Letter to Batch 26 of the Early Retirement Masterclass

Dear Students of Batch 26,

It’s been a great honour and privilege to conduct a 5-Day Early Retirement Workshop for you.

Batch 26 is one of the luckiest batches to graduate from the ERM programme, just a tad less lucky compared to Batch 12, which managed to buy right at the market bottom of the pandemic crisis. Batch 12 bought the stocks in March 2020 and constructed a dividend portfolio that generated 7% per year. At the time of writing, they still managed an XIRR of 16% when the rest of ERM was plugging along with an XIRR of just 4%.

This can be considered the wrong time to invest for many people. The US had just completed two consecutive quarters of negative GDP growth. China is bogged down by the demon of its own design, otherwise known as the Zero COVID policy. Russia is still trying to invade Ukraine. The Fed has declared a crusade against inflation, leading to rising interest rates worldwide. And now, the Hungry Ghost month has just started.

But it is always the darkest before the dawn. ERM remains resolute that there is no better time to invest than now. The equity risk premium we track has been going up three batches in a row. A downturn worldwide has always been suitable for low beta, high dividend portfolios that our programme has been known for.

This is also the batch where a lot of calculated risk-taking took place, with Dasin Retail Trust being chosen after Group 3 did a detailed investigation on the odds of being able to enjoy the 16% current yield that it offers. The team was cognisant that the business could fail but was persuaded when they saw some recent purchases by Aqua Wealth holdings from the SGX announcements. Alumni should feel free to omit the purchase of this counter if they are uncomfortable with the risks involved.

Lastly, I hope that Batch 26 will participate actively in the FB group. Sometime in Q3 2022, we should be meeting up for an online community webinar.

Hope to see you then!

 

Christopher Ng Wai Chung

Why you will fail at Value Investing - part 1

 

Over the next few weeks, I will be reviewing the latest literature on Value Investing. I've decided to do a three-part series on this blog before I summarise it into something more useful on the Dr Wealth blog. The first book I will be reviewing is Where the Money Is by Adam Seesel and I see this as a valiant attempt to update the principles of value investing in the digital era. 

The biggest conclusion I get from reading this book is that most of us would likely fail at value investing. 

If you look at the training provided by my peers in the training industry, a lot of younger trainers claim to be some kind of acolyte of Waren Buffett, but even Warren Buffett has evolved over the years. He started as a disciple of Benjamin Graham and adopted a deep value philosophy based on liquidation value, combining it with board control. Then Buffett pivoted under the influence of Charlie Munger and began to buy companies with powerful mindshare on TV. The latest incarnation of value investing subjectively imputes earning yields of digital companies by peer review. 

If I adopt this alleged form of value investing,  then value investing is effectively meaningless.  It becomes ambulatory with the times - it can be anything you want it to be. So long as investment performance is good. 

Nevertheless, I think there is great value in doing a thorough literature review and seeing what scraps can actually be used in Singapore. 

There are three parts to doing value investing for the digital age, I will discuss business quality. 

In the author's view, business quality is high if (1) the company has a low market share in a market that is very large and growing rapidly. (2) The company has a sustainable competitive advantage.

The moment we look at this definition of business quality, we will see logistical difficulties in finding such businesses. It is tough to generate a screen for low market share in a growing market. A retail investor would literally have to read the newspaper and find a company by pure luck. And weekly periodicals in Singapore put a very neutral spin on articles featuring local companies. No journalist would deliberately put in the article numbers on market share and the rate of growth of the industry at large - you need to find the exact article by chance.

Also, what are the odds of a Singapore company being able to compete globally? In many of these cases, authors of value investing companies will invoke Peter Lynch - buy what you know or follow your wife around when she goes shopping. 

The idea of sustainable competitive advantage is slightly more useful because we can isolate a factor in screening. Companies with a high ROIC are generally seen to have large moats. Now let's see the highest 5-year average ROIC companies in SGX.

[ Note that most value investing acolytes prefer to subjectively evaluate the moat of a company. I hated that ever since someone else in an investment panel argues that Old Chang Kee had great investment moats when any Mak Cik from Batam can come over and start selling sardine epok at MRT exits. If you still prefer this form of subjective evaluation then you should revise Porter's 5 forces model and steer clear of eating too many curry puffs. ]

So as a budding value investor, you will start with this list of 10 companies, and you want to go through each of them one by one to see (1) what is their size relative to their target market (2) whether their market is in fact growing. 

