Investor Keynes Insight and Strategies

What an investor, in a different time and place with different rules of the game.

Knowledgeable, with his hand on the pulse of the economy and commerce – yet flexible and prepared to take a risk, Mr.Keynes – the famous economist.

We have all studied Keynes as an economist, however few have looked

at his investment strategies and achievements.  We came across an interesting article in the Wall Street Journal, we would like to share  key points from the article with our investment analysis students for discussion purposes only and not as investment advice, kindly consult the appropriate professional before you take any action with your money.

John Maynard Keynes overhauled the global economy decades ago. He also transformed the world of investing – in ways most investors today can only dream of. WSJ’s Jason Zweig discusses with University of Cambridge Finance Scholar David Chambers.

A new analysis of the investment performance of John Maynard Keynes proves that the famous economist also was one of the greatest investors of the past century. By understanding what made Keynes such a star, investors can get a firmer grasp on why so many of today’s money managers seem so dim.

Regardless of how you feel about his theories on the need for governmental intervention in the economy, Keynes (1883–1946) long has had a reputation as an outstanding investor. Until now, however, no one had ever gone to the trouble of reconstructing his investment track record.

David Chambers and Elroy Dimson, finance scholars at the University of Cambridge and the London Business School, respectively, have spent much of the past few years picking apart Keynes’s portfolios.

“They have found out that Keynes’s returns were extraordinary.

How he achieved them was even more remarkable.”

During the period 1924 through 1946, “while writing numerous books and overhauling the global monetary system, Keynes also found time to run the endowment fund of King’s College at Cambridge.” A multi-tasking master as well.

Over that period, according to Messrs. Chambers and Dimson, “Keynes outperformed the U.K. stock market by an average of eight percentage points annually, adjusted for risk.”

Such great investors as Benjamin Graham, Peter Lynch, John Templeton and Warren Buffett beat the market by an annual average of three to 13 percentage points over their careers. Most of them, however, didn’t have to cope with the Great Depression or World War II.

How did Keynes do it? Here is the secret ;

Flexibility, resilience and independence; along with information and Knowledge.

Keynes began as what we would today call a “macro” manager, relying on monetary and economic signals to rotate in and out of stocks, bonds and cash. He traded foreign currencies and commodities.

As a director of the Bank of England, Keynes was privy to inside information about interest-rate changes, although there isn’t evidence that he traded on it. Today (2012) we can not do this, however we can guess (educated guesses).

” But Keynes wasn’t a very good macro manager. He lagged behind the British stock market miserably until 1928, and he had 83% of his primary portfolio in stocks going into the fall of 1929. “

“It’s hard to time the markets,” Mr. Chambers says. “Keynes struggled with it, and then he missed the 1929 crash—even with an unrivaled network of information sources.”

So Keynes made a series of radical changes: He switched from being a “top down” asset allocator to a “bottom up” stock picker. He tilted sharply toward undervalued small and midsize companies.

Keynes also made large bets on industries he thought were cheap; by 1936, he had 66% of his portfolio in mining stocks and not a farthing in bank or energy shares. South African gold companies, he correctly foresaw, would benefit from falling currency values.

Keynes wasn’t only a pioneer in owning stocks when most big investors favored bonds. He also relished risk, concentrating as much as half of his assets on his favorite five holdings or, as he called them, his “pets.” Keynes clung to his typical stock for more than five years at a time. Only partly in jest, he had proposed making “the purchase of an investment permanent and indissoluble, like marriage.” (Today, the average U.S. stock fund has only 19% in its five biggest positions and hangs on to its typical stock for just 15 months.)

The “tracking error” of Keynes’s portfolio—the extent to which it behaved differently from the market as a whole—ran nearly four times higher than is typical at institutional funds today, report Messrs. Chambers and Dimson.

