Thinking aloud: AX.UN

(Disclosure: I've owned Artis REIT for more than two years)

Being a long-term value investor, I try not to worry too much about short-term fluctuations, but that doesn't mean I'm not keenly interested in the reasons behind them. If a stock loses, say, 10% of its value, I want to know why. Did earnings fall off a cliff or did they lose a key customer? Or did it simply get knocked back by a broad market sell-off, but still has a decent long-term outlook? If it's the former, I'll probably avoid it, as it may have further to fall. But if it's the latter, I might kick the tires and take a stake if it's suddenly on sale.

The point is, I'm more than willing to live with my stocks being in the red (temporarily) as long as their long-term prognosis looks good, and as long as I can understand, sort of, why the market values it one way or the other. I like my companies to be predictable -- even when they have bad news, is what I'm trying to say.

It's why, despite the fact that's its actually made me money, one stock that's always been a noggin-scratcher for me is Artis Real Estate Investment Trust (AX.UN on the TSX.)

Artis has always been something of an anomaly, because it's done inexplicable things in both directions for as long as I've owned it. Typically, REITs are steady, dependable sources of income, that shouldn't be counted on much for capital gains. I bought Artis in 2006 when I was looking for exposure to two things in my portfolio: real estate, and the booming economy of Western Canada. I figured Artis (then known as Westfield REIT) was a good proxy for both.

In the first 12 months that I owned it, Artis' unit price increased by nearly 30 percent, and that doesn't even include distributions. Nice, but not exactly typical REIT behaviour, especially since the company was shelling out a disturbingly high percentage of its cash flow in distributions. In the year or so since then, it's been picked clean of most of those gains, before recently starting a mini-march upwards again. All this, despite the fact that its holdings and focus (retail and industrial properties in booming Western Canada) have remained largely the same. As I said, it's been quite the head-scratcher.

I'm oversimplifying a little, but conventional wisdom has it that falling interest rates are good for REITs. So you would imagine REITS have been doing quite well since the end of last year -- but you'd be wrong. They've started inching up a little of late, but the sector sank like a stone from about September until early 2008.

As I said, it's not the what that concerns me -- it's the why, and frankly, with Artis and Canadian REITs in general right now, I have no idea. The REIT's FFO recently increased (meaning they have more cash on hand available to pay distributions) which is nominally a good thing, but the marker hasn't really rewarded them too much for that yet.

I like to make informed investment decisions, but to be frank, while Artis was riding high, I didn't understand what was going on, and now that it's doing less well, I still don't get the rationale. That seems like a bad sign to me, so I'm thinking of selling my stake. I'm not in any urgent rush or anything. But since I'm slowly migrating my portfolio over into a passive ETF-based one, at some point soon I'm probably going to sell AX.UN and put the proceeds into a broad-market ETF, or possibly even the REIT ETF, if I want to maintain a real estate presence.

Who am I to ignore Warren Buffett's advice -- holding an asset I apparently don't understand (even one that's managed to make me money) it doesn't leave me with a very good feeling, and might be a pretty good signal to sell.

Nothing imminent, but it's safe to say Artis is officially on notice.

The forest for the trees

As investors, we tend to get caught up in the fact that the stocks we buy and sell, when you strip away all the hype and/or pessimism around them, have some sort of quantifiable, underlying value to them. They're worth something in absolute terms, we reason, every time we buy a stock. If they didn't, why would we buy? They don't bring us any pleasure or improve our lives in any way, really, like a consumer product might do. They're pure financial instruments, so what's the point of buying them if we're knowingly paying too much for them? It must be quantifiable somehow, we tell ourselves.

But as much as I understand, and to a certain extent believe in, concepts like fundamentals, efficient markets and intrinsic value, the thing I'm learning as I age as an investor is that ultimately, none of of these companies are worth a penny more than what somebody else is willing to pay for them at any given time.

Among numerous other things to his credit, Ben Graham came up with the concept of Mr. Market. Mr. Market was essentially the collective wisdom of all the other investors but yourself, setting the prices for what he was willing to pay for any given security, often regardless of what the business was worth yesterday or how much money they actually make. He sometimes goes by different names, but Mr. Market has since made an appearance in a variety of different investing books.

I thought I understood the parable, but it's really hitting home of late, because my own stocks have been quite volatile for the last few months. Sometimes, I've been able to pin it on one particular event of piece of news. But often, I'll watch my stocks gain or lose several % in a single day without any idea why it's happening. I find it hard to learn from those sorts of situations.

Value investors like me love the thought that they're buying stocks "on sale." The rest of the market may not like it, but we're the kind of people who secretly cheer when a blue chip company's stock gets hammered, because it opens the door to us owning the company "for less than what it's actually worth." But really, there's nothing to say what a stock is going to be worth tomorrow, much less 30 years from now.

As much as we can try to ensure we keep an eye on things like cash flow, low P/Es, dividends and whatnot, ultimately, there isn't a thing we're going to be able to do if our cash-generating, dividend-paying, recession-proof blue chipper isn't catching Mr. Market's attention at any given time. Our options then are the same that they always are: sell to him for whatever he's willing to pay, or hold in the hopes he'll change his mind later.

Something to keep in mind at the moment, while you watch your blue chippers sink like a stone despite growing earnings, and wonder why.