As in all cases, it helps if you are a full-time investor. You may also want a Bloomberg terminal.

This is just round (1) Business quality.

Why buy the whole cow when you only need the milk ?

The idea of why a person would want to buy a whole cow when he only needs to drink some milk is quite an ancient one. My dad always had a bunch of friends, which I did not respect very much, they said this very often to my dad and me when we hung out over weekends. The idea is mostly applied to their views on marriage. And my dad’s single pals were asking why bother getting married when they could visit prostitutes. Now I want to point out that I had a fairly liberal upbringing, my parents would visit lounges over weekends and I take along as a secondary school and JC kid, so I was familiar with the smoke, alcohol and prostitution way before NS.

I thought it would be fun to revisit this idea in the financial realm. If you adopt the mindset of my dad’s single pals, then the same argument can be made for making a living in Singapore.

It does not take a lot to survive as a bachelor in Singapore. The ballpark is not too far from LKYSPP’s 55-year old imaginary single who needs $1,768 a month. While this is not high living, it enables a basic standard of living with some amounts of entertainment thrown into the mix. 

Now, it does not take a lot to earn $1,800 a month. You can earn his amount doing food delivery. Recently, you can even earn $3,500 washing dishes. You might be able to wash dishes part time to earn that bare minimum of $1,800 to sustain your lifestyle. You can play Diablo Immortal the rest of the time and still have some money leftover to visit prostitutes.

Now my father’s single friends are probably the very kind of people who will scoff at the FIRE movement. If you want to FIRE, then you need to aim well above the median income of $4,500 and save more than 50% of your take home pay. You will need about $530,400 at the safe rate of return of 4% to credible generate about $1,768 a month. They would then find the idea of earning $530,400 within a decade even more ridiculous, with folks paying me good money to raise the probability of success of doing that. 

So the same mental model applies in finance. Why buy the whole cow ( raise $530,400 ) when you only need some milk ( $1,768 a month ).

If you follow this train of thought, you’d come back to that story of the MBA who tried to advise a fishermen. The idea was go through one full circle of levelling up, starting a business, scaling, so that the fisherman can relax like what he used to do in his youth. 

Whats hidden in the story is that the fisherman can probably fish for a living over the short term, but he has to contend with illness and old age over the long term, so saving up and scaling up a business is just another way to sustain his lifestyle, and possibly grow a family in the meantime. It’s also ridiculous if the fisherman is single and contend with other fishermen for mates, so he has to struggle to signal his economic resourcefulness to women as well. 

But I think there’s no better no way to understand the consequences of choosing this philosophy of life. 

And I should explain why my philosophy is the opposite - to own as many cows as legally possible. If things work out, folks will be paying good money to buy my milk. 

My dad’s friend, did remain single his whole life, he partied hard with prostitutes and drank lots of beer. At an older age, he got lonely, and eventually settled down with an old prostitute in a HDB. The old prostitute had some kids from an earlier dalliance, but he provided some financial assistance for them as they grew up. 

He did buy an old cow in the end, the calves were not even his but he had to raise them too.   

  

Is Singapore too "tense" for our own good ?

 

For reasons which can only be explained if you know me well enough, I seldom have a meal with my secondary school classmates. It's just the way it is if you are a banana and your school is very Chinese helicopter. But when I do, I always learn something.

Prior to the latest event, my classmates asked me why his dad could support a family on one income but he can't and whether it is feasible to emigrate to Australia. 

This time around, my classmate, who is a very senior Malaysian R&D engineer, said that Singapore is very tense and he'd rather live in JB and commute to Singapore than living here in Woodlands. Initially, I thought this was an economic argument because SGD goes a long way in JB. 

But it is not, the main draw is that he can be with his family in JB over weekends.

So I was puzzled because what's the difference if you spent a weekend with family in JB versus SG beyond the obvious economic advantages?

I did not unpack the argument. His reasoning was that Singapore is just a "tense" place.

Just today I found out the hard way what my classmate meant.

