SEVENTEEN UNCLE SAM’S GARAGE SALE Allied Capital II ‘When Uncle Sam or the Queen of Enland is having a garage sale, alin ry to attend, NotSo-Creat Britain is aay head of sponsoring these events, bavingsoi everything ro the waterwocks to the aines, but Hour wn deft spending continu tthe preset tate, someday we may have Lo pevatize the rational parks, {he Kennedy Spuce Cente, andeven the White House Rose Gurdon just pa the mtereston rman deb Privatization ts» range smc You take something that’s conned by the public and then sll t beck to the public and eon {hen on, i's preate. From a practical standposet, what's asefl ‘ow about isis that whenover the Americans of the British have rated someting by sling shares in i, sally Deena good {eal Yor the buyer, The reason ie not Hard to imagine. Inthe democratic counties, the buyers of privatized industries are also wots, and goverment, Inne enough trouble getting eekected without having to contend With a mas f eisgruned investors who lost money on the tle- hoe company oF the gasworks. "The British Learned his less i 1983, afer 0 oftheir ears privatization, Brio and Amersham oteratona, came ou ovet= Bese me Steet 257 priced, creating widespread il will when the pices deine. Since thon, the Bich ave srt thot offers so Ws been kcly {tat ovestors woud os, a Feast in the early gong. British Telecom ‘doubled in price In one des: Thre millon Brie snapped up the shares. No wonder the Tis are stil in office, This Tends 46 10 Peter's Priciple #21 Whatever the queen sling, buy i A few years ago, I nas intraduce to tempting proposition rom s Brtkh contingent thst showed up in our offices at Peli They fatyoduced each other as Lard Sovand-So abd Sit So-andSo. They ‘bro along zee bod volume which posed 0 bea prospects {ora group of Brits water ules that were about woe pieatzed. “Tye prospect nae nombered ike the ined eon ofa rit (Ga the cower were the names and the corporate logos ofthe ew ‘oupaniesNorthumbrian Water, Severn Trent, Yorkshire Water, ‘Walgh Wator PLC, te Een though Mayan had aleady taken pat inthe bonanzas of Brith elem (ihe largest ple ation dhe world had ever seen st the time Shion) and British Aves, I was unprepare for the tenets tat were ult oto these waterworks dele They were ‘monopoles, just as water utes everyhere tend tobe it ays nic to own 8 monopoly. The Bitkh government, Before stg ‘ht fee, had absobed most of the prior de Those companies wore coming our debt fee, with extn opi provided by the government, eich ad given them "grec dow)" {o get them off onthe rah fot. They agreed to embark on 3 10- year prom of upgrading the water systems, an effor thst would bbe pay subsided bythe green dowry, with the rest pad for by an inceease in water Bis "nour conversion try oe, the wate oat ne tat water bil in England were so tw (106 pounds yas) that even if these prise doubled the customers would not resent. ven they dd fesoat it there mas nhing they could do about it excep top ting ‘wae, which was uniely- Water demand ia England was sowing EL petcat a yar “These new water shares could he bought onthe nstallnen plan, jt is eae or stereos or ros. You eel pt 0 perce Soe iy the ret to en nstallments, one dv in 12 months sd the258 Peer Lynch ther i 20 months. The British had offered the same sort of deal, ‘whic they called "partly pa shares,” on British Telecom. When British Telecom eae publica $0, ll he buyer had o pay was 8 ‘ovr, Them, hen the share pce rose 1 $36, the buyer who paid $6 could sll snd double his money. "The implications ofthis partial spoid concep aed to appesite with Britsh Telecom. I thought the stcck price was going up too Fast, hut when I fially understood the bevels of the pata paid featuo, I coud se thatthe busing fenzy was jsted. The same sort of deal was offered with the water company, follows. Th addition