"For everything there is a season, and a time for every purpose under heaven" (Ecclesiastes 3)
The fierce battle between equity-REITs ("eREITs") to mortgage-REITs ("mREITs") may never end but it sure is interesting.
In essence, mREITs are financial entities, sort of "specialized banks", that predominantly try to "live on the spread", i.e. paying lower-rates on money they borrow short term against receiving higher rates on money they give to lenders//invest in securities long term.
As such, investing in mREITs is a kind of "time bound", more sensitive type of investment. Not only that their ebb and flow don't necessarily coincide with the overall market, not even with traditional banks, but they tend to be more sensitive to changes in both (short-term) rates and (long-term) yields.
In this article, I aim at succeeding in doing the following:
- Explain the difference between macro views/decisions (and macro analysts) to micro views/decisions (and micro analysts).
- Go through my views over the past year so that anyone who does bother to read my work knows exactly what were/are my real views/actions, not what others claim my views/actions to be.
- Differentiate between "timing the market" to "adjusting to the market".
- Prove to you that mREITs were - and still are - better positioned than eREITs.
In his most recent article, Brad Thomas has offered readers a view into one of my relatively old (dated July 13th) article and, to describe how highly he values my work, he writes that: ..."as far as I'm concerned, the author was staring at a cloudy crystal ball - hardly a fortune teller."
I must admit that I've experienced way worse than that in my career... Nevertheless...
- Since I don't have a crystal ball (never actually seen one!);
- Since I do find my views and projections to be quite clear (though the weather from where I write is, no doubt, very cloudy at the moment);
- Since, in his article, Brad is mixing data from various articles that have nothing to do with each other;
- Since, in his article, Brad is using information from an article that is simply too old and, therefore, far from reflecting my current stance accurately (7.5 months have passed since mid-July and few "tiny" things have changed since then, both globally as well as within my narrow world and line of thinking);
- And mostly since Brad claims that he read my work while he clearly hasn't (otherwise he wouldn't be so wrong about both my past irrelevant and mostly current relevant views),
... I have no choice but to ensure that both my views and my (non-existing crystal) ball(s) are clear.
Rebuttal? No! Facts? Yes!
This is not going to be a rebuttal per se; not at all. I see no point in debating with someone who clearly hasn't read my work and only uses certain, old, irrelevant pieces (out of my work) that suit his own theme and views. I see very little justification to respond to an article that is mixing data from various articles of mine, articles that have nothing to do with each other and by doing so, (the author) delivers a deceiving and misleading view as if it is mine.
Call me a weirdo, call me someone who is "staring at a cloudy crystal ball", even call me "a fortune teller" - I can bear any nickname - but I admit liking to stick to the facts, not to the fluff. Although my English is not (and can't be) as brushed and shiny as Brad's, I believe that by using the "facts language" I do speak a universal language that fits all.
I'm the first one to admit that:
- eREITs are a much better (fundamentally) and bigger segment than mREITs!
- eREITs are the "founding fathers" of the REIT-dom!
- eREITs are the go-to-picks for anyone wishing to sense the level of yield starvation at a given point in time!
- eREITs provide a much better macro view than mREITs!
Nonetheless, these fine, well-deserved, features still don't (automatically) make eREITs better investments (eternally) and/or better positioned (at present) than mREITs!!!
Without further ado, let the (facts) show begin!
MACRO vs. MICRO
Here is a very simplistic drill regarding macro views for you:
Taking everything that you know/foresee into consideration, please answer the following three questions regarding the US markets:
- Where do you think short-term rates and/or long-term yields are heading?
- What is your view about buying medium/long-term bonds right here, right now?
- What is your view about buying bank stocks (whether single names like JPM, C, BAC, WFC, GS, MS, PNC, etc. or ETFs like XLF, VFH, KRE, KBE, IYF, IYG, FXO, etc.) right here, right now?
While I'm sure that most of you already know where the wind blows, please allow me to share with all of you what most are the answers that most investors currently give to these very same questions:
Once again, I wish to emphasize that no matter what I'm/you're thinking, those are the answers that most investors, worldwide, currently give to the above three simple questions.
