Positive and Magical: Well, 2016 is a brand new year, full of whatever we individually chose to make of it. One of DJM’s overriding themes is embracing every year with optimism. Over the past several years, DJM’s marketing team launched a collateral campaign titled “The Power of Yes”! This campaign is based on a philosophy which embraces life’s brilliant chances, not paralyzed by what many folks see as potential failure, fear of the unknown or the risk of upsetting the status quo. It would have been very easy to dismiss the challenges and opportunities eventually realized in the DJM portfolio over the past 15 years. As a company, we devote significant resources to our messaging, starting with the DJM website and the Yes! Campaign; from Silicon Valley to Istanbul, the audience response is nearly universal; an appreciation for the highly creative look, vibe, content, and tongue and cheek humor. Stepping back from the philosophical netherworld and 6,600 miles, to those keeping score, 2015 was an exceptional year; DJM continues to be “the best untold story in commercial real estate.” While delivering above market (alpha) returns across the portfolio, DJM closed a total of $600 million in recapitalizations, development, sales and acquisitions. Nothing exotic, no black magic‐uber sophisticated financial engineering. Boring to some, but highly accretive to all of us. Adopting a conservative investment strategy, in light of whipsaws in the other capital markets, world events, China and rising paranoia about interest rates and terrorism, this strategy isn’t rocket science, but just plain smart. I’ve embraced the power of “Yes” as my New Years resolution!

The Big Short or The Big Sigh!:  No, I’m not diving into the newest movie adaption of Michael Lewis’s narrative highlighting bad behavior, financial voodoo, and a parade of big losers and big winners back in ‘09. Given the performance of the stock market and other equities over the past year, investors are pretty spooked and, once again, stressing over tough choices on where to invest and how to avoid a big fat goose egg return! As a personal diversification strategy from real estate, as well as getting a “handle” on alternative investment strategies, I invest in individual stocks and select hedge funds as well. Hedge funds provides me with a vehicle using pooled private and institutional capital, while executing different, non‐real estate financial strategies, in order to realize above market returns and take advantage of market volatility. It’s a fairly aggressive approach to investing for a real estate guy like me. At least that is the goal. Hedge Fund investment decisions are based on proprietary algorithms by brilliant quantitative wizards, (think Ken Lee at DJM), coupled with the in‐famous Black–Scholes mathematical model: “The key idea behind the model is to hedge the option by buying and selling the underlying asset in just the right way and, as a consequence, to eliminate risk.” It’s worked great in the past, but today not so much.

Lost in Translation and Kiss me Stupid!: According to the hedge fund research firm Preqin, September 2015 marked the fourth consecutive month of negative returns, making this the longest negative period since June to November in 2008. According to Bloomberg, hedge funds lost $95 billion in value in 3Q15 alone, the largest quarter‐ to‐quarter drop since 4Q08. What is fascinating about this sector, aside from its sheer size of nearly $3.0 T, is its historic volatility, its massive appeal to lots of private and institutional investors, and its extremely complex set of macro and technical financial models wrapped into hedging strategies. Makes your head spin if you’re not paying attention‐Vegas high stakes poker comes to mind. John Paulson’s hedge fund, which booked billions in profit shorting residential mortgaged‐backed securities in ’09, delivered a negative 12% return in 2015. That’s awful!

For fun, the following is an imaginary conversation from Paulson to his investors last week (written by some friends of mine in that world); “We have taken all of the daily volatility out of the Fund by shorting 1x our long holdings. Now the return will come from our picks to monetize mispriced market volatility, while adding all our technical/algo trading to generate pure Alpha. Technical/Algo positions are held for short times and are managed with tight stop losses. This is a very scalable strategy and investor’s base is much wider due to the true hedged nature of the strategy.” Makes sense, right, particularly if you’re a math quant and finance major from MIT? I like the “keep it simple stupid” real estate investment strategy; take advantage of low debt cost, reasonable 65% loan to cost leverage, a 400‐500 basis point spread over 10 yr. treasuries, shoot for a 7%‐9% per annum current yield, target 14%‐18% overall IRR. In all fairness, real estate fortunately has relatively simple metrics, bubbles and trends understood on a long term perspective versus the alphabet soup of hedge fund complexities. So much for diversification!

It’s Still Pretty Cold Outside: Look on the bright side of real estate alternatives, the S&P 500 fell more than 6% through the first nine months of 2015, but rebounded to end at negative 1.5% for the year, with an overall return from 2011‐2015 of 3.57%. Is that good? As I have said many times, investing is all about perspective and personality. By taking risk and if you win, it’s great; if you lose, you’ve gained wisdom. And, gaining wisdom is historically expensive, like getting a Ph.D… Speaking of college education, for all those football junkies, New Years Day is a feast full of back to back games and non‐stop promotions promising to deliver the perfect opportunity to start the year off right to change your life. During the Rose Bowl, between Stanford and Iowa, Northwestern Mutual was pitching a money management strategy called “Investing Yourself to Wealth”. I like the line, just not sure how you get there with a portfolio primarily focused on risk avoidance and the S&P…DJM’s tag line is “Wealth Through Real Estate”. I like our chances of achieving “Alpha” better than any hedge fund or insurance company pitch. Stay tuned. Happy New Year.

 

Take care,

DJM Capital Partners, Inc.
Asset Manager

D John Miller, Founder and CEO of DJM Capital

By:
D. John Miller, Founder & CEO