GOODN - 5 Essential Lessons From 'The Tortoise And The Hare' To Master REITs

2023-03-20 07:00:00 ET

Summary

• Seeking Alpha has been a great platform to teach REITs and today I would like to highlight the reasons to own them for the long-haul.
• I’ve been writing on this very website for over thirteen wonderful years, and I can say that a large percentage of readers dream of being the speedy bunny rabbit.
• Today, I want to help all of you make it to the finish line with me, so we can run victory laps around the braggadocious bunny.

Seeking Alpha has been a great platform to teach REITs and today I would like to highlight the reasons to own them for the long-haul.

I recognize that some of you reading this may be traders (aka market timers), but please bear with me, as this content could also be quite useful.

For those of you who aren’t familiar with Aesop’s Fable: The Tortoise and the Hare, let me summarize the story…

This was a great race between the tortoise and the hare, and although the hare was much faster that the tortoise, he loses the race because of his propensity to stop and nap. Alternatively, the tortoise just keeps putting one foot in front of the other and wins, simply because slow and steady beats fast and variable.

Now, I know that many people reading this article would like to be the hare, after all, the doctrine of the speculator is: “ I want to make a lot of money on little capital in a short time without working for it .”

It’s just human nature right, to be a hare of sorts. Frank J. Williams (Wall Street writer in the 1920’s) summed it up nicely,

“We are all gamblers at heart. We cannot be blamed for wanting to get at the best things in life in the quickest possible way. This is the spirit of America. The stock-market seems to offer the most rapid road to fortune.”

I’ve been writing on this very website for over thirteen wonderful years and I can say that a large percentage of readers dream of being the speedy bunny rabbit that blows past the silly old tortoise . But I hate to disappoint you folks, because (once again citing Williams),

“The average small trader takes a flyer in the market without forethought, on the theory that if he loses, he is not much out. Gambling in stocks in this happy-go-lucky, hit-or-miss style used by hundreds of thousands is a hopeless waste of time and money.”

So today, my goal is to show you how being the tortoise can be sexy after all. I want to help all of you make it to the finish line with me, so we can run victory laps around the braggadocious bunny…

Have a plan and stick to it

Having a plan is critical to success. David Swensen wrote (Unconventional Success),

“The heart of the investment process lies in producing a coherent set of portfolio targets that reflect the science of applying basic investment principles and incorporate the art of meeting investor needs and preferences.”

Having a plan of action (or a blueprint) is critical and a “custom-tailored portfolio promises greater customer satisfaction than the one-size-fits-all alternative.”

At iREIT on Alpha we believe in designing and constructing customized REIT portfolios based on an individual's own risk tolerance levels. It’s silly to invest in the stock market unless you have a plan of action and determine your own unique appetite for risk. Most importantly, your time horizon constitutes one of the most influential variables in structuring portfolios.

Somebody got angry with me last week because I recommend shares in Digital Realty ( DLR ) a month ago. Shares are down 9% over 30 days and over 25% in the last 12 months. Meanwhile, we maintain a Strong Buy, with a high degree of confidence that eventually the data center REIT’s valuation will revert to its norm (of around 20x P/AFFO).

My point is, our blueprint at iREIT is to overweight data centers and cell towers – that’s part of our blueprint, and unless fundamentals deteriorate in these sectors, we’ll stick with our gameplan. Our conservative annualized total return forecast for DLR is 20%.

Time in the market beats timing the market

As I said earlier, every investor must know his or her time horizon, and I consider this an important lesson from the Aesop tale.

During the race between the tortoise and the hare, we see the rabbit running hard and then stopping to showcase is speedy skills. It’s kind of like bragging about these so-called “one hit wonders” who get lucky with timing a trade. Once again, Frank Williams has some sound words,

“The quick profits are just froth. They arouse a fever in the blood and don’t last. The worst thing that can happen to a new spectator is to make a lot of quick money on his first trade.”

