Rory Gillen's free book: "A guide to sound investing"

Discussion in 'Investments' started by Brendan Burgess, Nov 21, 2016.

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  1. PMU

    PMU Frequent Poster

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    Mr Gillen's pamphlet is aimed at the non-investor and in clear and simple language says (a) why you should invest; (b) how much of your income you should invest; (c) why and how you should diversify (i.e. over different asset classes and over time); (d) the risks investors face and how these can be mitigated; and (e) the different investment vehicles (e.g. funds, investment trusts, REITS, etc.) that can be used to implement an investment strategy.

    I'm certain more experienced investors will quibble with certain sections, but as an introductory text for a non-investor I think it has a lot to offer. Frequently there are posts on AAM where non-investors pose questions on the line of 'I have X amount to invest but know nothing about investment. What should I do?, etc.' I think such posters could profitably be pointed in the direction of this text.

    [Please note I have no connection with Mr Gillen; I have never met him and do not subscribe to his investment service.]
     
    Last edited: Nov 26, 2016
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  2. frankde

    frankde Frequent Poster

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    "I could have benefitted from a mentor earlier in life. Thankfully there's plenty of good investors who have written their knowledge down and for a few pounds or dollars one can benefit from another's life experiences. Thank God for that, as I certainly have benefited from others' writings. Action, of course, is also a learning tool and there's little substitute for practical investing. Some on this website have previously said that there's nothing to learn in books. I beg to differ, but each to their own."

    Great points, I have learned the hard way myself from bad investments. I wish I read more books such as this when I was younger.
    I live abroad and have seen first hand how "Financial Advisors" exploit peoples lack of knowledge in regards to investing, and sell them products that have very high fees or in somes cases lose all the money that was invsted.

    Here is a link to an article that describes how a investment firm in Japan defrauded people of their life savings.
    In the end no one at this firm was held accountable. The fund in quesiton was hosted by Friends Provident

    http://www.andrew-drummond.com/2014/09/lm-appalling-offshore-stitch-up-of.html?m=1
     
    Last edited: Nov 27, 2016
  3. Wollie

    Wollie Frequent Poster

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    On a related point, it's worth clarifying a possible area of misunderstanding arising from Rory Gillen's article in today's Sunday Times. At the end of an interesting piece on whether investors should sell out of an insurance company property funds, Rory writes "There's an opportunity to reinvest in the shares of Green REIT and Hibernia REIT knowing that they are already priced for a substantial 12 - 16% decline in Irish commercial property values. That is definitely NOT the implication. Investment trusts (which effectively is what REIT's are) generally trade at a discount to net asset value, irrespective of the perceived future prospects for that particular asset class, while open ended funds, of the insurance company property fund type, trade at NAV (with some tricky questions around how one defines NAV for a property fund where high transaction costs mean that NAV can vary depending on whether the property is being valued at the buying or selling price). The discount of an investment trust share price to NAV can be significantly HIGHER THAN the 12% to 16% figure mentioned by Rory. This variability of the share price relative to NAV is an additional imponderable for someone who owns shares in an investment trust. It should have been pointed out in the article.
     
  4. Wollie

    Wollie Frequent Poster

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    I should have clarified that NAV stands for Net Asset Value i.e. the value of the underlying assets, divided by the number of shares/ units in the fund/ company.
     
  5. jpd

    jpd Frequent Poster

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    Apart from the problem of property being valued at buying or selling price, all property funds and REITs have the general problem of valuation of the properties in the portfolio. Someone has to estimate how much they are worth - either by capitalising the future estimated revenues or evaluating the property on its own merit. Until the property is actually sold, no one, repeat no one, knows it's exact value.

    As the turnover in commercial property is low compared to the turnover in shares, it is and always will be a bit of a guessing game. Trust and confidence in the managers is key ...
     
  6. Rory T Gillen

    Rory T Gillen Registered User

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    Nothing to do with derivatives. With a REIT, you buy shares in a fund that is listed on a stock market and that fund owns property assets. A decent way to get diversified exposure to property assets if that's what you want.
     
