DocSnowball

Many have had phenomenal returns with a large portfolio. Lynch owned on the order of hundred(s) of stocks and he killed the index. So did Schloss. Even buffett had around 100 holdings in the 60's. I think concentration on half dozen stocks should absolutely be value plays. That is they should be sure bets on undervalued assets -- not earnings. You’re right, everyone has to have their own investment philosophy and it can be concentrated or diversified. Personally, I’ve only found 3 ideas in 3 years despite looking and have not been able to diversify (Goal is 5-15 total investments). If valuation is from growth assets rather than current assets, then a much bigger margin of safety than 25% is desirable, more like 50% plus - if there is more risk, one has to be sure to be adequately compensated for that higher risk.

Great post - I’ve been thinking of the same. After completing my MBA and studying healthcare and investing for two years, I find myself with a very small circle of competence in my area of expertise in a subspecialty of medicine, barely. So I can either concentrate and know what I’m doing, or diversify. I’ve chosen the former and that too in micro and small cap companies (only 2 so far where the initial investment thesis was not disconfirmed), where I have a reasonable idea of their business model, story, valuation and teams. It is def a roller coaster, one has gone from a share price of $3.50 to 27 to 10 over the last year! Time will tell, but imho wealth is created by concentrating in good ideas, as long as you don’t lose money doing so. Otherwise what’s your edge over simply indexing (when valuations are reasonable)

+1 seems to be something put in place a while ago. The legalese is beyond me, but glad it does not take away from the catalyst of upcoming threat of a draw when DTAs change Here's another WSJ article from today - their new found appreciation of FnF's business model is almost too good to be true. https://www.wsj.com/articles/treasury-will-allow-fannie-freddie-to-retain-small-capital-buffer-1513867331 Quoting part of it "The Treasury agreed to modify the terms of the U.S. backstop of the companies after discussions initiated earlier this year at the request of FHFA, said senior Treasury officials on Thursday. Fannie and Freddie have reported strong profits in recent years because they have dramatically restructured their underlying business of guaranteeing mortgages that are bundled into securities and sold to investors. They have raised the fees they charge lenders and are guaranteeing higher-quality loans than they did before the housing bubble burst in 2007. Through September, Fannie and Freddie have paid around $276 billion in dividends to the Treasury, while they were forced to borrow some $187 billion in the years after the 2008 financial crisis."

I’d been wondering why contents of the Senate bill would be leaked to Bloomberg, by those not friendly to GSEs. Now it makes sense, to prepare the ground for this capital retention perhaps?

https://www.fhfa.gov/Media/PublicAffairs/Pages/Statement-from-FHFA-Director-Melvin-L-Watt-on-Capital-Reserve-for-Fannie-Mae-and-Freddie-Mac.aspx

More Uncertainty now (range of outcomes) versus Risk of loss (higher probability of negative outcomes) as in the past For me, the Cato institute discussion back in July was an aha moment, after the Moelis blueprint showed a viable plan forward - in that discussion, those advocating for GSEs to be wound down basically came to admitting that the 30 year mortgage would also need to end with them!

Even if dividends turn on in 2020, once the uncertainty is resolved valuation is easy to calculate and not too far from par

Waiting to see the bill now, enough rumors. The title of the article is different now https://www.bloomberg.com/news/articles/2017-12-15/fannie-freddie-talks-focus-on-finding-rivals-for-mortgage-giants “Fannie-Freddie Talks Set Competition as the Cost of Freedom“ Also, now relook at the last FMCC earnings call,which I posted at that time, quoting CEO Don Layton, how he is positioning FMCC going forward “First, I will address overall corporate financial and operating results, they were excellent on several levels. Second, I will get into the individual lines of business. Behind the specifics of each, you will hear the recurring theme of business transformation, a big part of which is going from the not-very-competitive past to the very-competitive present, where we compete as if there were 3 or 5 or 8 GSEs not just 2.”

Regarding point 2: just because NWS has been deemed legal, does not imply that liquidation can be done without just compensation, correct? That would be a whole new can of worms (liabilities) to consider, instead of the 100B plus asset for Treasury if the companies survive? What I don’t get is Rs bill to tie the hands of its own administration, unless its posturing and a head fake to get what they want from the administration.

