The REIT is run by professional management (in this case the definition of professional is that they get paid). You can let them deal with tenants. Of course, you have to analyze the REIT’s management to make sure that they are competent and properly incentivized, but this analysis is not much different from what a businessperson would do when hiring a manager of an apartment building.
So, you can do the same analysis you performed on an individual apartment building on this REIT, except — and here is where we enter into the domain of public equities and the rational person is replaced by an irrational one. Stocks are priced every second of the trading day.
Thousands of times a day someone tells you, this company is worth this much. Actually, this is not what they tell you; this is what you hear. What they tell you is “I would buy or sell this company for this much at this moment.” There are a million reasons why someone might want to buy or sell a stock on any given day. A lot of them have nothing to do with a company’s value. So yes, there is a difference between value and price. You only know the difference if you’ve spent the time to value the company.
If your apartment building was a public stock its price would fluctuate daily, and most of the fluctuation would just be noise. The price would be moving based on local weather, employment, highway traffic, a mayoral race — the list is long.
A lot of these factors will be transient and random in nature — in a word, noise. If a building similar to yours is put on the market at a ridiculously low price by a forced seller, you are not going to be upset that your building is now probably worth less, you’ll see it as an opportunity to buy another building on the cheap. That is rational, businesslike behavior.
The liquidity of the stock market and its negligible transaction costs are great features, but probably do most people more harm than good. They can turn even most otherwise astute private investors into degenerate gamblers on a daily basis. The difference between a gambler and a degenerate gambler: the gambler plays with as much money as he can afford to lose; the degenerate gambler puts everything on the line.
When you gamble in the stock market with all of your life savings, you are a degenerate gambler. That’s why it’s important to focus on what businesses are worth, not how the market prices them.
This article was republished with permission from Value Walk.