments for another course while also doing my PhD studies and working full-time ;(

I've enrolled in 'High Performance Scientific Computing' which may be of use for my PhD work (and doesn't start until next year), and DS1 has enrolled in another couple of courses that start soon ('Internet History, Technology and Security' and 'Learn to Program: Crafting Quality Code' and 'Computer Science 101'). The courses are all free (unless you choose to pay a nominal fee for the 'Signature Track' option, which involves extra identity confirmation steps during the assignments and exams [such a using your webcam and typing characteristics to confirm the identity of the person submitting the course work] which gets you an official verified certificate upon completion of the course) and are offered via online video tutorials (about 1-2 hours worth each week), reading materials and exercises. The courses are generally run over 4-12 weeks, although some are also offered in 'self study' mode where you can access the videos etc. at your own pace and submit work for automatic grading, but you don't get an official 'Statement of Accomplishment' that is available upon completion of most of these online courses. Each course requires around 4-12 hours of 'homework' each week, although the amount of time required can easily blow out if you are totally unfamiliar with the subject area and need to carefully work through all the exercises and do additional background reading.

There are literally hundreds of quality courses available in a wide range of subject areas, and the courses have been produced by some top-notch universities around the world. From what I've seen so far, the content and assignments are just as good as you'd get through attending some university courses, although some fields of study are better suited to the on-line delivery method (eg. you can learn computer programming perfectly well through an online course, but studying analytical chemistry would be less satisfactory, due to the lack of practical experience using expensive lab equipment). While such online courses can't provide direct interaction with fellow students and university lecturers (although the online forums provide a good substitute), there are an excellent alternative given the cost (free) and easy accessibility.

Some of the courses are aimed at first year university level, and I've found that these are suitable for a gifted high school student. The introductory computer programming classes are an example, especially those that are entry-level and developed for arts of 'soft' science students (and therefore don't expect much more than an interest in the topic and a background of high school algebra).

These courses are a great example of the educational opportunities provided by the internet, and the quality of content is almost indistinguishable from some of the 'distance education' I did for my Master of Astronomy or Graduate Diplomas in Industrial Mathematics and Computing. Unfortunately, while they are great learning tools, employers (and universities when you apply for admission) are unlikely to regard them as comparable to 'real' university courses - even if you pay the $100 or so for the 'Signature Track' option. Which is a pity considering the quality of these courses and the high cost of university enrolment, even as a distance education student. However, they are still worth doing for personal/professional development purposes, and *may* be helpful to list on your CV in some circumstances (eg. a high school student applying for work experience of college entry).
Subscribe to Enough Wealth. Copyright 2006-2013

Unexpected and costly change of piano teacher

My sons recently sat their AMEB piano exams - DS1 got a B+ on his grade 5 'Piano' exam, while DS2 got an A on his preliminary grade 'Piano for Leisure' exam. I also sat an exam (getting a B for grade 5 'Piano for Leisure' - better than I thought given I hadn't played much since I sat my grade 8 AMEB Piano exam more than 30 years before, and didn't have much time to practice due to my PhD studies) as I wanted to ensure their piano teacher had enough students being examined to have the exams held at his studio. As it happened, I needn't have bothered enrolling for the exam, as their piano teacher unexpectedly went out of business the week before the examination date, due to him being arrested and charged for allegedly grooming a child for sexual purposes! I won't form an opinion as to his guilt or innocence, as I always stayed at the studio while DS1 and DS2 were having their lessons and (therefore?) nothing inappropriate happened to my sons. On the one hand the "where's there's smoke there must be fire" line of reasoning (always a favourite of lynch mobs) would suggest that since he has been arrested, questioned and charged on the same day the police must be some substantial evidence that the alleged offence occurred. But, on the other hand, everyone charged with a crime is entitled to a presumption of innocence, so I'll leave it up to the jury to decide. Whether or not he is actually guilty his days as a piano teacher are over - he's 70+ years old and was considering retiring soon anyhow, his business has been closed down with his computers and paperwork taken by the police, and word-of-mouth about the arrest passed around the local piano-teaching community like wildfire (one of the prospective new piano teachers I contacted mentioned that she'd seen the news in the local paper, and her husband had commented that she'd be getting a rush of new students as a result). So, even if he is found not-guilty at his trial, he would be unlikely to want to resume teaching, and probably couldn't get any students regardless of a non-guilty verdict.

It was a bit of a shock to suddenly have to arrange for the exams to be shifted to the AMEB head office in town at such short notice, and I also had to contact several local piano teachers to try and find a replacement teacher for the boys. There were only three local teachers listed in an online directory of piano teachers, and of them one was fully booked and not accepting new students at this time, the second one sounded like a very young man when we talked on the phone, and the third charged substantially more than average for lessons (~$95/hour compared with the typical rate of about ~$70/hour). We arranged to meet the young (cheaper) piano teacher at his home, but found that he was very young (early 20s) and didn't seem very professional (he had his injured arm in a cast due to a recent motor bike accident, was living at home with his mother, and was teaching on a small upright piano located in a messy bedroom!). That left only the more expensive teacher as an option, so I've arranged for DS1 to start weekly 45-minute lessons with her from next week. She doesn't have a time available for DS2 to have lessons at the moment, so I've started teaching DS2 some new grade 1 exam pieces for next year myself. Given the higher hourly rate charged by the new teacher, I'll try to arrange for a one-hour lesson to be scheduled next year, which can be shared between DS1 (40-min) and DS2 (20-min) in order to save a bit of money. And if she can't find a suitable time-slot for a year to so, I'll probably be able to teach DS2 adequately myself until he completes grade 2 in a couple of year's time. One good side-effect of having their old piano teacher go out of business just before their AMEB exams were scheduled, and not having started lessons with any new teacher yet, was that I had to fill in an AMEB 'change of teacher form' and nominate myself as their 'teacher'. This means I an now registed as an official AMEB 'piano teacher' and can easily enter DS2 for his grade 1 exams next year.

