1) Hedge fund. Yesterday Congress has an testimony on Hedge Fund, and five famous Hedge Fund managers were there. Hedge fund industry has grown rapidly in last 10 years. Besides wealthy clients, they manage money for pension funds and university endowment funds, which in hindsight are not suitable investors for hedge funds. A recent example is T. Boone Pickens lost his $165 million endowment to his alma mater University of Oklahoma. How big is hedge fund? One source I heard is the hedge fund industry manages $1.3 trillion in the US.


George Soros (from left), James Simons, John Alfred Paulson, Philip Falcone and Kenneth Griffin are sworn in during a hearing on the hedge fund industry in Washington, DC on Thursday. Photograph: Tim Sloan/AFP/Getty Images

2) Mutual fund. This one is much bigger. The problem is in the US as baby boomers approach retirement, amid this market crash, they have every intention to bail out (sell their shares), and put their money under mattress. I have heard whole a lot more talkings on market and stocks in local Panera Bread store, compared to the past.

3) Retail investors. Similar things are happening here. If people invested the money for their child’s college fund, and saw that shred in half with their child about to attend college, they have every intention to sell, and put money under mattress.

Risk tolerance for different people
My father and my father-in-law, both in their 60s and live in China, would never touch stocks.

My wife, has more risk tolerance, but she will only tolerate the upside of the stock market, not the downside. I think many people think like her (although they don’t like to admit).

Me? After 5 years in the US stock market, I think I am more realistic. I can take both the upside and downside of a stock or the market. One nice thing is I will continue to work for many years before I retire. In other words, the short term up and downs do not mean much to me as they meant to many baby boomers

Any buyers left?
1) Buffett: unfortunately he ran out of money now, after he did the deal with GE and GS.

) Very few retail investors who have the money.

1) In order to short a stock, I need to open a margin account, which I dislike. Margin account means I have to borrow from the broker, which increased the risk quite a lot, and increases the “anxiety factor” which is something I dislike. A good example is: someone bought Berkshire Hathaway stock in its early days on margin could get wiped out, because the stock dropped 50% on the way. A more recent example is the CEO of Chesepeake Energy (NYSE:CHK), if we believe the story.

2) So I can not short. Why not buy the puts (or sell the calls)? Welcome to the wonderful world of Options. Well, from my observations (both my own small experiment and others experience), Options are totally different ball game. Basically we are play against time. Options have its expiration dates. While I think in this bear market, the down trend of some stocks are obvious, I have no idea how much the stock price will be at a certain period of time. Remember the old saying “dead cat bounce”. While it’s unlikely a company will use precious cash to buy back stocks these days, it’s likely we will see something like we saw on Monday Oct 10: a 960 points pop on Dow.

So what to do?

Save. Retire some debt. Get some more sleep. Do some research. Buy some fundamentally good stocks at bargain price because I believe the world is not coming to an end

2) Try to be the hero: pick up “cheap” financials, commodities, technology stocks simply because you think they are “cheap” compared to 2 weeks ago (without any own research);

3) Sold all the stock fund postions in 401k, and put it to cash. The chance is you will not be able to buy them back at the bottom;

4) Put the Greenbacks under your mattress

Things to do
1) Have some emergency cash and credit line (credit card and HELOC if possible);

2) Do the homework: reading words of Buffett and Munger (my list here). Find some quality name we can understand (or model using Munger’s word). I am thinking AMZN, RIMM now, not buying just watching. When the dust settles, and I have some free money, I will buy them at bargain price;

3) Continue to contribute to 401k, IRA: depends on your risk tolerance, put it in bond or stock funds you have trust in management.

And yours truely, after been in the US stock market for almost 5 years, is one of the WM shareholders. Looking back, this is a mistake largely self made and I could avoid it if I used more brain a bit more. Here was my rationale and how I did it:

Last Wednesday Sept 23 morning on my way to work, I listened to NPR and heard Citibank along with others are bidding on WaMu. I knew WaMu the stock 5 years ago, and I know it’s in the mortgage trouble these days. But I don’t think the goverment will let it bankrupt like it did to Lehman, because the last thing they want to see is people lining up before the WaMu branches and trying to withdraw money. That could trigger a bank run on other major US banks, and it will shaken people’s confidence on financal institutions. I thought they could do something they did to Fannie, Freddie and AIG: take over with some sort of loan, a life line. So I bought a little WaMu shares, betting the bailout plan will pass congress quickly, and WaMu will get a second chance.

I was wrong. On Thursday evening, the bailout plan stalled. FDIC took over WaMu, and sold it to JP Morgan in a second (refer to this article by Michael Steinberg). Quote Michael:

During the consummation conference call, (JPM CEO) Jamie Dimon disclosed that JPM had unprecedented access to WaMu’s mortgage detail. JPM received computer tapes with the most granular mortgage detail (FICO scores, LTVs, and MSAs) to compare with their own data and develop loss projections. JPM had the time to do a true bottom up analysis.

