Day: June 4, 2011

How to Make More Returns on REITs

How to Make More Returns on REITs

Before I start this evening, I want to offer corrections to my last piece on REITs.? Sorry, data glitch, and the results are a little different but the conclusions are unchanged.

Here is the correct regression for Mortgage REITs:

And the the correct regression for equity REITs:

Why the change?? The main difficulty was that the first set of regressions was disaligned time-wise because the twenty-year Treasury yield was not estimated by the Fed for about ten years.? This calculation adjusts for that.? Interesting that when you use the correct data, mortgage REITs fit less well.? That’s an odd happenstance.? Equity REITs, are around the same — though the t-statistics look worse because I included two more points on the curve.

But now to the point of tonight’s piece.? After my last piece, one reader said:

This sounds like an interesting scenario to use your grid analysis, where your quantiles might be ranked using (1) equity/mortgage REIT spreads and (2) monetary policy (measured by either short term rates or yield curve slope).

I decided to try it, except for one thing.? I thought that using the spreads or yields in quintiles would have too much information about the future that if an investor knew the limits of how high or low yields could go, it would be too simple.? The surprise was this: I tried it for fun, and it was no better than what I will show you.

I chose two variables:

  • Yield curve slope, measured by twenty-year yield less one-year yield
  • Momentum, measured by amount the price is over the ten-month moving average.

I divided both up by quintiles, reasoning that an investor focused on momentum and the yield curve would have enough data from history prior to 1972 to generalize what would be favorable and unfavorable conditions for investment.

Here is what I found for Mortgage REITs:

and what I found for Equity REITs:

Both data series? confirmed one idea.? Momentum matters.? (Now the yield curve matters, but not so much.)? So I constructed a rule to be invested in REITs if they were in the third momentum quintile or higher, or be invested in one year Treasuries otherwise.

So what were the results?? Equity REITs:

The difference in returns is 20.8%/year following the strategy versus 12.0% not following the strategy.

Now what for Mortgage REITs, that properly despised subindustry group?

The difference in returns is 22.4%/year following the strategy versus 5.1% not following the strategy.

The bizarre result is that though equity REITs trounced mortgage REITs? over 38+ years as indexes, the momentum strategy makes mortgage REITs do better then equity REITs.? That is probably because the returns on mortgage REITs are more autocorrelated — they streak more.

I just say wow, and wonder at it all.? I have some daily models for interest-rate sensitive sectors that I haven’t trotted out yet, which switch between mean reversion and mean aversion that do better than this, but I don’t believe them because they are too good.? It is possible to trip onto something parsimonious that explains history if you are smart enough.? I prefer stuff where I have a theory behind it, as with momentum, where people are slow to catch on.

Now, after all of this, I will tell you I have no money riding on this.? None. Nada. Null.?? Part of this is that it would not be so good when implemented in real-time, and mortgage REITs are a thin industry.? More of it comes from an aversion to what might happen if/when momentum investing becomes pervasive.? We had a taste of that in Summer 2007, where momentum strategies blew up for a short time.? For those willing to see it through, though, it did not amount to much.

So long as? momentum is an incidental strategy to the market, it can work well.? It can never be the main strategy of the market lest matters go totally nuts.

Book Review: Miles Away… Worlds Apart

Book Review: Miles Away… Worlds Apart

This book is unusual.? Let me give you my quick view: this is a book written by an Orthodox Jew regarding an unscrupulous Jew who used his abilities to communicate to swindle others in a Ponzi scheme.? This is a surmise, because of all the ill-will toward Jews created after the scandal broke, the author tries to differentiate between one who is nominally/ethnically a Jew, and one who takes the ethical principles of Rabbinic Judaism seriously.

As such, this is really two books.? One on the author’s congregation, friends, and extended family, and the good things that they have done as Orthodox Jews, and a book on how the author concluded earlier than anyone else that Scott Rothstein was a fraud, and probably running a Ponzi scheme.? (Alternatives were money-laundering, drug transport, etc.)

I appreciate the logic that the author brings to the table in the book.? I myself have uncovered a variety of investment scams from life settlements, collateralized stock loans, Nigerian schemes, and penny stock promoters.? The author zeroed in on the lack of data to verify the cash flows, and the unlikelihood of so many cases being handled by one man, Scott Rothstein.

As an aside, always be wary when you meet someone that wants a lot of information, but is averse to sharing information.? Divide-and-control is an excellent way to gain power in an organization.? Fight it by connecting with others.

Once the author came to a firm conclusion that Scott Rothstein was dishonest, he faced the question of where to take the information.? Because Rothstein had used some of his clients’ money to buy favor with state and local officials, he decided to go to the FBI as the most competent interested federal organization.? After less than two months after talking to the FBI, the Scott Rothstein’s organization collapsed from a lack of cash flow, partly due to the efforts of the author to convince potential investors not to invest.

And now Scott Rothstein and more than a dozen of his associates are doing time in jail, because of a $1.4 billion Ponzi.? Not the hugest, but give the author credit, he kept it from becoming bigger.

One final note: the title of the book is delicious, because the author and the felon were miles away in distance, but worlds apart in what they valued.

Quibbles

There are a few misspellings, but nothing major.

I understand why he brings up the good deeds of Orthodox Jews, but to have it occupy so many pages of a book dealing with financial fraud will leave some cold.

Also, I disagree with the way Rabbinic Orthodox Judaism interprets the Law (Torah).? We are not to create a hedge around the Law, as the author states.? We cannot be holier than God.? To add to God’s Law is to take away from God’s Law and substitute Man’s Law in its place.? Far better to understand the Law the way Y’Shua Ha’Mushiach (commonly called Jesus) did, and understand that it applies to our hearts and actions, as best expressed by the Larger Catechism Questions 91-153.

Who would benefit from this book:

Most people would benefit from this book — it will make you aware of financial fraud on two levels: the way that the finances of a fraud don’t make sense, and the outward aspects of the life of one committing fraud.? If you end up more suspicious of those offering opportunities that are too good to be true, that will be worth more to you than the price of the book 100 times over.

If you want to, you can buy it here: Miles Away… Worlds Apart.

Full disclosure: I asked the author for this book, and he sent it to me.? I read and review ~80% of the books sent to me, but I never promise a review, or a? favorable review.

If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.

Theme: Overlay by Kaira