“Keynes was no mere contrarian. He was the epitome of his own definition of a long-term investor: “eccentric, unconventional and rash in the eyes of average opinion.” To emulate Keynes, “you have to be idiosyncratic,” Mr. Chambers says. “That’s easy to say but much harder to execute.” “

“One of Keynes’s biggest advantages, say Messrs. Chambers and Dimson, was that the board of King’s College gave him uncontested authority to invest as he wished.

Today, such latitude can be found only in smaller investment boutiques—Fairholme, FPA, Longleaf and Yacktman, to give a few examples—that operate independently and don’t kowtow to their clients. That latitude, of course, comes at the risk of horrific returns in the short run and the chance that the best talent might bolt.

At most larger investment firms, meanwhile, portfolio managers must invest in narrow “style boxes” and sheepishly shadow the performance of their peers. The prime directive at today’s weak-kneed asset-management companies is to ensure that their portfolios never deviate much from average results.

That discourages clients from fleeing and enables firms to keep earning fat fees— maximizing their own returns while minimizing those of the clients.”

Be diversified. Invest but be selective. Take risk – but within reason…

You need to be selective in your investment decisions – however what you and I need to be is active in our pursuit of investment opportunities. Along with information and knowledge of investment tools and knowing our goals ( end game) we need to act and be flexible enough to adjust and move in the direction the market moves (as we anticipated it would) and our capital resources will allow us to stay in the game to collect our profits and pay our taxes.

We also believe that real estate should be a pillar of your investment portfolio. Great control over the asset of real estate for the owner, however challenged with issues of  liquidity and manageable risk. Well managed real estate, a long-term investment – which delivers stability, growth and cash flow.

What are your thoughts on Keynes’s strategy  and actions?

What actions would you recommend ?

Share your insights and let’s discuss it.

Blog:  www.capitalmoves.blogspot.com

www.envoycapitol.com

Don’t Follow The Crowd ! Nor Yeretsian

It is hard not going with the flow.

There are even books entitled :The Wisdom of Crowds , more act smarter than a few.

It is safer in the crowd , or at least it use to be .

We are human beings after all. We have herd instincts, running with the crowd.

This could be and has been dangerous for investors.

One of the best quotes I ‘ve heard coming from Gov. Sarah Palin, was

when she said that up here in Alaska there is a saying :

“The only thing that goes with the flow is a dead salmon.”

It says something about the fish and something about the direction of the crowd.

At times the crowd may be smarter than a few, elections / the stock market , etc…

However when the markets get hot, and a bubble starts to form -

everyone seems to jump on board and it starts to get scary.

A good book to explore this over the top behavior is Charles MacKay’s  collection

of stories which covers a couple of hundred years and looks at ;

The Mississippi Scheme(1719 and 1720, John Law )

The South- Sea Bubble(1717 -1727)

Tulipomania(1634-1636)

these are classic examples of  Banking ( and paper money )

Real Estate and a Tulip ( an object of affection value ? ) over heated bubbles and Crowds gone wild !

Book reference 1814-1889) Charles MacKay’s  Extraordinary Popular Delusions and the Madness of Crowds .

nyeretsian@yahoo.com   July 21, 2010

Twitter :  EnvoyCapRealty

Envoy Capitol Realty Inc., brokerage    Toronto, Canada

www.capitalmoves.blogspot.com

Investment Values Norair Yeretsian

Three investors are considering an investment opportunity which has a

Net Operating Income of  $ 125,000 .

Investor One wants to achieve a return of  10% on the capital he invests.

Investor Two wants to achieve a return of  15% on his equity investment.

Investor Three demands 18.5% on his invested capital.

Using the direct capitalization approach to estimating Value
the three investors calculate the following :

Given the above :

Investor One determines :      125,000 / 10 %  = $ 1,250,000  Value .

Investor Two determines :      125,000/ 15%   =  $ 833,333 Value .

Investor Three determines :   125,000 / 18.5% = $ 675,676  Value.

