Sunday, January 8, 2012

"Looking to capitalize on the next Black Swan event. Where and when may the next one pop up. I think Real Estate"

Dow Jones Industrial Average 12217.56 (Down) Week ending 12-30-2011 - End of Year

Dow Jones Industrial Average 12359.92 (UP) Week ending 01-06-2012


The Black Swan Theory or theory of black swan events is a metaphor that encapsulates the concept that "The event" is a surprise (to the observer) and has a major impact. After the fact, the event is rationalized by hindsight.

The theory was developed by Nassim Nicholas Taleb to explain:

1.The disproportionate role of high-impact, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance and technology

2.The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities)

3.The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs
(Source Wikepedia)

The largest black swan economic event of the last 5 years was certainly the collapse of the Mortgage Backed Securities market worldwide and the downturn in values in the US real estate market. Trillions of dollars in investor equity being loss. My thinking now is that the Real Estate market has over corrected This will create at some point a boomerang effect and possibly a "Black Swan" event going rapidly in the other direction to return to the mean.

So I am looking this week at some of the Real Estate Investment Trust (REIT'S) that you may be able to take advantage of this bounce back in prices. I am not drifting to far a field from some familiar names because they are the entities with the largest capital and purchasing capabilities to take advantage of this turn when it happens.

EQUITY RESIDENTIAL (Symbol EQR, $55.69) of Chicago , IL. the developer of apartment properties would be the first one to look at. EQR operates at a Net profit margin of 52.20% , not to shabby. It has a 4.08% dividend yield and the stock has profited from people not being able to afford houses and moving into apartments instead. EQR has produced a 3 year return
 on the stock price of 152. 3%.

Simon Property Group Inc. (Symbol SPG, $126.82 ) would be the next REIT to look at. It has been extremely profitable and very successful even without a black swan event. Lets say to the tune of a 3 year return of   215.2%.

SL Green Realty Corp. (Symbol SLG, $69.78) are the "Kings of New York City" real estate guys and gals. Own SLG and you can be like Donald Trump, a real estate magnate. Net Profit margins for the company are 54.90% and the 3 year Total return on the stock is 354.5% . Think about a Black Swan event happening and them really doing good! Throw in 5 year sales growth of 14.68 %.

You probably drive by one of these on your way to work everyday and never notice it,  PUBLIC STORAGE (Symbol PSA, $132.28) .  You have to empty out a bunch of houses and the stuff has to go somewhere. People are hoarders, they never throw anything away due to the fear of lost value.
5 year earnings growth here at Public Storage is 40.49%. Net profit margins run 45.2%. ( By the way credit all these stats the fine work of the people at , great job by them). Total 3 year return of 128.2%. So somebody has been making money in the real estate downturn.

  Of course you cannot have real estate without mortgages. (unless you happen to be really rich). With Fannie Mae and Freddie Mac
sorting out their current quagmire, the logical place to look for investment in this area is Annaly Capital Management Inc. (Symbol NLY, $16.06).  49.10% Net Profit Margins here at NLY.  5 year sales growth of 14.76%.  This one has a 14.20% dividend yield to keep your interest in case you get bored. A three year total return of 56.5%.  Remember that before the "big fallout" that this was a very profitable business for a long time.

If you think of other Black Swan economic events for 2012 please comment on my blog and share them with everyone and we can try to flush out investment ideas for it.

Thank you and happy hunting,


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