I was bringing my son back from school and this bastard rode a bicycle at warp speed towards a crowd of K2 children. I did the best thing I could and interposed myself between my son and him, forcing him to slow down, then he cussed me in Hokkien, and rode away. Upon reflection, there was nothing I can do because my son rode a tiny scooter and I would hypocritical to tell a bicyclist off in front of my kid, so I just kept silent.

In my head, there were two scenarios, if my son was hit and I go berserk on him, I will die. He's got a hard luck Kranji Turf Club face and looked fit in his forties and I'm a diabetic sedentary worker who might have sarcopenia. If somehow I survive and hit him with a lawsuit, I'll probably be able to do better than engaging in melee combat, but I probably can't recoup my costs, so I won't win either way. 

But the outcome is optimal, I keep quiet and go about my own way, and bicyclists will continue to plague the pavements around the primary school.

You can interpret the meaning of the word 'tense' from the rudeness of the encounter. That's one way of seeing it. 

In KL, the infrastructure is so bad, bicyclists will have to contend with potholes rather than schoolchildren. Traffic infrastructure is so bad that courtesy actually helps a lot if you need to cross the road. Same in some US states - if everyone can carry a gun, being extra polite is a survival skill. 

I think the deeper problem is the internal calculus I am so used to going through as I go by the day-to-day business in Singapore. I can :

• Physically fight, but that never achieves any objective and getting caught on camera will ruin me.
• Call the police, if there's clearly a Penal Code violation, but my experience is that police may reject the case. 
• Go to court where you can find recourse in Civil Litigation. But you need to be rich and the amounts at stake substantial. 
• Complain to MP. A favourite manoeuvre. 
• Somehow pay the problem to go away, but the other party wins.

I apply the same mental model in many tense situations. If a fight breaks out, should it be done with words, a video, my fists or a writ?

A society can be thought of as "tense" if everyone is constantly evaluating their options this way. 

Apparently, things can be as ferocious in one local social media platform for traders and investors. I heard of this story/myth/ rumour from friends. All unsubstantiated, so I will keep the parties anonymous.

Apparently, some seasoned investor takes it very personally if he plugs a buy call for particular company stock and someone actively brags about trying to short it. One altercation got so bad, the police got involved because someone's profile even got uploaded to a gay dating website. 

For me, whoever shorts a stock I really like is a True Friend, at least others can buy it at a cheaper price.

No, I will not name that platform with salty traders. 

I will also never go there.

  

Why you need to have your own Marshmallow Test

When the Stanford Marshmallow Test was conducted in the 1970s, psychologists concluded that kids who can exert enough self-control to resist eating a marshmallow move on to have greater life satisfaction and success. This rocked the world of self-help when the ability to delay gratification was then touted as a powerful predictor of personal success.

But in 2020, psychologists attempted to replicate the experiment with a more diverse and larger sample size, they found that the effects were very much more muted, with children with a higher SES background being able to resist the marshmallow much better. 

Heck even when my son was sent to NUS to measure his ability to resist temptation, he coped well beyond what other kids could handle because I would buy him an ice-cream quite often when I brought him home from school so a Mars bars is not very much to him. Perhaps the modern test should be 10 mins on an iPad, with an extra 30 mins if the kids can do nothing for an hour. I think my kids will fail the test if it's designed this way.

Validity of the test aside, business and executives should design their own version of the Marshmallow test to see whether the folks they work with have the capability to delay gratification. Not everyone is designed to be able to commit to long term projects to make money. 

I noticed a particular pattern among the younger people I get exposed to. 

The folks who condone quick-fix marketing messages that hijack the emotions of other people also have a heightened fascination with get rick quick schemes. They might be useful to other business people, but these are not the kind of folks who can support a product or project that builds wealth steadily. When I work with folks like this, my brand almost always takes a hit.

So how do we design a Marshmallow test for our personal use? 

The first cut is always educational qualifications. Sadly, Singapore is so hierarchical and obsessed with paper qualifications, a degree from a local university requires a lot of careful planning and execution. This will be followed by the field of study - the harder the field is, the more conscientious and intelligence the candidate will be.

But what if you're just stuck with candidates with the same qualifications? 

Then you need to design something from your own industry. Maybe in software engineering, you might wish to see the developer's comments in their software code to see whether they are intelligible, whether Programming Patterns are adhered to and variables don't get recycled.

For me, I will just show or write about the latest REIT current dividends. 

