Some wise words from Peter Lynch's book, "Beating the Street" in the chapter 18, "My Fannie Mae Diary", a book, and a chapter I recommend to all:
Was Fannie Mae an obvious winner? In hindsight, yes, but a company doesn't tell you to buy it. There is always something to worry about. There are always respected investors who say that you're wrong. YOU HAVE TO KNOW THE STORY BETTER THAN THEY DO, AND HAVE FAITH IN WHAT YOU KNOW. For a stock to do better than expected, the company has to be widely underestimated. Otherwise, it would sell for a higher price to begin with. When teh prevailing opinion is more negative than yours, you have to constantly check and recheck the facts, to reassure yourself that you're not being foolishly optimistic. The story keeps changing, and for better or worse, you have to follow those changes and act accordingly. With Fannie Mae, Wall street was ignoring the changes. The old fannie mae had made such a powerful impression that people had a hard time seeing the new Fannie Mae emerging right under their eyes. I saw it, but not right away. Not right away was still soon enough to make $1B on a $200M investment.
He then goes into page after page of review about his knowledge of the FM story starting in '77, and says this in his '88 diary:
There are different shades of buys. there's the "What else am I going to buy?" buy. There's the "Maybe this will work out" buy. There's the "buy for your mother in law" buy. there's the "buy for your mother in law ans all the aunts, uncles and cousins" buy. There's the "Sell the house and put the money into this" buy. there's the "Sell the house, the boat, the cars, and the barbecue and put the money into this" buy. There's the "Sell teh house, boat, cars, and barbecue, and insist your mother in law, aunts, uncles, and cousins do the same" buy. Thats whay FM was becoming.
About '89 he says:
This is the year I backed up the truck. "Backing up the truck" is a technical term for buying as many shares as you can afford. finally Wall street was catching on to the idea that this company could continue to grow at a 15-20% growth rate. The stock rose from 16 to 42. As so often happens, several years worth of patience was rewarded in one. Even at this higher price, it was still undervalued, with a PE of 10.
About the stock getting clobbered in teh 90 Saddam and real estate fears selloff, he says:
I watched with fascination as more weekend worrying sank this stock just when everything in teh company was going right. Never in all my years of seeing worthy companies get clobbered for no good reason had I seen one that deserved it less.
About 92 he says:
FM was still a 12-15% grower and still undervalued, just as it had been for the past 8 years. some things never change.
I recite all of this so you can see that even multi billion$ large cap stocks with a big institutional following can be severely undervalued for long periods of time, frustrating even the nations largest mutual fund manager.
Whose story is to be believed? The markets story right now is that expensive but steady lumbering huge cap stocks are priced right at forward PE's of 20-35, while a cheap small cap like AXC, trading at a 97 forward pe of 13(and a 98 PE of 6.5, and a 99-01 PE of 1 or even 0.8?) is too expensive and ought to be marked down. I know the story better than they do, and I'm going to outlast em to the tune of selling out to all those ignorant money managers in teh triple digits. Count me a holder, and a borrower of more if I can.
Bramson borrowed millions to buy more at 6 7/8 five months ago. |