Scratching my head how this bill is coherent with the RNC resolution! Inverting, we all knew about Hensarling and the historical republican position re: Anti recap and release of the GSEs, so I wonder what sequence of events and people led to the GSE shareholder friendly resolution being passed back in July - just doesn’t add up. I came close to hanging up on this investment after looking at the rider extension in this bill, then reminded myself my thesis was never based on trusting the republican legislators to get this done. This is, as it has been since February, a thesis based on the motives of the administration with an easy 100B plus and a political win on a platter while giving Obama a black eye, and the GSEs being irreplaceable. Good luck everyone!

A bit late to the discussion, apologies for repeating - What is within my circle of competence (after two years of learning)? Nothing yet! I do think there is such a circle, where one can have a rough idea of: 1) the valuation of a company and how unfolding events may affect the probabilities of valuations and in what direction 2) the business model (how a company makes money), the strategy (the unique value proposition of the company and how it creates value for itself and its customers) and how th financials support this strategy and what key metrics show it is working 3) the industry, ecosystem and competitive landscape - enough to understand what events are fundamental and what are noise 4) the management team, at least to have assessed whether they are competent and honest I think Buffett’s four filters describes it well already, but only experience teaches us how hard it is to develop this circle and stay within it. In two years I barely understand the new antibiotics landscape! So I’m compensating for having a very very small circle by taking the risks of concentrating until I can expand the circle or indexes become obviously undervalued.

VALUATION ATTEMPT: Back in Feb 2017, Judges Millet and Ginsburg wrote that our company is not undergoing "liquidation" in their opinion, and like a good corporate finance student I first calculated the net present value of my equity FNMAT as promised in the prospectus (8.25% dividends unless called back at par, valuing it as a perpetuity). If dividends are turned on in future it will be a delayed perpetuity and discounted further based on when dividends are turned on. I'm revisiting this today to compare this option (the odds of this best case scenario) to alternative investment decisions. NPV = Dividend/(r-g) where r is the discount rate and g is the growth rate (assuming zero growth rate, and beta =1 for a low risk utility) Using Professor Aswath Damodaran's discount rate teachings, Discount rate = Risk free rate + Implied Equity risk premium at current level of index*Beta = 2.37%+ (4.68%*1) = 7.05% NPV whenever dividends turned on (example today) = 2.06/0.0705% = 29.22 FOR FNMAT NPV if dividends turned on after capital raise completed 12/31/2020 as per Moelis blueprint (3 years from now) 29.22 discounted back at 7.05% = 24.00 for FNMAT EDIT: based on this valuation and revaluing it as an option at current price of 6.87, markets are giving 28.6% chance of this working out. That is still a mispricing with the ever-changing narrative

+1 Trump has called infrastructure a “very easy one” to pass in the past.

Keep in mind the warrants that the gov't owns. They would give up a few billion per quarter by stopping the NWS but would gain a massive amount of cash ($100B+?) almost immediately by the common stock rising and the warrants being sold/exercised/etc. With a maximum 7-year window for this Administration, perhaps 3-year window, I'd rather have a massive payment up front to use at my disposal. And ? use this upfront payment to move forward administrative initiatives needing that 100B to balance the budget to be deficit neutral. Certainly the motives of the administration align with monetizing the warrants.

