The WSJ asks an interesting question: Public REITs Are Down, Nontraded REITs Are Up. Which Is Right? (paywall?). Public REITs are traded on an open market with daily liquidity, and prices are down ~26% overall this year. Non-traded private REITs are simply assigned a value by the sponsors of the REIT, have very limited liquidity windows, and have somehow increased their net asset values (NAVs) slightly this year. That seems rather… convenient.

The valuations differ because public REITs are valued at whatever their shares are trading for on the stock market. Nontraded REITs are valued monthly by their sponsors working with independent appraisers analyzing how much the commercial property they own is worth.

As usual, I agree with whatever Allan Roth says:

“With nontraded REITs increasing their valuations while markets are punishing public REITs, I’d run for the hills,” said Allan Roth

Again, as usual, Matt Levine has a clever take with People Will Pay for Illiquidity:

Another, funnier sort of financial innovation is about subtracting liquidity. If you can buy and sell something whenever you want at a clearly observable market price, that is efficient, sure, but it can also be annoying. Consider the following financial product:

You give me the password to your brokerage account.
I change it.
You can’t look at your brokerage account for one year, because you don’t have the password.
At the end of the year, I give you back your password and you pay me $5.

[…] “It is well known that one of the best services a retail broker can provide is not answering the phones during a crash,” I once wrote; in this product I am charging you for that service. Your mileage will vary — perhaps you are good at market timing — but this service might well be worth more than $5 to you.

This explains one reason why private equity has become ever more popular amongst large institutions:

By being illiquid, the private equity fund can look less volatile. Getting similar returns with less volatility is good; getting similar returns and feeling like you have less volatility also might be good.

The inability to sell your non-traded REITs is a feature! So is accepting a made-up NAV instead open market pricing! It’s better that they hide the true volatile nature of “Mr. Market” from you. Kind of like telling your kids about how the dog went away to live on the farm. It doesn’t change the truth, but maybe they’ll feel better about it.

If seeing volatile market prices is bad, the best thing a passive DIY investor can do (besides own privately-held businesses) is not look at their brokerage statement. If you are truly a “long-term investor”, then what’s the point in looking at daily, weekly, or even monthly fluctuations? You don’t need the liquidity, so we should use that as a feature. People also love to anchor to the all-time high of their portfolio, even though it is really just an arbitrary moment in time. If you only check once a year, then you’ll most likely have missed a peak or a trough.

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The Value of Not Checking Your Investment Statements from My Money Blog.


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