So, in other words, the shareholders and bond holders of WaMu were robbed by FDIC and JPM. The fall of WaMu also served as another warning to the US congress to pass the bailout bill. It looks like the bill will go at this time Sunday Sept 28. If Wachovia and other troubled banks survived, they owe a big thank you to WaMu.

Lesson learned
1. Don’t speculate on troubled financial companies. Because FDIC, Fed or treasury could take over those institutions. Shareholders will get wiped out in this case.

2. If you really can not resist the fun of speculation, try it in small amount. Or better yet, go to Las Vegas and have some fun while losing the money.

3. Fundamental analysis is still valid here, I am not talking about the warning signs from credit rating agency, I should do my own homework if I want to speculate on other things later on.

What to do from here
The WaMu stock is essentially worthless. It’s not being traded in exchange (NYSE) at this time. I guess it will start trading as pink sheet (NYSE Arca?) sometime in the near future.

The root causes for current crisis
Credit default swap: Wiki entry, the weapon of mass destruction Buffett referred a while ago. Obviously Bear Stearns, Lehman and AIG are all brought down by that.

宋鸿兵: 金融海啸来袭 美国金融危机可能进一步升级. Mr. Song was the author of Currency War (in Chinese), and he is the manager of Structural Products dept. of Hongyuan Securities in China.

Video at Charlie Rose
A discussion about the crisis on Wall Street, Sept 16 2008 (long, about 56 mins)

March 16: Bear Stearns, $29 billon

Sept. 6: Fannie/Freddie, $200 billion

Lehman Brothers: sorry baby no bail

AIG: $85 billion

Who is the next???

Essentially Fed/Treasury are transfering the downside risks from individual companies to the fed/treasury/greenbacks. Note the money pledged to support Fannie/Freddie/AIG could exceed the original number if the problem worsens.

I can only say: gold, baby, gold!

As we have seen from the difficulty of Lehman discussion, the key is US goverment is not going to provide any kind of finance support, as they did in the Bear, Fannie, Freddie deal (total $229 billion). For the goverment, they don’t want to do this due to two reasons: 1) Moral hazard; 2) The increasing debt on the US goverment and tax payers, and the the pressure on USD comes with it.

If the worst happens, nothing will be spared, except the gold (Wiki: ways investing in gold). Because before the 1970s un-pegging of dollar and gold happened, gold was the central banks reserve/deposit to print paper money. And if we could go back history a bit more, we know gold is the most widely used precious metal for money.

So, I am seriously thinking about the Gold ETF (GLD). Another way, if you are like my friend Sun, you can buy the gold bar from bullion direct.

I am trusting the good old gold much more than the Lehmans, the wall street, the US goverment (treasury department, the federal reserve), will you

But think a minute, if the United States can not sort out this mortage thing, why should China/Japan mess with it? I think the implication of this mortage crisis will be much greater than many peoeple (convention wisdom) think. The house will NOT always go up. The housing sector and homeownership are good thing, but sometimes too much of a good thing could be a bad thing. I think the people in China state investment Cos. should seriously think about their strategy.

The Market

These days the market acted like the world is coming to an end. I have not read the history of 1929 crash, but I felt this one is the most severe in my investing life. I guess the importance of US economy to the world may be bigger compared to 1930 because of globalization, the dominance of dollar.

Just my speculation on today’s market action. Some banks lost big on the Fannie and Freddie’s preferred shares, they need to liquidate some common stocks to raise some cash? Or another commodity hedge fund blew up?

While I think the US housing sector is coming to an end, China and other countries will move forward: more cars, more houses and more consumer spending

发信人: failed (Failed), 信区: Stock
标 题: 紧急求救：FNM损失已经12万了，我该怎么办？谢谢您了！！！！！
发信站: BBS 未名空间站 (Tue Aug 19 12:35:30 2008), 转信

I understand investment is a personal choice and I deserve whatever I have.

However, during this critical moment,
your any comments are sincerely appreciated.

Thank you so much!!!

My investment account is below as of today:

YEAR TO DATE PROFIT & LOSS
FNM ($117,283.4482) (this is my loss, i.e., I bought FNM at $12.80)

CASH BALANCE ($67,851.32) (this is my margin)

The below is all I have. There is no options/calls or any other stocks.
EQUITIES SYMBOL SHARES PRICE MKT VALUE
FNM FANNIE MAE 16907 $5.8574 $99,031.0618

NET LIQ VALUE: $31,179.7418
(this is all the money I left, from orginal 148,463.19)

Now I expect to get a marginal call.

My only left money is my IRA account which still have 71K

That is all my money left after being working hard for 10 years.

I know my greedy is driving me into this stage…

Question 1: I am wondering whether I should buy FNM at amount of XXX
in my IRA account and sell FNM at amount of XXX in investment account
at the exactly same time so that I can equivalently use IRA account
to avoid the marginal call.

Question 2: Shall I sell FNM or still hold on?

Question 3: Any other thing I could do? What shall I do next?

