The Lottery, Penny Stocks and Fannie Mae

This past week, two people won a record lottery, after taxes each person will receive about $120m.

On Monday of this week, CNN Money published an article about a young man who traded penny stocks for three years and turned $1,500 into $1m.

In other news, an investor in Australia, John Hempton who runs a fund by the name of Bronte Capital, has also done well.

Buffett has called the lottery a tax on the mathematically challenged.  I seriously doubt whether anyone  would consider buying lottery tickets an investment strategy.  To borrow a phrase from Taleb, “if you are so rich, why aren’t you smart.”  Nevertheless, two people are now each $120m richer and no one will ask them for investment advice tomorrow (though, I can guarantee they will receive copious amounts of advice on how to spend that windfall).

The penny stock trader claims to have turned $1.5k into $1m.  I am always skeptical of such claims. Where are the audited results?  Penny stocks are sort of like gold.  The best way to make money is to sell shovels and other tools, not to search for the gold yourself.  Appropriately enough, the article has as its headline a picture of the stock-picker and his “guru teacher” whose “newsletter” the stock-picker read in order to learn the “tricks.”  That picture and article will do wonders for the guru, not much however for his readers…

These two stories bring us to a final one, John Hempton.  I enjoy following his blog because I think he writes well and he was right about Chinese reverse merger-companies.  The specific topic I want to focus on today is Freddie Mac and Fannie Mae.  Mr. Hempton wrote a great series of articles on these two entities back in 2009 and bought shares when these companies preferred shares were literally penny-stocks.  Trading for 1-2 cents, these stocks are now valued at anywhere between $6-$8.  I have no idea when he sold, but I am sure he has done very well (he has stated that he has sold some, but not all of his holdings).  In his blog series, Mr. Hempton did a good job of laying out the financials, but concluding that he had no idea how the politics of it would work out, which in this case is a huge issue because the US Treasury is effectively claiming that the common and preferred stockholders claims are worthless.

I am trying to be explicit in my thinking by combining these three stories.  Lottery–not an investment strategy.  Penny-stock trading: just burn your money, that way you can at least heat your home.  BUT–I want to combine this penny-stock article with my thoughts on Mr. Hempton’s investment in Fannie and Freddie because the stock-picker in the penny-stock article indicates that his best day was trading in Fannie Mae, a day on which he made $215,000.

Personally, I believe that the current Fannie and Freddie shareholders will be wiped out (or extend into perpetuity a paper-valuation that has no actual value, but for trading purposes, a la “those are trading sardines, not eating sardines”).  However, if you buy something low enough and the price is bid up and you sell before it collapses, is that an investment strategy?  Three stories, three different approaches to investing, but maybe not so different after all.




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