If you are an investor for a while, REIT dividends are fairly high right now and some of the heavily beaten down REITs like EC WORLD can be bought at bargain prices.     

More of the folks who get excited about the table above tend to become my better clients. As yields are at a historical high around 8%, it's still mathematically impossible to get rich quickly by waiting for REIT dividends to arrive. Folks who are interested in this are generally willing to pay the price and delay gratification for financial independence. 

Now to complete the test, we need the opposite of REITs dividend yields. 

The above table shows the real-time yields of Apollo Vaults, a platform to do liquidity pool mining on the collapsed Terra Classic blockchain. The yields fluctuate by the day and are largely boosted by exploiting mathematical differences between APR and APY.  More importantly, vaults compound in USTC, which is a stablecoin that has already collapsed in May 2022. So while you can compound your USTC at 1,600%, USTC can collapsed by 60-70% over a day's trade.  

( I love channeling part of my REIT dividends into the Terra Classic Blockchain. )

Invariably, Apollo Vaults will attract a different kind of investor. These are the same folks who can really comfortable discuss options, drop-shipping, building a business empire with information products, direct selling and SEO. They may not be the students that I'd like to have but are grist for the mill for the dudes that show up in a Youtube ad. 

( Yup, even my crypto course is too serious for them ) 

This is what I've discovered over time, as I flash the different mathematical properties of the two asset classes I teach, I excite a different demographic. The same goes for different blog articles. 

The really sad thing was that I had an even more powerful Marshmallow Test when I was growing up :

I stared playing D&D at the age of 10. What's a fricking plate of marshmallows compared to a handbook that introduces the bell curve to primary school students using 3 six-sided dice? 

The 1st Edition AD&D was so dense and difficult as a ruleset, it's impossible to play without at least processing 100+ pages of text. Worse, in the 1980s, no one plays D&D in a consistent manner.  

Too bad the latest edition of D&D has become so simplified that it's now a staple of mainstream entertainment and playing D&D has lost it exclusivity.  

Pfft, you can even catch Vecna on Netflix. 

  

    

   

Million dollar idea : How to Develop Conscientiousness

 

The question of how to develop and increase conscientiousness is a million-dollar question that parents and various arms of the government want to be answered. It is no surprise that this is one of those questions that I've kept at the back of my head because one way to summarise my life is all about witnessing folks who are less talented and intelligent than I move on to thrash me in all areas of my life.

How big is such a question?

• Ritalin, a drug that deals with ADHD, rakes in millions every year. Some folks without ADHD take the drug to help them concentrate in class and do coding. 
• Angela Duckworth earned millions in defence contracts to teach grit and resilience to US Air Force.
• Teen camps that can turn students around probably generate many times more revenue than investment training courses.  

I don't think the question of developing conscientiousness can be fully answered because a lot of interventions may not result in permanent change. I am only 10 percentiles above the median in conscientiousness, and only became more conscientious after I got older.

If there are few ways to make someone more conscientiousness, borderline conscientious folks like me have to rely on changing the way I work to be more effective. So while I can never be as punctilious as some of my ISTJ colleagues at work, I can develop a system to be as effective as these very OCD people.

These systems to virtually raise conscientiousness comes in many forms :

• Getting things done or GTD is a popular productivity system. ( Which I just can't follow, sadly )
• Marie Kondo's KonMari system is an organizational principle for physical objects.
• Lawyers use a simple system called IRAC to improve their legal writing. 
• Even entering all your stock picks in Stocks Cafe is a system. ( Vital one, in fact! )

The beauty of Building a Second Brain is that it jazzes up note-taking. Knowledge workers often have to capture notes from different media from images to paragraphs of text to .wav files. The author teaches a simple system called PARA to organise your notes :

• Projects - Ongoing projects. For me the courses I conduct are projects.
• Areas - Areas of interest. For me, it is Investments, Health, Parenting, Lifestyle Design and Comedy.
• Resources - Material related to specific Subjects. I split mine into areas like Engineering, Finance, Psychology, Philosophy, and Law
• Archives - Completed Projects that are no longer being run.

I think I can sense an improvement in my quality of life after I've installed Microsoft OneNote on all my devices and I can now capture interesting snippets of information without really caring what format they come in. Not only do I have something to relate to my training material, but it's also easier to help my body of knowledge evolve. When organizing my notes, I can suddenly recall that one area of study can solve a problem in another.

