Retirement

[weijian]

If my hypothesis is somewhat close, I think to be able to come out with an idea like that is very impressive & refreshing - it is more credible than those who teach you to analyse stocks and tell you that you can be financially independent thru' investing. There wld of course be risks since it's using leverage, unexpected events like govt policy changes, etc but I think young working adults may afford to take higher risks esp if they want to F.I.R.E.. Also, I think the trainer had backtested his strategies to factor in recessions, etc.

I am not trying to de-credit the guy but the idea is not new. This idea is akin to the age old method of "borrowing short term to lend long term and then earning the differential".

All banks do that, until non bank entities like GE Capital started to imitate them to earn big money. And the the old adage - "what the wise man does in the beginning, the fool does in the end" applies again - We all know what happened in GFC2008 when the money markets simply froze and GE Capital couldn't roll over their commercial paper.

Using banks' leverage capabilities is simply akin to borrowing short term - This is because they can simply take it back or request you for additional funds to top up your margin. While earning the returns - dividend payout is long term because even though you know when they will pay out dividends, you can't actually dictate when and how much they do.

Listening to survivors like Temperament is probably boring   But if one understands survivorship bias, then it would probably be useful to take heed of survivors.

[BlackCat]

If we do back testing for the past 43 years, we have seen the following major financial/economical crisis:

1987 - Black Monday
1997 - AFC
2000 - Dotcom
2008 - GFC

Agree, anyone who has been through these crises will instinctively avoid leverage.  The same way you avoid putting your hand in a fire.

Even if you find some backtests showing a leveraged strategy that worked, the next crisis is always different from the last one.

Maybe you could use leverage AFTER the crisis. With hindsight....

[ghchua]

All banks do that, until non bank entities like GE Capital started to imitate them to earn big money. And the the old adage - "what the wise man does in the beginning, the fool does in the end" applies again - We all know what happened in GFC2008 when the money markets simply froze and GE Capital couldn't roll over their commercial paper.

Using banks' leverage capabilities is simply akin to borrowing short term - This is because they can simply take it back or request you for additional funds to top up your margin. While earning the returns - dividend payout is long term because even though you know when they will pay out dividends, you can't actually dictate when and how much they do.

Listening to survivors like Temperament is probably boring   But if one understands survivorship bias, then it would probably be useful to take heed of survivors.

Hi weijian,

Though I don't disagree with your views here, there is certainly some flexibility in the trainer's strategy. Leverage can be reduced by selling stocks in the margin account if the broker requires higher margin requirements. REITs have locked in rentals and though they are not guaranteed to pay out dividends, in order to enjoy tax transparency, they have to pay out at least 90% of their earnings as dividends. Of course, the strategy might have problems during crisis period but he had back tested his strategy.

[corydorus]

Early retirement is dependent on how much you need. If monthly only 2.5K, I could have retired with 600K investment of 5% dividends at age 39. If draw down, even earlier. Don't think is hard for a number. So the key is lifestyle. We only have one life. Do we seriously want to retire like a beggar, no travelling, no family, no luxury ... etc.

[mobo]

Dear all,

The trainer certainly uses leverage in his portfolio. This could be seen in one of his blog posts:
http://treeofprosperity.blogspot.com/201...e-and.html

And his back testing efforts seems to favour REITs with weaker sponsors
http://treeofprosperity.blogspot.com/201...-good.html

All in, it looks like he is employing leverage, and with smaller REITs and maybe business trusts and high yield stocks as a strategy, I think his portfolio might yield higher than 4.5%-5%pa that what mobo had cited here. Maybe closer to what dreamybear had stated at around 7%pa. As for financing costs, yes, some brokers are offering around 3%pa, a lower number than what mobo had cited here.

Thanks for the clarification. The problem is though I can see how that might work for a short while, I do not see any real viable path for this strategy to last for a lifetime.

Quite honestly, employing significant amounts of leverage to go for a portfolio of the highest yielding REITs and business trusts is a Russian roulette disaster waiting to happen. If one is lucky and manage to somehow stay within a bracket of upturn say 5-10 years, it might be possible. But a 43 year window period to me it's just a matter of when one goes kaput, not if.

Using the last 2008 GFC scenario, if one had owned a highly leveraged portfolio of the small and high yielding REITs/business trust this is what will happen:

1) The unit price will collapse, triggering a margin call
2) Retiree will have no choice but to sell off a portion of his holdings to reduce debt
3) The deleveraging results in immediate drop in dividends - ouch #1
4) As the economy weakens, cost of debt at the REIT level increases, rents drop, vacancy and counter party default increases
5) This in turn causes DPU to drop even further - ouch #2
6) Such a turn of events puts strains on the weak REITs which necessitates a massive infusion of new capital in the form of private placement and rights issue at depressed prices
7) Retiree has no money to participate in the capital replenishment
8) Massive dilution follows and yet another drop in DPU - ouch #3

At the end of the day, borrowing large amounts of money to purchase high risk high yielding instrument in order to profit from the gaping is a very very old technique. You don't really need to attend any course to learn that. As weijian and Temperment have alluded to, such a strategy only works as a guerrilla style hit and run, it does not work for someone who intends to sit around for many decades passively for the rest of his life.

