REITs and Value investing?

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jadela
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REITs and Value investing?

Post by jadela »

Thinking through my AA and trying to find something I can stick with long haul. Two questions:

1) what is the take on REITs? I see them recommended often as a core asset class / part of the economy (Core 4 etc). Yet Bogleheads recommended allocations such as 3-fund don't use REITs. Why?

2) I've read a lot of investing wisdom from Buffett/Munger/Graham, which are widely respected yet I realize they seem to be primarily value investors. I've read a lot the forum of skeptical view of value factor & tilts. Is there a difference here between value investing & value factor investing? For example, when asked how to manage his estate's money, Buffett said put it in SP500 (LCB) + treasuries and get back to work. That doesn't seem very value-investing-ey to me. What am I missing here?
brad.clarkston
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Re: REITs and Value investing?

Post by brad.clarkston »

To me holding a REIT tilt is second after a SCV tilt, both are good.

I would recommend you do allot of research on REIT's before jumping in. I ended up researching each company one by one before buying stock as there are a bunch of sub-factors in the segment.

I've sold off my REIT index ETF and most of my dividend stocks I just hold O (Realty Income) and SRET ETF (Global X FDS Superdividend) in my Roth.
SRET holds most of the ones I would want anyway or used to but that's another subject. I did learn how to read annual and quarterly reports because of REIT's so it's not all bad.

Once the market stops kicking us in the teeth I'll probably dive back in but for the time being I'd stay away from shopping mall and small retail sub-sectors.
Only a Sith deals in absolutes
squirrel1963
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Re: REITs and Value investing?

Post by squirrel1963 »

1) what is the take on REITs? I see them recommended often as a core asset class / part of the economy (Core 4 etc). Yet Bogleheads recommended allocations such as 3-fund don't use REITs. Why?
I think for the most part we value simplicity for good reason. A 3-fund or a 4-fund lazy portfolio will give the biggest bang for the buck. In fact I would argue that a two fund portfolio (total world stock index fund and total bond market index fund) will be okay for most people.
There are however many portfolios which include portions of some asset classes, and REIT is a very common one. I have about 10% of the portfolio in REIT on the grounds that in many scenarios REIT will give you good protection from inflation. The biggest caveat of a REIT is that it is incredibly tax inefficient, so typically you would only do it in an IRA, 401K or variable annuity.
FWIW my portfolio is about 50% total stock market index funds, 10% REIT funds, 25% TIPS and 15% treasuries (a bit more complex but this is the gist). I want a strong inflation protection because I'm retired.
2) I've read a lot of investing wisdom from Buffett/Munger/Graham, which are widely respected yet I realize they seem to be primarily value investors. I've read a lot the forum of skeptical view of value factor & tilts. Is there a difference here between value investing & value factor investing? For example, when asked how to manage his estate's money, Buffett said put it in SP500 (LCB) + treasuries and get back to work. That doesn't seem very value-investing-ey to me. What am I missing here?
This is I think somewhat controversial among Bogleheads. Some think you should just buy the market (SP500 fund or total stock market fund) and get market returns, and that any deviation from this implies portfolio tilt -- value tilt in this case. Some people like this some don't. There have been periods in which value funds have done better than SP500. Supposedly lose less value during recessions and bear markets.
In reality you'll probably find multiple approaches. I do hold 5% of BRKB as part of my US stock allocation.

Another controversial topic is funds which give you higher exposure of dividend yielding stocks. This is also hugely controversial. And again I do have some of these either. I am definitely not a purist.

All in all, it all depends on how much time and effort you want to dedicate to your portfolio and what are your goals. I would recommend understanding which goals you want to achieve if you haven't done it already, and from here read related threads to understand the pros and cons of each asset class, especially in relationship to each other. Or you can also give a better explanation of what your needs are to get opinions which are more relevant for your goals and situation.