Not to throw water on the fire, but how many of you bought bitcoin or bragged about your Annaly ( NLY ) or EPR Properties ( EPR ) investment back in 2019?

Regardless of the mouth-watering yields back in 2019, investors in these REITs have dropped by an average of 40% while the Vanguard Real Estate ETF ( VNQ ) has increased by 5%+.

You will always have people who think they can beat the market. These are the people who improvise themselves as traders (aka market timers). They simply don’t have the skillset to master the race, since they’re primary motivation is greed.

The intelligent approach to winning the race – just like the tortoise – is to bet on dividend growth REITs that offer the important power of predictability. Most market timers don’t grasp the power of compounding concept but the lesson here is that the more time you give your money to build upon itself, the more it compounds.

When you understand the time value of money, you'll see that compounding and patience are the ingredients for building wealth.

Since December 31, 2010 here’s how these REITs have performed:

• Annaly ( NLY ): 1.0% annually or 64.2%
• Gladstone Commercial ( GOOD ): 3.8% annually or 58.5%
• EPR Properties ( EPR ): 4.1% annually or 64.2%

Using the same date, here are REITs we’ve been recommending:

• Digital Realty ( DLR ): 9.2% annually or 192.9%
• Agree Realty ( ADC ): 11.0% annually or 256.9%
• American Tower ( AMT ): 13.2% annually or 353.6%

Slow and steady wins the race!

The tortoise beats the hare against all odds thanks to its ability to go the distance. I’ve seen so many investors get burned because they’re simply trying to run a sprint, instead of practicing patience as Frank Williams reminds us,

“There is only one narrow trail leading to permanent success in the stock-market. Unless traders are prepared to climb that steep path with cautious steps, it would be better for them to stay out of Wall Street and to keep their money in the savings-bank.”

One example of this is Medical Properties ( MPW ), a beaten down hospital landlord that has seen its fair share of short attacks. Admittedly, there are risks worth referencing with this pick (i.e. leverage and operator concentration); however, patience is being recognized given the fact that we’ve done our homework.

Another way we can maintain patience is because of diversification. Recognizing that MPW is a Speculative Pick with an elevated payout ratio, we must keep our exposure to a modest level. However, in time, MPW shares should revert to valuation levels indicative of a “mission critical” hospital portfolio.

You Snooze, You Lose

Remember that the hare took occasional naps thinking that his lead in the race allowed him the opportunity to snooze, and the tortoise took advantage of it. When it comes to investing, you must be ready to pounce when Mr. Market is either sleeping or perhaps even angry.

Last week I took advantage of buying more shares in Arbor Realty ( ABR ) after an anonymous short and distort attack. As I mentioned on my weekend blog ,

“I spoke with the CFO at Arbor on the day that the short seller posted his tweet and later I informed members at iREIT on Alpha that I was buying more shares.”

We’re always looking to capitalize on opportunities like this one, which is why it’s always important to have a game plan and keep plenty of dry power, just in case.

Ignore the Big Egos

I think one of the most important lessons when it comes to investing is to always practice humility and it’s a tough lesson that I try to remind myself on a consistent basis.

When I was a college basketball player, I would watch other players on the competing team during warmups. Oftentimes they would brag – like the hare – in an attempt to gain an edge. But the reality is that the braggers do this because they have no confidence in themselves.

But remember, the tortoise wins in the end, and this is a reason I ignore others who brag about how much they made on fancy-dancy residential mREITs or ultra-high yield alternatives. These boastful types look to take advantage of others by exploiting their human desire for greed.

Rather than wasting your time with these people, do as the turtle does . Focus on your plan and follow your course of action. Persistence is the secret to success!

People of the dupe type are hypnotized by the glare of gold. They stare so long at glistening fortune that their minds are brought under subjection to one of nature’s strongest passions—greed. They will listen to any tip, however wild and ridiculous, and impulsively act on any suggestion. Frank J. Williams

Happy SWAN Investing!

Author's note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.

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