There’s something to be said about investing in stocks that have been battle-tested – more simply stated, it comes down to seeing a company take a financial punch and keep on going, or as the old Timex slogan went, “it takes a lick’n and keeps on tick’n.
There’s just no company that’s immune to risk. As Howard Marks wrote in The Most Important Thing, “risk is inescapable…you’re not unlikely to succeed for long if you haven’t dealt explicitly with risk.”
Accordingly, the companies that have persevered under pressure have oftentimes matured into stronger and more trusted brands. As Marks explained, “risk is the potential for loss if things go wrong” and managing risk under stress is one of the most critical aspects to investing.
However, the true mark of superiority in an investment operation is when a company “rises to the occasion” – when risk is the highest – and then skillfully controls it (while confronting adversity head on). That’s the inflection - a time when the cream rises to the top…the men are separated from the boys…and the overall investment operation becomes battle-tested.
The Flight to Quality
Warren Buffet often stresses the importance of investing in companies that are battle tested or as he described them as “economic moats” – these businesses offer structural advantages that protect them from competitors. Arguably, economic moats provide meaningful defense mechanisms, yet sustainability is equally important for assessing the overall merits of a security.
By fending off risk over long periods of time, the battle-tested companies have been able to withstand threats while also earning high returns on capital for many years into the future – increasing earnings, returning cash to shareholders, and compounding intrinsic value.
Warren Buffett once said (Fortune 1999), the key to investing is …determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”
A Few Battle-Tested REITs
The Great Recession offers the most recent period in time to examine perseverance under pressure. Remember that REITs weren’t the only securities under fire, the financial collapse was only paralleled by the Great Depression and saw the end of Lehman Bros and Bear Sterns with the near collapse of
The financial markets were in utter turmoil and there was no certainty that any REIT would have access to the capital, as a result, many public REITs chose to be proactive and access capital, and cut dividends.
However, a handful of REITs were better prepared, opting to control risk while maintaining consistency in profits. By continuing to grow dividends, even during the darkest hours, these battle-tested brands flexed the ultimate sign of corporate strength – delivering on a promise and commitment to shareholders – RAISING DIVIDENDS under pressure.
These favorite five REITs (the Fab 5) have earned their mark of excellence by steering their vessels through turbulent times, never losing focus on the most important thing – managing risk under pressure. Realty Income (O),
...a record of continuous dividend payments for the last 20 years or more is an important plus factor in the company’s quality rating.
Brad Thomas is the Editor of the Forbes Real Estate Investor and in his Forbes.com column, REIT Beat, he provides insight into the world of commercial real estate investing. Thomas is considered an expert in real estate securities with a keen eye on value investing. It really comes down to understanding the true definition of “buying low and selling high” (as Donald Trump insists) or investing with a “margin of safety” (as Benjamin Graham wrote). Ironically, Thomas considers himself a hybrid of these two successful investors, as he explains, “all I wanted to be when I grew up was Ben Graham in a real estate wrapper”. In addition to writing frequent articles for Forbes and Seeking Alpha, Thomas is also a frequent guest on Fox Business and he is writing a book about the secrets behind the legendary billionaire,Donald Trump.
The author owns shares in (O), (HCP), and (WPC).