  7. Wollie

    Wollie Frequent Poster

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    I agree with Rory on the derivatives point. It's a red herring. More importantly, I would appreciate if Rory could respond to my comment on the misleading interpretation that could be taken from the last sentence in his article in yesterday's Sunday Times and if he agrees with my assertion that REIT's introduce a further element of volatility in terms of the extent to which the share price can fall below (or above) the value of the underlying assets. To put numbers on it, I hold shares in a REIT that is currently trading at a discount of more than 25% to NAV. The same fate could befall shareholders in Green or Hibernia.
     
  8. mathepac

    mathepac Frequent Poster

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    It's not a red herring. Every time you mention REITs you mention the value of the underlyings or underlying assets. This strengthens my case that REIT shares/bonds have no value in and of themselves, only the underlyings have. The other telltale sign that REITs are derivatives by another name is that a shareholder in a REIT only earns or has ownership of a portion of the INCOME produced by the underlyings and not the assets themselves. IMO it's less like a red herring and more like a red flag.
     
  9. Wollie

    Wollie Frequent Poster

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    A REIT is exactly the same as an investment trust except that it invests only in properties. The properties are owned by the REIT (no derivative there), the net asset value per share is the total value of the properties in the REIT, less borrowings, divided by the number of shares in issue (no derivative there). The market price is whatever investors are prepared to pay to buy the shares off one another (no derivatives there either). Now could I please get back to the serious question I asked Rory.
     
  10. Rory T Gillen

    Rory T Gillen Registered User

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    I deal with several queries every week on my own website for subscribers, who know their queries are being answered by someone with experience. Now and then I participate on AAM, but I've been put off engaging further by the plain rudeness of many participants.

    I see no misleading interpretation in the Sunday Times article as you so eloquently phrase it! The REITs have fallen to discounts on the basis that investors are concerned that NAVs - actual property prices - will decline some time ahead. That may occur or that may not occur. If NAVs do not decline, the REITs share prices will recover. Hence, the discounts are a signal that the risks of a downturn have risen. Such share price weakness/volatility is not unique to REITs; rather it happens to every company or fund listed on stock markets if investors believe the outlook has deteriorated for that particular company of fund. The stock market is a discounting mechanism, but it's not always right.

    Physical property prices are so illiquid that they take time to decline, but if the downturn is real, they decline. Whereas it took six months for the share prices of REITs to bottom in the downturn of 2008/09, it took 3/4 years for physical property prices in Ireland to bottom. It often helps to ask: What would you prefer...a volatile share price with liquidity or less volatility with no liquidity! There's pluses and minuses to both...and I covered that issue in detail in Chapter 7 of my original book, 3 Steps to Investment Success. I should say that that book was not aimed at the Irish market, but UK market. Hence the publication now of an easier to read booklet - 'A Guide to Sound Investing'.
     
    Last edited: Nov 28, 2016
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  11. sunnydonkey

    sunnydonkey Frequent Poster

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    Why does the Irish market need an "easier to read" booklet than the UK market?
     
  12. Wollie

    Wollie Frequent Poster

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    Rory

    My comment was not intended to offend. I am sorry if you felt offended by it. I just wanted to correct a possible misunderstanding for readers arising from the final sentence in your column in yesterday’s “There's an opportunity to reinvest in the shares of Green REIT and Hibernia REIT knowing that they are already priced for a substantial 12 - 16% decline in Irish commercial property values.”

    That statement is simply incorrect. It’s not true. Investment trusts generally trade at a discount to the net asset value irrespective of the prospects for the assets underlying the investment trust. Do you disagree with this statement?
     
  13. Rory T Gillen

    Rory T Gillen Registered User

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    We deal with investment trust discounts on our 1-day seminar in detail. As you point out REITs are, in essence, investment trusts, but their special nature means that they are as likely to trade at premiums to NAV as discounts to NAV. Your observation about investment trusts and discounts in general is mostly correct, but I think you've over-read into my last sentence in the article.