Using the Rule of 72 we can quickly calculate the time it would take each

of our investors to double their money using each investors’ desired rate of return,

with the benefit of  Time Value of Money ( money being compounded ).

Investor One   72 / 10 =  7.2 years to double his money .

Investor Two  72 / 15 =   4.8 years to double his money.

Investor Three 72/ 18.5 =  3.89 years to double his money.

Be a more demanding investor, you will only get out of life

and investment what you expect and usually nothing more.

Let discuss it , leave a comment / make a suggestion …

Do you have any special techniques to make valuations ?

or Twitter @ EnvoyCapRealty .

nyeretsian@yahoo.com  June 30 , 2010

Savvy Investors Norair Yeretsian

There’s Lots of Money looking for a home but not necessarily real estate?

U.S. Private Equity firms are on the sidelines with $500 billion waiting for an
attractive opportunity to buy. [ New York Times , 6/23/2010]

One of these is the Carlyle Group which is sitting on $18 billion.
However buyouts have been scarce and prices are rising because
competition for good assets.

The Carlyle Group is also a major Manhattan landlord and
their portfolio is doing very well one of their buildings in their
portfolio of properties is 666 Fifth Ave the retail portion.

Where they just signed one of the biggest retail leases in Manhattan history
with a Japanese clothing company for 90,000 sf of space on 3 floors for
$300 million on a 15 year lease deal , which commences 2011 .
They purchased the retail portion in 2008 and on this leased space  it is
working out to be approximately a 30% return without the benefit of  TVM.

Some of the investment criteria for Private Equity firms ;

Investor’s money is generally tied up for 10 years.

Money must be invested within first 3 to 5 years of funds’ life.

Management fees run approximately 2% of assets value and 20% of annual profits.

They are generally looking for returns in high teens – 20% plus , however looking
forward  investor’s returns over the life of the fund are likely to drop into the low to mid-teens.

Returns will be even lower once fees are factored in.

One factor in the  modest forecast is rising prices for buyouts, because of competition.

The ” tough competition for deals” had driven up valuations recently.

Money is there , but it is patiently waiting to meet an opportunity.

Leave a comment or Twitter @ EnvoyCapRealty

nyeretsian@yahoo.com     June 29, 2010

Investment Strategies : Tax free Cash ! Norair Yeretsian

Know your Risk Tolerance before venturing into any investment strategies.

Many options to consider and each has its associated risk(s) and reward(s).

You have the freedom to make money or lose money.

Here is an option : A-II , to consider. It works like this …

You start with a $ 150,000 income producing acquisition in year 2000.

You leverage your investment with a 75% loan- to- value mortgage and
hold the investment for approximately ten years (2009, end).

At which time (2009 / begin 2010) it’s appraised value is determined to be $ 500,000.

Year 2000 —-( ten years)———end of  Year 2009——begin Year 2010
$150,000 ———————————————-$500,000
LTV 75% : Debt equals : $112 ,500 ————LTV 75%: $ 375,000
Equity :   $ 37,500  ——————————- Equity  :  $ 125,000

Debt has been reduced over the ten years , however these principal payments are
with after tax dollars.

Assuming the balance of the mortgage at the end of year ten is $90,000,
we are increasing this with the new financing to $ 375,000.

So that we receive $ 285,000 of new funds into our account [ War chest ].

A number of big assumptions were made :

1. Property is an income producing property …generating Cash Flow !
( your home would work also, but you must have the income to support the debt)

2. For the whole thing to work — Property value must go Up!

3. There is enough Income to support the new financing and you get approved .

4. Since it is a loan to the investment : this amount is tax free ( for now –until sale) .

You have $ 285,000 new funds to enjoy , to invest – to buy another property.

On it goes, it could go on forever or if you over leverage and values drop : you’re out of the game !

The down side concerns :

(1). If property values go down ( and it all becomes upside down, Debt is greater than Values )?

(2) If your income drops off or your tenant(s) leave or stop paying :
can not pay the interest on the loans?

