thepupil

You're buying this for $200K/unit

ELME used to be called "Washington REIT". It was (is) a perennial underperformer and was previously a multi-asset, regional focused REIT, an oddball in world where REIT mafia wants large liquid single asset, but multi-geography REITS. In the 10 years before covid (12/31/2009-12/31/2019) Washington REIT returned 5.5% whereas REIT index returned 12.5%. 1999-2009 it atually slightly OP'd (12.3%.yr vs 10.9%). Washington REIT became "ELME" after they fire saled all but one of their remaining office buildings to Brookfield in '21. At the time it looked like WRE was optimizing optics by selling to BAM fro an 8.5%+ cap rate. BAM then put like 80% leverage on half the portfolio and decreased their equity consideration considerable. I assume BAM will lose every single one of those buildings given the floating rate high LTV debt they put on it. WRE took the proceeds from that and paid off debt and bought two or three multifamily properties in atlanta at steep prices. with hindsight, the office sales were probably good. So WRE basically did what all the cool kids were doing, bought sunbelt multifamily at peak values. they changed their name to ELME and are trying to improve their margins/operating platform. I think what matters more than the past is that you have a low leverage portfolio of 8,900 units. The question I'm trying to answer is "wreckability". Can an activist get involved and what roadblocks can ELME put up. I can't find if they've elected MUTA in their bylaws and need to understand the board a little better. But even absent any kind of event, I think there's a case to be made for just owning it in its current mediocre state. Just buy it and make a 5.2% divvy + growth of a few percent. 8% / yr with optionality on much more w/ some kind of positive change. It's only a $1.2 billion company, easy to be swallowed up or fought. DC is an unglamourous investment destination and people will say none of the public guys want this portfolio (true) and that PE guys don't want to add to their DC weighting. I don't have evidence to refute that, but there's a price at which I just hold my nose and buy and <$200K / unit for units that rent for $1,900/month...that just feels too afforable to me. housing shouldn't be that cheap.

Well that’s a hell of a lot cooler than a bond!!! Congrats!

I think @TwoCitiesCapital was talking about constant maturity long durations, which would have done very well over the time frame. I have tried to find a benchmark/performance for this in the past with no success. I think this would be competitive (not sure more) with equities for much of the past few decades. If he's talking about bond index vs stock index, obviously stock index done much better than bonds. no idea why he'd say bonds done better.

I bought the ROIC 6.75% of 2028 at $98.78 / 7% yield. These are a little low in duration for my taste with a duration of 4 ish. Just a low risk 7% return. nothing more, nothing less. zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz

I think it might finally be time to buy ELME. Don’t love the mgt, don’t love the assets, but we’re closing in on a low leverage 8% cap rate…

yes, in reality, I probably wouldn’t go 50/50, but faced with the binary choice b/w 100/0 and 50/50, I’d probably choose 50/50 given the above statistics. I mean i’m 35 and approaching >20% bonds right now. Right now my self imposed limit is I’m not going to allow myself to have more bonds than my mortgage lol.

Doesn’t the above chart show 75/25 as having highest chance of success at 3-5% wr’s? (Though 100% stocks looks grea too) and even looking at 100/0 vs 50/50 for 30 years is 96% vs 98%; if that’s actually the case, I’d take the MUCH lower vol of 50/50 in exchange for 2% lower actual statistical chance given the huge behavioral advantages of 50/50. To me that chart makes the case for like 20-40% bonds (perhaps not coincidentally kind of the standard boring retirement portfolio hawked by folks everywhere) am I misreading it?

He claimed that it’s easier to tell which bonds are riskiest than to tell which stocks are riskiest. A claim with which I wholeheartedly agree. you can pick where on the maturity/credit risk spectrum you invest and that will lead to a generally predictable payoff profile and low risk of nominal losses over the duration you pick. Many stocks aren’t like that and are all long duration quasi perpetuals (they are all 30 years). “ And unlike equities, there places you can be guaranteed to "hide-out" in bonds regardless of what other bonds are doing.” he also made some comments about the relative level of “bonds” which typically means the agg, which has duration of 6 (was like 7.5) and has experienced like a 15%-20% peak to trough total return drawdown in the worst Ben bear market ever, which id say is consistent with a much lower than equity risk profile.

well I'm not building any bunkers, but our childcare / future education / lifestyle expenditures are probably equivalent to a bunker....the life we choose to lead is expensive which I think constitutes much of our difference in outlook. could move to the hinterlands/make different choices in a pinch, but for now, I'll be moderately drawdown sensitive and keep "preparing". I'm definitely one of those people. assuming it'd be available in bad times where everyone wants such a job. being a UPS drivers seems MUCH MUCH more stressful than our current jobs for signficantly less pay. if you google around, it seems quite common for UPS drivers to work 12 hours / day.