    While the general observation that investment trusts tend to trade on discounts in aggregate (which is what I think you are saying) is correct, it would be overdoing it to apply such a generalisation to REITs, and certainly it would be overdoing it to suggest that all investment trusts trade at discounts 'irrespective of the prospects for the assets underlying the trust'. We know of many investment trusts trading on the London and New York stock exchanges trading at premiums to NAV at present. For example, IRES REIT, which is an Irish REIT trading on ISEQ, currently trades at a small premium to NAV. In its case, investors are simply anticipating an uplift to NAV, which seems sensible given the buoyancy in Dublin residential property prices and rents.

    It might also help to ask the question: If I was to buy Irish commercial property today as an investment for the medium to long-term - would I buy a life company fund (which has not yet recorded any setback in value) or a REIT (which has already discounted a downturn)? Personally, I'd buy Green REIT and/or Hibernia REIT regardless of whether the discounts they currently trade on apply consistently in the future. Others might see it differently and act differently, and that makes a market, I guess.
     
    Last edited: Nov 28, 2016
  14. Wollie

    Wollie Frequent Poster

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    Rory

    I haven’t attended any one-day seminars on REIT’s, but I do have a relevant qualification and, most importantly, I have considerable experience of investing my own money in REIT’s. (I don’t try to advise others on what they should do with their money, but I do try to help them steer clear of bad advice.) I’ve been investing in REIT’s now for more than 10 years and I’m well aware of the vagaries of price relative to net asset value.

    For one particular REIT that I’ve held for the last number of years, I’ve checked the numbers. The share price at yearly balance sheet dates has varied from a low of 59% of NAV to a high of 86% of NAV. In contrast to your theory that the share price of a REIT falling below NAV indicates some sort of gloom around asset values, the evidence for this particular company doesn’t bear this out. Yes, when the share price was 59% of NAV, NAV fell by 1% in the following year, but the following year the price was still only 67% of NAV yet the NAV rose by 15% in the following 12 months. When the share price rose to a high of 86% of NAV, the NAV only rose by 4% in the following 12 months.

    This sequence of events indicates that there is no definite relationship between the extent of the discount of the share price from NAV and subsequent movements in NAV. I would be loath to extrapolate from that limited experience to make any general comments on the market but I have never heard of any academic studies that supported your thesis. Can you point me to any?

    For what it’s worth, I have been reluctant to invest in Irish REIT’s as the discounts from NAV are far too low for my liking. The discounts on UK and other REIT’s are far higher, as the numbers given above indicate. I would think that discounts for Irish REIT's will eventually reach levels similar to those in other countries for stocks of similar size, which is not good news for their prospective share prices.
     
  15. jpd

    jpd Frequent Poster

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    If REIT are ALWAYS discounted to the NAV is this not an indication that the NAV are too high ie permantently over-valued? In that case, why wouldn't someone buy all the shares and dissolve the REIT and realise the profit? after all, is the discount is permanently bin the range 60-85% it would be like taking candy from a baby.

    I suspect there is something more profound going on here
     
  16. Wollie

    Wollie Frequent Poster

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    Google "Why do investment trusts trade at a discount?" and you'll get some of the answers. In the case of the REIT that I'm invested in, there are some special characteristics, but I always live in hope that someone will come along to buy us out at something closer to NAV and I'll be on the pig's back. In the meantime, I'm getting a nice rental income on the properties and good management of the portfolio, so I'm not complaining too much. If I have time, I'll come back with a more comprehensive answer later, but in fairness I think we should let Rory say his piece in defence of what he wrote in the Sunday Times about Hibernia and Green being good investments at the present time.
     
  17. Username2012

    Username2012 Frequent Poster

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    That is the same with every share, ever. You own a residual claim on the earnings of the companies assets. Every financial instruments is a derivative by that logic, including cash.
     
