KISS: Keep It Simple Starwood

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Summary

I was previously bearish on STWD’s business model, but the moving parts began to blur my analysis.

I always seek to limit my area of focus by investing by utilizing the K.I.S.S. model (keep it simple stupid).

Some will argue that conglomeration is a strategy that should provide value to STWD shareholders, but I don’t consider complexity a strategic initiative.

You may recall that in February I downgraded shares in Starwood Property Trust (STWD) from a BUY to a HOLD. In an article I explained,

“I am not interested in the complexity related to STWD’s evolving business model. The company is considered a conglomerate and I am not certain that the market will reward STWD for its complex operating model.”

As my readers know, I was previously bearish on STWD’s business model, but the moving parts began to blur my analysis. Understanding the limits of your circle of competence is important for any investor, and I always seek to limit my area of focus by investing by utilizing the K.I.S.S. model (keep it simple stupid).

When REIT management teams begin to widen their circle of competence it concerns me, and that was the case with STWD. As Charlie Munger explained (in the 2014 Berkshire Annual Meeting),

“I don’t think that it’s difficult to figure out competence. If you’re 5’2”, sy no tp professional basketball. Ninety-two-year-old, you’re not going to be the romantic lead in Hollywood. At 350 pounds, you don’t dance the lead in the Bolshoi ballet…Competency is a relative concept.”

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The Business Model

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