Contributed by Ho Cheow Seng
"The study of history is a powerful antidote to contemporary arrogance. It is humbling to discover how many of our glib assumptions, which seem to us novel and plausible, have been tested before, not once but many times and in innumerable guises; and discovered to be, at great human cost, wholly false."
- Paul Johnson
Friday, January 2, 2009
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Market price understates the value of the shares
I invested in a REIT a few months ago at a dividend yield of 6%. The price has dropped by 50% during the past few months, due to the global financial crisis. The REIT now yields 12%.
During the economic recession, the rentals may fall. If it drops 50%, the REIT will still yield 3% based on my purchase price or 6% based on its current price for a new investor.
Eventually, the economy will recover and the rentals will go up. The price of the REIT will also go up.
There is little risk that the REIT will go bust, as it comprise of a few good, well managed properties. The borrowings are capped at a certain percentage (maybe 30%) of the value of the assets.
The current price represents the price that a distressed holder has to sell the shares and the lack of buyers. The price is low, compared to the intrinsic value of the assets and the rental income. According to the experts, the "valuation is attractive".
For a long term investor, the current prices are attractive. When the economy recovers, the price will run up rapidly and many investors will not be able to catch the low prices.
During the economic recession, the rentals may fall. If it drops 50%, the REIT will still yield 3% based on my purchase price or 6% based on its current price for a new investor.
Eventually, the economy will recover and the rentals will go up. The price of the REIT will also go up.
There is little risk that the REIT will go bust, as it comprise of a few good, well managed properties. The borrowings are capped at a certain percentage (maybe 30%) of the value of the assets.
The current price represents the price that a distressed holder has to sell the shares and the lack of buyers. The price is low, compared to the intrinsic value of the assets and the rental income. According to the experts, the "valuation is attractive".
For a long term investor, the current prices are attractive. When the economy recovers, the price will run up rapidly and many investors will not be able to catch the low prices.
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