Asset Allocation and Portfolio Management

I allocate my portfolio into four asset classes:

• (1) 10% to money market saving account holding ready cash,
• (2) 10% to forex time deposit,
• (3) 40% to swing trading, and
• (4) 40% to long-term investing.

(1) 10% of the Portfolio would be set aside as ready cash sitting in a money market bank account earning HIBOR or LIBOR. It might be held in either HK$, US$ or Euro. This is so because this is what my favourite bank ICBC offers. The money will usually oscillate between HK$ or Euro, unless there is hint from the Hong Kong Government (or Li Ka Shing) that it is dumping the US$ peg. I might use a portion of this 10% to buy some Passbook/Statement Gold if the condition is right. I will dip into this pool of fund for (3) swing trading and (4) value investing as and when the need arises.

(2) 10% of the Portfolio goes to forex time deposit. One third goes to one-month, one third to 3-month and the last one third to 6-month. I only buy AUD, CAD, CHF, DKK, EURO, GBP, HKD, JPY, NZD, RMB, SGD and USD, because these are what my favourite bank offers. I will base my decision mostly on technical indicators (eg, stochastic crossover, MACD, RSI, Bollinger bands, fibonacci retracement) with some assistance from fundamental analysis. Again I might use a portion of this 10% to buy some Passbook/Statement Gold if the condition is right (eg, War!!!). Money earned from this pool will be re-invested back into forex time deposit and will not be used for (3) or (4) below.

(3) 40% goes to swing trading. By swing trading, I mean I will hold an asset (eg, stock, commodities, bonds) for a few days or few months based mostly on technical analysis with some assistance from fundamental analysis. I believe the market oscillate between stock, commodities, and bonds. That is, when the stock market had reached the end of the bull market, it will be the beginning of a bull market for commodities. When the commodities market reached the end of its bull market, that would be the beginning of bond bull market. And finally, when bond market reached its peak, it's the stock market's turn, etc, etc... I cut losses at 10% for all swing trading.

Phase I : I use the following indicators to detect the bottoms of the stock market and tops of bond market, which I think ought to coincide (ie, the beginning of a bull market for stock):
(i) US treasury yield curve (eg, steep).
(ii) Index of Leading Indicators.
(iii) Chart patterns of S&P500, DJIA and HSI (eg, island reversal)
(iv) Technical indicators of S&P500, DJIA and HSI (eg, slow stochastics, MACD, RSI, Bollinger Bands, parabolic SAR)
(v) stock market sentiments (eg, AAII BB, II's BBS, CBOE Put/Call ratio, ISE, State Street, VIX/VXN, call/put ratio of HSI warrants and options, turnover and open interest of HSIF, HSI making headlines in local newspaper 2 to 3 days in a row)
(vi) the difference between 10-year T-bond rate and S&P500 forward earning (ie inverted P/E), if more than 6%, sell all stocks (Lynch and the Fed Model). S&P 500 forward earning crossing the Bollinger Band (ie, 2 standard deviation) are good signals. But in 2002, an economist at Federal Reserve Bank of Kansas City named Pu Shen did a research paper and suggested that the 3-month T-bill rate is better predictor than 10-year T-bond rate. But, it appears the 10-year rate is more widely accepted.
(vii) Are Li Ka Shing buying or selling? SHK's Kwoks brothers and Henderson's Lee Shiu Kee are
(viii) Three local commentators 曹仁超, 石鏡泉, 曾淵滄 and Quamnet.com's Tony Measor all have a huge following. The prediction of the head of UBS Hong Kong 陸東 makes headlines.

I will construct a "Phase I Progress Index" (P1PI) based on the above factors. An index value of 0 to 2 signals the beginning of Phase I; a value of 8 to 10 signals the end of Phase I.

But there is no substitute for reading Financial Times, WSJ and SCMP everyday. Barron's, Euromoney and The Economists are essential weekly readings.

Phase II: To detect the tops of stock and bottoms of commodities market, I use the above factors (ignoring (v) to (viii)) plus a combination of fundamental and technical analysis of the following:

(i) S&P's Commodity Index
(ii) DJ AIG Commodity Index
(iii) Goldman Sachs Commodity Index

I will construct a "Phase II Progress Index" (P2PI) based on the above factors.