w aloving you to buy shazes onthe stalin plan, the water companies pa an 8 percent dividend, beginning imme: Aintly For atleast a year, yo got this 8 percent dividend om the fall sue of shares you sogered at 0 percent down, Thit save you 2.20 percent etun on you imestmentin the Ast 12 moaths—even ifthe sfock price stayed ft, ‘The Bish we shares were understandably gute poplar. Before he iii bli offering, U.S. fund managers and othe istusonal Imestors were gen an alloament. For Magen, 1 Yoak everything Tyas alloted, an then bought more shares inthe allermarket, a8 they began to trade onthe London Siok Exchange. A porto of Al ve ofthe water ities dobledin vale m thre years ‘The other Bridsh companies sold t the public have one jst as well or beter inthe sx months o one yer after the offerings. Tis Tings ws wo anther what fund, che Queen's Garage Sale Fun, ‘Any US. nestor ould ave put iogetber portfollo of ths soaks Shown in Table 17-1 and got the resalts shown there Everytime a telephone ompany tis been pve in whatever country—the Philippines, Mexico, Spin-—the shareholders have Feaped oncen-tfetime rewards, Policans around the world ae dedieated to improving phone service, and inthe developing couse twas there is auch hunger for phones that these company ae troming at 20-30 persone x yea, What you've got here isthe growth fate ofa sal growth company the size and staiity ofa bie chip, and the guaranteed success of 3 monopoly, Ifyou missed AT&T i 1910, you could have made up for it wih Spanish and Merican telephones in the nt 1980s Magellan shareholders made « lot of money on Mexican tle- phones Now dida't nocd to vst the Mesican telephone company {o see that 2 bonanza tas coming. The country know i had to Benne mi Sacer 259 “ibe 1.4. QUDENS GARAGE SALE FUND omen ae ‘here red Om home Pron Sto ae ist irom We ns 85 Improve the phone service before the rest ofthe economy could fxpand. Phones were imporant a oad. The country also knew thatitcoakiat hve good phone stm without a wel-eapalzed, Wellmenaged plone company. And # eouldat att the capital Without lowing saccholdrs to make a decent poo. "Here's another great what portfolio, Telephones of he Emeng- ing Nations “Tle 172, TELEPHONES OF EMEROING NATIONS omy ane —_ Soe a 0 Oe ae ony Koo Recents 2S iis tg Be seo By 190, sales of pitted companies worked reached ‘520 blo, mith more to come. The French ve sod their eletie tutes and their rns, Sotland has sod its hydroelectric plans, the Spaniards andthe Argentinas have parceled out their oi com- Junie, the Mexicans thir siines. Britain may someday sel its Fails and it ports Japan ss ballet tains, Korea is stale-ran ban Thelen i alin, Grosse 3 cement company, and Portugal 1 tcephones Ta the US, there asst Been as much privatizing as weve seen2 Peer Lynch trou, bucause cere ft a much privatize ete, Our ol sm penis, phone companies, ond skectriccomponics were piste to begin with, The bigest recent del was Conroe forty, the Consolidated Ral Corporation. which was assembled fom the ‘wreckage of Penn Central an ive oer banks line the North: as. For several years the govromeat ran Conall a deft, nt the Reagan administration doided tht taking Conrail priate was the only way to inp i fom secking mote goverament handouts, high already had exceeded 87 bilo, ‘Some political actions favored selling Conrail to an exiting ll road, with Norfolk Souther the most likely burer, but afer mach congressional wrangling. a plan to sel it tothe public prevailed. Ip March 1987, Conall became the lagest puble offering io US. stor $1.8 bill, The goverment spent forte gold plating ths aivood, upgrading the ras sd equipment, and pumping money, The initial price was S10 a shoe, abd as ofthis Writing that ‘ime share is worth S36 "Al gnthering to celebrate the Conrail del, President Reagan quinpod "OK, then lo we sell the TVA?” OF course, no seis ‘Rtempt has ever been made to privatize the Tennessee Valley Aw ‘hori but if it happened, ae standing lin forte prowpeots “There was alk, once, of privatzng Amtrak. and ast te naval ‘petroleum eserves in California and Wyoming and standin ine or those prospectuses, to. Maybe someday they sl off the Na ‘onal Gallery or the Marine Band oF Niagara Fl 'AS it was, there were no exiting new privaztions coming to market athe time Twas looking fr stocks forthe Barron’ pate ‘The old ones :hat I elon. such a the Mesican telephone company (he orginal Theo Bel) andthe Spanish telephone company a ‘menco Bell), bad mde big gin the prior year and seemed be getting ahead of themselves, Did this mean thee wis no way fOr an imestor (0 prt ftom government giveaways ta 19927 NOt 38 Jong us we've gota Resolution Trust Corporation. ‘We already discussed one Way to take advantage ofthe S&L. smess—tuving sates inthe healthy SLs that are squiring the ranches andthe depos of thee Led brethren. Ano ma) Was ‘O buy stock in eomany called lied Capita ‘Allied Capital sone the fem vntar apts thats pully traded, Tt leads money, mostly fo sill companies, andi retur ges felatiely high rte of interest pus achat” (tock options, hearer Stet 261 warrant) tat gies Alle asta nthe pros ifthe venture Wrocs, Th strigy has bon so progetve ha a person WP Jest 310/00 fe Aled Capital T wea it came pbc 19808 Sing on 28.5 ion mest etd. ‘One tangle result of led Capt tarp oan 1 the ait purr that sis inow eaoom in Marblehead. Tis amazing piece equipment mover so much gt om the ai tht our betream tthe quay aig of genetic engincesing a. Te Ben one ‘Eines unlsto ny mother la and on omy eects he tuarea tet nev of Gs The machine wads hy Enroce, {bitch fm in walled Capa nom has age guy Inetes og slong wth et an "Recent te pople fas Allied Cail die to peform an cous They ened asec polo mane (692 lon by sling Stars in Aled piel whith ow Wades the ove he-comtr iach se a masse in he st Ale, The Tomas Drow gains po of mone. a hsease $92 ion, todas smote 9 lion Now # as 2p of S184 min. ‘Bestia to uy om hat py 4,10 pesent ines, W Aled own sx of foi a Pte sn cies portfio of fans hit py 19 percent. it ean make a hfe spread frit sharshoWer, ps the ecco esuty Sake” as dbcribed above. The company has few empoyes so few expen : “Toe ley Ali succes shen the managements abit 10 gel te maney teks Unt bars the lender at Aled hae been ‘ty pay about who can borow the money, 86d Sy stingent ‘Shut much clara he borrowers spot vp. Ad Capt TE Tulhead, sos using portion of 0 tone 6 ba ans ffom the Resluon Tr Corporation "We normally think ofthe Resolution Tst Corporation a ling cons ut ours ole tre chespied artwork, sd Corpor sone own eo ofthe bnkpt SLs But IRR sss ont hate made Py tie wl at ry 2 Among the mosy un an (these SL prob, thee {EC ctl some good one aévanced to repute boomers with eid sie "Wal Set avesiment houses and te big aks ave bought up nay sa Toa the niin dor ago, but the Hoste 23min es hae not Bee 0 ea For the Tt ult262 Peer Lanch 1 ee ht Ad Cpt I ad pane 0 ete he ton Ul ts amp fo sere ae at eae om ata she nial ed Caplan te Ss les pal tsar Ale ee ig for $9, nts pera ene imesing nA sed hes sie {nthe Seno mctig shone sche {sake tek some Othe trv al ht pe tae ‘S&L bailout. eiecade = Sec Sb EIGHTEEN MY FANNIE MAE DIARY [Every year since 1986, I've recommended Fannie Mae tothe Bar- ‘ron pane. Is geting to be Boring tote itn TOR as the “best sins, Hira, in Amerie,” oting that Fannie Mae had & squarterofthe employees of Feit ae ies the profs tuted iti 1987 a the ultimate savings and loan,” Tn. 988, Tsai it was "much Peter company than it was 2 year 2g0, and the stock i sfabe pousts lower” a 1989, when Alan Aeon asked, "What is our favorite sicck?” T answered, "A company tha ou have heard Dt