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  18. mathepac

    mathepac Frequent Poster

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    No, you don't understand the basics. Regular shares give you ownership of the assets of the company and an entitlement to a share in the earnings of those assets. Depending on the type of REIT, publicly traded or private, and the type of investments the REIT has, mortgage or property, you may or may not have bought a derivative. The chances are high for a derivative.
     
  19. Rory T Gillen

    Rory T Gillen Registered User

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    Last edited: Nov 30, 2016
    This will be my last post on the issue. There's little to quibble about here - your observations are accurate and your experiences are real and interesting. However, the frustration you communicate - by demanding certainty in responses - shows a certain inexperience. The following is not meant as a criticism, but the saying that 'a little knowledge can be a dangerous thing' may be apt. In this case, I think you are not seeing the woods from the trees.

    In my experience, the most important thing about a stock or fund is the likely rate of growth in the future and how it is priced relative to that likely growth. In the case of an investment trust - which is a fund listed on a stock market - if investors feel the future growth is likely to be well above average they are likely to bid up that fund's price to a premium. Sometimes it is still worth paying that premium because the subsequent growth makes up for it. If the growth does not materialise the price may revert to a discount. But that's not really much different to how investors treat individual stocks. Sometimes investors on masse get excited about a certain company's future growth prospects and pay, say, 20 times earnings when in the past the stock normally traded at, say, 10 times earnings. In that case one might argue that the stock is trading at a huge premium to its historical valuation.

    The key in both instances is the actual growth, and, in the case of investment trusts, the growth in net asset value. The share price wanders around the net asset value - sometimes at discounts, sometimes at premiums. But if you get the right fund and it delivers decent growth over the medium to long-term, whether it started at a discount or premium is not particularly important. In other words, the discount or premium is not the primary determinant of returns. In that context, I think your own experiences, which are informed and real, suggest you are more comfortable looking for REITs where investors see no excitement or see a lack of growth (in other words, you sound like a value investor). This creates a lack of demand and the shares fall to a discount. In the case of the Irish commercial property market, both Green REIT and Hibernia REIT were priced at premiums to their balance sheet values (NAVs) since they listed in 2013 as investors in general expected strong growth as the Irish commercial property market recovery took hold. Good growth has been delivered, but the future is now quite uncertain. As a probable contrarian investor you may now be more comfortable with a significant discount, or you may want to see wider discounts given the cloudy outlook. Your patience and understanding of value may be rewarded or you may miss the boat if investors change their gloomy forecast.

    Personally, I don't have a strong view one way or the other at present, sometimes I do. In July 2013, we thumped the table for subscribers to GillenMarkets that the great recovery in the Irish commercial property market had most likely begun, and it was time to buy into life company Irish property funds (there were no REITs listed then). We got that right, we don't get everything right.

    So, in closing, investment trusts where the outlook for growth is opaque or where the track record of the fund manager has been poor mostly trade at discounts. But well-performing funds which carry low risk and where investors think more of the same lies ahead often trade at premiums to net asset value. The mighty £2.5 billion RIT Capital Partners Trust (ticker code: RCP LN), which trades on the London Stock Exchange, is a case in point; it currently trades at a small premium to NAV. Such investment trusts, of course, are the minority which is why it is accurate to say that the average investment trust trades at a discount. But as I think you'll agree, it's not the full picture.

    In the current low interest rate climate, investment trusts that focus on delivering an above average income (dividend yield) that is well supported by underlying revenues into the fund are trading at premiums to net asset value. If long-term interest rates rise those premia won't last, but it's what investors are doing at present and one can subscribe to it or avoid such funds. The Holy Grail is to find a trust that trades at a wide discount - 80p in the pound, say, - and where investors are misjudging the outlook. But, again, that's no different than finding a company whose shares are trading on a below average price-to-earnings ratio and where prospects for growth are about to change or are simply underestimated by the market.
     
    Last edited: Nov 30, 2016
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  20. Rory T Gillen

    Rory T Gillen Registered User

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    The booklet is aimed at existing investors as well as new investors.
     
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