I was taking a taxi the other day, and the taxi driver started talking about investing in the markets. He said he was buying the S&P index and hoped it would continue to go up.
On a somewhat related note, I received an email the other day from someone asking my impression of Tesla stock, just as the stock was approaching a lifetime high, and asked whether they believed it was a good time to buy (you can see from the image that the stock is up by over 9% the day this article was written).
A few weeks ago I received an email from someone asking my opinion of Bitcoin.
Last spring I received a few emails from people asking about investing in cannabis.
There’s clearly a herd mentality with regards to investing, which oftentimes defies investing logic and sometimes borders on mania. Bitcoin approaching $20,000, cannabis, and Tesla all remind me of an investment that’s best left alone until the euphoria subsides.
I’m not suggesting that Bitcoin, cannabis, or Tesla are poor investments. What I am suggesting is that there’s a problem when people read in the papers or speak with a friend who happened to make a killing on a particular investment, and the FOMO takes over the better side of logic. I have an issue when people enter a market, not because the fundamentals make sense, but because the herd is moving in that particular direction, and asset prices defy reasonable valuation.
My thought has always been that when the herd moves left, I move right, and vice-versa.
I’m not a contrarian investor. I just try to stay away from an investment that appears frothy, one that I don’t understand, or when it looks like everyone is buying something just because everyone else is. Bitcoin, cannabis, Tesla stock, and to a lesser extent the S&P (at the time of writing this article) are examples of herd-mentality investments.
The Merits of Being a Value Investor
I was speaking with a friend who happened to read my article on preferred shares last spring. She was staying as far away from the Canadian preferred share market as possible because it was trading at multi-year lows.
My comment in return was “that is exactly why you want to enter the market now!”
I wrote the article on the Canadian preferred share market on May 28th, 2019: Are Canadian Preferred Shares an Asset You Should Consider Holding in Your Portfolio?
Since I wrote that article, I expanded my preferred share portfolio from 11 holdings to approximately 60. I own a 50:50 mix of perpetual and fixed income shares, considering they typically trade somewhat counter-cyclically to one another. I avoided the ETFs specifically because they are very fixed-reset heavy.
I’m not writing the above to tell you to invest in preferred shares. Rather, my perspective is when an asset or asset class might be out of favor is not the time to run away but instead the time to consider running into that asset class.
Preferred shares, as an asset class, are trading at multi-year lows. If you can construct an appropriate portfolio, you potentially have a lot of upside room, unlike buying Tesla at its peak or Bitcoin at $20,000. And by the way, my preferred share portfolio is up, not including dividends, by 3% in the last year, and approximately 8.5% including dividends. That’s pretty good for a fixed income investment.
Other examples of Out Of Favor Assets
There are other out of favor asset classes and shares that I have invested in over the last few months. For example, I recently bought shares of Simon Property Group (NYSE: SPG), which is down by about 50% in the last few years. The stock is paying a 6% dividend with a solid balance sheet and is a best-in-class REIT trading below NAV (net asset value) that owns class-A malls around the US.
I also recently bought shares in CoreCivic (NYSE: CXW) that is also trading at multi-year lows, down 20% since last July and is paying a healthy and very well-covered 10.5% dividend. Because of the perceived political risk, the market sentiment on the stock is quite negative at the moment, and many people have jumped off the CoreCivic ship, but the company is healthy, with growing EBITDA, flat debt, improving debt metrics, and, best of all, it’s recession-proof.
As an investor, you need to have an investment thesis and a core belief in what you are investing in. Next, you need a long-term plan. And most of all, you can’t chase the latest and greatest stock or idea of the day.
The ideal is to build a stream of passive income that pays you regardless of what happens in the markets.
Let me provide a couple of more examples:
Last August I wrote the following article: What Are Real Assets, and How to Diversify Your Wealth by Investing in Them?
In the article, I discussed my idea that real assets would prove a long-term, multi-decade, opportunity to invest in the world’s infrastructure. That includes wind farms, highways, airports, buildings, malls, farms, energy, renewables, and pipelines. Basically, backbone infrastructure that populations can’t live without.
Since writing that article, BAM (Brookfield), NYSE: BAM, stock is up 38%, BUT Brookfield Property Partners, NASDAQ: BPY, is down by about 2%. BPY pays a 7% dividend and is a company run by one of the best property managers in the world. Although I do own BAM, I am buying more BPY, because it’s slightly down and because I believe in management and in their long-term vision.
Another example is investing in real estate.
Many people see their friends do well in real estate, so they run to buy real estate as well. The market for condos, homes and even multi-unit-residential is going crazy in many markets in North America, especially in Toronto where I live.
I am not of the opinion that multi-unit residential has a lot more room to go up in price, so anyone without an investment thesis who is buying into this market is likely already buying at close to its peak.
Now, what do I mean about an investment thesis?
In this article, Here’s How to Buy an Apartment Building and Make a whopping 110% in Three Years, I explain how to buy a building and then flip the real estate in a few years and walk away with a huge return.
So I am not just suggesting that you should buy real estate and then wait. I am suggesting that you develop a plan around your purchase before you dive into the market. Otherwise, you could end up buying high with little upside potential.
The idea behind being a “value investor” implies you are buying stocks, or assets, that are conceivably out of favor and are selling below their intrinsic or book value. Brookfield Property, preferred shares, and CoreCivic are all examples of value investing.
You can do extremely well by developing an investment style and game plan, studying those specific markets, and then taking advantage when others are running. There’s a reason that Warren Buffet said: “Be fearful when others are greedy, and greedy when others are fearful.”
Disclosure: I am not an investment advisor and this is not investment advice. Nothing in this article can be relied upon by any person for any reason. Should you decide to buy any of the stocks in this article, you do so at your own risk.