Without knowing anything else, I would just say that in general during the accumulation phase it probably doesn't matter too much to have a REIT asset class because in general the stock market as a whole is expected to outperform inflation anyway. Once you get close to retirement or you are retired, than you are spending out assets and want to preserve purchasing power, so having some REIT would make sense IMHO.
gougou
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Re: REITs and Value investing?

Post by gougou »

Some REITs such as office and retail REITs are pretty cheap now. Value investors must like them because they trade at big discount to the underlying buildings they own. But as interest rate rises those buildings could drop in value. Apartment REITs and industrial REITs appear to be good hedge against inflation but they are more richly valued.

I think the most important thing in investing is that you need to have an asset allocation, be diversified and stay the course. I think it's fine to have a value tilt but you need to be careful not to chase performance.

Value investing provides a framework to evaluate whether some investment is undervalued or overvalued, and value investors aim to achieve a superior risk-adjusted return. It's probably not an easy thing to do.
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jadela
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Re: REITs and Value investing?

Post by jadela »

That makes sense, thank you.

I'm squarely in the accumulation phase (36yo).

I guess the real question I'm asking in (2) is: is there a difference between "value investing" as Buffett would discuss it, and "value factor investing"?
Valuethinker
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Re: REITs and Value investing?

Post by Valuethinker »

jadela wrote: Fri Jun 17, 2022 12:55 am That makes sense, thank you.

I'm squarely in the accumulation phase (36yo).

I guess the real question I'm asking in (2) is: is there a difference between "value investing" as Buffett would discuss it, and "value factor investing"?
Absolutely.

20%+ of the value of Berkshire Hathaway was accounted for by its holding in Apple (probably less now). BH also owned/owns newspapers, railways, candy company, Gilette/P&G, Heinz, Coke etc.

What Buffett and Munger seek is a "wide moat". A business that by virtue of its market position has a superior return on capital in the long run. Usually characterised by a management team that is obsessed with running their business, rather than the size of their remuneration. That is very cautious with the deployment of capital-- treats shareholder money as carefully as their own. BH's own HQ is tiny (20-30 people?) and whilst Buffett & Munger are ruthless in their deployment of capital they do not take active operational decisions in the constituent businesses.

Buffett has a list of companies he watches (small, now that he is so huge and it takes a big deal to "move the needle"). And waits for when these businesses become available at attractive prices.

https://www.amazon.com/Essays-Warren-Bu ... 139&sr=8-3

is well worth reading. Organises Buffett's thoughts by topic area.

(If Buffett were said to be a Factor investor, then what BH is is:
- low volatility investor
- leveraged (via the insurance company)

Add to that Buffett's long term patience, that he can wait for market cycles to move his way. BUT it's gotten harder. Precision Castparts he has had to write down. Heinz has struggled, etc)

Understand this. Buffett makes it sound simple, and easy. But there is only one Warren Buffett-Charlie Munger combination. It is not simple, and it is not easy.
LFS1234
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Re: REITs and Value investing?

Post by LFS1234 »

jadela wrote: Fri Jun 17, 2022 12:04 am Thinking through my AA and trying to find something I can stick with long haul. Two questions:

1) what is the take on REITs? I see them recommended often as a core asset class / part of the economy (Core 4 etc). Yet Bogleheads recommended allocations such as 3-fund don't use REITs. Why?

2) I've read a lot of investing wisdom from Buffett/Munger/Graham, which are widely respected yet I realize they seem to be primarily value investors. I've read a lot the forum of skeptical view of value factor & tilts. Is there a difference here between value investing & value factor investing? For example, when asked how to manage his estate's money, Buffett said put it in SP500 (LCB) + treasuries and get back to work. That doesn't seem very value-investing-ey to me. What am I missing here?
Your reading list is good. It is valuable to have a good understanding of these things even for those who elect to follow a fully passive Boglehead path. Those who have zero understanding of where value comes from are those who are most likely to react irrationally during market fluctuations.

1.

A few things to keep in mind with REITS: they are required by law to distribute (rather than retain) the vast majority of their income, which typically for the most part is taxed to the distributees at ordinary income tax rates rather than at the (lower) long-term capital gains tax rates. If you are in the accumulation phase and plan to reinvest all dividends (rather than spending them for consumption), these investments would be very tax-inefficient unless they're in tax-deferred accounts.