As such, I'm allowing myself to say very loud and very clear: If you personally agree with these answers - I do! - and if your very own views are like mine (hereinafter) - you should avoid/sell eREITs and consider buying mREITs!
Whether admitting so or not, facts are:
- eREITs are bonds-like proxies and their performance is inversely correlated to the direction into which rates and yields are heading to.
- mREITs are banks-like proxies and their performance is positively correlated with the direction into which rates and yields are heading to.
As you can see, from a general macro perspective, there's simply no need to put too much emphasis into specific micro names. If the macro analysis points very clearly at the desirable/undesirable path, there's no need to bother doing (too much) micro analysis. Putting it differently, if you agree at present with the Fortune Teller's macro views - Brad Thomas' work (as fantastic as it may be) won't help you much.
It's not a personal issue but a fundamental matter: If a macro analyst moves in one direction, the work of a micro analyst who is focusing on the other direction can't help (the macro analyst) much. For as long as they don't move in the same direction - they won't see things eye to eye.
Many readers put the focus on the specific stocks that Brad and I don't agree on. In my opinion, this is the wrong way to look at it. The differences aren't in the micro (single stocks) rather on the macro level (eREITs as a segment). Naturally, if there are different macro views - and possibly different time frames (investment horizons) - the micro views can't match.
Facts are that:
- During a market fall, even the best stocks may dive.
- During a market rise, even the worst stocks may thrive.
Folks, this is exactly why macro views are way more important than micro views. This is exactly why macro decisions (e.g. where the market is heading) are way more important than micro decisions (e.g. what are the best stocks). This is also the reason why the popularity of ETFs is on the rise for years already.
If I thought that the yield-based/related arena, including eREITs, is a good place to be in right now - Brad's articles would have been one of my first stop while searching for the best single picks. Since my current (macro) view is the exact opposite, i.e. run away from anything that is predominantly driven by rates/yields, I see very little added value in finding the right stocks within (what I view as) the wrong segment or asset class to be invested in!
MACRO Analyst vs. MICRO Analyst (or: Why I'm not a big fan of micro analysts)
Brad is a micro analyst - and a terrific one. He is doing a great job in analyzing and identifying the best picks within a certain pool, namely eREITs. Nonetheless, this pool is admittedly limited and it seems like there's no "access" to other pools. Some of those (other pools) may be nicer, bigger, warmer, more friendly - you name it - but if you have no access (or no intention getting) to other pools, how can you like anything outside the pool where you are employed as a lifeguard!?
I'm a macro analyst. It's not a big deal as it may sound; anyone who reads this article is a macro analyst too. Basically, we all are! (even without reading any article...)
As a matter of fact, I'm the first one to admit that a micro analyst has a much harder job than that of a macro analyst. A micro analyst needs to read a lot of material to gather tons of data and to dig deep into tiny, quite annoying details; admittedly, this is not for me... Nonetheless, a few months ago, I did run a micro analysis for each of the ten components of my A-Team:
- Main Street Capital (NYSE:MAIN): Part I (This article lays the foundations for the A-Team as a whole)
- Ares Capital Corporation (NASDAQ:ARCC): Part II
- Starwood Property Trust, Inc. (NYSE:STWD): Part III
- New Residential Investment Corp. (NYSE:NRZ): Part IV
- Apollo Commercial Real Estate Finance, Inc. (NYSE:ARI): Part V
- Gladstone Investment Corporation (NASDAQ:GAIN): Part VI
- Ladder Capital Corp. (NYSE:LADR): Part VII
- Newtek Business Services, Inc. (NASDAQ:NEWT): Part VIII
- Hercules Technology Growth Capital (NASDAQ:HTGC): Part IX
- Prospect Capital Corporation (NASDAQ:PSEC): Part X
Bear in mind, though, that when I finished the above task, I declared: "No more!"... I thank anyone who read my ten (micro analysis) pieces but this is not for me. I'm happily leaving such tasks to Brad, Scott Kennedy and many others who are fine micro analysts. They are, undoubtedly, doing a much better job here than I do!
