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TMFPostOfTheDay (< 20)

The Simplicity of REITs



May 01, 2013 – Comments (1)

Board: Real Estate Investment Trusts

Author: klee12

Hello Factoids. Let me clarify my position a little and comment on your post. We do not disagree, I think, but have different methodologies which reflect our abilities and personalities and this is what, I think, to a large part drives our points of view.

First I think investors should know their own weaknesses. Some of my weaknesses are:

1. My difficulty (or inability) to learn accounting on a deep level. On a deep level means being able to read the Enron 10-K and smell a rat before it blew up. Some did, some didn't. OK, we don't have to be that good, but I know I am far from being good. A little knowledge can be dangerous. I've tried to get a good knowledge but always fell asleep. I've decided to depend on analysts to warn me if the balance or income sheet looks dangerous. One of the advantage of REITs (for me) is their relatively simple balance sheets, at least compared to MLPs and other sectors I have looked at.

2. I'm way past retirement age and my brain is turning to mush. I can't read or assimilate knowledge as I used to. I don't think my brain is complete mush yet but I hope I'm not at the stage when I should put my money in an ETF and go fishing. Also I am spending less time on my stocks than previously for various reasons. This cuts down on the DD that I can do.

3. I used to think I had "nerves of steel" and could keep my emotions under control. I learned in 2008-2009 I don't.

I started investing in REITs about 13 years ago, first tentatively but as my knowledge increased I thought I know this sector well. I listened to the conference calls of over 50 REITs and read all the news about them. I had over 80% of my IRA in REITs at one time. Then came the Big Crash. I decided to diversify. (BTW almost all sectors got hit so diversification might not have provided much protection). For reasons I won't go into now, I decided to try to duplicate my knowledge of REITs with energy MLPs. But early on I realized I could never know them as well as my beloved REITs because of my weakness in accounting and my mushier brain. Anyway I did as much DD as my mushy brain and time allowed and started taking small positions in several MLPs anyway, aiming to allocate 20% of my portfolio to that sector. I got to 10% and price movements weren't going as I expected and maybe it wasn't noise. It turns out, according to my mushy brain that my MLPs were more sensitive to the price of natural gases (methane, ethane, etc) than I thought. I knew that MLPs were not completely immune from the price of gases and oil but I had underestimated, among other things, how much their earnings depended on the price of the commodities. I still plan to have 20% of my portfolio in energy MLPs, but I'm in no hurry. I'm still learning and will look at a few more conference calls. BTW I took a position in LNCO in part because I felt their income was relatively well hedged against commodity prices.

I had written "(Factoids) may feel they (BDCs) are relatively safe." Factoids wrote "I believe that BDCs have attractive risk adjusted yields. But those are high yields. BDCs are not relatively safe. To an atypical degree, BDCs are not buy first and learn latter stocks."

Ahh ... I put in the weasel word "relatively." I take the point of view nothing is safe; treasuries may not be from inflation. Everything has has risk associated with it. If risk and return were measurable we could choose level of risk and search for investments with the maximum return that meets our risk criteria. Or if we require a level of return, we could search for investments with the minimum risk that satisfies that return requirement. Or we could do something in between. Doing one's DD means looking at what you think return will be, looking at the risk and fitting that information in your risk/return rankings or making a cost benefit analysis. What I meant by saying for "BCDs are relatively safe" was relatively safe for investments of approximately the same return. I did not mean (but this was not clear) "safe" in the absolute sense. Note I also put in the weasel word "may" earlier.

Comments, corrections, bricks welcome


1 Comments – Post Your Own

#1) On May 01, 2013 at 11:25 AM, Teacherman1 (< 20) wrote:

Good morning King

I too am retired and my brain does not work as well as it used to, so I can emphatize with you on the "mushy" part.:)

I agree also that MLPs are a lot of work, and the amount required is not something I am willing to invest.

However, I tend to avoid REITs also, but for a different reason.

I understand that there are a lot of differences between today's REITs and those that existed in the past, but events have a way of "repeating" themselves over time and I like to think I have learned from past experiences.

I went from being a banker to a real estate investor and developer in the 80's, because I could see that the people sitting across the desk from me, were making a whole lot more money, with no more knowledge and a lot less work.

I did not invest in REITs, but got the bulk of my capital for my development activities by taking advantage of "give away prices" on properties which a bankrupt REIT was forced to sell for pennies on the dollar, because the court told them they had to "wrap it up" at whatever they could get.

This was as much "luck" as ability, but I still remember the lesson learned ( at others expense), just how drastically things could change, no matter how well thought out the plan.

I am not saying that the REITs of today are going to go the same way, and I wish you good fortune in your investing, but for me, it is just something that my "mushy old brain", just will not let me do.

JMO and worth exactly what I am charging for it.

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