My Portfolio Strategy For Q3/2022

Summary

  • Most investors invest the majority of their wealth in stocks and bonds.
  • I prefer to invest the majority of my wealth in alternative investments like farmland, private equity, and REITs.
  • I believe that this approach will do particularly well in an environment of high inflation, rising rates, and high risk of a recession.
  • I do much more than just articles at High Yield Landlord: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »
Possbile Opportunities Ahead.

chaofann/iStock via Getty Images

Most people invest the majority of their capital in traditional investments like stocks and bonds.

The 60/40 portfolio, popularized in the 1950s, aims at maximizing returns while minimizing volatility by pairing stocks with bonds, and it has been remarkably successful over the past decades:

The performance of the 60/40 strategy

The performance of the 60/40 strategy (Schroders)

But past returns are not indicative of future performance, and what worked well in the past may not work so well in the future.

Today, bond yields are deeply negative when adjusted for inflation and taxes. As such, you are guaranteed to earn a negative real return, and despite that, you'll still pay some taxes to Uncle Sam.

Chart
Data by YCharts

Stocks, on the other hand, may offer positive returns but at what risk?

The world bank just announced that a global recession is almost inevitable at this point. Inflation is being felt at every level, from gas to food, and it is forcing consumers to spend less.

At the same time, the Fed is trying to cool down inflation by hiking rates at the fastest pace in decades. It just announced the first 50 basis point hike in 20 years, and several more are expected in 2022.

Adding fuel to the fire... China is still putting entire cities on lockdown, causing huge supply chain issues; and Russia illegally invaded Ukraine, causing a humanitarian crisis of massive scale and putting world peace in jeopardy.

Any one of these factors alone would be enough to cause a recession, but combined together, they are a perfect mix for an economic disaster according to some legendary investors like Ray Dalio and the 'Big Short' Michael Burry.

Burry recently explained on Twitter (TWTR) that:

"US Personal Savings fell to 2013 levels, the savings rate to 2008 levels – while revolving credit card debt grew at a record-setting pace back to the pre-Covid peak despite all those trillions of cash dropped in their laps. Looming: a consumer recession and more earnings trouble."

He added the following two charts from Bloomberg that show the sharp drop in U.S. personal savings coupled with a steep rise in consumer credit outstanding:

US personal savings drop in 2022

US personal savings drop in 2022 (Bloomberg)

Consumer credit outstanding is at all time high

Consumer credit outstanding is at all time high (Bloomberg)

Again, that's a perfect recipe for a consumer recession and more earnings misses.

If stocks were valued cheaply, perhaps they could cope with a recession, but with the S&P 500 (SPY) still trading at a historically multiple even as we enter a season of troubled earnings, there's little margin of safety:

The S&P500 is still priced at a historically high multiple

The S&P500 is still priced at a historically high multiple (Multipl)

To be clear, this doesn't mean that stocks will do poorly going forward, and I am still heavily invested in some specific stocks.

But I think it's fair to say that the risk-to-reward offered by the market isn't particularly compelling, and I probably wouldn't invest the bulk of my portfolio in stocks.

There's a real possibility that we face a lost decade, according to Ray Dalio, the biggest hedge fund manager in the world, and if you look at history, we are long overdue for one to occur:

Stocks and bonds are long overdue for a lost decade

Stocks and bonds are long overdue for a lost decade ("GMO")

What's The Solution Then?

Let me start by saying that there's no perfect solution and what works for me may not work for you.

With this disclaimer out of the way, I am heavily investing in alternative investments like farmland, private lending, REITs, and private equity.

My portfolio is unique in that most of it is invested in such alternative investments, and I only use traditional assets like stocks and bonds for diversification. Most investors do the opposite.

High Yield Landlord Portfolio Strategy

High Yield Landlord Portfolio Strategy (High Yield Landlord)

Why Do I Invest So Heavily In Alternative Assets?

In short, I believe that they offer materially better risk-to-reward than stocks and bonds in today's environment, and here are 5 reasons why:

#1) Profit from high inflation: Real assets are resilient to inflation because they are real, essential, and limited. To give you an example, apartment rents are currently rising the fastest in 15 years, resulting in rapid property price appreciation. Meanwhile, the debt used to finance these investments is being inflated away.

#2) Recession-resilience: Regardless of how the economy is doing, people need food, energy, housing, and transportation. If you own this vital infrastructure, you enjoy steadier and more predictable returns. This explains why farmland values are typically resilient to recessions and why REITs have historically provided nearly 2x better downside protection during recessions.

