Saturday, September 17, 2022

Letter to Batch 27 of the Early Retirement Masterclass

Dear Students of Batch 27,

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

We’re getting into deeper bearish territory as the Fed is about to raise rates by another 75 basis points. This will dampen demand and make it harder for growth strategies to flourish. Correspondingly, every factor model built by this class has shifted to favour a value-based strategy. We are slowly changing from a course that invests in high dividend and low beta stocks. Now we buy cheap stocks with decent momentum.

One consequence of a shift to value is that the factor models will start to highlight stocks that are unpopular with investors, so the rejection rate this round was much higher. Another anomaly is that, for the first time, the factor models did not flag a single bank or REIT in the final STI portfolio which may need getting used to. DBS was added as a bonus stock since banks do benefit from higher Net Interest Margins as interest rates go north.

The second consequence is that for the REITs segment, I’ve added the large STI REITs into to REITs universe for backtesting and this ended up favouring the very same 7 REITs in the STI. Choosing REITs with strong sponsors, while reducing volatility has resulted in lower yields for the final portfolio.

Students have commented that the dividend yield of this batch is on the low end at about 5.4%. For students who wish to have higher yields, they are welcome to research US Office REITs like Keppel Pacific Oak REIT, Prime REIT or United Hampshire REIT and make a discretionary investment on their own. I‘m not adding them into the batch 27 portfolio as I have a large allotment in my family fund.

The important takeaway is that the model portfolios built by ERM do not bind student decisions in any way and they are free to invest as they wish. The model portfolio exists as a tool to track the investment performance of all ERM students and bind the instructor into investing his training fees into choices made by the students. Poor investment decisions on the student's part are meant to affect the instructor first. This is the unique selling proposition of the course - I have skin in the game.

Lastly, I hope that Batch 27 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


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