(3) If the  Bank decides not to renew or extend your financing this become a real concern -
may have to liquidate at an inconvenient time: values are low and you are selling under stress. ?

(4). Can you live with the uncertainty  and a little stress ?

(5). You could extend this type of financing indefinitely.

However , if you get to far ahead with a heavy debt burden it becomes
a monster that you may no longer be able to control.
And you are no longer the master ( lord), you have become  the slave to the debt.

Beware.

A professional is always in control.

IF the above numbers held and you Sold the property,
we could do some further calculations to figure out what returns the investor received.
Without the operational cash flows( CFBT – CFAT ; numbers )  to consider or worry about .

Investor Yeretz invests  :
$ 37,500 of equity (year 1 and by year 10) it has grown to and sold for $ 500,000 :
the mortgage has been reduce to $ 90,000 therefore $ 22,500 equity build up .

sale price……………………….. $500,000 sale price
cost of sale (less)…………………. 37,500
balance on mortgage (less)……..90,000

sale proceeds before taxes …. $ 372,500

Return over 10 years     :    $ 372,500
__________________________   =   X          ………..     X = 993 %increase over 10 years

Investment                      :          37,500

Average annual return ( without the benefit of TVM , so simple average ) :  99.3 % a year .

What a large number and yield , wow !

Average annual rate of return on investment (TVM menu on the calculator ): 25.81 % .

1 P-YR    End

N =10

I/YR =  25.8084 %

PV= 37,500

PMT = 0

FV = 372,500

With the beauty of  Time Value of Money , the simple average  of 99.3 % comes down to 25.81% annually .

This is still a great return , relatively speaking .

More in future blogs as we discuss similar types of investments and their returns.

Leave a comment below ….

nyeretsian@yahoo.com    June 18, 2010

Discounted Cash Flow : NPV– IRR % Calculation Norair Yeretsian

Here is a sample calculation — for practice , running cash flows
determining NPV and IRR% . Give it a try on your financial calculator .

With an initial investment ( equity : investment at purchase ,
which includes your down payment plus costs of acquisition) : $ 86,350 .

Cash Flow After Tax ,with a Sales Proceeds After Tax number(s) as follows
with the inputs in to the calculator …

Initial Flow (0)  86,350 [+/-] [CFj]

Flow (1)  15,621  [ CFj]

Flow (2) 13,932 [CFj]

Flow (3) 11,287 [CFj]

Flow (4) 14,863 [CFj]

Flow (5) 15,849 + 94,700 (SPAT) [CFj]

using a given discount rate of  : 10.75 [I/YR]

We solve for  NPV by pressing [shift] [NPV] … + 23,651

and solve for IRR% by pressing[shift][IRR%/YR] … 17.91% .

Thanks to OREA for resource materials from REIA course.

You can follow the same template and simply change the
cash flows and sale proceeds and re-run the numbers.

You can do the above for Before Tax or After Tax numbers.

The real challenge becomes the interpretation of the results
the analysis and the determined action which follows the analysis.

Do we like the investment opportunity

Is it a okay / good / great opportunity for our investment dollars ?

What were our goals and did the results indicate a positive or negative ?

What other tools or metrics work for you as you invest ?

Let’s hear your comments below or Twitter at
EnvoyCapRealty

nyeretsian@yahoo.com       June 16, 2010

Even Professionals Learn Valuable Lesson, Norair Yeretsian

G.E. Capital was struggling with its huge commercial real estate
portfolio of approximately $80 billion.

GE Capital is planning to reduce this by about half to $40 billion.

” It was just the toughest market I’ve seen in my lifetime. ” said GE Capital’s
chairman and CEO Mike Neal. Coming through the economic crisis,
GE Capital will be” smaller and stronger with a goal on returning to profitability.”

The goal is to make its real estate portfolio about 10% of its overall assets.

The company will be exiting commercial properties as it can.

