Under-Reaction to Property Plays

If investors has certain biasness to over-react to certain situations like a single bad quarter, investors may also have some biasness to under-react to other situations. And recently, I discover my own biasness to under-react to a property play as I bought smaller stake in that property stock than I would buy if it is some other stock.

I do not normally buy property stocks due to my lack of understanding to value them in the long run. Or in other words, it is difficult for me to apply discounted dividends or cash-flow method to property stocks. In most local research reports, they would use a RNAV (Realized Net Asset Value, if I’m not wrong) to value property stocks. I recognize that I lack the understanding in properties to do an estimate of RNAV, so I generally do not buy property stocks until two weeks ago.

Around two weeks ago, I bought into Orchard Parade at $1.10 as I think that it may be a rare case of a property stock that I recognize as low-risk with good gains. There are two main reasons behind my thinking. One, Orchard Parade’s price is around two-thirds of its net asset value at $1.64 in its latest annual earnings announcement. This provides a certain margin of safety.

Second, I can see several factors that may lead the market to close up the gap between the stock price and the NAV. The most obvious factor is the very positive sentiments towards property stocks, especially property stocks with buildings in the city area. Orchard Parade owns a freehold hotel near Tanglin Mall. Another factor may be the possible further increase in the NAV of Orchard Parade due to increasing prices of properties in the city area.

Perhaps with Orchard Parade’s price rising to its current level, I may be suffering from a hindsight bias when I lament that I should buy more of Orchard Parade at that time. However, when I look at my average position size in my portfolio which is larger than my Orchard Parade’s holdings, I realize that I may have under-reacted or under-purchased Orchard Parade due to my biasness against property plays.

Nonetheless, I am unlikely to make any more purchase of property stocks due to lack of cash. Perhaps even though I recognize my biasness to under-react in property plays, I have not corrected fully for my biasness. In most cases, property plays will still be quite alien to me.


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