The fact that REITs are required to distribute out all of their income can leave them short of funds at the very occasions when real estate bargains abound; and since REIT prices tend to be low during times of depressed real estate markets, it is expensive for them to raise new equity issuance money at the very times when it could be put to good use.

2.

Buffett/Munger/Graham look (or in Graham's case, looked) at companies individually and try to figure out when their stocks are trading for a whole lot less than they actually are worth. The traditional value investor stops there; Buffett/Munger don't stop there - they favor companies with great future prospects, preferring to buy great companies at good prices, rather than so-so companies at great prices. Over time, the former category yields much better investment results.

The problem with this kind of investing is that few people actually can do it well, especially at scale, and especially without taking long breaks during periods of slim pickings. Boglehead-type investing in low-expense, highly diversified index funds consistently over decades requires minimal time and effort and no special skills, yet yields better investment results than those obtained by the vast majority of active investors.

It makes perfect sense for Buffett to suggest to the vast majority of the population, including the manager of his estate (in the case of bequests to his wife), to follow the latter path instead of the former. Buffett and Munger will continue to follow the former path because they can. The overwhelming majority of the population, including professional trustees, cannot.

"Factor investing" is something spit out by academics and their computers. "Value" is one of the "factors" they use. You can google "factor investing" for more details.
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jadela
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Re: REITs and Value investing?

Post by jadela »

Thank you for the replies and explanation.

It seems as that you all are saying that yes, value investing and value factor investing are different things.

Based on that, I would summarize as...

Value investing is what Buffett et al try to do. Buy great companies *individually* w/ a moat at good prices, and hang on. Don't buy unless meets there criteria. Takes a holistic view of the business. This is essentially an individual stock / business picking framework and mindset. Very hard to do, but probably good mindset for any small fun/speculative money portion of portfolio.

Value factor investing is one of many factors academically derived (Fama French et al) and tries to skew toward value, quality, momentum and other factors. Major difference from value investing is that it's done at scale via an index and structured screens (e.g. DFA, Avantis) rather than buying individual stocks as Buffett does.

Is this a good summary?
Last edited by jadela on Fri Jun 17, 2022 8:00 am, edited 1 time in total.
investuntilimrich
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Re: REITs and Value investing?

Post by investuntilimrich »

I like some REITS but of course you really need to understand what you're buying and it takes a lot more due diligence. I am not buying any more at this time but I did pick some up in 2020. Rents have increased quite a bit in that time for apartments (and I assume storage space too although I'd be a little concerned how the later would hold up in tough times -- I have not researched it but I got rid of my holdings related to those which was not much to begin with).
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Re: REITs and Value investing?

Post by grabiner »

My logic for overweighting REITs is that a large portion of real estate is not publicly traded. Therefore, a total stock market fund holds real estate at its weight in the stock market, rather than in the investment universe. Overweighting REITs compensates for that effect, and in a more diversified way than owning a rental property does.
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jadela
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Re: REITs and Value investing?

Post by jadela »

That makes sense, thanks for sharing the thought process.

Regarding value factors (and I think REITs too): the main counter argument I hear is that SC/SCV have not consistently outperformed LCB since papers were published.

Was consistent outperformance the point though (durable/consistent premium)? Or was the point that SC/SCV outperform sometimes and aren't perfectly correlated to the market, so adds a diversification & rebalancing benefit, yielding a higher total return at the end than without them?
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JoMoney
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Re: REITs and Value investing?

Post by JoMoney »

A total market fund holds REITs at market weights.
There is a ton of real estate represented in the publicly traded stocks, companies like Walmart own tons of property on their books and even operate real estate business segments to manage it, it's just not incorporated as a REIT, and the tax treatment for the investor is better because it isn't.
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Re: REITs and Value investing?