Subscribe to Enough Wealth. Copyright 2006-2013

Congratulations, Prime Minister Abbott

While, as they like to say, "the only poll that counts is on election day", it looks like we won't have to stay up very late on Saturday night to know the election result - so I'll get in early and 'call' the election as a resounding win to the coalition. My guess is about 87 seats will go to Libs-Nats, 60 to Labor, and 3 'other'. As a sweetener the $5 online bet I made about six months ago should add a few more dollars to the small win I made better against the Aussies winning the Ashes series in the UK ;) It will be interesting to see how things pan out over the next term of parliament - if the global economy recovers and Australia gets back to trend growth rates, unemployment could be trending down and the federal budget deficit diminishing, which should put the coalition in a good position to win a second term. From the coalition's points of view, the large deficit, slow growth rate and increasing unemployment rate left behind by Labor should make it easy to maintain the mantle of 'sound economic managers' during their first term(s) in office. The big question will be whether or not the result on Saturday is such a convincing win for the coalition that they are tempted to call a double dissolution early next year in an attempt to gain control of both Houses of Parliament. The trigger could be either the Carbon Tax or Paid Parental Leave legislation being blocked twice in the Senate by the Greens and Labor. While it is unlikely that the coalition can win a clear majority in the Senate in a double dissolution election (given that the Greens appear to have a fairly solid ~10% of the vote), if they win a large enough majority in the Reps next Saturday they may think it is worth taking a punt. ps. I decided I am pretty much a Liberal supporter these days, so I became a 'card-carrying' Liberal Party member last week. As I'm enrolled as a post-grad student I took the opportunity to pay the 'student' membership rate ;) Subscribe to Enough Wealth. Copyright 2006-2013

Net Worth: August 2013

Not much change to our SMSF balance this month as the stock market (Australian and International) was fairly flat overall, despite a couple of rises and dips during the month. And there were no employer contributions deposited into our SMSF this month (due once a quarter). The net value of my stock and real estate portfolios was also fairly constant, but there was a sizeable transfer of funds out of the 'property' column and into the 'stocks' column caused by the sale of our investment property last week. The sale proceeds were used to pay off the loan secured against the investment property, and the surplus funds were used to pay down one of our home mortgage accounts (the variable rate one - the other home mortgage account is on a fixed rate for another year and a half, and the early repayment penalty would be similar to the amount of interest over the remainder of the fixed rate period!), and the remainder used to pay off some of my margin loans. Hence the decrease in the net value of my real estate investments corresponds with the 'increase' in my geared stock portfolio.

The remaining amount shown for 'properties' and 'home mortgage(s)' is my half of these figures. As usual, I don't include assets or liabilities belonging to DW, DS1 or DS2 in my net worth figures.

Assets	$ Amount	$ Diff	% Diff
Stocks *	$148,503	$132,809	n/a
Retirement	$526,183	$2,967	0.57%
Properties	$471,105	-$393,584	n/a
Debts	$ Amount	$ Diff	% Diff
Home Mortgage(s)	$102,371	-$260,643	n/a
Net Worth	$1,043,421	$2,835	0.27%

* the Stocks figure is portfolio value - margin loans

Paying off the investment property mortgage has freed up about 1/4-million dollars of available credit in my 'portfolio loan' account (which is secured against our house title), so I could, in theory, deposit $250K into my leveraged equities margin loan account by drawing down on this loan account, and then purchase another half a million dollars worth of stocks (or managed funds, or index funds) on margin, at a 'modest' LVR of 50% (from the point of view of the margin lender). A bull market over the next decade could see the ASX200 double, as the world fully recovers from the GFC, which would result in a windfall gain of half a million dollars. But on the other hand, a stagnant market over the coming decade (as happened in the 70s) would see me throwing all my available cash flow away simply servicing the debt. And a decline in the stock market would erode my net worth considerably.

I suspect I have reached the limit of my personal risk-tolerance, as I will feel more comfortable using my cash flow to pay down some of my existing margin loan balances, and/or contributing additional amounts into my SMSF. While I won't get rich with that approach, there is more certainty of achieving a comfortable lifestyle for my retirement.  I already have several hundred thousand dollars of 'other peoples money' invested via my geared share portfolio, plus we have a small amount of gearing in our self-managed superannuation fund via our IQ CFD investment. Borrowing even more to invest in the stock market seems too high-risk at this of my working life, and would not leave much room for misadventure (such a ill health or losing my job). I'll leave it to DS1 and DS2 to create a 'family fortune'. ;)

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