December 15, 2022

JF3024: The Most Important Metric for Passive Investors | Passive Investor Tips ft. Travis Watts

Passive Investor Tips is a weekly series hosted by full-time passive investor and Best Ever Show host, Travis Watts. In each bite-sized episode, Travis breaks down passive investor topics, simplifying the philosophy and mindset while providing tactical, valuable information on how to be a passive investor.

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In this episode, Travis discusses why he believes track record is the most important due diligence metric. Using stocks and real estate private placements as examples, he explains how to properly evaluate a track record and the most important questions to ask before deciding to invest.



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Travis Watts: Welcome back, Best Ever listeners. I'm your host, Travis Watts; you're listening to Passive Investor Tips, right here on Best Ever. In today's episode, what we're covering is the most important metric for passive investors. Disclaimers, as always, never financial advice; not telling you or anyone else what to do. Please conduct your own due diligence. This is educational purposes only.

And with that out of the way, no matter what we're talking about, whether it's real estate, private placements, whether it's stocks, whether it's any other form of asset that produces passive income, as an investor myself, if I could only have one piece of due diligence to conduct before making an investment decision, I would say that the most important metric is track record. And I'm going to share with you why in this episode.

Let me draw a quick analogy using the game of golf. Let's say I'm out one day, playing a round of golf, and on the very first hole, I make a hole in one. Now imagine, I take that experience and I create a course that other people can purchase, and it's how to be a great golfer. So if we flip that around, and as a consumer, if I was somebody looking to potentially buy that course, and I was conducting some due diligence before I made a purchase, my first question would be, "What's your track record? How many times have you done that? Do you hit a hole in one 8 out of 10 times? Show me the proof." And if you do hit a hole in one 8 out of 10 times, I'm probably interested in buying your course. So that analogy can relate to doing your due diligence for an investment.

There's a lot of new syndicators or general partners in the space that are looking to do their first and second deals, they're out there podcasting and blogging and writing articles about the power of real estate and why invest in real estate... But as an investor looking at their deals, I'm always asking the question, "Have you done this yet? If so, how many times? What is your track record? Did you have any deals go bad? What are your successes? Have you lost investor capital? I want to know the details of your track record." To quote the famous film Jerry Maguire, "Show me the money", right?

So let's take a look at a couple of visual examples. I'm going to start with the example of stocks, and I'm going to put a couple things here up on the screen if you're tuning in on YouTube. If you're tuning in on audio, I'll do my best to articulate what's being shown on the screen. So if I'm an investor looking for dividends or passive income, and I'm going to use the example first of looking at the stock AT&T, ticker symbol T. So as you can see here on your screen, there's a 38-year history of dividends, and the chart here - it looks like it goes back to about 1995... But you can see that they've consistently paid out dividends year over year, most of the time; that's been up-trending up here, until recent. So this gives you a bit more surety of "Are they going to pay a distribution moving forward?"

In contrast, I'm going to pull up another stock here, GM, General Motors, ticker symbol GM, and you can see here that yeah, they were paying dividends for numerous years consecutively, but in 2021 and 2022 they stopped paying distributions. And this all comes down to evaluating track record. Now, you can obviously evaluate the price of the stock as well, but we're talking about passive income in this episode.

Break: [00:05:01.16] to [00:07:03.03]

Travis Watts: Now let's examine another type of stock where there is no track record. So I want to focus on IPOs, which stands for initial public offering. And that means it's the first available time for consumers to invest in the stock when it goes public on the market. So in other words, there isn't any history that you can pull up, because it's just now being publicly-traded. And IPOs, generally speaking, are associated with the most amount of risk, because you don't know what's going to happen right out of the gate. Again, to draw the parallel to private placements, someone doing their first deal, you really don't know how that deal is going to go, or how they're going to be as a management team or as an asset manager... So keep that in mind as you're evaluating deals.

So the first example we'll show here is BroadMark Capital, ticker symbol BRMK. This is a publicly-traded REIT, which is a real estate investment trust... And you can see that they IPOed in 2019, somewhere around $10 per share, went up to almost $13 per share, and then zoom forward two years later, they're trading at about $5,5 per share. So they've lost between 40% and 50% of their value. When they IPOed there was no track record to show past performance, therefore investors had to take on more risk.

Another famous example of an IPO was Facebook, as a company now called Meta. They IPOed in May of 2012, and they IPOed, as you can see, at just about $40 per share, and right out of the gate lost nearly 50% of their stock price. Again, not having any kind of track record... No one knew what to expect with a company like that in 2012.

So when I'm looking at a real estate private placement - I'll reel it back into real estate since this is the Best Ever commercial real estate platform - this is what I want to see, what you see here on your screen, as a track record from a syndicator or general partner. They've taken 17 deals full-cycle all the way through the business plan. They had nine recapitalizations, which means that another investor bought out the limited partner, so it's kinda like a sale, but a little bit different, in technical terms... They have increased the net operating income 32.9%, they've given their investors 22.7% annualized IRR over the hold period, and a 1.7 equity multiple. Notice here, no deals lost capital.

So let's talk about deals gone bad, because deals will go bad. There's things like capital calls, where the general partners have to call up the investors and ask for more money, there could be a pause and distributions, there could be a deal that actually lost investors capital... So when you come across that, it's not to say that I haven't invested with groups that have had these circumstances happen, I just want to ask the proper questions. What happened? What were the circumstances? What did you do about it? What systems or changes have you put into place so that that doesn't happen again? And I just want to know how they responded to the issue. And I kind of base my decision on whether or not I'm going to invest on how they handled the situation.

Now, obviously, there's a lot more due diligence that you and I have to do when we go to make an investment, but in this episode, I want to highlight what I feel is the most important metric to look at, and I find that to be track record. So hopefully, this episode added some value to you. This is Passive Investor Tips. I'm your host, Travis Watts. Thank you so much for tuning in. Have a best ever week, and we'll see you in the next episode.

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