On commercial real estate market conditions,  overall
” we are largely through the free fall , better days are ahead.”
said Mike Neal.

In addition to cutting back on real estate assets, the portfolio is
also likely to shift to more debt holdings than equity.
And that the company’s goal is to transition to more of an
asset management platform, according to Neal.

” When you talk about what we learned, Neal said,
“one is that with small operations at a distance you can’t earn very much.”

This advice was given many years ago by a master builder and founder of
Tridel Corporation Jack Del Zotto,’ try to buy properties that are within a
day’s drive of your home — you will be able to manage them and
you will make more money ‘.

Sage advice, as Pension Funds and other large entities are searching the planet
to invest the billions of dollars intrusted to them and believe they must diversify
it all over the world to better protect the capital for their stakeholders / investors/ pensioners .

I have a feeling they too will learn this simple lesson years from now.
However it will not be at their expense.

Keep your investments close to you. So that you can see them everyday, as need be.

Let’s continue the discussion and comments below or at Twitter @ EnvoyCapRealty.

Costar was source of material information, June 14/2010 .

nyeretsian@yahoo.com     June 15, 2010

Present Value Calculation(s) : DCF model……. Norair Yeretsian

Estimating the Present Value of  an income producing property
using the discounted CFBT model ( Cash Flow Before Tax) to arrive at
a valuation of the asset. In reality your biggest challenge in applying
this technique will be in the appropriate selection of the discount rate.
Appropriate to the investment(s) under consideration and the investor(s)
perception of risk and cost of capital over a reasonable timeframe (5-20 years).

Let’s focus right now on the mechanics of calculating the Present Value
with an assumed discount rate, to see  how all the numbers would line up
and how they would be inputed into your financial calculator or
your Excel spreadsheet. We will use the numbers from a previous
financial worksheet we developed ( in previous Blogs ) to help us illustrate
the workings and later ( future Blog) we will do some analysis of the
findings/ resulting numbers.

Illustration : A-1 , Discounted CFBT [ using the HP 10 BII ] :

set to 1 P/Yr  :  1 P_Yr

Recall the  CFBTs :  EOY1 to EOY5 with EOY5 adjusted for SPBT number.

Step 1 : Initial Flow set to zero ” 0 ” [CFj]

Step 2 : input all CFBT’s into the Cash Flow journal of the calculator ;

Flow 1 — > 122,610 [CFj]
Flow 2 — > 137,323 [CFj]
Flow 3 —> 153,802 [CFj]
Flow 4 -–> 172,258 [CFj]
Flow 5 -–>1,192,929 [CFj] (this is made up of EOY5 CFBT + SPBT)

Step 3 : entering discount rate :

enter an appropriate discount rate : 17.25 %  [ I/YR]

Step 4 : to determine the estimate of present value of the cash flows ;

[ shift ] [NPV] :  929,353.06

The display on the calculator represents the Present Value of the  Equity portion
of the investment.

Step 5 : We need to finally add in the present value of the mortgage ($ 2,412,000)
to arrive at the total value of the investment.

Estimate of PV  (equity portion ) : 929,353 + 2,412,000 (mortgage or debt portion)

Total value of the investment : $ 3,341,353 .

Let’s discuss it below or Twitter at : EnvoyCapRealty .

nyeretsian@yahoo.com       June 1, 2010

Capitalization :Direct vs. Yield Norair Yeretsian

Direct Capitalization Rate, also referred to as overall cap rate (OCR) ,
it is the overall return from an income producing property on an all cash position.
It represents the one year view of the property.
The formula is derived from the income approach to value :

OCR = NOI / Value   :

overall cap rate equals net operating income divided by value.

example : OCR   is    10 %    =   321,600   /  3,216,000

Yield Capitalization is a more dynamic perspective of the property
and it relies on discounted cash flows looking out 5 to 10 years
( or more) into the future of the property’s performance.
This is a lot more work, and with many more assumptions
being required to be made with the associated risk(s).