This reminds me of the real world, where (low-ranked) employees get to do the (let's face it...) lousy/hard tasks while their boss eventually gets the credit (and the larger bonus...) for the work they've done. Similarly, while the micro analyst is required to dig into the same (type of) information repeatedly, the macro analyst needs to digest and assess what are the implications of, say, the election of a new president? What are the chances of a tighter monetary policy?... And how about: Tax cuts? Deregulation? New legislation? Protectionism? Globalization? The EU? China? GDP? Employment situation? etc. etc.
It's a hard work too, don't get me wrong, but it's much more interesting and less of a routine. Because, guess what? Things change all the time, frequently and rapidly. So are views and, consequently, decisions. And yes, that includes investment views and investment decisions.
I follow Brad's work for years and I don't recall him ever saying "time to dump eREITs", "This isn't the right time to buy eREITs" or anything of that sort. Have you asked yourself how come he never shy off eREITs? There are three possible answers to this question:
- He really, really likes eREITs and never thought they should be left behind. Fair enough. Unreal, but fair enough.
- He never left the pool he has always been swimming in. Whatever the reason for his untouched loyalty, he sees no other option (or doesn't want to examine any alternative view).
- Like all micro analysts, he has much more to lose than to gain (by swimming in other pools and/or against the stream).
I've been working for various banks through most of my career and let me share with you few well known "secrets" regarding micro analysts:
- Micro analysts work for banks/brokers that serve and get paid by the very same companies that those micro analysts cover on a regular basis. Conflict of interest, anyone?...
- Rising markets are good for business. Consequently, positive tone is always - I repeat: ALWAYS - warranted and, to some extent, required if not being forced. Have you ever looked at the ratio between BUY to SELL recommendations on Wall Street?
- Micro analysts usually have higher aspirations; joining the same companies they cover, establishing a hedge fund or managing clients' monies independently - you name it. Would you turn negative on the same club you wish to become a member of?...
- Once fulfilling their (out of employment) aspirations, micro analysts usually sell something. A service (for example: a newsletter), a product (for example: a book) or anything else that they wish as many people to pay for as possible. And when you sell something - it's only natural to try and dismiss/eliminate anything that threatens your ability to sell more. Killing the competition is one the corporate world's main objectives.
Personally, I don't read most of the way-too-many analyses I'm receiving from banks/brokers. Knowing that there are always too many forces and biases that influence the pieces I get make me suspicious. I find it hard to "buy" what they try to sell, (solely) based on what they say. These forces and biases are simply much greater and more powerful than the analyst himself. No matter how high are the working standards, the level of integrity or the comprehensive understanding of the underlying asset/s that is/are being covered - there's always this element of "this piece must serve other/external/unrelated interests" embedded in every analysis.
So, forgive me for being suspicious and cynical but whenever I get something from someone (for free) - be it a product, service or analysis - I ask myself: What the person - who is giving me that "something" - has to gain, aside and on top of me reading/using/benefiting from the product/service/analysis itself???
My Real, Fully Documented Views Over the Past Year
The scope of the portfolios I'm involved with (for myself as well as got others) goes way and beyond what I'm writing about here on SA. Since I wish to remain focused (within the topic of this article) and since I like to provide sources/proofs to everything I say, I'll (in this instance) only refer to views/positions that I've expressed here on SA through documented articles:
- General call to invest in interest-rate sensitive instruments >>> This call specified eREITs, mREITs, BDCs and preferred shares as recommended picks. Even if you stick to the themes, all the way (and I've made changes along the way; hereinafter), rather to the specific stocks (that performed even better than the general themes) - the results were impressive, as anyone who follows these types of assets knows.
- General call to invest in the energy sector, especially large caps >>> We all know what has happened to energy prices and stocks since then.