tefre, the Federal National Moripage Association,” sno cident tat there's snap of Fale Mae headquarters alongside the tamily photographson the memento sel in ny ofc, Iiswars my heat think ofthe place. The sock has been so great ‘hey ought to retire the symbol ‘Baring oy fnal thee sears xt Magellan, Fano Mue wes the biggest positon in the fund-—half a Bilion dallas worth. Other FFeltyfands aso loaded up on Fannie Mac. Betwcen the sock and the warcants (options 10 buy more sbares aa certain price). Fidelity and te cenfe made more than 1 lion no Fannis Mae i he 1980 Tm sbmiting this result the Guinness look of World Records most money ewer mate by one mutualfund group on one stock in the istry of finance. "Was Fannic Mac an obvious winner? In hindsight, yes, but company doesnot wl you to Buy iy Tete is aldass something «0 worry about. There are abrays respected investors who sy that t "aot Por Lam you's weong. You have to know the sory better than they do, an Tevefith a what you know. Fa a sock to do Bute than expected, the company has 1o be sidely unerestiated. Others it would ell fw a higher price {o begin wth, Whe the preva opin is more megane than yous, you have to constantly check and recheck the fats, 0 reassure Soursel that you're not Reig Toolishly epost. "The story Keep changing, for citer bette oF worse, amd you have fo foo those ehanges and ect accordingly. With Fase Me ‘Wall Steet wis gvorng the changes. Te old Fanaic Mae had made sch a powesfl inpressom that peopl had a hat time seeing the rw Fannie Mac emerging in Ront of tir eyes Isa t,t not ‘ay, Not right aay was al soon eng 1 make io ‘rion 2 $200 milion investment, This my Fannie Mae dir ook my poston nh stk Wit ko shot he “Snpay?udetin ba ygoermen anne ese sen no and the 8 Ti etn fo i wt So oie iy nth argge make ch asp y Goring mips anak ST ma ose ‘Sat hd fed ong Foi Mas borrowed maya cea ae Sed the mum by longterm morte that pad gered ‘Bs, and pct erence Thingy worked OR a pei enineretass were gong down fue Macca a wocy rng nc, le the cat of fe borong deste chet peau om is etl of facd se mtvigags sine coma, When intrest Pees wet wie cu ol boeing bee da Pea Mace Siar aan Tr heck fow mon ae Rough for sal pros {ay ta ere re wee Sg st Fannie Mae ha! lot in common with the heroine of The Peri of Paaline ts trying to wert te atest calamity. Al the long ter torigages had Bought inthe ide were ping frm 8 110 Beam me Sree 25 petcent, Meanntile,shortferm es had skyrocketed to 18-20 per- een a cat get very tt by orzowing at 18 make 9. Ivestors few thi, which i why he stock, which sold for as much 2 $9 a Share in 174, fel 1 ahstorc Tow of $2. "This was oe of howe rare periods whea a homeowner cou a oa home OK, but iy mortgage f beautiful.” Out the window theve might bea lag heap, bw people didn't want to move. They feo sting pu forthe sak of thie Doauiul mortgages. Tis wos Porn banks and tribe for Fannie Moe, Thre were rumors the company would po ot of Business. 92 ‘Under ay nose Tanne Mas we about to undergo 2 major person Mirehange Some people noticed let Sehneer of Grant & BAe Biat ho was knows the worltsmont daicted Fnaic ‘Pach pred to is cents “Fann Mac wl exome te kind Sy bring home to moter “Poe Tengny we al thought we understood 25 interes rte pa icangons ome yea king mos the met, Ws ying ecient Wel A gy named Dave Mawel ws brought i Mansel nan lawyer and former insurance comisoner of Fenn fina oho ea had stared wn mortgage isance ct any and made sues of He ke thei ‘amen deermned to pat topo Fai Mie sid swing, ie Mima am the compory ine sable, mare enterpie ht taie earings‘ he hoped To acon 0 ays Teta edt tutto sore lend ong ad) yang Free Moe rede Mz, fay krown asthe Feel Home Loan Mort ane Gnportion, was ab sured by the federal goverment 1 Ba pease mortgages excise fom S&L, Freie Mac bec bi traded