Reaping the Rewards of Value Investing Reaping the Rewards of Value Investing

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I always include a few mentors when I write new books and in my latest book, I reference my friend and fellow Seeking Alpha writer, Chuck Carnevale.

I met Chuck around fourteen years ago when I began writing on Seeking Alpha and he was kind enough to teach me how to become a value investor. As Chuck explained,

โ€ฆif youโ€™re looking for short-term profits, value investing is not a strategy for you. To keep this clear in my own mind rather than calling it value investing, I like to think of it as business perspective investing.

In other words, I am not seeing myself speculating in a stock, instead, I see myself partnering as a shareholder in a wonderful business that I purchased at an attractive value. Therefore, I am thinking like a business owner not a day trader.โ€

Over the last decade, Iโ€™ve become a student of value investing, always seeking to own stocks that I could purchase at a wide discount, or margin of safety. As Seth Klarman explained,

Few are willing and able to devote sufficient time and effort to become value investors, and only a fraction of those have the proper mind-set to succeed.โ€

More words of wisdom from Chuck, also known as Mr. Valuation:

There are numerous ways on how value investing can pay off.

You can simply buy a great company that is growing at a sound valuation and then let the growth generate strong future returns.

Or, you can buy a slower-growing company at a significant bargain and make your money through P/E expansion as the undervalued stock moves back into alignment with fair value.

There are other ways that value investing produces good returnsโ€ฆโ€

Klarman adds,

The most beneficial time to be a value investor is when the market is falling.โ€

I just reread Klarmanโ€™s book, Margin of Safety, which I would encourage all of you to read. A few more sentences from Klarman:

The disciplined pursuit of bargains makes value investing very much a risk-averse approach. The greatest challenge for value investors is maintaining the required discipline.โ€

Iโ€™ll admit, when I was younger, I had no interest in discipline, and in fact, I was a speculator, always looking to get rich quickly. Hereโ€™s how another Wall Street writer, Frank J. Williams explained speculation:

The quick profits are just froth. They arouse a fever in the blood and donโ€™t last. The worst thing that can happen to a new spectator is to make a lot of quick money on his first trade.โ€

Thatโ€™s precisely why I limit my speculative holdings (to 10% of my portfolio) and ignore the so-called โ€œsucker yieldsโ€ and โ€œvalue trapsโ€. As Klarman pointed out,

Being a value investor usually means standing apart from the crowd, challenging conventional wisdom, and opposing the prevailing investment winds. It can be a very lonely undertaking.โ€

Iโ€™m honored to be the most-followed writer on the Seeking Alpha platform, and I hope that my โ€œconservatismโ€ pays off for all of my readers.

Itโ€™s rare (or very unlikely) that you will see me touting a high yield stock like Annaly (NLY) or AGNC Investment Corp. (AGNC), both of which have witnessed numerous dividend cuts and have drastically underperformed.

I had a hard time grasping the concept of value investing because I could not recognize the fact that markets misappraise stocks in the short run, however Chuck Carnevale explained,

โ€ฆat any point in time, the market can and will overvalue or undervalue a given companyโ€™s stock without regard to fundamental values. As a result, these same investors lack the confidence to trust that fundamentals will inevitably rule over the long run.โ€

As Chuck pointed out, โ€œmost unsuccessful value investors fail because they lack the patience to commit to long-term holding periods of time.โ€

Uncovering Opportunities in REITs

Most of you know that I spend a lot of time researching REITs. As Seth Klarman wrote,

Investment research is the process of reducing large piles of information to manageable ones. Distilling the investment wheat from the chaff. There is, needless to say, a lot of chaff and very little wheat.โ€

Our REIT coverage spectrum consists of over 150 companies, ranging from large S&P 500 names like Realty Income (O) to small-cap companies like Orion Office (ONL).

The reason I spend so much time researching REITs is because I want to achieve investment success and to help others (like Chuck did for me) reach financial freedom. As Klarman pointed out,

โ€ฆtodayโ€™s research may be advance preparation for tomorrow opportunities.โ€

So, in this article, I want to provide you with two REITs that our team has researched extensively and are in our so-called โ€œsweet spotโ€.

Essential Properties Realty Trust (EPRT)

EPRT is a relatively unknown net lease REIT that Iโ€™ve been buying.

The company began trading in June 2018 and we picked up coverage almost immediately (August 2018). At the time (August 2018) EPRT was trading at $14.04 per share and since that time shares have returned over 135% (over 2x the S&P 500).

EPRT was my top pick in 2019,

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