example :  CFBT # s from initial investment ( year 0) to EOY 1 CFBT … to EOY5 CFBT + SPBT#

time line ( also taking into account the Time Value of Money )

…… Year 0 -)->–EOY 1—EOY2—–EOY3——-EOY4—–EOY5

(804,000) .122,610..137,323..153,802..172,258.. [192,929+1,750,000]

….CFj ……..CFj……..CFj…….CFj ……… CFj……  CFj …

Flow 0 —— 1——– 2——- 3———— 4——– 5 –

Using the HP10BII calculator , you can easily run these cash flows with
the following key stroke entries :

step 1 : make sure your calculator is set to  1  P-YR
[ press shift   1 p_yr to comfirm it]

step 2 : start entering the cash flows with the initial flow
( initial investment ) going in as a negative …
[ press 804,000 then the +/- key to set :
-804,000 enter into [ CFj ]

step 3 : enter the balance of the cash flows
enter the  number 122610 [ CFj] you should see flow 1 quickly
appears and disappear, then enter the next cash flow,
till the final cash flow : make sure you add the together the
EOY5 CFBT + SPBT and enter the total as one cash flow,
otherwise your time value of money ( time line) will be thrown off.

step 4 :  by pressing  the  IRR%/YR  key , the internal rate of return is the yield
on the invested capital in the property ( stated as an annual rate ).

Therefore the result you should get on your display is :  31.01 % .
This is the before tax yield .

If we changed the Sale Proceeds Before Tax to $ 1,000,000
with the EOY5 cash flow and re-ran the numbers the resulting
IRR%/YR would equal : 21.71%

These are both great yields, now the challenge is go out and find them !

We could continue playing a What if game with altering cash flows
over the years and different  revisionary values.

There were a number of positive assumptions embedded in the above
cash flows which may not happen. Caution is the order of the day,
your assumptions must be made clear, rate of increase year over year.
The cost of capital, the rate of inflation, the risk associated with the
asset and the location. Many many more…tenants?

Let talk about it,… twitter : EnvoyCapRealty

or just below…

nyeretsian@yahoo.com May 20, 2010

Over Leveraging Is not Fun, Caution ! Norair Yeretsian

Discussing the real estate market in Toronto last week,
an investor announced his latest purchase.

First among many he claimed !
I love the entrepreneurial spirit…

As he described the investment strategy they planned to
employ to quickly a mass a huge  portfolio of real estate assets.

We are going to start buying income properties .

We are going to leverage aggressively the assets and
the income to purchase more and more!
Never is enough ? I just listened .

At least you have a plan, that’s a good start.

I think I understand the logic and the rational of the investment plan.

This is the time for us to buy and build up the portfolio of assets.

But you are building up on Debt, I countered .
How do you plan to pay it off or control the level of debt going forward?

We will worry about that later, we are young.
Right now build up, ramp up : growth is the aim.

I began to worry for them. I recalled the War stories I had read
in Professor William Poorvu’s book The Real Estate Game.

As he ” invoked the lessons of some of the biggest players in
real estate in this century. Bill Zeckendorf, for example, was one
of the most creative and productive developers who ever played
the real estate game. He gave us Kips Bay in New York City,
Mile High City in Denver, Century City in Los Angeles,
Place Ville Marie in Montreal — and eventually had most of
his properties taken away from him.

It’s  important to understand what Zeckendorf got wrong
( for example, getting
too far out in front of reality and overleveraging his properties ),

as well as what he got right
( a vision of the future of our downtowns that was uncannily accurate).

We’ve recently seen more or less the same phenomenon replayed

at London’s Canary Wharf, developed by the ambitious Reichmann family

of Canada.”

Let’s discuss it , what alternative strategies would you recommend they consider ,

rather then building an empire of Debt ?

twitter :  EnvoyCapRealty

nyeretsian@yahoo.com May 18, 2010