- Introducing the A-Team (as of 3/31/2016): Ten stocks (mentioned above) to buy immediately that are expected to deliver total returns of 10% in the first year and 50% during a five-year course >>> So far, 10 months since launch date, the A-Team has delivered about 30% (complete data is presented hereinafter). Here is the most recent (periodical) coverage.
- Reiterating the "buy energy" call, this time in a more urgent (time sensitive) manner as well as in a more elaborated way.
- Strengthening the case and speaking in favor of mREITs; a rebuttal to Brad Thomas' previous article where he was calling mREITs "a headache" >>> A few months later, as per Brad's most recent holdings disclosure, he is long ARI, BXMT, LADR, STWD. I'm in full agreement with Brad regarding these holdings but for someone who describes mREITs as a headache I'd say that holding four mREITs is pretty impressive. Furthermore, I now hold less than twice the number of mREITs that Brad does - and I'm being referred to "an endless mREITs lover". Go figure...
- Defining many eREITs as overvalued. This was a bold call at the time, swimming against the tide, but I described exactly what I saw and, as always, I put my money where my mouth is:
- Introducing the H-Team: Ten stocks that I opened short positions in, out of which eight are eREITs (DOC, EQIX, HR, HTA, NNN, O, ROIC, VTR; the other two are WING and TSLA; I'm no longer short the latter). I emphasized that for me, having many long-REITs positions, this is predominantly a hedge, i.e. protecting the longs by entering these shorts. Brad called this move at the time "market timing". I call this "risk management". Judge for yourself.
- Making a call in favor of mREITs over eREITs. It's worthwhile mentioning that this part I of the "why mREITs are better positioned than eREITs" series was written way before the US elections took place and even (few days) before Mr. Trump became the GOP official nominee.
- Reiterating my (general) preference for mREITs over eREITs following the US elections' results. Presidents change, times change, preferences change too. So are my views regarding specific types of mREITs:
- Differentiating between various types of mREITs. In this article, I'm sounding a warning alarm regarding agency/traditional mREITs, considering the very quick and sharp rise in US Treasuries' long-term yields (that, for itself, intensified following the US elections' outcomes and expectations).
- Since the US elections (11/8/2016) all the way to year-end I mentioned, in various articles as well as in few dozen (if not hundreds) of comments, that I'm moving more and more into a hedged stance, i.e. my large net long position - that run through most of 2016 - is shrinking.
- Expressing a cautious tone regarding the market (as a whole) and declaring that I'm moving (from a net long position) into a fully hedged (mostly long-short) multi-strategy. While entirely theoretical, I've demonstrated a possible implementation of a long-short strategy through 50 well-diversified, pair trades.
- Shortly after claiming that the market "deserves" a pullback I've "upgraded" this call into a "most probably will get one", here (part I) and also here (part II).
- I've also explained my two highest convictions for 2017: Higher long-term yields (TLT, TLH, TBF, TBT) and a stronger US Dollar (NYSEARCA:UUP).
These views - and not views that someone else is trying to attribute to me - have led me to start the current series that I'm running, where I'm checking how mREITs, eREITs and BDCs cope with periods of rising rates/yields, the exact same macro theme that I foresee.
This series started with identifying mREITs that are worth keeping vs. those that need to be avoided. Forty mREITs are divided into four groups and the performance of each group (combined) and each stock (individually) is being examined over three different periods of rising rates/yields that we experienced over the past five years.
From mREITs we moved onto eREITs, a much bigger and more diversified segment (as I already acknowledged in the opening statement). On this instance, we deal with 120 names, divided into 11 sub-groups.
In this series, thus far, we covered the following eREITs' sub-groups:
Part I: Residential eREITs
Part II: Data-center and storage eREITs
Part III: Small-cap (*) hospitality eREITs
Part IV: Large-cap (**) hospitality eREITs
Part V: Large-cap (**) healthcare eREITs
Part VI: Small-cap (*) healthcare eREITs
Part VII: Industrial eREITs
Part VIII: Triple-Net Lease eREITs
(*) Small-cap = Below $3 billion market cap
(**) Large-cap = Above $3 billion market cap
Brad claims that he read my work but had he been reading my work, he would have known (unlike what he wrote in his article), that:
- This series is examining one factor and one factor only: sensitivity and vulnerability to rising rates/yields. In my humble opinion, under the current political/market environment/expectations this is the most important factor; yet, it's only one factor.