Of course, my low conscientiousness does affect how much I can integrate this into my life. I can install note-taking software and build a taxonomy of notes. I still can't build an over-arching productivity system out of this note-taking tool because it feels as uncompromising as GTD. 

But hey, it's managed to change my life in a small way. 

I think the final lesson about developing conscientiousness is that baseline conscientiousness is often required before life can flourish. Blog readers will forward my posts if I regale them with stories of that guy who promised to make out 100 prostitutes in a year, but productivity posts like this will see a much more lukewarm response.  

Worse, nothing much can be done for folks who don't read blogs at all. 

 

What great questions are you working on?

 

Financial independence and running a freelancing business has narrowed the field that I read. In those days when I worked for other people, I read books on running businesses and office politics, it feels quite good that I can free up some of the mindshare to read more deeply into quantitative finance and technology. 

Building a Second Brain  by Tiago Forte is a fairly nice read with interesting ramifications for knowledge workers. I enjoyed this book and will be putting in several articles to blog on it. 

I think one surprising point of personal improvement is to simple ask ourselves, what are the big questions we are grappling right now ? In this world where folks are narcissistically trying to increase personal pleasure and reduce personal pain, refocusing on the big questions about life can bring more focus into what the modern knowledge worker is trying to do. I think this is particularly relevant in an era where younger Millenials / Gen Z are trying to focus on mental health / doing fuck'all / lying flat, when older Millenials / Gen X are too busy sipping champagne, spending their money on expensive holidays, and accusing some other generation of being lazy and self-entitled. 

Seems like in all cases, Millenials seems to be root of their own problems.

In this book, the author recommends that all knowledge workers prepare about a dozen questions that they'd like answered. This is almost like the GP papers that A level students will have to do except the answers may take a lifetime to answer. A dozen questions is too much,  but I think having 2-3 questions is more reasonable. While the author does not have a system to qualify these questions, I think it's worth applying the ikigai framework as a test to see whether it is worth solving - we should be asking ourselves whether answering the questions is profitable, desirable, something you enjoy working on, and something you can credibly solve one day. 

Once you have these great questions embedded in year head, you will automatically employ a cross-disciplinary approach looking at it. Solving good questions often require mental models and skills from multiple disciplines. 

It's fairly obvious what question I was fixated with in my 20s and 30s. 

My question was simply what does it take to become financially independent such that I can decouple my survival from my need to work the corporate world. When I asked myself this in my mid-20s, the IT industry was reeling from the first dot-com crash and the beginning of the outsourcing revolution which eventually took the life of an European colleague of mine.

Everything I did, from earning multiple degrees, building a dividend portfolio, downgrading from economic rice to vegetarian beehoon, dabbling in Stoic philosophy, reading 2-3 books a week, was channeled to answer this one question. And even after solving it for myself, even as I can systematize my solution to teach other PMET, I can't seem to show low income Singaporeans how to solve this problem. 

I think a good question or problem will probably not be solvable over a lifetime, so I'm not beating myself up over this, I just keep improving my knowledge over time. 

There are other questions that animate me and would motivate make me expend sufficient effort to solve it if the opportunity arises :

• What will it take for Singapore society to do  away with commissioned salespersons in the financial advisory industry?
• How can we increase the conscientiousness of ourselves and our children?

In my second part of the review of this book, I will talk about the multi-million dollar question of how to infuse conscientiousness into someone. 

In the meantime, feel free to share the big questions you are currently looking at. 

 

On Stand-Up Comedy

 

Last week, just before July this month, when I'll be conducting not one class but two, I decided to do a bit of exploration beyond just finance and gaming. So I paid $50 to attend a stand-up comedy event by Rachman Blake who is still performing at Blue Jaz at the moment.

It's good to get out every now and then to do things out of the blue. Anthony Robbins called this a 'breaking the pattern' and it was money well spent. I had a good laugh but I also managed to get exposure to what a world-class performance is like.  

What I particularly like about the performance is that the comedian took great pains to understand what living in Singapore is like and shared some really sharp observations about us.

