Nothing Performs Better in Times Like These Than Real Estate REITs
Stock-Markets /
Housing Stocks
Mar 17, 2010 - 10:44 AM GMT
By: DailyWealth
Dr. Steve Sjuggerud writes: Darn it. I should have known better...
A fantastic idea sat right under my nose, and I missed it. I will try not to let it happen again.
Let me show you what this investment is... how it was so obvious... and how to NOT miss it next time.
The investment is, historically, the best-performing asset in our current economic situation (at least by one measure).
Before I get to the specifics, let me back up and explain something about investing...
When it comes to investing, I know everything will work out just fine as long as I follow my rules.
I don't worry about my returns year to year (though I do have a few accounts up more than 100% in the last year). I know the returns will come if I just stick to the rules.
I don't beat up on myself at all for taking losses, either. Losses these days don't faze me a bit... Giving up small battles is simply a part of winning the war. Never let a small loss turn into a big loss. It's part of the rules.
So I don't get worked up over winners or losers... What do I get worked up over? NOT sticking to my rules. Argh! The worst is when your brain overrides your rules. If you do that, the rules aren't even rules anymore.
In this case, it was a missed opportunity...
I didn't follow my rules and invest heavily in an asset class I knew would perform best in the current situation. Why didn't I? Darn it, I have no idea!
The missed opportunity... the asset I SHOULD have bought... was real estate investment trusts (REITs).
Yes, real estate stocks. By my rules, a year ago, REITs were exactly what I look for...
REITS were 1) hated, 2) cheap, and 3) in an uptrend.
If I had simply, mechanically, pulled the trigger a year ago, I would have made another 100% gain in a year, by simply investing in a fund that tracks the REIT market (like the iShares Dow Jones REIT Index Fund, IYR).
My friend Meb Faber reminded me of my missed opportunity when he published a table showing what asset classes perform best when the spread between short-term and long-term interest rates is wide.
In short, you make a fortune in real estate stocks when the spread is wide. Right now, the spread between short-term interest rates (near zero percent) and long-term interest rates (approaching 4%) is at near-record levels.
Meb did a historical test, going back to 1973, of how various asset classes perform when the spread is at different levels. When the spread is above three percentage points, REITS are the top-performing asset class by a long shot – earning an astounding 24% a year.
Even when you step down a level (when the spread is between two and three percentage points), REITS are STILL the best-performing asset class, making you 15% a year.
These numbers are exceptional. So is now a time to buy REITs? I don't think so. They don't fit my rules anymore...
The uptrend is strongly in place. And investors still expect bad things from commercial real estate. But they're far from cheap.
The index of REITS is up over 100% in the last year. The real estate those companies hold, those buildings, didn't double in value... The shares went from underpriced a year ago to overpriced today. Now, REITs have a dividend yield of only 4% and are selling at near two times book value...
That's not a deal worth chasing.
Don't worry about your returns. And don't worry about taking losses. If you follow the rules (which we've laid out over the years in DailyWealth), you will be just fine.
Don't celebrate your winners or kick yourself for having losers. Instead, beat up yourself over not following your rules... like not cutting your losses or missing opportunities that fit your rules (like REITs a year ago).
It works for me... and it will for you, too. I'm certain of it.
Good investing,
Steve
http://www.dailywealth.com
The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.
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