mnuchin has laid the groundwork that he's the boss in this area. he's currently however in a year-long quiet period on the matter. crapo merely reads some lines given to him by his junior aide which jives with the lobbyists who buy the aide's dinners and wine. the key question, for me, is what does mnuchin really want, besides the 2 standard lines he's given to date. I liked the response of not agreeing to dismantle FnF a couple weeks ago. At 2 standard lines per year we should be able to have a full paragraph by the time Trump's term is over. Not bad. The legal thesis was already weakened considerably after the February sixth circuit ruling - those banking on the legal thesis should have bailed already. I certainly considered it but hung on because of the administrative thesis odds working out being much better than the share prices reflect, I'd say 50% plus in a 4 year timeframe vs 20% suggested by the price. The one comfort the law still provides is if further action like liquidation is taken, it may bring with it more meritorious lawsuits. Plus the remand to Lamberth for pre-2008 shareholders, and the contract argument still up in the air from Fairholme about contract rights being transferred with the sale of stock to new stockholders even after 2008 (at least it has not been dismissed so far). Still, unless the Supreme court takes up the issue of whether HERA is itself unconstitutional by violating the 5th amendment, it is hard to see how the legal aspect will bring investment rewards just on its own merit. imo catalysts still there are tax reform if it passes and the draw it will threaten to bring with tax cuts, coupled with the administration's consistency bias with its repeated statements to address housing and GSEs and the enticing 100 bn plus that recap will bring that is desperately needed by the Treasury. If they want that recap money, they will have a hard time doing so without aligning it with shareholders interests in some way. Any alternative plan, including maintaining status quo, will need to bring similar benefit to the Treasury to be competitive. Also, I am not aware of any instance so far of this administration trampling upon Trump supporters, which cannot hurt our cause.

Happy Thanksgiving to everyone reading this, wherever in the world you are!

Just reading the sixth circuit decision in Robinson vs FHFA. Again affirmation that FHFA can do whatever it wants as long as it is fulfilling its duties as conservator or receiver (even if it infringes my rights as a property holder under the Fifth amendment). Bizarro! But we’re not expecting much from the Courts at this stage anyway

How is this accessible to US residents?

What is the best place to park short term to medium term cash part of this anti fragile portfolio?

In my field of infectious diseases - companies making next generation antibiotics to treat resistant bacteria, like Paratek and Achaogen are interesting- caveat is it should be a zero to one kind of drug, be available to use inpatient and outpatient and the company although small has a fortress like balance sheet w cash on hand. If economies do well, they do well with tailwinds of aging population, increase in drug resistance in a compounding fashion, and the GAIN act for additional 5 years market exclusivity, or get bought out via big Pharma. If wars/ flu pandemics/ natural disasters occur then after the emergency stage is over there are more infections in the population due to poor sanitation needing treatment. If recessions occur or costs of care keep rising, Insurances want less people admitted to hospitals and pay up for drugs that prevent hospitalizations. Not correlated much with the indexes and worldwide value potential. Thoughts?

Chapter 8 of my favorite investment book. :-) Reminds me of the “it was the best of times, it was the worst of times” quote I think from rros. It is a strange and moody mr. market or mrs. market - some of my small cap biotechs are also down to 40% of summer valuations while their story is moving along just fine, this despite indexes being at tops. Those of us who have looked for investments not correlated with the indexes are getting just what we wished for...

the thesis is alive and well, nothing in this interview to disconfirm. Very similar in timing and content to what was said almost a year ago, interestingly. It was an emphatic "No I wouldn't" answer to the question of killing the companies. Just a waiting game once tax reform is done with, tick tock...

From FMCC earnings call, quoting CEO Don Layton, interesting to note how he is positioning FMCC going forward “First, I will address overall corporate financial and operating results, they were excellent on several levels. Second, I will get into the individual lines of business. Behind the specifics of each, you will hear the recurring theme of business transformation, a big part of which is going from the not-very-competitive past to the very-competitive present, where we compete as if there were 3 or 5 or 8 GSEs not just 2.” I’m wondering how this happens. Perhaps some iteration of the Moelis blueprint, or Moelis part 2 after the companies are capitalized. Versus simply letting other competitors enter the market if they would like to. In any scenario, Fannie and Freddie don’t seem to be going away.

2009-2015 invested 50/50 in S&P 500 and emerging market index funds Fall of 2015 studied Value investing as part of my MBA @ U Mass Amherst and have been investing in individual securities since. Concentrated portfolio of only 3 core investments since then (two emerging pharma companies and fannie/Freddie preferred) a fun ride and a tremendous learning journey. Glad to have stumbled onto this message board when researching value investing resources. The investment thesis that I ended up disconfirming like AAPL, FXI and PYPL have gone up by 50%-100% as well, so not sure what my skills have to do with anything. Just enjoying the experience of being a business owner!

Which bill? Is there a link to the bill itself?