#3) High income generation: It is not uncommon for alternative assets to pay 6-8% yields while you wait for growth and appreciation. This is important today as we may face a lost decade.

#4) Lower volatility: Many alternative assets provide steady returns. Farmland is a great example as it kept appreciating even in 2008/2009. Moreover, they also provide uncorrelated returns. Farmland is uncorrelated to the returns of private equity investments for instance.

#5) Upside from democratization: Alternative assets are rapidly growing in popularity. Just 20 years ago, few invested in them. But today, they already represent ~1/4 of investors' portfolios, and by the end of the decade, Brookfield (BAM) expects institutional investors to invest up to 60% of their capital in alternatives. As this massive capital shift takes place, I expect the valuation multiples of alternative assets to rise, unlocking upside for those who make the shift early:

Alternative assets are growing in popularity

Alternative assets are growing in popularity (Brookfield)

But not all alternative investments are created equal.

A lot of investors are heavily betting on Cryptocurrencies like Bitcoin (BTC-USD) and Ethereum (ETH-USD) or even investing in NFTs, fine art, and other collectibles.

Technically, those are alternative assets, but they are not what I am interested in. I invest mainly in productive "real" assets (or backed by real assets) that are essential to our society and able to generate significant income.

Below, I highlight 3 alternative asset classes in which I invest particularly heavily.

Farmland

Historically, farmland has arguably been the best investment you could have made. It generated higher returns with lower risk than the stock market (SPY), bonds, real estate, gold (GLD), and even REITs (VNQ):

Farmland outperforms stocks, bonds, real estate and gold

Farmland outperforms stocks, bonds, real estate and gold (FarmTogether)

Farmland investing

Farmland investing (Farmland Partners)

Farmland has historically been such a great investment because its supply is limited, but its demand is always growing. Not only is the global population getting bigger, but just as importantly, the middle class is getting larger, resulting in more consumption. Moreover, unlike other real estate investments, there are no broken toilets or leaking roofs to deal with and the demand for farmland is almost perfectly recession-proof. It is the only asset class with a 100% occupancy rate. Just think about that.

Here's what Warren Buffett said about his farmland investment in his 2014 Berkshire Hathaway (BRK.B) investor letter:

"I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside. There would, of course, be the occasional bad crop, and prices would sometimes disappoint. But so what? There would be some unusually good years as well, and I would never be under any pressure to sell the property. Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm."

Farmland investing

Farmland investing (FarmTogether)

All of this remains true today, and therefore, I would expect farmland to continue delivering attractive returns in the long run (rent + appreciation), especially relative to its low-risk profile.

Despite that, most people have never considered investing in Farmland.

Why is that?

Well, until recently, it was almost impossible to invest in the asset class. Unless you had $10s of millions to invest, it would have been impossible for you to build a well-diversified and professionally-managed portfolio.

This changed over the past 2 decades with the IPO of two farmland REITs, Gladstone Land Corporation (LAND) and Farmland Partners (FPI), and the recent creation of crowdfunding platforms.

Gladstone Land & Farmland Partners logos

Gladstone Land & Farmland Partners logos (Gladstone Land & Farmland Partners)

LAND is today quite expensively valued, trading at a 60% premium to NAV, but FPI is undervalued in our opinion, trading at a 10% discount and offers attractive growth prospects. It is currently hiking rents by ~15% and with crop prices on the rise, we can expect growing farm profits in the coming years.

I invest in FPI, and on top of that, I also use the crowdfunding platform, FarmTogether, to complete my farmland allocation:

Farmland crowdfunding

Farmland crowdfunding (FarmTogether)

Crowdfunding comes with pros and cons.

On one hand, you get to earn higher yields and potentially, higher total returns over time. As an example, deals on these platforms commonly pay a 6-8% yield compared to just 1.5% for the farmland REITs. But on the flip side, most deals have a 10-year term and offer no liquidity so you need to be patient. Unless you have a long-term outlook, this isn't for you.

REITs

REITs are publicly listed commercial real estate investments. Research has shown that they are more rewarding and less risky than private real estate investments. Here are the results of 3 different studies on this topic:

REITs vs private real estate

REITs vs. private real estate ("EPRA")

REITs vs private real estate

REITs vs. private real estate ("NAREIT")

REITs vs private real estate

REITs vs. private real estate (Schroeder)

These results may shock you. After all, how can REITs be so much more rewarding if they are investing in the same asset class, commercial real estate.

