4 ms·

Fannie, Freddie and You: What It Means to the Public

14 points by dpapathanasiou 18y ago

byrneseyeview 18y ago
It is now clearer than ever that there is no such thing as a truly safe single investment — not a big savings account at IndyMac, not the auction-rate securities that have caused so many problems for scores of investors and not supposed blue-chip stocks like Fannie Mae or Freddie Mac that you might buy on your own, outside of a mutual fund. So, who is more likely to have owned some FNM and FRE: someone with 100 different investments, who must thus spend less than 1% of their time investigating any given holding (perhaps far less, if their research ever causes them to reject a potential investment); or someone with five or six investments, who thus spends a lot of time thinking about each one, and about what sorts of minor problems or unusual events could make those companies worth a lot less?
- huherto 18y ago
  Is that a rhetorical question? Of course the one with 100 different investments is more likely to have own FNM and/or FRE. But, he only had 1% of his investments on that. On the other hand, if you only had 5 investments then you may have had 20% of your investments in FME or FRE.
  - byrneseyeview 18y ago
    The point is that the expected value for making a few investments is higher, if you put any effort at all into picking them. I just mean that if you have twenty people with five stocks each, versus one person with 100, I am betting that the latter will have more disasters, and fewer great picks. Although from one day to the next, 100 will show lower volatility. Sort of like how if you decided to pursue your MD, JD, MBA, and PhD, this diversification would insulate you from the risk that you're not cut out for legal work. But would still be a terrible idea.
    - soldarnal 18y ago
      There are two assumptions you're making that may be invalid: 1) That the 100 stocks are picked at random 2) That studied (non-random) investments beat out index (random) investments Even mutual funds are managed and carefully studied by financial institutions. And Warren Buffet, at least, seems to think that the S&P will outpeform the majority of hedge funds over a long period.
      - byrneseyeview 18y ago
        Your first assumption is incorrect. I never said they were chosen randomly, and specifically mentioned researching those 100 stocks. Since I did not say that the stocks were random, and also said that they were not random, I am not sure where you got that idea. It seems fairly unlikely to me that there is no value to research. The average person's research may have low marginal value, but I cannot help but notice that some folks are able to research a company, articulate why it's a good company to invest in, and be right. It would be kind of funny if stocks were the only financial transaction in which doing less research was an advantage. Of course, for pecuniary reasons I won't discourage you from investing on that assumption. The average hedge fund is not necessarily trying to outperform the market. Many of them are looking for higher risk-adjusted returns (i.e. being up when the market is up, and up less when the market is down). And to some extent the low future returns of hedge funds can be blamed on outside investors: a fund with a good record can scale up tenfold within a year once investors start chasing them -- that hurts returns, but their fees can convince managers to take on the extra money anyway. Finally, the hedge fund comparison is silly because you (probably) don't pay a 2 and 20 on your own personally selected investments. If you do, I would suggest switching brokers. Since Buffett's bet is at least partially a bet that the high returns don't justify such high fees, you might pay attention to the gross returns rather than the net returns.
        anamax 18y ago
        > The average hedge fund is not necessarily trying to outperform the market. Many of them are looking for higher risk-adjusted returns (i.e. being up when the market is up, and up less when the market is down). What do you think that "outperform the market" means if not "higher risk-adjusted returns"?
deleted 18y ago
[deleted]

It is now clearer than ever that there is no such thing as a truly safe single investment — not a big savings account at IndyMac, not the auction-rate securities that have caused so many problems for scores of investors and not supposed blue-chip stocks like Fannie Mae or Freddie Mac that you might buy on your own, outside of a mutual fund. So, who is more likely to have owned some FNM and FRE: someone with 100 different investments, who must thus spend less than 1% of their time investigating any given holding (perhaps far less, if their research ever causes them to reject a potential investment); or someone with five or six investments, who thus spends a lot of time thinking about each one, and about what sorts of minor problems or unusual events could make those companies worth a lot less?

huherto 18y ago
Is that a rhetorical question? Of course the one with 100 different investments is more likely to have own FNM and/or FRE. But, he only had 1% of his investments on that. On the other hand, if you only had 5 investments then you may have had 20% of your investments in FME or FRE.
- byrneseyeview 18y ago
  The point is that the expected value for making a few investments is higher, if you put any effort at all into picking them. I just mean that if you have twenty people with five stocks each, versus one person with 100, I am betting that the latter will have more disasters, and fewer great picks. Although from one day to the next, 100 will show lower volatility. Sort of like how if you decided to pursue your MD, JD, MBA, and PhD, this diversification would insulate you from the risk that you're not cut out for legal work. But would still be a terrible idea.
  - soldarnal 18y ago
    There are two assumptions you're making that may be invalid: 1) That the 100 stocks are picked at random 2) That studied (non-random) investments beat out index (random) investments Even mutual funds are managed and carefully studied by financial institutions. And Warren Buffet, at least, seems to think that the S&P will outpeform the majority of hedge funds over a long period.
    - byrneseyeview 18y ago
      Your first assumption is incorrect. I never said they were chosen randomly, and specifically mentioned researching those 100 stocks. Since I did not say that the stocks were random, and also said that they were not random, I am not sure where you got that idea. It seems fairly unlikely to me that there is no value to research. The average person's research may have low marginal value, but I cannot help but notice that some folks are able to research a company, articulate why it's a good company to invest in, and be right. It would be kind of funny if stocks were the only financial transaction in which doing less research was an advantage. Of course, for pecuniary reasons I won't discourage you from investing on that assumption. The average hedge fund is not necessarily trying to outperform the market. Many of them are looking for higher risk-adjusted returns (i.e. being up when the market is up, and up less when the market is down). And to some extent the low future returns of hedge funds can be blamed on outside investors: a fund with a good record can scale up tenfold within a year once investors start chasing them -- that hurts returns, but their fees can convince managers to take on the extra money anyway. Finally, the hedge fund comparison is silly because you (probably) don't pay a 2 and 20 on your own personally selected investments. If you do, I would suggest switching brokers. Since Buffett's bet is at least partially a bet that the high returns don't justify such high fees, you might pay attention to the gross returns rather than the net returns.
      - anamax 18y ago
        > The average hedge fund is not necessarily trying to outperform the market. Many of them are looking for higher risk-adjusted returns (i.e. being up when the market is up, and up less when the market is down). What do you think that "outperform the market" means if not "higher risk-adjusted returns"?

deleted 18y ago

[deleted]