Serenity Alternative Investments Blog - REIT Strategy I: Stacking The Deck - Systematic Value And Momentum

Serenity Alternative Investments Blog - REIT Strategy I: Stacking The Deck - Systematic Value and Momentum

“Chance can be thought of as the cards you are dealt in life. Choice is how you play them.”

Edward Thorp

So here is a question. If you could remove any single card in a deck before playing blackjack against a dealer, which card would you choose? It’s not a trick question, there is an answer that maximizes your chances of winning. Take a minute to mull it over.

Which card would you pick? Did you pick an Ace? Queen? Lucky number seven? You didn’t pick the number five did you? If you did then you are either lucky, a nerd, or possibly, you are a lucky nerd. Five is the correct answer to the question. Knowing that fewer fives gives the player better odds is also the first step towards a comprehensive system of card counting. It was this knowledge and eventual system that allowed a man named Ed Thorpe to legendarily beat the game of blackjack and consistently make money in Las Vegas casinos.

During the early 1960’s Ed Thorpe developed one of the earliest mathematical models of the game of blackjack, and in the process discovered that by removing a single 5 from a deck of cards, the Casino’s advantage decreased by 0.8% per hand. He also discovered that removing an Ace increased the casino’s advantage by 0.58% per hand. While this 0.8% difference seems small, it’s actually enough to flip the game in the player’s favor, and, over long periods of time, makes it likely that you will beat the casino. At the time it was a pretty remarkable discovery.

Thorpe went on to develop a full system of card counting and used it to make real money playing blackjack in Reno and Vegas. His approach to the game rested on creating a small advantage that added up over a multitude of hands played. Thorpe’s second act was in the stock market, as he again used a mathematical framework to gain a small edge over the seemingly un-beatable institutions that make up “the market”. These strategies relied on historical edge, systematic implementation, and a huge amount of discipline. When employed correctly, the strategies were extremely profitable.

So how on earth is this relevant for REITs? Is there a five that we can remove from the REIT deck to help us make money? In this piece we will explore two strategies for picking REITs and see if these strategies give us a sustainable edge when applied systematically. What we find is that common value and momentum strategies can shift the odds of beating the market in our favor.

View the rest of the post here.