Real Estate & REITs
My Dysfunctional Relationship with Market-Timing

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By corvinojm
April 21, 2004

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Three to four years ago this board discussed the advisability of selling REITs since prices had gone up substantially. At that time I posted an extremely reasonable discussion of my experience holding HPT for 5 years, watching the share price go up and down, but being very content with the sizeable dividend that kept coming in as regular as clockwork. I made clear that I had no conflict about selling--I would sit tight, collect my dividends, and be content.

One month after 9/11 I got smarter and knew I could make a lot of money predicting short-term movements in the market. I bought very large positions in HPT and MLS. I sold both in May 2002 and, with my 40% profit, I thought I was one smart investor. Well�I spent the next 2 years sitting on a large pile of cash, waiting for prices to come down enough to buy, counting the dividends I was not collecting, and watching prices go through the roof. I did reinvest approximately 50% of my cash in 2002�at what proved to be very good prices�but I continued to have a significant amount of money sitting idle while share prices went through the roof. I was not only an unhappy investor, but a much humbler one. I would have been way ahead of the game if I had sat on my original purchases and added to them as funds became available.

I did not want to get back in because REITs seemed so clearly overpriced and a substantial correction seemed very likely. Finally I could stand it no more and reinvested my remaining cash in December 2003. I intended to sell when the correction began and then rebuy at lower prices.

After the first two days of dramatic drops in REIT prices I not only sold my new purchases, but I sold the positions I had held since 2002�something I had not intended to do. I now owned no REITs and 60% of my investment portfolio was in cash.

The next week I could do nothing but watch the market and worry about my situation. If I had guessed wrong again, I would either have to reinvest at a loss, or wait another indefinite period without dividends and without capital appreciation. My sleep was disturbed and my stomach was tying itself into a variety of curious knots. I did carry on an email exchange with Ken, who was very comforting through this. I also found Barry's daily emails and posts giving his day-to-day thoughts on the direction of the market very helpful.

On Friday REIT prices started to go up, and I could take no more. I reinvested 68% of the money from the sale of my REITs 10 days before. With those purchases I replaced 82% of the dividends from my former REIT portfolio. The dividend yield on my portfolio went from 5.88% to 7.2%.

What are my conclusions from this apparently successful maneuver? NEVER AGAIN. From December 2003 when I reinvested until Friday when I reestablished my positions, the rest of my life went on hold. I was too preoccupied with the market to continue with the several areas of my life that are my real joy. I slept poorly many nights. When I was completely out of REITs I was a wreck. I kept imagining prices turning up and me being once again stuck with cash for an extended period of time. I had no illusion that there was any certainty about what direction the market would take, and I knew I was taking a big gamble. The whole maneuver was not worth the 4 � months during which the rest of my life stopped. I also have no doubt that if I do this again enough times, that I will guess wrong and pay a major price.

I am now sitting tight and collecting dividends. I feel much less pressure to buy and can be more patient in picking my entry spots. I do hope to be fully invested by the end of the year. Then I will rebalance periodically, but otherwise sit tight.

I think I dodged a big bullet.


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