I won't spoil all his jokes which centre on his sex life and dating in general but one of my favourite anecdotes is about Singaporeans who love talking about interest rates while on a date. And this was a great observation because if I were in the dating scene, I'd definitely talk about Fed action this coming end-July and its possible impact on interest rates and home loans. I think talking about interest rates exceeding 4% for fixed-rate loans is probably more exciting (and painful) than talking about anal. Worse if your loan is tied to SIBOR/SORA.

While I doubt ENTJs make great comedians, I'm beginning to see that exposure to comedy is not just relaxing and fun, but also good for my business, because the injection of some comedic elements can make my material more engaging. Some clients go for my programmes because of my competence, but I think I can increase my reach if I can improve my warmth. 

I'm not coming from unfamiliar territory as I did try some improv in the past but I did not follow up after one session. Feedback from classmates was that my jokes are too 'atas' and require some knowledge of current affairs. Also almost 4 decades of TRPGs should help. 

So I'm going to do this the slow steady way, I'm going to sign up for comedy courses in Udemy which should set me back less than $200, then I will slowly attend a couple of stand-up comedy acts. This July, I will attend my first Powerpoint karaoke session.  

If I find some avenue where I try my luck with an open mic setting, I'll go to unleash a few quips about FAs and hope I don't get beaten up by insurance salesmen. 

If you have a cruel anecdote or gag about FAs and don't mind me stealing and repurposing your material, feel free to write to me with your contribution. 

Feedback on Education and Lifelong Learning

If I do get to participate in the Forward Singapore feedback sessions, I'm going to talk about two issues:

a) Changing the grading system in local universities

There's been a big change jumping from NUS Engineering school in 1995 to SMU Law School in 2014.

The most immediate change is the increase in levels of anxiety which I was not really prepared for even though I'm kinda used to the academic environment. I don't come from a generation that really gives a damn about mental health but I witnessed a nervous breakdown in class and an exam score hacking from another classmate. The system is really unhealthy and students don't get to work on their personalities and interests because final grades are so consequential. ( eg. Baker and McKenzie will only interview anyone with SMU GPA > 3.7 )

It's extra grating because SMU likes to put happy faces on the walls while you are getting to the lecture theatres. The fucking dancers on campus don't help because they are actually not from SMU. 

One problem is that universities see themselves as being in the service of industries and GPAs function as some kind of shortcut that HR managers love. 

I propose a simpler three-grade system for local degrees.  For every subject, either you pass, fail or get a distinction. A distinction means you score in the top 5% of your cohort. Scoring and weights for the final degree classification should be confidential and students should also just get three grades Fail, Pass and Distinction. 

The system still celebrates excellence and some top employers can still use the distinction grade as selection criteria, but students still get a chance to shape their resumes with more internships, CCAs or hobbies. 

Let's not spoil the HR managers and let them try to learn more about an interviewee rather than to fixate on just one aggregate score. 

Graduates are not wagyu beef.

b) Claw-back of Skillfutures payouts

During the pandemic, it is possible to sign up for courses that pay $1,200-$1,500 per month for six months. This is a lifesaver during the pandemic but we're not getting numbers on re-employment after training is over. I do know that folks who do not get a job after 6 months exist in Singapore, some are highly educated, which makes this convenient money grab at the expense of taxpayers.

When I learnt about this loophole, I was so angry I actually took steps to actively rebel against the taxman last year.  ( But it's totally legal, I used my dividends and fees to generate $50k+ of tax deductibles by maxing out my SRS, CPF and Medisave contributions. ) I ended up cutting my nose to spite my face and lowered my standard of living so that I don't have to pay a single cent of income tax this year.

I'm probably going to do this again this year even though we are out of lockdowns. The price I pay is that I don't get fancy travel, but at least I get the satisfaction that my money is not used to subsidise these deadbeats. ( Having more money in CPF-SA is not too bad as well. )

I want future schemes to include a claw-back provision. If a job is not found six months after training, then maybe a clawback amount of $2,000 should be imposed to provide an incentive for the bum to at least try to get employed. I am aware that the government is now more careful in selecting candidates for these incentives but I think clawbacks should plainly be outcome-driven. 

As I do invest in my student portfolios, the government may even want to claw back money from training firms as well, but this can be smaller at maybe 5% of revenue for each student who does not get a job within 6 months. This way the schools have an incentive to actively filter potential students.

I'm sure other citizens will have different peeves and I respect them for it. 

But do let me know whether you agree with my approach.