Background: Have being working for 10+ years. Expect to use the money for
long-term investment

thanks again…

Appendix: a good reply from mitbbs (link here)

发信人: ytyx (平常心), 信区: Stock
标 题: 写给那个输了12万的朋友– 我在花旗上面2周输了18万
发信站: BBS 未名空间站 (Wed Aug 20 06:51:26 2008)

看了你写的文章，心情真是很复杂。我很少来看股版，也没有ID在MITBBS，为了回你的
文章，刚刚注册了这个ID。

很多回信都很有见地。也看到很多好心的朋友在这里提供意见。股票本来就是是非地，
倾家荡产也不奇怪。但是看到你的经历，让我想起我自己的经历。提供一点意见供你参
考。

1）不要轻易动你的IRA，那是你和老婆养老用的。你可以用它买基金，或Index fund，
比如金融的基金 FIDSX， 今年从大约120跌到现在65， 将来会有一天回到120

2） 不要用Margin, cut掉大部分FNM， 留6000股在账户里面， 如果FNM能回来，5年内
可能回到30，你的6000股变成18万美元。如果到零，也死心了，省得像祥林嫂，老抱怨
自己为什么都清掉。

3）你现在很emotional,不要玩什么Option, put, call, 对你没有什么好处，会死的很快

4）只做自己熟悉的股票，什么LDK之类的如果你不熟最好不要碰

5）这次经历是你人生中一次大的教训，不一定是坏事情，今后不要以为自己聪明，可
以beat 市场，有家庭的人，如果不是绝对不用的闲钱，投资应该稳妥为主

6）太太那边暂时不要告诉了吧，痛苦自己扛算了。将来情况好转了，再给她讲。看来
你有个信赖你的太太，是你的福气，好好珍惜，不要轻易下赌了。

关于我自己：

走麦城的经历：

不知道你有没有经历几年前的Enron破产的事情，当时所有的能源股都掉头直下，像WMB
从50元掉到1元以下，DYN从30元掉到0.4元，还有很多直接就破产了。本人当时是学生
，但是也输了不少。WMB我是3元买的，很快就掉到0.7元了，5年后回到了30多元。算起
来还是赔了些，因为有些其他公司破产了。

去年10月底日买了花旗的股票，当时没有意识到金融股票都要快完蛋了，花旗从前一直
在45-55之间晃动，但是掉下45元，以为是好机会，平均43元买了3万股， 现在想我这
个老兵，当时还是有些发疯了，因为那个账户里面只有80万，用了40多万的margin，不
到2个星期，就掉到37，全部cut掉，一股没有留，输了18万美元。 现在回头看看，还
是很庆幸的。

辉煌的经历

我是属于所谓的professional trader，就是有各种的license那类。每次开账户都很麻
烦，要被特殊对待一把。

也挣了一些，但是股市挣钱的时候我不太记得清楚，只是赔钱的时候那种感觉很痛彻。

挣得最快的一次是一个股票上市，有个老同学有亲属股（就是IPO的时候，公司可以拿
出来5%发行的股票给亲朋好友，和关系公司，这个大家可以查SEC规定，是合法的），
他有3万股，自己不想要，问我，我就接下来了（用的他的帐号，我出钱），上市后2天
挣了60多万美元，我自己拿了50万。

目前的状况：

没有人能够100%市场的走向，但是今年的金融股让我总是有当年能源股的感觉。我自己
基本是空仓，除了401k上面买了5000股FIDSX，我是70元买的，一直看他在100元以上，
以为快到底了。不过，因为这个基金都是买的大金融公司，除非世界完蛋，早晚可以上
100元的，我自己觉得要5年后吧。

空仓一是觉得市场走向不明朗，比如房地产市场有没有见底，二是希望金融股继续跌，
比如FNM跌到3元，甚至到2元，那时候可以小赌一下，买2万股，输了就认了，赢了会获
利巨大。

因为一直在街上工作，基本上每个大financial firm都有朋友，上周一个在Fannie Mae
做senior resercher的朋友来纽约开会，一起吃了顿饭，聊起来，他主张买FNM，说了
很多原因，其中之一是因为房地产的困境，Fannie Mae的竞争对手基本上都死了。他们
现在可以收很高的fee, 还有，现在新的资产质量都极其好，今年过去，明年的盈利就
会好起来了。等等，很多理由。 我承认他说的是对的，但是我还是希望像猎人一样，
耐心等待好的时机。也许会到1元呢。如果到不了，就等市场稳定了再买也不晚。

—————————–
最后的话：

金钱只是生活的一部分，虽然是必需的。但是保持一个良好的心态是最重要的。我猜你
在35岁左右，这种挫折应该是抗的住的。你的工作，家庭，应该是对你最重要的。

学会风险控制，将来投资的时候要养成良好的纪律和尊从定下的规则。股市永远是风险
很大的地方，不要把所有的钱放到一个篮子里面，不要以为自己比大多数人聪明。

凤凰涅磐、浴火重生，但不是说经历了输钱就可以挣到钱。希望你不要让自己成为一个
股市赌徒。