@Gregmal , don’t you live off your investments? Or so you have a job? How is your money, “money you don’t need”? it you’re living off your nut, then volatility and drawdowns have deleterious effect on your wealth and impair capital. I know I’ve said this before, but you often say things like volatility doesn’t matter, it’s just an opportunity, but then also say “you don’t need that much to retire” or “the 4% rule is bullshit”. In my view it’s completely contradictory. you either aren’t living off your investments and have other sources of income in which case volatility is a feature not a bug, or you are living off investment in which case volatility and sustained drawdowns impair your capital. I have a job that pays for the household expenses, but still don’t want to impair capital. I lost about 40% in a month during covid. For me the traumatic part was not the volatility/drawdown itself, but rather how quickly the fundamental outlook of that which I owned changed. What I thought were good investment with a margin of safety were not. I was very poorly positioned. I made some changes and survived and had my best 3 years after it, both relative and absolute, but it absolutely shook my confidence, and am much more diversified now (my Nw is also about 4x as much in nominal terms so that also impacts my thinking). I feel like there are alternative histories where if the fed acted differently, I would have lost a huge amount of my money and been severely underwater on my (at the time) 98% levered house. Instead it all worked out swimmingly.

I again think that the discussion on stocks vs bonds is overly binary. For me it's choice of 100% stocks 0% bonds or 60-80% stocks, 20-40% bonds. In my opinion no sane person is going to go 100% bonds/cash as that is clearly destructive to long term wealth and introduces a debasement tail risk. I'd really struggle to sleep at night having all my assets in nominal instruments. bonds have historically generated positive real returns (and will going forward), but you still don't want to have everything in them if "the big one" (in terms of currency) ever happens. Rather than run a bunch of monte carlos or look at 1000's of historical scenarios, I prefer a more simplistic exercise. Over the last 10 years, US stocks (defined as VTSAX) have returned 12.2%/yr. (215% cumulative) Over the last 10 years, US bonds (defined as VBTLX) have returned 1.5% / yr. (15.6% cumulative) Over the last 10 years, a 60/40 portfolio (defined as VBIAX) has returned 8.0%/yr (116% cumulative) Notice how the 60/40 returned about what you'd expect. (12.2%*0.6=7.3%)+(1.5%*0.4=0.6%) = 7.3%+0.6% = 7.9%. the 60/40 portfolio did a little better in practice but there wasn't a lot of rebalancing benefit (like 0.1%/yr). the cost of decreasing volatility by investing in the balanced index has been pretty freaking huge. About 100% of starting value. Starting with $1mm, the 60/40 guy has $2.15mm and the 100% stocks guy has $3.15mm What will that number be for the next 10 years? Well we know that absent defaults (the agg isn't going to have many defaults and neither are IG bonds), bonds will make their yield to maturity if held to the duration of the index. So the duration/maturity of the bond index isn't quite 10 years, but let's just say it is (one can buy 10 yr fixed income if one wants to). The barclays aggregate has a yield to maturity of 5.1%. So going forward, rather than make 1.5%/yr, bonds will make 5.1%/yr, if held for long enough. Let's say stocks defeat the naysayers and repeat the last decade's amazing returns, tey make 12.2%. So a 60/40 portfolio will make about 9.3%/yr vs 100% stocks at 12.2% (assuming no rebalancing benefit). This is $2.4mm vs $3.15mm for a $1mm starting nut. There's still a big difference and a high cost of "safety" of bonds, but it's 28% less than the prior decade. ($715K of wealth difference instead of $1mm). IF you think stocks do 8%/yr instead of 12% and assume no rebalancing benefit, then the wealth difference is $220K in favor of 100% stock portfolio. The cost of lower volatility of the balanced portfolio is 78% lower than the prior decade. Of course as you get closer to or even lower than the bond yield on forward equity returns, then there is no cost to having a substantial portion in bonds.. Portfolios with bonds will end up with better returns. So I'd frame it as something like this, If stocks make 12%/yr (repeat wondrous bull market), the cost of incremental safety from carrying bonds will be 30% less than the prior decade, but still substantial. If stocks make 8%/yr, then the cost of safety will be 78% less than the prior decade. If stocks make less, there will likely be little to no cost of safety. I can't really predict the market's next 10 years of returns. I don't know, but I think the above supports that holding bonds will have significantly less opportunity costs than it has in the past. In my view, the above logic supports a weighting to bonds significantly greater than the prior decade (which for me was basically 0). For now that's something like 20-25%, and going higher. Also, anyone who's been investing and saving for the prior decade should be many multiples richer in 2023 than in 2013. As you get richer, keeping the money instead of optimizing for absolute highest NW makes sense for many, but not all people. There are some people who are inclined to take more risk as they get wealthier. I am not one of those. My goal is to reduce dependence on my labor via accumulation of capital. my goal is not to have the highest possible net worth in 50 years. If someone who invest in all stocks ends up 10,20,30% wealthier than i do over the next decade because stocks do really well, I'm not going to care. If it's 50-100%+, I will care. But either way if stocks do very well for next decade, then I'll be just fine. I'd also posit the rebalancing benefit will probably be higher in the next decade than in the last. This tilts the math in favor of including some bonds. Also we haven't taken into account portfolio withdrawals and sequence of returns, which will tilt things further to the less volatile portfolio that has bonds. I don't really think the inclusion of bonds in a portfolio is about market timing or predicting doom and gloom. I think it's about bond yields (nominal AND real) being substantially higher than they have been and equity yields do not appear to be any higher today than they have been; owning more bonds today than in the past 10+ years seems like a rational response to changes in relative pricing. It's fundamental investing. The inclusion of bonds will probably have lower opportunity cost than it has and may even lead to better outcomes than all stock portfolio. the era of financial repression is over (at least for now). we have positive real rates. we aren't forced to invest in just risk assets anymore. the entirety of this ignores any potential value add from active management. it also ignores the more extreme upside/downside of longer term bonds, which I invest in to be a little more grey. A 20 yr IG bond at 6.2-6.5% is more competitive w/ equities, but also far less predictable in return over an intermediate horizon so the math isn't quite as clean as the above. It's also very US centric. Prospective US bond returns look MUCH better if you think stocks outside the US repeat the prior decade's shittiness. tat wouldn't be my prediction, but just saying that US stock market participants have been incredibly spoiled of late relative to ex US. EM index has made 3.5%/yr for 10 years and developed international 5.1%. US bonds yields are higher today than either of those. I'd wager the ex US indices will do better going forward, but strictly backward looking.