company 197. Tnaddion oss eespeaurigages and hong Um, Freddie Mac had stunbled ono he ewan wes of packing Mori Wh ues wat spies bay's bunch of morigigs, bundle chem toutes adsl he bul bans, SLs, surance companies, Celloge or chante codes Tose sae suped the Fedde Blac ten and began packaging ngs 1582 Let's ay You haa moriggs on yor house that‘ae from Bank X. Bask X would sl your morgage to Fale Mac. Fumie Mac would limp together ith othe mortgages fo este a “morgagebuced secur.” Hr ould then ll te mort ‘spehacked scat 1 ambody, even back othe banks that had ‘gated the mortgages inthe package, arn Mae go nie fer dong his, And by seine mortggss that toned to hod ns ow porto, it pane the flere $k on nom burn, “Thispacaging service mas ery popular inking ete, Reore smorgage bathed secures came lng, bnka and Sts wer stick ‘ih ouing thowsonds of ie mortgages I mah aed koe k tthe a ard hom n+ ph, No he ne oul sll hi ite mortgages to Fame Mae and use the p= ‘edo ake more morgage, so thet money was ed up. T they sil wanted to own mortage, they could bu Tew mor ‘ck cure fom th sn Foe Mas ne ‘Shon there was u marke fo the mortgage ached secures, and thoy could be Wade stant ie sock or 2 bond oe Bote of Sods ia Moco. Mowigape bythe thoosanay tn tr y the tullins, were comer ito pckiges. Thi ie meta fo ould oven eal hatma esined to Boome a Sena eae inhny, gor than Bg Sts! Bip Color Big 01 ‘Dut 1982 1 wast Loking a fopae a a neste iy bough the sock for he neon! ine nny caret tet fats were fling Inte ates ok ater cling the company om ‘November 23,1062, Tote" = I gute toy ae SS she ‘That year te sock rebounded in type Fae Mie fon rom $2 1039, Ths what happess wih eccls:the company loses Ione in 12 andthe stock ree oro, vests a pts the nxt golden age. ‘When eaedinFebruny, the company was doing ion amonth in these new moriage-backed secures. T occurred to ibe that Fane Mae wake a bank, but ako had major advantages over a ‘bank. Banks had 2-3 perent overhead. Fanaic Mae col pay is cempensss on a2 percent overhead. I did’t hae a blimp, Ii’ ‘te aay ouster ens. It cia py Phil Rizo to avertine morgge- Dackod securities on TV. Is entire parol nas around 1,300 people, erm rie Seer 257 spread out in four offices oad in four ferent is, The Bank ‘F Ancia ad as many branches a Panic Moe had employes. Pusat to sstsn os quongoveromentl genes Fannie Mae cul bee money mare Seal shan ay Pn oe cea than {DM Generel Moors rthowsnds of oter companies. could, {ovinstancs borrow mone for 1 years t peter wse tbe money {Goya jearmrtggs a9 percent and cart pees peed Ro bank S&L or ete onl coma i America could make promot pret ped Te dont nd ae mh b 8 apres ons eibon worth of loans stl 3 iim Fc Ma had tegun fo cp ss at hat lle the “Mock ct pnite™the potas of longterm roortgnes shad acgted inthe mid197s a afore acs. Ths eas slow process The Imontgages wool oll er and Panne Mz wou plate them with Morte tht po higher ates of intrest Sl owned 0 lon ‘Roth bing coleive 9.24 percent, when the merge COs of TS de ya IAT erent “The empaty ag gt he tetion of Tomas Hears at Mr sl yneh Mage Alpert ss Best Stars ad Tuomas Rlingenstin ‘St Wenici, A tof analysts wore sping god things abou ‘Tag saw that further detns im itret rote Would, 5 one of thea i, explede the earnings. ater elgh ovat guartescl oss, ani Mae actully posted pro ip 88, The sock ent nowhere My commitment tothe stook was 2 whopping 1 percent of Mage Tan's ass, Bat eve sal postion enabled me 10 keepin toe, Tineceaved it gingers 37 percent by the end ofthe year. TRe ook fl al ga, fon 3910 $8, and in ypcal old Fannie Mac Sipleinteret safes rose tnd csning fell The benefits of moet {age backed securities wore sil outweighed bythe Block of grate fo avid ths predicament the Faure, Fannie Mae had begun to “math” its borroming fe lending, Instead of borrowing shor= tex