Post by Outer Marker »

After decades of slicing and dicing (SCV and REITS) - with disappointing results - I finally threw in the towel and simplified to an essentially 3-fund portfolio.

I do however, hold Berkshire. It is my only "individual" stock, which I hold in taxable for its extraordinary tax efficiency. It's about 10% of my equity exposure.
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jadela
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Re: REITs and Value investing?

Post by jadela »

Outer Marker wrote: Wed Jun 22, 2022 8:00 am After decades of slicing and dicing (SCV and REITS) - with disappointing results - I finally threw in the towel and simplified to an essentially 3-fund portfolio.

I do however, hold Berkshire. It is my only "individual" stock, which I hold in taxable for its extraordinary tax efficiency. It's about 10% of my equity exposure.
Got it. My question is about expectations: What were you expecting as you held it--consistent outperformance or occasional stretches with rebalancing? Something else?
tibbitts
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Re: REITs and Value investing?

Post by tibbitts »

jadela wrote: Fri Jun 17, 2022 4:30 am Thank you for the replies and explanation.

It seems as that you all are saying that yes, value investing and value factor investing are different things.

Based on that, I would summarize as...

Value investing is what Buffett et al try to do. Buy great companies *individually* w/ a moat at good prices, and hang on. Don't buy unless meets there criteria. Takes a holistic view of the business. This is essentially an individual stock / business picking framework and mindset. Very hard to do, but probably good mindset for any small fun/speculative money portion of portfolio.

Value factor investing is one of many factors academically derived (Fama French et al) and tries to skew toward value, quality, momentum and other factors. Major difference from value investing is that it's done at scale via an index and structured screens (e.g. DFA, Avantis) rather than buying individual stocks as Buffett does.

Is this a good summary?
I don't agree at all: "value" and "value factor" are two words for exactly the same thing. Of course between approaches there are different measures of value and how individual investors apply screens, the degree to which an investor applies them passively vs. actively, etc. but there's absolutely zero difference in the terms.

You're assuming that by adding the word "factor" an investor is adding other factors to their approach (momentum, etc.) but that's not implied by adding the word "factor."
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Re: REITs and Value investing?

Post by Valuethinker »

tibbitts wrote: Wed Jun 22, 2022 8:54 am
jadela wrote: Fri Jun 17, 2022 4:30 am Thank you for the replies and explanation.

It seems as that you all are saying that yes, value investing and value factor investing are different things.

Based on that, I would summarize as...

Value investing is what Buffett et al try to do. Buy great companies *individually* w/ a moat at good prices, and hang on. Don't buy unless meets there criteria. Takes a holistic view of the business. This is essentially an individual stock / business picking framework and mindset. Very hard to do, but probably good mindset for any small fun/speculative money portion of portfolio.

Value factor investing is one of many factors academically derived (Fama French et al) and tries to skew toward value, quality, momentum and other factors. Major difference from value investing is that it's done at scale via an index and structured screens (e.g. DFA, Avantis) rather than buying individual stocks as Buffett does.

Is this a good summary?
I don't agree at all: "value" and "value factor" are two words for exactly the same thing. Of course between approaches there are different measures of value and how individual investors apply screens, the degree to which an investor applies them passively vs. actively, etc. but there's absolutely zero difference in the terms.

You're assuming that by adding the word "factor" an investor is adding other factors to their approach (momentum, etc.) but that's not implied by adding the word "factor."
Value Investing is the older term and is more general in its application. Lots of active investors are Value Investors.

You can be a Value investor without investing via value factors.

Value Factor Investing really originates with Fama & French's paper and is an academic attempt to get to grips with what the "secret sauce" was of the long term outperformance by value investing strategies. By focusing on specifically identifiable quantitative factors, it is less general (and less ambiguous) in its remit than Value Investing.

By and large the passive-like implementations, such as value tilted ETFs, are using Value Factor Investing i.e. a quantitatively driven approach.

Warren Buffet is a Value Investor. He's not a Value Factor investor *unless* one includes Low Volatility Factor as a form of Value Factor Investing (I don't think most people would).
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