5,10,20,30 year yields all now > October 2022 highs.

not trying to get into some kind of index multiple tit for tat here, but Yardeni is at 20x trailing operating earnings for S&P 500, Ibbotson as source. there's like 40 PE's in this YArdeni PDF. Let's just agree that it's somewhere between 20 and 30x trailing lol (which is a huge delta) https://www.yardeni.com/pub/stockmktperatio.pdf

in fairness, there's a gap b/w "as reported" and "operating earnings" that gets you to more like 24.5x

that's only for the nasdaq 100, which isn't the market. I just downloaded the entirety of the S&P 500 (which is most, but not all of the broad market / a selected portion of the profitable US market). Median PE is 20.5x Median Fwd PE is 18x. Summing up all forward year estimates and market cap (the right way to do index PE) you get 18x fwd. Now you can take issue w/ next year's earnings or some of the top guys, but I simply don't see the broad US mkt at the kinds of current multiple you do. Here is the Wall Street Journal. S&P 500= 20x Nasdaq =30x. "PE Data is based on as-reported earnings" S&P provides a comprehensive excel of S&P 00 earnings. They have S&P at 19.5x 2022 EPS 20x 2023 EPS 18x 2024 EPS https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx

I see you're referring to earnings yield not total return. That makes more sense now, but what's all this 30x talk?

LTPZ, this is the only ETF (that i could find) that owns long term TIPS, trades $7mm / day, $635mm market cap It charges 20 bps/year for the privilege, but I'm willing to pay that given I'm buying these with dividends/interest coming in and sometimes buying only a few k at a time which is quite cumbersome/impossible if you're buying such small pieces of actual direct treasuries. 20-30 year TIPS yield about 2% real. If you bought this ETF in 11/2021 when real rates were -0.5%, you've lost about 30% in total return since then, which is roughly in line with the 32% one would have lost buying TLT. Effectively the long duration of long term TIPS offset any gains in par value coming from inflation increasing your principle. Long term TIPS are a terrible short term inflation hedge if real rates rise by 2.5% as they did. I don't think they'll continue to rise, and if they do, Ill buy much more. A move to 4% real would cause another 38% decline for these things. I'd be tempted to put a huge portion of my money at that price. ~20% in bonds of varying kinds, 2.5% in LTPZ. long term TIPS can only be bought in an IRA. paying tax today on accretion of principle that you won't get until 2053 would be a crazy thing to do. very unnatractive for taxable account.

disagree. If earnings grow 10%/yr w/o interruption then stocks will make ~11%/yr over next 7 yrs. If exit @ 15x vs current 20x then ~7.2%/yr. In both cases that beats bonds (if we assume one earns the YTM over the 7 ish years of duration. I like bonds but this math doesn't make any sense to me.

you can do this by looking up managers Form ADV’s on the SEC website. This will get most RIA’s and funds in a given geographic area. search by firm rather than individual. Then read up on the ones that look promising. https://adviserinfo.sec.gov/search/genericsearch/grid goes without saying the vast majority of firms don’t hire people from “non traditional” backgrounds and this will be a long slog / low hit rate exercise. But there are many people who started out doing what you’re doing. You can email me at thefinancepupil@gmail.com. I can’t promise that I’ll be helpful but can try

Is this a China ETF?

