

Fannie, Freddie and You: What It Means to the Public - dpapathanasiou
http://www.nytimes.com/2008/09/08/business/08consumer.html?_r=1&ref=business&oref=slogin

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byrneseyeview
_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
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
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
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
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
> 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"?

~~~
byrneseyeview
"Higher returns."

