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No. of Recommendations: 11
Tom C.,

Nice analysis, but I'm not sure that I agree with your characterization of our dollar-cost average strategy. We're not buying simply because “the price is way below where it was several months ago.” Your experience with Metro Media Fiber is a good example of why a drop in stock price is a good time for “reflection” regarding your investment strategy. I had a similar experience with LVLT.

Let's reflect on NLY, though. Have there been any fundamental changes to NLY's long-term business model? If you conclude no and you're a long-term investor that liked the stock at $19 or 20, then you should love the stock at $15.50.

I would not describe that reasoning as “hollow.” If you can buy in at an even lower price in the future, I congratulate you. For me personally, however, trying to time the market is not good for my blood pressure.

As far as management, I agree that it shouldn't be the only reason to buy. But it definitely should be among the first considerations.

I am invested in NLY because a company with a current yield of 7+% and a sustainable business model has an excellent chance of outperforming the S&P over the mid-to-long term. You can find a number of investments in the REIT / BDC arena that fit the profile. Transparency by management mitigates the risk, though.

I agree with you that the mortgage REIT business is a “conservative, easy to understand business.” However, the business is inherently leveraged and the accounting is complex. The biggest risk to a consistent 7 – 10+% yield is some event that causes a liquidity crisis. I will pay a premium for a company like NLY that focuses on the creditworthiness of its portfolio, does not use derivatives and cuts the dividend when the short-term business outlook deteriorates.

A normal reaction to NLY cutting the dividend should be disappointment over the lost yield. For me, though, it's a sigh of relief. It tells me that management will take the necessary steps to weather any storm and my long-term return will be the “normalized” return. If the housing market implodes, I have less confidence that the mortgage REITS with less transparent management will survive to deliver those 9+% yields.

Nice post, though. Let us know when we're at a good entry point.
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