So if you had to pick a number for the delta between 100% VTSAX and 70% VTSAX / 30% VBTLX , over the next ten years, what would it be? Is it greater than say 1-2%/yr? If so why? I suspect you will say "who cares?" to which I would respond, "anyone w/ a 401k". I care about index returns for about $70K/yr. It's material to me. It may not be material to you. But I also care about it for the portion of my portfolio I control. I don't have a high degree of confidence in generating HUGE outperformance/high absolute returns. A certain 5-6-7% / yr with consistent carry and low risk of nominal capital impairment is a nice tool to have. It's not THE tool, but it's A tool.

yes, agreed with @Spekulatius. I don't think anyone is saying that "bonds will absolutely and definitively beat stocks over the next 10 years". What I'm saying is that "having 10-20-30% in bonds will potentially have lower opportunity cost [maybe none or negative cost] vs a portfolio of 100% stocks over the next 10 years when comparing portfolios comprised of broad market indices". To phrase a bit less clumsily, I expect the go-forward return on a portfolio of 70% stocks / 30% bonds to be "competitive" with a portfolio of 100% stocks. I expect the path to more closely resemble 2003-2013* than 2013 to 2023 2003-2013, balanced index lagged all stocks by 0.5% / yr. 2013-2023 that number was close to 5.0%/yr. That's a huge difference. I'm not looking to lag passive indices by 5%/yr, that's destructive to my wealth / purchasing power. If I lag by 0.5% and have a smoother ride, that's a tradeoff I'm willing to take. All the better if I can outperform in my stocks and not lag at all. The reasoning is that we are at a 5 handle on agg (mostly tsy's and MBS) and a 6 handle on IG corps. Bond returns, if held for their duration are pretty predictable; if you lose initially, you make it back on the reinvestment of coupon. I expect them over the duration of the index (7-8 years) to return their current YTM's. I also expect some rebalancing benefit. I don't expect stocks to repeat the 12%/yr of the prior decade. I'm not crazily bearish, just when i look at the ingredients of earnings growth, yield, multiple change, etc, I don't get to 12%. Therefore, for many of us who can only invest in indices for a substantial portion of our ongoing and existing savings, I think it makes more sense to own bonds, than it has in the last decade. I also find myself surprised that the bond market has become MUCH more attractive and we've entered a much higher return on savings environment without me having experienced any personal wealth destruction. It seems like I (and a lot of otgher folks) have a ZIRP NAV and now get to ivnest at a PIRP RoA / RoE. Feels like a free lunch for savers. To some extent, I don't think that is sustainable/will last and am therefore adding a chunk of duration, which introduces more price risk, but also more upside if things change. *i just picked these as arbitrary 0-10, and 11-20 lookback so as to not be accused of cherrypicking and just for ease, not trying to pick top of market to bottom of market, or only have "the lost decade" etc.

agree completely. If we think of Utilities as a perpetual TIP, then we've seen the competing 10-30 yr TIPS go from negative yields to 2%+ with little corresponding de-rating from utilities and that's just from rates alone. When you add in the asymmetry regarding these liabilities, it really seems unattractive. Why pay 200% of book value for a 8-9% ROE (4% earnings yield with a slow inflaiton increase) when you can get 2% real from TIPS or 6-7% nominal from bonds. Here's the 2006-2022 and 2012-2022 Per share growth in fundamental metrics. Maybe go forward's a bit better if we have higher inflation, but certainly a shitty starting point. This argument is probably stronger than the staples discussed in the KVUE thread because utilities have just as weak long term growth w/ far greater capital intensity. Another way to think about it is the utilities index returned about 9% / yr w/ divvies reinvested over the last 10 years. over that time frame the index re-rated from 1.5x book to 2.0x book, so you had a nice ~3% / yr from re-rating. If you think that's goes from a positive to negative, then the total return prospects for utility stocks are quite low.

so as y’all know I keep an eye on long duration high quality fixed income. If you look at Fidelity’s offerings (which tend to feature lots of adverse selection l) the highest yield for the rating is in utilities, clearly people trying to decrease their weight to “low risk” utility bonds, including Berkshire related ones. on the margin, I’m a buyer, but at very small size, stuff like BRKHEC 2054 at $85 / 6.6%. Not recourse to the mothership, but it’s still be a pretty momentous decision for Berkshire to give up an important subsidiary. For a small portion of capital, I’d bet that won’t happen. I think taking advantage of peoe ligjtening up in related securities may be the better option than running to the literal fire.