| January 5, 2015 | Archives | Unsubscribe | | | | |  | | | Starting, Again, at Zero | | | - We ruefully bid adieu to the holiday break… and kick off a round of 2015 forecasts...
- An unlikely lawsuit against the federal government portends 10-fold gains in two infamous stocks...
- Then, Chris Mayer stacks his investment approach against professional fund managers… and comes away with some sage advice for you in 2015.
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January 5, 2015  Dear Reader, Well, it's done. The gallon of bourbon-fueled eggnog furnished to us by Laissez Faire director Doug Hill is empty.... We successfully braved the million-plus crowd in New York on New Year's Eve with three kids in tow. The crowd and phalanx of police officers pushed all up 6th Avenue from 47th Street to Central Park.  What were we thinking?! We watched the fireworks hail the wee minutes of 2015 through some trees on a hill overlooking the park…
And as of this morning, we've officially enrolled in a "spin" class. A pint-sized woman on a bike yelled at us for 60 minutes this morning while blasting dance music at very high decibels…
Happy New Year.
In the publishing business, we start every year again at "zero." It can be a daunting task to look over profit and loss statements that are effectively blank, so each year, we choose to distract ourselves in other less painful ways.
Hopefully.
"My big prediction for 2015 is," our friend Chris Mayer writes, kicking off a round of forecasts from our editors this morning, "shares of Fannie Mae (FNMA) and Freddie Mac (FMCC) could soar as much as 10-fold in 2015."
If you're a longtime sufferer of The Daily Reckoning, you know why we preface Chris' 2015 prediction with "hopefully." Fannie Mae and Freddie Mac were featured characters in The Daily Reckoning leading up to the housing bust in 2008. We spent many hours on radio and TV talk shows laughing at then-Fannie CEO Franklin Delano Raines' hyperbolic claim that they weren't in the "mortgage business"… they were in the "American dream business." | "Shares of Fannie Mae (FNMA) and Freddie Mac (FMCC) could soar as much as 10-fold in 2015." | If the American dream had morphed from owning your own home to defrauding your customers, well, then we could have agreed. Fannie and Freddie, two fat government-sponsored firms, at one point controlled 71% of the mortgage market in the U.S. It was 97%, or $2.1 trillion, if you add in Fannie and Freddie's redheaded stepsister Ginnie Mae, who guarantees loans made by the Federal Housing Administration (FHA). You can make a lot of money guaranteeing loans in a housing bubble…
That is, until the bubble bursts. And you lose a lot of money.
Collectively, Fannie and Freddie helped $14.9 billion in mortgage assets evaporate in 2008-09. The shares plummeted. From a record $79.08 in February 2004, Fannie has dropped to $2.17. Freddie was trading at $73.70 in December 2004… today, it's at $2.14.
But here's the kicker.
Together, they still own or guarantee 56% of the single-family mortgages in this country, or $5.4 trillion of the total $11.9 trillion in outstanding mortgage debt.
"And now Fannie and Freddie are profitable again," says Chris without even a wink. "The credit losses have receded. Those subprime markets are gone, and, in fact, the government has allowed Fannie Mae and Freddie Mac to triple the fee that they collect to guarantee mortgages. Fannie Mae and Freddie Mac are very profitable today."
So what could cause them to shoot up to $20 or $30 this year? Chris explains: "The government owns 80% of the shares of these companies but is currently taking 100% of the profits. A group of investors have sued the government under the Fifth Amendment. They maintain that the government taking all the profits violates the 'takings' clause in the Fifth Amendment and that the government owes them just compensation for those profits.
"The lawsuit is proceeding. The discovery phase ends in March.
"I'm not sure how long it will take to resolve, but if it happens in 2015, the value of the profits that the government is currently taking -- if those were to go back to shareholders of Fannie Mae and Freddie Mac and you were just to put a reasonable, say, 14 times multiple on those shares -- could be worth more than 10 times what they're trading for today." Last year, Chris made a similarly bold forecast that Eastern Europe would rebound in 2014. And offered two ways to play the trend. How'd they pan out? His recommendation of the Emerging Europe Fund (EUROX) was down 16%. The stock pick he made, Kennedy Wilson (KW), was up 16%.