- This series, as I indicated many times, is not about buy/sell recommendations rather about providing undeniable facts = indisputable historical data of eREITs' performances during rising rates/yields periods. I emphasized repeatedly that there are many other considerations that one should be minded of when it comes to buying or selling a position.
- eREITs are performing very poorly during periods of increasing rates/yields. That's, for itself, not a major revelation. However, looking at the various sub-groups and the specific stocks (within each sub-group) allows investors to better identify those eREITs that are more resilient (to higher rates/yields) than others. This is a revelation (at least to me).
- I said loud and clear that anyone who does not (fore)see higher rates/yields (the way I do) should obviously do the exact opposite of what this series suggests.
Brad dismisses my work as not using other additional (undoubtedly) important metrics that he uses when evaluating eREITs. Once again: In this specific series, I never meant to be using any of those metrics and since I declared that I'm only analyzing one factor - it's a bit out of context to wonder how come other factors haven't been checked too.
Putting it differently, Brad is blaming me for not analyzing eREITs the way he does and Brad is dismissing my work because it hasn't reached the same conclusions as he does. Why is he so bothered with my style/analysis is up for him to answer but you already read few of my own ideas to that...
Has the Jury Reached a Verdict?
Obviously, I'm biased. But so is Brad.
Therefore, allow me to quote few comments that were placed on Brad article's thread by readers whom I know to be reading my work (How do I know? Simple: They participate in my threads too) on a regular basis. These readers know exactly what I meant - Judge for yourself:
"High Yield Investor" writes:
Brad, you and Fortune are both good analysts with different perspectives. I have increased my ability to select stocks that fit my investment method from both of you guys. I believe both of you have selected commercial stocks as good high yield investments moving into 2017 and I agree. I'm staying away from eREITs for now since most yield below my minimum of 7% selection.
"Arctic Investor" writes:
I found this a bit too insulting to TFT considering you didn't actually refute any of the points he made in his series. His primary point is that ereits don't tend to perform well during periods of rising rates, and he showed some time periods to support that thesis... are you challenging that? Where's your supporting evidence?
What I am getting from the Fortune Teller series is that if you believe that interest rates will be going up this coming year, now might not be a good time to commit new money into the eREIT space. I agree with Fortune Teller regarding this view.
Brad, I see no conflict between Fortune Teller's viewpoint and yours.
Look again at FT's piece because it is what you could call a trading piece in that it asks only one question which is- what happens to reits when interest rates rise. It is not about long term investing. Some firms can go down for a bit and then recover. So the question is one of time-frames or timing. In point of fact he likes several stocks which you do as well. The devil is always in the detail.
The statistics shown by TFT is undeniable, irrespective of whether he considered other factors. I can believe everything Mr. Thomas says and yet to say that the drop was caused by investors panic/stupidity (pick your term) who react with their belly and the brain. Then what?? - to get out of the conundrum one would have to conclude that after a while blood will return to investors skull and the economic facts will prevail. Stupidity has its inertia time at which reits will be down exactly at TFT graphs are showing. He never claimed they are economically justifiable. He only has presented their existence. Each of us can then deduce his own conclusions.
It is an interesting conversion between Brad and TFT. However, I would throw a "wrinkle" into this conversation. That is, there is an assumption that the UST 10yr will be significantly moving up (i.e. yield) on the forth coming Fed rate hikes. I would just say this. Two things need to happen for the 10 yr to make this move. First, the short end of the yield curve needs to rise per the Fed projections that 3 rate hikes are likely this year and 2, that the longer end of the curve needs to rise with it. While I am in the camp that thinks short term rates will be hiked at least two, perhaps three times this year, I am not so sure that the 10 yr will follow suit. If this is true then a "flatter" yield curve will occur. In this scenario, the mREITs certainly will not perform as well as the eREITs. Since mREITs have moved up in share price fairly significantly since the election, one could predict a better entry price into mREIT shares as the market comes to the same conclusion.
