Great investors can be wrong-Richard Pzena

One of the greatest things that will go down in history is the nationalization of Freddie Mac and Fannie Mae. It is still currently debatable as to whether the Goverment should have bailed out Freddie and Fannie Mae. Richard Pzena made such a convincing argument that Freddie Mac was a great company and i bought into that or was i not?

There are three stories here. One, Freddie and Fannie did not need goverment intervention and were still well capitalised enough to carry on as a going concern as per Richard Pzena.

The 2nd story was : Freddie and Fannie were bleeding and were suffering from liquidity problems.

The 3rd story is built upon the first and that both Freddie and Fannie were fine but the government had to bail it out as confidence over its assets from other goverments holding them were dwindling fast in this crisis. The Govt had no choice but to bail it out to restore confidence in the markets.

On hindsight i am more inclined to the 3rd thesis stated above and even if Richard Pzena's thesis was the 1st, a variation played out and this really made me think hard on scenario analysis. My take is this: Pzena was probably right on most counts including his valuation of the company but more vital than any sound valuation technology, he probably did not factor in the fed taking control of the company by taking on a preferred equity stake which nearly wiped out most of tht value in common equity.


For those who do not understand the case, taking on a preferred equity stake eventually wiped out the commons. Simplistically if a company had a book of $10 and later $9 of preferred were issued, it would have reduced the book value of common equity to $1. That was what happened to the saga.

Key takeaways would be:

1) Diversify sufficiently to protect your portfolio. WE are human and mistakes are inevitable in investing

2)Do your own research before you coat tail others.

For more read:

Fooling around with freddie and fannie by forbes

Best regards,
Lucas