"One bad one… one good," Chris wrote to me this morning. Luckily for Capital & Crisis readers, Kennedy Wilson was the official recommendation he made. And in fact, had readers bought when Mr. Mayer first recommended it, their overall gain would now be 132%.
We don't know if the investors' lawsuit against the federal government over Fannie and Freddie's profits will prevail. Nor do we know if it will be resolved this year. But for a couple bucks a share, it might be worth taking a flyer on as a way to kick off your own new year. Heck, you gotta start somewhere, right?
Cheers,
Addison Wiggin
The Daily Reckoning
P.S. In February, in just a few weeks, Capital & Crisis will turn 12.
During the year last year, we had Chris' track record verified by Alpha Performance Verification Services, an independent auditing firm. They looked at returns from 2004 until Aug. 31, 2014.  The average holding period for an FST stock is 1.7 years. That means annualized returns were 16% compared with the S&P 500's, which were 5%. And 70% of Chris' picks made gains. He's the real deal. Even if you already value the advice you get from other sources, Chris Mayer can add a kick to your portfolio. He can help you take the pile you have… and make it bigger. If you value any of the contributions or insights you get from The Daily Reckoning or Agora Financial, you'll be doing yourself, your family and your money a favor when you subscribe to Capital & Crisis. After you have, read on below. Chris takes a stab at reviewing his own performance in 2014... and how his approach stacks up against professional fund managers. | | | | | | | | | One of our analysts is making an early call on the biggest political event of the next 20 years. He spent probably well over 10,000 hours analyzing this situation. WARNING: This man tells it like it is. His latest forecast is not for the faint of heart. He will tackle the hard, unbiased facts about race, demographics and welfare that no one in mainstream news will dare to touch… | | | | | | | | The Daily Reckoning Presents... Chris Mayer stacks his own investment advice up against the so-called professionals. Sometimes if you want to do something right, the ol' yarn goes, you have to do it yourself…
****************************** | | | | Don't Chase Returns in 2015! | | | | By Chris Mayer | | | | "Year: a period of 365 disappointments."
– Ambrose Bierce, The Devil's Dictionary  The year 2014 was one of the worst ever for stock pickers. But almost everyone thinks about this in the wrong way. And it could cost you a lot of money in the long run if you think this way too. I'll tell you how I think about it instead below.
First, some evidence: - Bank of America Merrill Lynch research shows fewer than 20% of active managers are ahead of the market this year, the worst performance for more than a decade
- Bill Alpert at Barron's: "Less than 15% of the money managers who actively select stocks are ahead of their benchmarks"
- Denys Glushkov, a researcher at Penn: Only 9.3% of all mutual funds that invest in big U.S. stocks such as those in the S&P 500 are ahead of the index through Sept. 30. The previous low was 12.9% in 1995, and the average over the past quarter century is 38.6%.
Glushkov says that 2014 "is likely to enter the record books" as the year when active managers -- as opposed to index funds -- "delivered their worst performance relative to the index, net of fees, since at least 1989."
Case closed.
Faced with that experience, people are pouring money into passive funds -- like S&P index funds. As nearly everyone knows, the universe of stock pickers can't beat the market, because of fees. Still, this year was an epic rout.
There's been a lot of ink about why this is. I don't really care about it, because I think we're all guessing. And secondly, even if we knew, it doesn't mean we'd be able to predict when things would change. | Don't try to chase returns, because doing so will cost you a lot of money over time. | So here's part one of my advice: Ignore all talk about trying to explain it. Don't try to chase returns, because doing so will cost you a lot of money over time.
Most people won't do that. Most people chase returns. As an example, consider one of my favorite studies of all time by Dalbar. It showed that the average mutual fund earned a return of 13.8% per year over the length of the study. Yet the average investor in those funds earned just 7%. Why?