Last but not least, our dear lady "RoseNose" writes:
You are well aware of all the REIT types and sectors they represent and by no means covered them in really the methods used by The Fortune Teller, showing how rising interest rates affect the price of the stock and in real terms to total return. However short each time period was, there was some very significant price deterioration. I just like to think TFT was just showing how important it is to consider this type of trend and buy when that time should appear.
These regular readers of both Brad and myself know the truth but you can't find the truth if you're not really looking for it, isn't it?
I have never seen Brad writing about:
- The major implications that the many changes in the (macro) landscape may have on eREITs;
- The elevated levels of risk and uncertainty that eREITs are currently facing;
- How higher rates/yields may severely affect eREITs;
However, I surely know that I haven't read all his work and I surely know that not writing about something doesn't undermine what he is writing about. Missing parts don't make the existing parts worthless!
I read many great articles of Brad that were (in most cases) very favorable regarding eREITs. It's hard to find eREITs that he doesn't like. Admittedly, I didn't bother counting but just like with any micro analyst, I believe that also in Brad's case, the buy vs. sell ratio, as expressed through his articles, is high; very high.
Risk Management is Key
There are very few readers in SA that get our fund's quarterly reports and (while they are not allowed to share any information about it in here!) they can testify that I'm pretty successful at what I'm doing. Yet, even I admit, this is not the point!
It's not the absolute return that matters but the return vs. the risks taken. Nobody would claim that giving your money to a poker player who succeeds in doubling your money is a good investment. Contrary to that, everyone would agree that returning 1/2 of the S&P 500 (NYSEARCA:SPY) return while taking 1/4 of the risk is a good deal.
Risk/reward is the name of the game, at least my game. Unfortunately, most investors look at investments from a too simplistic stance: If an asset is "safe enough" I'll buy it and accept the lower risk embedded into it whereas if an asset is "too risky" I'll refrain from buying it and skip on its embedded higher return.
This absolute, black and white, view is the wrong approach. A very safe asset can still pay too little as much as a very risky asset can pay "too much", i.e. more that it "supposes"/deserves" to pay. Appropriate investments are only those that reward investors enough for the risk taken, regardless of how low/high the risk is!
Choosing the right investments is, therefore, a relative game and the ability to distinguish between different risk/reward profiles is what makes one investor better than another.
There are many factors that investors need to ask themselves when analyzing/picking a stock but even the best company on earth - that ticks all the necessary boxes - may not tick the most important box of them all: Does this stock offer me enough reward for the risk I'm taking (even if that risk, in absolute terms, is considered to be very low)???
There are many very skilled authors in SA but most of them never managed money (to anyone) aside of their own, never held a risk management-related function and, in most cases, never used risk management systems, models or techniques to correctly and adequately evaluate/quantify the risks inside their portfolio and/or of the single holdings in it.
Most articles that you read here will tell you how good is a stock and make the case to buy it. Hardly ever you'll see an article that tells you what you should refrain from doing. I believe that anyone who held a risk management function becomes more skeptic; turns into a more "coward investor". I know I did.
While many authors point at what seems to be looking great, I point at what seems to be looking ugly. While many authors tell you what to buy, I tell you what to sell. Because you see? For me, it's not about (being) right or wrong, black or white, buy or sell. For me, it's mostly about calling the most reasonable/probable shots from both macro and quantitative perspectives, while using my brain (first and foremost) but also (appropriate) risk management-related tools, systems and models.
"Timing the Market" vs. "Adjusting to the Market"
On several occasions, I've been accused by Brad for trying to time the market. If that means that I'm more focused on the short term than on the long term I'm guilty as charged. I'm indeed more focused on the short term, i.e. one year at a time, and I'm trying to deliver absolute positive returns on an ongoing basis, whether it's my own portfolio, the fund's portfolio or other people money that we're in charge of.
