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Author: yodaorange Big red star, 1000 posts Feste Award Nominee! Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 77266  
Subject: Re: REIT Preferreds= Hotel California Date: 2/9/2013 1:04 PM
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This contains replies to Annedoc and Earslookin:

Annedoc said: although you do not argue the other side re: their benefits when compared to common stock investing.

Anne, my apologies for not mentioning any of the positives about REIT preferreds. I probably have posted 200+ times on this board about REIT preferreds and their positives. It is a GREAT asset class IMO and we own many of them in the widows and orphans portfolios. In many cases, the percent allocation is VERY HIGH.

This new post was specifically written to help insure that any investor that either owns or is contemplating purchasing REIT preferreds understands the illiquidity of the class. Nothing more and nothing less. I did NOT say it was a terrible, horrible, very bad kind of asset class that you should never own.

There will be a day when REIT preferreds are NOT a good asset class to own IMO. I don’t know if any of us will still be around when that day occurs. That day might be tomorrow or it might be 50 years from now. Personally I am betting that it will NOT be tomorrow or anytime in the near horizon.

What we want to avoid is having anyone on this board come back and say: “I never understood how illiquid REIT preferreds were. I thought I could sell of them on short order, but found out that selling them drove the price down substantially. I wish somebody on the board had told me this MIGHT occur.”

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Ears listed the average volumes for REIT preferreds.

Ears, I don’t talk much about the average volumes for a specific reason. They can be very misleading IMO. There are two ways it can be misleading.

Case 1 is where the average volume appears reasonable, but it dominated by a few days of high volume with many days of low volume. A reasonable example is DDR-pH with a recent 10 day average volume of 40,873 shares. You might look at that and conclude it is a very liquid issue. Take a look at the volumes for the last ten trading days:



1/28 1,836
1/29 2,400
1/30 615
1/31 1,450
2/1 8,453
2/4 3,220
2/5 3,592
2/6 273,432
2/7 2,200
2/8 111,532



The two high volume days on 2/6 and 2/8, skew the average to give a misleading impression of liquidity. If you happen to sell on one of those days, you might get a good fill. On the other hand, what it you decided to sell your shares on 1/30 when the total volume was 625 shares? Chances are good, you would substantially lower the price to sell say 1,000 or 2,000 shares.

Case 2 is where the volume on a single day can be very misleading. I posted a good example of this on PLD-pO.[1] On 12/27/12, it traded 94,179 shares. You see that and think it was fairly liquid until you realize that there was only ONE trade that day. Unless you happened to be the seller of the 94,179 shares, there was no market. Matter of fact, there were NO trades on the three previous trading days. If you only looked at the average volume, you might be mislead into thinking it was easier to sell than reality dictates

I track the volume on every REIT preferred every day. I look at the median and average volume, but only pay attention to the median volume. The average can and is often skewed by a relatively few issues with large block trades.


BOTTOM LINE is that you must be careful relying on average trading volumes to accurately judge how liquid a specific REIT preferred is. If the trading volumes are fairly consistent and are NOT large blocks, the average volume is a reasonable metric.

Thanks,

Yoda



[1]Yodaorange post on PLD-pO strange trading day
http://boards.fool.com/stange-day-for-pld-po-30453796.aspx
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