I Fucked Up On My Investment Thesis

I really hate to admit it, but I don’t think The Link REIT is as great as a company as I originally thought. I also think I’m taking up too much risk.

Why I change views on The Link REIT

In my essay on why I thought The Link REIT was a great company, I was wrong in my analysis on The Link REIT’s Favorable Long Term Economics.

I was horrified to only learn of the recent news on September 29th 2014 that The Link REIT sold 5 properties for future purchases and that the previous 4 properties sold last year was to buy 1 property called Lion Rise Mall.

The reason why this realization horrified me is because The Link REIT is forced to consistently make sub-optimal investment decisions due to its REIT status. REITs under Hong Kong law are legally obliged to distribute at least 90% of distributable income, which means that every time The Link REIT sells property, it has to re-invest it immediately lest the cash gets distributed back to shareholders, which also means that when it re-invests the money immediately, the property they buy maybe fair value, but most likely over-valued and definitely not under-valued.

This is because The Link REIT only sells when its property is overvalued, but if your properties on aggregate is overvalued, then the property market in general is most likely overvalued, thus the property The Link REIT buys immediately with the cash will be most likely overvalued as well. No rational person / company sells a property unless they get good money for it or they are strapped for cash.

In the same essay on why I thought The Link REIT was a great company, I said one way The Link REIT could fall from “Great Company” status was if it sold its properties, because:

“The only way you can get dislodged legally by competition is if your strategic locations aren’t strategic anymore (very rare, think of your city’s CBD district and see how frequently it changes places), or most importantly, if you decide to sell your strategic locations and risk never getting a chance to get back into those strategic locations. Property owners are legally allowed to not sell its property regardless of how ludicrously high the offer’s value is.”

So besides The Link REIT not getting great deals in terms of valuations in swapping properties for propertie(s) since everything’s all overvalued, it risks deteriorating its competitive advantage of “control of majority of retail space and car park space situated strategically near dense residential areas covered by MTR stations that most ordinary Hong Kong folk can’t live without” every time it makes a swap deal by being wrong in its analysis of the new properties acquired.

The reason why The Link REIT was so unstoppable was because it basically took over all retail space and car park space originally managed by the Housing Authority (the government body that looks after public housing). If you’re living in public housing, you really don’t have much choice but to use the retail space and car park space nearby. But as The Link REIT moves further away from its core portfolio into new property, the new properties may not have as strong of dependence from nearby residents as the original properties.

If The Link REIT was able to hold onto its cash and wait for properties to be undervalued before pouncing, then that would make the business model great since it would give larger margins of safety in valuation (price paid) and evaluation (competitive advantage) of the new property. Now it just looks decent at best.


Why I think I’m taking too much risk

The quote from Charlie Munger to “Don’t go after large areas. Don’t try to figure out if Merck’s pipeline is better than Pfizers. It’s too hard. Go to where there are market inefficiencies. You need an edge. To succeed, you need to go where the competition is low. That’s the best advice I can give to small investors.” has been at the back of my mind consistently for quite some time.

The reason being I felt that I was going after large areas with my bet on The Link REIT, and that the odds weren’t stacked so favorable for me that it warranted an all in. The only realistic areas where I will have an edge would be to buy during a bear market where depressed prices offer huge margin of safety or illiquid markets where NCAV stocks exist.

Charlie Munger’s portfolio during his partnership days were very concentrated just because he only betted aggressively when the odds were ridiculously in his favor.

Reading a Quora answer recently on that one of the best advice to receive for poker beginners was to play Tight-Aggressive (only going in when you’ve got great hands, and aggressively pursuing the win once you’re in) reminded me of Charlie Munger’s quote once again and made me face reality.

I’m going to start reducing my portfolio’s weighting on The Link REIT by stop buying The Link REIT as soon as possible and sell it immediately afterwards. I will start transitioning into a pure NCAV stock strategy soon once I accumulate enough cash.

I’ll bet heavily when I actually have a ridiculous edge. For now, cash will do.




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