Nonetheless, focusing on the short term doesn't mean that we don't have long-term views or goals. Furthermore, focusing on the short term has nothing to do with an attempt to time the market. Those are two different "allegations".
As always, allow me to provide a live, real-time example:
Remember the two separate calls to invest in the energy sector that I made in early 2016? Back then, I wrote that anyone who has a 10-year investment horizon should buy into the sector, mostly large caps, because energy prices are very low (in both relative and absolute terms) and, therefore, will most probably recover at some point along these 10 years.
Clearly, this is the opposite of an attempt to time the market. This was a genuine long-term call solely based on logic and common sense (combined with assigning a quite high probability to this scenario to unfold itself over time, based on our calculations). I had no idea that the recovery in energy prices will be so quick and so sharp. One year later, we sit on very nice profits, asking ourselves the exact same question that "The Clash" in their "Combat Rock" album asked: "Should I stay or should I go?"...
Let's assume we cash out now. Does that turn us into a market timers? No! At worst, it turns a long-term investment into a short-term profit. Neither our long-term view nor our pro-energy call has changed. The only thing that might have changed is, you guess right, the risk/reward profile! What was a very attractive risk/reward profile a year ago is now, pure and simple, less attractive.
Once again, the question that we ask ourselves is not can we make money in here. (The answer to this is yes); instead, we ask ourselves: Does the potential future reward compensate enough for the risks (that, by the way, decreased) takes?
I really like this example because not only that it explains the difference between "market timing" to "short-term thinking" but, more importantly, it also demonstrates the changes that may occur in the risk/reward profile over time, even when the reward is still there and in spite of the reduction of the risk level.
Neither at the fund nor elsewhere I'm trying to time the market. Instead, I'm either adjusting to the ever-changing landscape or implementing long-term decisions over short-term intervals.
Let's start with the latter:
When I write "implementing long-term decisions over short-term intervals" I mean that when a long-term decision is being implemented over a short period this isn't a "market timing"! Take, for example, my "buy energy" call in early 2016. This was a long-term call and, as a matter of fact, I made this call only for and because of the long term. Nonetheless, I wouldn't consider anyone diving into energy stocks in February, March, April or even May as trying to time the market. A long-term decision (I spoke about a 10-year time frame in this instance) that is being implemented over the course of few months is not, in my book, an attempt to time the market rather an attempt to locate a better/reasonable entry point.
Now let's move back to the former:
"Adjusting to the Market" means that if, for example, a new president is elected, and if, for example, he is expected to run a very expansionary fiscal policy, and if, for example, the Federal Reserve (as a result) decides to tighten its very loosened monetary policy - any (and surely all) of these examples does change my views, does affect my (macro) decisions and does cause me to adjust my (micro) positions accordingly.
By the way, the fact that I'm looking at (only) one year ahead doesn't mean that a short-term decision that is taken today won't last for many years to come, retrospectively changing its "status" (along the way) from a short term onto a long-term decision/implementation.
If such radical changes, such as the ones we are witnessing over the past three months, don't cause an investor - any investor for that matter - to (at least) think about the new/extra risks and high level of uncertainty - I wonder how such an investor defines "risk management" because, as far as I am concerned, this investor has no idea what risk management is about.
If you ask me what is the main difference between Brad's style to my own, I'd say that while Brad is analyzing assets/returns, I'm analyzing themes/risks. While Brad is looking for reasons to buy, I'm looking for reasons to sell. When it comes to investments I'm a very proud "coward"!
My/our methodology is not an attempt to "time the market" rather an attempt to adjust the "market to time"; Brad simply changed the order and, consequently, the meaning of the words (Unfortunately, not for the first time when it comes to my work/content).
We do, however, agree on one very important thing: Protect your capital at all costs! This is a bit surprising goal coming from someone who doesn't seem to be very minded of risks and from a DGI that is mostly concerned about the consistency, growth and safety of both the AFFO and dividends.
I always say that as much as I consider myself a DGI investor, I care about one thing and one thing only: total return or, using the way I prefer to phrase it, the best possible risk/reward profile.
