Early Retirement Masterclass: Our Worst Investment Mistakes

Unlike other folks in this industry, I think that It is more valuable to share investment mistakes than investment triumphs.

Carl Jacobi, a German mathematician often used the phrase “Man umss imer umkehren”. This is German for “Invert, always invert.”

We can, of course, ask ourselves what are the steps to take to make great investment decisions, but new and refreshing insights can be gleaned if we ask ourselves what can we do minimise our investment mistakes.

The philosophy in the Early Retirement Masterclass (ERM) program is that a good investment course should catalogue the worst investment mistakes ever made because to improve as an investor, you need to make better decisions.

In order to make better decisions, you need to learn how to avoid making bad decisions.

Finally, to learn to avoid making bad decisions, you have to actually make bad decisions and lose some pocket change from making them.

As such, I make it a point to catalogue our dumbest investment mistakes and teach it to all future batches of students.

To give some background, each retirement masterclass is given a list of stocks which has been screened based on certain composite criteria weighted towards providing passive income.

This is just to start. Just because a stock has passed the numbers test does not mean it passes the story test. We must exercise judgment in deciding which stock should and should not be accepted.

Students are taught to dig through reports and conduct qualitative tests to sum check if the stock that has been flagged should really be included in the final portfolio.

As always, it is when humans get involved with things like judgment when mistakes can be made.

Here are two of the worst mistakes, on hindsight, we have ever made.

Mistake #1 – Buying Singapore Press Holdings in June 2019

The first mistake was accepting a stock flagged by a quantitative model when the stock should have been discarded. My students were taught that no quantitative model is perfect and steps need to be taken to remove stocks that are flagged by analyst as high-risk counters.

On 27th June 2019, Batch 5 of the Early Retirement Masterclass (ERM) program agreed to buy SPH at $2.46. The stock was flagged by a blue-chip strategy that focused on picking STI components that had a low Price/Earnings ratio and high dividend yields.

The rationale for the purchase was that SPH was a play on a media monopoly that was slowly pivoting to new sector like healthcare and can earn future income from rents and age healthcare – safe bets for the future. The fantasy is that, one day, we can go back to the SPH of the 2000s, a $4+ stock that yields 6%.

This turned out not to be the case.

SPH not only had to contend with lower ad spending and a poorer local economy, SPH’s purchase of nursing home Orange Valley in 2017 resulted in them having to compete against charities and ultimately resulted in impairments. The price has since fallen to $2.16 in a matter of a few months, a nasty 12.6% drop.

From this mistake, we learnt to appreciate that value stocks are often those facing some headwinds and we need to take note when managers try to pivot into a new sector. When a value play pivots too aggressively, it may be worth avoiding the purchase because management is acting outside its circle of competence.

Mistake #2 – Not Buying Ascendas India Trust in September 2018

The second mistake, which was much more serious, was rejecting a stock when it was flagged as a good buy by a quantitative model. Quantitative models provide a measure of security when we make investment decisions because we know that, historically, these strategies work.

On September 2018, the first batch of ERM students employed a Low PE High Dividend strategy in all SGX stocks. This inaugural batch of students chose to reject Ascendas India Trust which was sold at $1.05.

The rationale was very reasonable – India is facing an election in 2019 and Modi Narendra presided over a disastrous regime where he was able to cancel India currency denominated on 500 rupees and 1000 rupees.

The expectation was that the left-leaning Congress Party would gain ground and the political risk made the counter unjustified at any price.

Assessing political risk and projecting currency moments is something retail investors are generally not good at as even the experts get it wrong. In 2019, Narendra Modi was able to remain in power and Ascendas India Trust trades at $1.46 today – a 39% gain!

It is very different to bet on political outcomes and I noticed that every batch has some kind of inherent bias against emerging markets, not just ignoring cheap Indian counters but applying the same pessimism to Indonesian ones as well.

In fact, emerging markets very often experience some market euphoria immediately after an election as the population feels optimistic about the future. Perhaps when making such decisions, investors should assess the dividends and give emerging markets the benefit of the doubt if the yields are high.

In this case, the stock would have been a good buy if investors focused on the “Ascendas” more than “India”.

In both cases, the mistakes made were not even close to being fatal to the portfolio.

• Batch 5, where the decision was made to buy SPH, was the only portfolio sitting in losses today having dropped 1.13% when the STI fell from 3,329 to 3,147.
• Batch 1, where Ascendas India Trust was dropped, was still positive with an XIRR of 4% when the STI, in fact, fell from 3,237 to 3,147.

Investors also need to realise that there is a difference between a bad decision and a bad outcome.

In the above cases, the jury is out as to whether the decisions made were ultimately good ones – as the trainer, I was unable to challenge the student because the student made the best decision that he could have made based on the available materials and time at his disposal.

If SPH recovers and Ascendas Trust falls, these decisions could easily have elevated my students to investment geniuses.

Ultimately, a good investment strategy is not just one that produces superior results, it should be one where mistakes can be made and learnt from without being fatal to the investor.

This is what every batch of classes aim to do when we meticulously build our portfolios – you can make stupid mistakes choosing stocks, the markets will still reward for you for participating in it.

Curious about how we continually improve our investing strategy to build a portfolio for early retirement? Join me here.