Because they took their money out after funds did poorly and put it back in after they had done well. Investors were constantly chasing returns.
Another favorite example is Ken Heebner's CGM Focus Fund. It was the best fund of the decade ending 2010. Heebner's fund turned in a sparkling 18% return. Yet the typical investor in his fund earned just 11%. Same thing: People pulled money out when they had an off year and plowed it back in after they had a great year.
I wrote about this in my first book, Invest Like a Dealmaker. And the advice I gave there is still the advice I give today. To illustrate that advice, let's look at how Mohnish Pabrai answered a question put to him by Barron's. | | | | | | |
| Have You Seen What Could Become America's Spooky New "Money"?
It has nothing to do with bitcoins, gold, euros, Chinese yuan or anything you may have heard from the mainstream media. It's unlike anything we've ever seen before.
But according to the financial threat adviser to the Pentagon and the director of national intelligence, this new kind of currency could replace the dollar as soon as March 2015.
| | | | | | | | | Pabrai's fund has returned close to 10% over the last 10 years, beating the index by about 1.5 percentage points. But he's well behind the index this year. Here's Barron's:
"When asked about this underperformance, he replied, 'I think it is an irrelevant data point. There is nothing intelligent that one can say about short periods like 10 months. I never make investments with any thought to what will happen in a few months or even a year.'" [Bold added.]
Amen to that.
The problem with the 24/7 media culture we live in is that everybody has to have something to say almost all the time. And yet most of the time, there really isn't anything worth saying.
So we get incessant daily commentary on every blip in stocks, gold, bonds and so forth. It's all meaningless drivel. I'm with Pabrai: There really isn't anything intelligent to say about returns over such a short period of time.
In fact, I'll go further: I don't think you should compare yourself with the S&P 500, or the broader market, at all.
Here's what Martin Whitman, one of my favorite investors, has to say about it: "Certain economists believe strongly that the goal of professional money managers is to beat the market. If professional money managers fail to beat the market either individually or en masse, this it taken as evidence that they are useless… The kindest word we have for this point of view is that it is amateurish." [Bold added.] This is from Modern Security Analysis by Whitman and Fernando Diz. If I had to pick an investing bible, this would be mine. I love the approach, and Whitman has had a big influence on how I think about investing over the years. The reason Whitman has such disdain for the market-beating point of view is that managers have different goals and duties. A manager investing for an endowment may aim for safety and income over capital gains. Thus, if such a manager turned in a 9% return with a portfolio of conservative names that never missed a dividend, it seems silly to rip him for trailing the S&P. Besides, who cares about one year? You have to play the long game. And anyway, there are approaches and investors who have beaten the market by a solid margin over time. The thing is, they seldom beat the market consistently. The best investors lag the market 30-40% of the time. As Barton Biggs once wrote after analyzing the stellar returns of superstar investors: "None in the group always beats the S&P 500 probably because no one thought that was the primary objective." There are ways to beat the market over time. My own CODE approach -- what I use to guide my Capital & Crisis readers -- is one of them, with an annualized return of 16% over the last decade, more than three times that of the S&P 500. But none of these approaches always beats the market. Even the best lag it, and often. Keep that in mind before you reshuffle your portfolio after looking at year-end results. Don't chase returns! Regards, Chris Mayer for The Daily Reckoning P.S. I have a lot of good things I'm already thinking about for 2015. There are places to visit and people to see. I also look forward to seeing how our ideas play out -- most of all, my newest ideas. I'm particularly bullish on a list of stocks within an obscure almanac that I took with me when I quit my job almost 11 years ago at one of the world's most prestigious banks. Click here for the details -- they've helped me lead readers to gains of 25%... 75%... and even 163%, with less risk than other stock-picking strategies. | | | | | | | | |  Chris Mayer is managing editor of the Capital and Crisis and Mayer's Special Situations newsletters. | | | | | | | | | BE SURE TO ADD dr@dailyreckoning.com to your address book.
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