- Risk management isn't about minimizing the risk because zero risk = zero return;
- Risk management is also not about maximizing the return because maximum return = very high risk;
- Risk management is solely about finding the best risk/reward plays out there; the investments/strategies that are expected to deliver the highest possible return for a one/set "unit of risk" or, alternatively, the lowest risk that needs to be taken to gain one/set "unit of return".
I/we am/are using lots of math and stats to quantify scenarios and probabilities that allow us to make macro calls. Only then, based on where we wish to go to (or walk away from), we are looking for the best micro elements that would fit into our macro views.
If I'm/we're bullish on eREITs - rest assured, I'll read Brad's (and few other fine authors') articles that would assist me in determining what are the current best picks. That would be in place for as long as we stick to our "bullish eREITs" macro view.
Unlike what Brad tries to tell you, this methodology has nothing to do with market timing! This is, pure and simple, a matter of adjustment to major changes in the landscape. It's in the heart and essence of risk management.
What is true/sensible (to do) now, at the end of January 2017, is very different from what was true/sensible back in July 2016, not to mention January 2016. Things change and so do views; with no intention whatsoever to time the market rather to adjust the market to the (ever changing) time.
Facts, no Fluff (or: mREITs were and still are better positioned than eREITs)
Instead of picking specific dates, I'll do a very simplistic drill that predominantly matches the calls I've made through my SA articles (as presented above):
- 3/31/2016-6/30/2016: Long mREITs (NYSEARCA:REM), eREITs (VNQ, IYR) and BDCs (NYSEARCA:BDCS).
- 6/30/2016-12/31/2016: Long mREITs and BDCs, short eREITs.
Let the charts speak for themselves:
- 3/31/2016-6/30/2016: Long mREITs, eREITs and BDCs.
- 6/30/2016-12/31/2016: Long mREITs and BDCs, Short eREITs
Need I say more?...
- It's important to note that should I have used my real top picks, the A-Team, this is what you would see (out of my long positions) for the entire period (3/30/2016-12/31/2016):
In more simple words, not only that I didn't "manipulate" the data, I've actually made my life more difficult by intentionally making my portfolio look less favorably than it really is. Should I have used my real holdings and the actual holding periods, things would have looked much better, in favor of my strategy/calls.
This is neither a rebuttal, nor an invitation for a "dogs fight".
I very much value Brad Thomas' work here although, admittedly:
- I believe that like most micro analysts, he is lacking/ignoring what I believe to be very basic elements of risk management.
- I'll always be a bit suspicious knowing that, as a micro analyst, there are all sorts of biases and possible conflicts of interests in his work, whether he admits so or not.
In any "top-down" type of market/sector evaluation, macro analysis comes before - and therefore, it's superior to - micro analysis. My style of analysis indeed adheres to the "top-down" method; it goes from macro to micro.
You may like it, you may not. Whether you like it or not, for itself, is neither a good enough reason nor a sound argument to dismiss my style or my work.
Starting with distinguishing between the "pools", i.e. asset classes, I wish to swim into those wish "cloudy water" I pass on. Only then, I look around the "pool", trying to locate the best spots, i.e. risk/reward plays, I wish to enter the water, i.e. single stocks, from.
I believe that it's not my "cloudy crystal ball" which should be in focus rather the very unwelcoming "cloudy water" that the eREITs pool is offering at present.
Adjusting to the ever-changing landscape has nothing to do with market timing. Not only that an adjustment to macro changes is an essential part of risk management but describing such an adjustment as an attempt to time the market is either a misleading statement or, even worse, an acknowledgement of not understanding what basic principles of risk management are.
Ask yourself: What does it take for a micro analyst to turn his back and go against a stock/sector that he/she makes a living out of?
Frankly, I'm still trying to figure this out myself too.
Disclosure: I am/we are long ARI, ARCC, BXMT, GAIN, HTGC, LADR, NEWT, NRZ, PSEC, STWD, TBT.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am/we are SHORT O, NNN, HR, HTA, DOC, ROIC, EQIX, VTR, WING