The SWAN Factor: Unlocking The Secrets Behind The Durable Income Portfolio


Brad Thomas wrote this article and it has appeared previously on Seeking Alpha.


  • As my newsletter subscribers will read in a few days, the Durable Income Portfolio delivered strong results in 2016.
  • Much like the mysteries learned in my book, The Trump Factor, we also have a secret sauce behind the Durable Income Portfolio.
  • To be clear, the secret for our success is not in market timing or speculating on sucker yield stocks.
  • Always insist on quality and always buy them as you would groceries – when they are on sale!

As many of you know, I recently wrote a book on President-Elect Donald Trump's real estate portfolio called The Trump Factor: Unlocking The Secrets Behind The Trump Empire.
It took me a few years to research all of the properties, but the effort paid off as I am the only writer who has succeeded in analyzing each and every asset owned by Donald J. Trump.
From Scotland, to Ireland, to L.A., to San Francisco, to Miami, to West Palm Beach, to Chicago, to Charlottesville, to New Jersey, to New York - I have set foot on every property owned by the 45 th President, in an effort to determine the true value of the real estate portfolio.
To provide an unbiased analysis I decided that it was important to dig deep into the real estate portfolio, hoping to uncover mysteries related to Donald Trump's billionaire blueprint.
In other words, I did not want to be influenced by other news reports, I insisted on my own research or the work of interns and expert contributors. It was only after I began to look at the quantitative and qualitative factors that I was able to assess the true net worth of Donald Trump.
That's also my formula for analyzing REITs.
The SWAN Factor: Unlocking the Secrets Behind The Durable Income Portfolio
As my newsletter subscribers will read in a few days, the Durable Income Portfolio delivered strong results in 2016.
One of the reasons for the success is due to our tactical weighting strategy in which we balance the portfolio with long duration leases and short duration leases. In other words, we own around 50% healthcare/net lease REITs and 50% hotel/industrial/data center/infrastructure/other REITs.
We call these long-duration REITs "anchors" and the shorter-duration REITs "buoys". We recently wrote on the "anchors" HERE and the "buoys" HERE.
We believe that owning a healthy mix of "anchors" provides investors with stable income. Most healthcare REITs and Net Lease REITs payout higher dividends and growth is more predictable given the contractual nature of the lease agreements.
However, the "anchor and buoy" tactic is not the sole secret behind the Durable Income Portfolio.
Much like the mysteries learned in my book, The Trump Factor, we also have a secret sauce behind the Durable Income Portfolio.
While many of the so-called "market timers" have attempted to crack the code behind the Durable Income Portfolio, they never quite grasp the concept behind our tactical investment strategy.
After all, who can't be blamed for wanting to get the best things in life in the quickest possible way. The stock market seems to offer the most rapid road to fortune. As Frank J. Williams explained in his classic book, If You Must Speculate, Learn The Rules,
The creed of the new speculator is "I want to make a lot of money on little capital in a short time without working for it.
Williams went on to clarify that "there is only one narrow trail leading to permanent success in the stock market. Unless traders are prepared to climb that steep path with cautious steps, it would be better for them to stay out of Wall Street and to keep their money in the savings bank."
Yesterday I wrote an article summarizing the performance of the "High Alpha REIT Portfolio". We cautioned investors that "high alpha" means "higher risk" and even though the year-end results (+40%) were exceptional, risks were also outsized. We even offered the following antidote,
I don't care how good the REIT investor is, there is no way that anyone can hit home runs all of the time. That's why I did not say that my High Alpha portfolio was designed for the home run hitters - I'll leave that up to the Mortgage REIT analysts.
To be clear, the secret for our success is not in market timing or speculating on sucker yield stocks. Instead, the secret sauce behind our results is rooted in owning a large number of blue chip REITs. As Frank J. Williams explained,
An investor is one who buys sound securities where he knows his principal his safe and he will get a fair return on his money.
I'm not sure who originally coined the term "sleep well at night" but we consider SWAN investing to be the secret behind the Durable Income Portfolio. By carefully analyzing each REIT in our research lab we decide whether the company is worthy of inclusion in our esteemed "SWAN" list. As viewed below, we have 23 REITs classified as SWANs:

Data as of 11-25-16 (Source: S&P Global Market Intelligence)
Our Durable Income Portfolio includes 13 SWANs that represent around 60% of the invested capital (in the Durable Income Portfolio). This chart illustrates FFO growth in 2016:

As you can see below, only 4 SWANs under-performed the US SNL Equity REIT Index (7.19%) and the average return for all SWANS (excluded SPG since it was a recent addition) returned 12.3%.

As we assess our SWAN holdings for 2017 we consider the growth prospects as follows:

We always consider not only the earnings potential for the SWAN, but also the health of the dividend payout ratio. Obviously we have already screened the SWANs so we know the dividend is covered, but we frequently analyze the strength of the earnings stream to insure that there are no fluctuations that could jeopardize the dividend record.

To sum it all up, we own a large number of SWANs because we know that by including the REITs with the steadiest and reliable dividend growth, we gain an edge over the market timers and blindly buying index funds. We know that by owning REITs with consistent profit margins we can easily forecast the earnings and dividend potential of our REIT portfolio.
We find it astonishing to watch some of the pundits try to accurately time short-term market movements (as I have writtenabout recently), it's simply better to be in the market, invested in value stocks that offer the highest potential returns (than to play the timing game).
I frequently use the SWAN analogy to explain my frequent travels to the west coast.
When traveling from NYC to LA the market timers may use the mREIT vehicle much like a single engine plane. He will have to refuel in multiple locations and the ride will be somewhat bumpy, and eventually he will arrive somewhat flustered by his journey.
Conversely, the SWAN investor will travel in a safer vehicle that provides a more stress-free route. While he or she may encounter some air turbulence over Kansas, if the plane is in good shape, there's no reason to bail out. The SWAN investor will eventually reach the final destination without the stress - or what is commonly referred to as "sleeping well at night".

Source: S&P Global Market Intelligence
Just to remind you, the dependability of dividends is a big reason to consider buying stocks, not just REITs.
As I wrote in my book, The Trump Factor, Donald Trump engineered a diversified real estate portfolio to protect him from market fluctuations. Investors should also diversify to provide themselves with insurance in case one stock blows up. By owning a majority of SWANS, we have reduced the probability of such a catastrophe.
The SWAN Factor is really no different that The TRUMP Factor.
Buying stocks and real estate "cheaply" has been the best way to grow money. Stocks (of high quality companies) and Real Estate on sale reaps the highest returns. Always insist on quality and always buy them (stocks and real estate) as you would groceries - when they are on sale!
Happy New Year and Happy SWAN Investing!

We will be publishing our top picks for 2017 in the upcoming edition of the Forbes Real Estate Investor.
Author's Note: I'm a Wall Street writer, and that means that I am not always right with my predictions or recommendations. That also applies to my grammar. Please excuse any typos, and I assure you that I will do my best to correct any errors, if they are overlooked.
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The only guarantee that I will give you is that I will uncover each and every rock I can, in an effort to find satisfactory investments that "upon thorough analysis promises safety of principal and satisfactory return. Operations not meeting these requirements are speculative". (Ben Graham).
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.