Phase III: I use the following to detect the tops of commodities and bottoms of bond market:
(i) The call/put ratio on T-bond futures
(ii) Aggregate duration surveys
(iii) The 2-year T-note rate relative to the Fed's fund rate
(iv) S&P's Commodity Index
(v) DJ AIG Commodity Index
(vi) Goldman Sachs Commodity Index
(vii) US treasury yield curve
(viii) Index of Leading Indicators.

I will construct a "Phase III Progress Index" (P3PI) based on the above factors.

The three Progress Indices will be known collectively as PnPIs.

Transition from one phase to another may happen in a few days or weeks, but rarely in months. I will gradually shift my assets from one market to another (eg, from stocks to commodities), depending on how the above PnPIs progresses. It's a matter of money management.

During Phase I, one third of the 40% will be used to buy an ETF index fund (eg, TraHK, Spider, DIA), one third will be used to buy individual stocks based on a combination of technical indicators (eg, patterns, EMA, stochastics, momentum, Bollinger bands, RSI) with some assistance from fundamental analysis (eg, market cap, revenue, P/E, PEG, P/B, ROE). I also follow Li Ka Shing and Lee Shiu Kee's holdings based on their HKEx filings. Hedging with options and warrants may or may not be employed. The last one third will be used to trade commodities futures, forex and shorting bonds.

During Phase II, one third will be used to buy an ETF index fund on two or three of the above commodity indices above. The one third will be used to trade individual commodities (or its futures). Hedging may or may not be employed. The last one third will be used to buy bonds, short-sell the stock market.

During Phase III, one third will be used buy an ETF bond index fund. The second one third will be used to buy individual bonds. The last one third will be used to trade forex and short-sell commodities. Hedging on forex will be employed, taking into account the forex time deposit under (2) above.

(4) 40% goes to long-term investing based on fundamental analysis, with some assistance from technical analysis. I might buy stocks, commodities, forex or bonds. For stock investments, I am an adherent of Value Investing, CANSLIM, GARP and Peter Lynch. I also look at ROE, ROA, P/E, P/B, P/S, P/CF, EPS growth, Dividend Payout ratio, Debt/Equity, NAV and EBITDA. I visit HKExNews.com and IRAsia.com for fundamental analysis. I usually only invest in companies in the top 10% market cap and top 10% annual revenue. There may only be one company each month which matches all my criteria. I cut losses at 7 or 8% as recommended by CANSLIM.

I work 10 hours a day from Monday to Friday and spend my time on each weekday doing the following:

• 30% analysing (including tweaking TradeStation)

• 10% trading (including tweaking MetaStock and Wealth-Lab)

• 20% reading mainstream newspapers/magazines
  

• Daily:
  
• morning (before 10am): SCMP, HK Standard, ChinaDaily, 曹仁超, Asahi,
• afternoon (during lunch): FT
  
• evening (after 6pm): WSJ, IBD..
  
• Weekly: Barron's, The Economists, Euromoney weeklyFiX.
  
• Monthly: Euromoney, FEER (first Friday), Stocks&Commodities, Active Trader, Futures, etc....

• 20% reading traders, fund managers and professional investors' blogs/websites:

• TheStreet.com
  
• forexblog.org
• earnforex.com
• http://blogs.wsj.com/marketbeat/category/commodities/
• http://rosemanblog.sovereignsociety.com/
• http://seekingalpha.com/
  

• 10% watching financial news channel (NowTV, CableTV, Bloomberg, CNBC).

• 10% general administration (eg, keeping a log/dairy, updating this blog, paperworks, updating and liaising with investors)

During weekends, I only work 2 to 3 hours a day, doing mostly reading and watching TV.

I expect the above would generate 30 to 50% return each year. Half of the return should be re-invest while the other half would be my income. But if you plan to give me a fund to invest, I will take a basic salary plus 30% of the monthly return and another 5% of the annual return as year-end bonus.

The above strategy is equally applicable whether it is a HK$10 million portfolio or $100 million..

Btw, I choose ICBC because:

• Its fees are low comparing to HSBC, BOC, Hang Seng and Standard Chatered
  
• Its forex time deposit and money market rates are quite high comparing to the big four.
  
• It is one of the largest bank in the world (both in terms of asset and market cap), much larger than BOC, thus making it one of the safest place to park money
• Its branches have very few people waiting in queue, even during lunch hours. There is a branch near my home.
  
• Its ATM machines are part of the JETCO network, which has a combined ATM machines of 1300 throughout Hong Kong, more than the 1000 machines of HSBC/HangSeng. Very few people queue up for JETCO ATM machines.