[specuvestor]

Thought maybe we can be reminded again how bad the situation was in 08/09 that REITS needed to be bailed out and Business Trust acquired a bad name

https://www.valuebuddies.com/thread-1928...#pid132185

Back test is one thing. Going through greed and fear is another. That’s what separates academics and practitioners.

[Temperament]

Ha! Ha!

Quote:

"That's what separates academics and practitioners"

i like the above quote very much because i know i can not or never can be an academic.

So i learn what i can from academics and try my best to be a practitioner.

And always have to consider greed & fear but not forget about instinct and guts gain from practice.

[dreamybear]

I am not trying to de-credit the guy but the idea is not new. This idea is akin to the age old method of "borrowing short term to lend long term and then earning the differential".

All banks do that, until non bank entities like GE Capital started to imitate them to earn big money. And the the old adage - "what the wise man does in the beginning, the fool does in the end" applies again - We all know what happened in GFC2008 when the money markets simply froze and GE Capital couldn't roll over their commercial paper.

Using banks' leverage capabilities is simply akin to borrowing short term - This is because they can simply take it back or request you for additional funds to top up your margin. While earning the returns - dividend payout is long term because even though you know when they will pay out dividends, you can't actually dictate when and how much they do.

Listening to survivors like Temperament is probably boring   But if one understands survivorship bias, then it would probably be useful to take heed of survivors.

Hmmm, I haven't thought of it that way - thanks for the explanation.

Yes, it is always enlightening to learn from wise & experienced people. My achievements have always been built on past lessons learnt(whether others or myself).

Personally, I regard leverage as a useful tool, for e.g. in the case of property cycles. During times of financial crisis/recession, private properties have a tendency to fall to a very affordable level. Taking up a substantial home loan(assuming to a reasonable limit without ultra stretching) without job security(i.e. strong labour unions) might mean assuming high risks(or deemed as reckless) at that point in time, but it may be the only real shot for an average Joe to move up the property ladder and subsequently a gd chance to earn a considerable cash pile. Once a substantial asset(property) is acquired, one can upgrade when one's financials improve or downgrade with profits.

The above is just to illustrate an example of leverage without considering factors like retrenchment, unexpected illness, possibliity of deflation(like Japan) which wld be another discussion altogether.

At the end of the day, i guess it's back to high risk, high return / low risk, low return.

[mobo]

Back test is one thing. Going through greed and fear is another. That’s what separates academics and practitioners.

As much as I like to diss ivory tower academics without common sense, I disagree with the quote that somehow implies academics follow a different set of logic than practioners. Yes, the emotional roller coaster is different for someone who is witnessing his net worth gyrate compared to a dispassionate observer that is just churning numbers, but the end result and conclusion should be similar if logicised properly.
 
If an academic does a back testing study for this high margin high yield strategy that somehow indicates that everything is well and smooth sailing which is different from the actual experience of someone living and breathing through that strategy, it is an indication that the academic sucks in his research and modelling, not because he never “lived through the greed and fear”. By the way the so called research done by Christopher Ng found in the link above is so infantile (i.e. pulling a bunch of TSRs over a basket on Bloomberg) I don’t think it even qualifies as back testing in an academic sense.
 
Very common back testing errors I have observed from experience include:

• Too small a sample size, whether it’s by time frame or participants
  
• Inadequate understanding of the underlying correlation and co-variance of factors at play
  
• Assuming normal like distribution for events that do not follow that pattern
  
• Not enough attention paid to kurtosis and its implications
  
• Missing out minor elements that seems inconsequential but are significant when they happen with enough frequency
  
• Survivorship bias, i.e. doing back-testing on samples you see now
  

 
Ultimately though, there will be lapses from academic studies either because of inherent imperfections in any modelling or a yet unknown development (black swan) that nobody is aware of yet. However, my personal take is many are not giving real academics in Finance and Investment related research enough credit and some are even openly dismissive of any conclusions and recommendations from them.
 
Academics and practitioners can actually have a symbiotic relationship and learn from each other. Academics provide practitioners with a more helicopter and holistic view that is less clouded by individual experiences whereas practitioners help academics to fine tune their modelling to get as close to reality as possible. 

In the absence of such a symbiotic interaction, an academic churns out papers with ridiculous findings that do not past the laugh test for professionals who deal with it daily whereas a practitioner might incorrectly extrapolate his personal learning from his own unique circumstance to an audience or area where it does not work.

[specuvestor]

Don't get me wrong that I'm dissing academics. But those who depend on back testing and statistics without the rigors of the field are like you say, doesn't even pass the laugh test. Hence there are even academic proof that Buffett is high beta.

Academics do help to form the frame work of what we see and observe but they are unable to provide the meat accurately in general. It's not that they are without logic but very often it is controlled and perfect world scenario like efficient frontier etc. Behavioral Finance just started to gain eminence when we have been observing it for decades

But to a person with a hammer everything looks like a nail; hence the multi-disciplinary approach promoted by Munger. If one can merge the 2 then one is on firm ground yet dynamic. Hence you have extreme end of academia like James Simons to Nassim Taleb (yes the guy who has folded a few funds. I tend to think in terms of known knowns, known unknowns and unknown unknowns instead of keep thininking of the 5 sigma black swan). Once on the field, one has to be pragmatic and adapt. Buffett's style had also been changing