I have expressed on many occasions my distaste for all the silliness and excess that surrounds earnings season.
It is a ridiculous way to manage and trade a portfolio and most of the bets are related to earnings guesses and are scooped up by the pros smart enough to not bet on a guess about a guess. They bet on the almost sure thing of most traders guesses about earnings and market reaction being wrong.
But there are some things I like about earning season and chief among them is the conference calls with the executives of the leading private equity firms. I find that I am much better off if I manage my investments using the mindset and time frame of these smart, patient and wildly successful investors than I am trying to be the next super trader. Every quarter I get to listen to them talk about their business and what they are doing with their investors' money and I always get useful information and ideas .
Once again this quarter Blackstone (BX) and CEO Steve Schwarzman kicked off the private equity earnings parade. At the top of the call, Schwarzman talked about current market conditions and how his firm is approaching the markets.
He said, "How can investors generate sustained, positive returns against this type of turbulence? The answer is, many can't, at least in the traditional areas of money management. We are increasingly looking to the alternative areas as a result. If you had been invested in the typical portfolio, mostly equities and fixed income, you would have made basically no money so far this year, as well as all of last year."
While I am not going out and buying up companies and assets the way Blackstone can, I can use his advice and approach markets differently than most investors. I veer dramatically from traditional money managers most of the time and right now have the majority of my capital in areas that I consider alternative. Very few mainstream investors have positions in the community banks sector. Indeed, most avoid it for the reasons I love it. These little banks are very illiquid, so you have to approach them with a private equity mindset.
Schwarzman described his firm's investment style saying, "We are patient investors, both in terms of when we decide to invest and when we exit."
That's exactly how I approach the bank stocks. I have a preferred set of conditions and a valuation limit I am willing to pay and I do not act until my conditions are met. Once I purchase a stake in a bank I will hold it until my conditions for sale or a takeover occurs and that usually is measured in years not months.
He talked about his firm's approach to real estate markets right now. Since Blackstone is one the world's largest real estate owners it make particular sense to listen to what they have to say about these markets.
"I'd say that we're not big buyers in real estate in secondary and tertiary markets," Schwarzman said. "One of the reasons we've being able to have really remarkable results in real estate is you have to pick your asset class, but you've got to pick your regions where you're doing things. I would say we are dramatically underrepresented in secondary markets and I don't know of any part of our real estate business that even touches a tertiary market from being involved with approving all the deals. Our business is not real estate across the board everywhere. We're highly selective in what we do and those calls have been, really, they've been the right calls."
That's pretty much the same approach that's being used by what I call my Core three REIT investments. Brookfield Properties (BPY), Colony Capital (CLNY) and Equity Commonwealth (EQC) own premier properties in select markets and are performing very well right now. I have owed them all for some time and have no intention of ever selling them unless there is some drastic change in management in the future. They are all well priced at current levels and should they fall I would happily buy more of all three.
He talked about their single family housing business as well, telling investors, "In our housing portfolio, for us and kind of the sector overall, supply is still at real lows relative to history and home price appreciation is very solidly, mid-single digits plus."
I love the single family rental business and the last several years of appreciation are not reflected in single family REITs like Silver Bay (SBY) and Colony Starwood Homes (SFR) and I think they are outstanding long-term buys at current levels.
Thinking and investing like a private equity manager would help most investors improve their long term returns. Reading the call transcripts and stealing ideas and insights from successful PE managers is a smart use of our time.