But it actually makes sense when you think about it. I have discussed this topic at length in separate articles, but in short, here are 5 reasons why REITs outperform private real estate investments:

  • REITs enjoy large economies of scale.
  • REITs have access to public equity markets to grow faster.
  • REITs employ some of the best talents in the real estate sector.
  • REITs have superior relationships with tenants, banks, brokers, etc.
  • REITs are resilient to downturns because they are well diversified.

And best of all, since there are 100s of REITs across the globe, you can be picky and build a portfolio of undervalued companies to boost your yield, returns, and lower your risk.

At High Yield Landlord, we invest in 1 REIT out of 10 on average and currently hold 24 of them in our Core Portfolio:

High Yield Landlord selection process

High Yield Landlord selection process (High Yield Landlord)

Some of our Top Picks include:

  • BSR REIT (OTCPK:BSRTF): An apartment REIT that specializes in rapidly growing Texan markets. It is able to hike rents by ~20% but trades at a discounted valuation at the moment.
  • EPR Properties (EPR): An experiential REIT that owns social gathering places that are experiencing growing demand in the post-pandemic world. It pays a monthly 6.2% dividend yield and we expect it to grow at 5-7% per year, resulting in double-digit total returns.
  • STAG Industrial (STAG): An industrial REIT that owns e-commerce warehouses with rapid rent growth potential. Its biggest tenant is Amazon (AMZN), and it currently yields 4.4%, a historically high yield for this REIT.
E-commerce warehouse

E-commerce warehouse (STAG Industrial)

REITs have historically outperformed the broader stock market during times of high inflation, rising rates, and recessions. As we are facing all three, we think that REITs are very likely to outperform in the coming years, and this warrants a higher allocation.

Private Equity

The public equity market is quite efficient these days, but there are lots of opportunities on the private side of the equity market, especially in foreign markets. Smaller private companies tend to trade at smaller multiples because they are riskier and aren't liquid, but higher risk can lead to higher returns.

A few decades ago, most of these investments were reserved for high net worth investments, just like farmland, but these days, you can enjoy private equity returns by investing in some publicly listed vehicles.

Here you have two options:

You could invest in a company like Compass Diversified(CODI) which invests in private companies just like a private equity fund. We think that it is currently undervalued, trading at 4.1% dividend yield, and it has historically done far better than the S&P500:

Chart
Data by YCharts

Alternatively, you could buy shares of a private equity asset manager like Blackstone (BX). These companies typically co-invest in their own funds and then they also earn fees for managing them. They have also been very rewarding investments over time:

Chart
Data by YCharts

Currently, one of our favorite private equity opportunities is Patria Investments (PAX), which is the leading private equity asset manager in Latin America. It pays a 5.5% dividend yield and I believe that it offers 50% upside to its fair value.

Bottom Line

Most investors invest the majority of their wealth in stocks and bonds.

I prefer to invest the majority of my wealth in alternative investments like farmland, private equity, and REITs.

This approach has served me well in the past, and I believe that it will do particularly well in an environment of high inflation, rising rates, and high risk of a recession.

Many of these alternative assets benefit from inflation, aren't materially affected by rising rates, and offer recession-resilience. Best of all, their valuations are generally more reasonable than that of the broader stock market.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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This article was written by

Jussi Askola profile picture
54.37K Followers
Become a “Passive Landlord” with our 8% Yielding Real Estate Portfolio.

Jussi Askola is a former private equity real estate investor with experience working for a +$250 million investment firm in Dallas, Texas; and performing property acquisition in Germany. Today, he is the author of "High Yield Landlord” - the #1 ranked real estate service on Seeking Alpha. Join us for a 2-week free trial and get access to all my highest conviction investment ideas. Click here to learn more! 

Jussi is also the President of Leonberg Capital - a value-oriented investment boutique specializing in mispriced real estate securities often trading at high discounts to NAV and excessive yields. In addition to having passed all CFA exams, Jussi holds a BSc in Real Estate Finance from University Nürtingen-Geislingen (Germany) and a BSc in Property Management from University of South Wales (UK). He has authored award-winning academic papers on REIT investing, been featured on numerous financial media outlets, has over 50,000 followers on SeekingAlpha, and built relationships with many top REIT executives.


DISCLAIMER: Jussi Askola is not a Registered Investment Advisor or Financial Planner. The information in his articles and his comments on SeekingAlpha.com or elsewhere is provided for information purposes only. Do your own research or seek the advice of a qualified professional. You are responsible for your own investment decisions. High Yield Landlord is managed by Leonberg Capital.

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Disclosure: I/we have a beneficial long position in the shares of HOM.U; EPR; STAG; PAX; FARMTOGETHER; FPI either through stock ownership, options, or other derivatives. 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.

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