money a the cheapest ates, its offering 35 and 10-year fonds nt higher rates. This neeased Fannie Maes cost of money, penalizing earnings inthe sort term. But the Tong rant made the company Jee vulnerable othe svings in rates hat hod ben ts bugaboo inthe pat288 Peer Lyk 19s ‘he pte fh thigs binned on we. Mor siete scutes cul es ge nd Faa Sins fo pctgine Sion of hse aye eve henemtar sg 85 pct rm ie hk of nts wer ep ed oy Manges now iad sat tbe od porta ap he ae porta" There were to ferent Busnes he, package ‘ona on ting em: on omang es ig ‘nena p in: nee as, but Txt. Cay tLe sown here ha en nag more nthe lipach bso ae isHlouon who's gen mtg i Spencer cows ee ing the hy he dor an! waking) om th aes the mongers. Ful ae meds a te sae To Ma. t vate the sompay ir Wanton ad pk © David Matel See important coapelion i te more: bases td dropped ou. Wi fever comptes ping ang foes, prtt margins on na id sided Ts wel Se Fac acs eaage st eben wl Fai Ma's poe ought amore tock cnogh oie Tarm la pet of he en See ope ie ing tn. ed Ps Pain te nestor eto sepimet pir ape Than mame in pad in este ny fs pe ls yee ler eM ty hs Matcha ee re bey oeson tak boat ky epromig Hos: it tings go eh, how mach eo Teun Wit he cat a theeqaoo? gre thai fame Mac endpay esters on the prot romenteage te scl Sd the ae ferent on soon Si i porto, coald ear ee, rots arg he sok spera Wiens apa Sica ack ihe psn oe Jar ore ease os raft hee youve fos pd ‘At 1k pgs an pps of wots ona comers with Fimic Ma, bt how tne te company oo med oad fe oe te omens ong nie Mac at 7 cnt 9 se 98 ut made $2 ct in 1985 The tc ebnnded om 84109 Bonn Seer 28 I retcated abit. Now only 18 percent ofthe fand was imested in Teunle Mac. Wall Sucet we sti worrying about Texas andthe heys Inthe doors. Herein my ots of May 19 was a ore important ‘evelopment; Fannie Mae hid jst 501 $10 blo of ts Dick of frame, and only $20 bln of these unfavorable loans femaied, Forthe fist ine, old myeli;“This stock a buy onthe movtzag- teed seus ane” ‘Sen new card ha tine up anne Mac wos ihtning senog santas em pe riggs THe turned ott De = ry weer ves ects prove anne Mac inthe next recession Wl bons ike Chae wove making Mt case to pet moreages Mintle doeumertton—-nodoe mongazes, low de omen, Taiteoe mortgages fannie Mas ws tang harder ane Mac dd not wan to epet te eas men that a, 8 rome the now Jose Dug The they on fannie Mae were obseurng the beauty of the snags a cis, hc cn ne ee TREE teed into the ation! peine. Even if new boos ‘reese ig, ti motenge busin woul! grew, OL eagle "ST nme oof od poe and new people wou uy the OX Somos and new morgage woul ave oe ten, Many of hee mat ca unin Pn Mow packages and Fumie Mae woud get ware fo, “Tc coropany had tem island wasn he verge of he ea xls that Thames Kibgeatlnforesae in 1D 96408 a Sus ree now sips Montgomery Scurites od ts cints ueeSumc Mos neverated rele to be ergs tnt in ow Sees Wahi way meager Stopibo pres Monenerycvtinacd, “could nepal im ete ss. bon nergges expat the [Southwest] "Prmic Mec-was chipping vay at dhe ick of granite. 1 sd anoter S10 billon ot sd mortgages that cavied interest aes tavrle Fale Me ie bn ve monty a 986 he took 05 fm $0 12. Th company ear for he Ya.270 Per Lyme Betmcen 2 and 2.3 percent of Magellan wa ints in Fannie Mae throughout the yest. The stock seesaed ra $12 0 So, back ne 812, buck to S16, and then suflered a setback 40 SH in the Ghose Correetion of Ociobet. Wiggle watchers were etuc, 1m geting ahead of myst. In February. | alhed to four Fane Mac executes on conference cll, learned that force ne bouses with Fannic Mae morigages were sll on the rise Tene “Mac ind taken back so many hous i Texas that i had becere ‘the bigest real-estate mogal in Texas, literally by defy Thirty-eight Fane Mue employees were working in Houston alone to get id ofthese hones. The company had to spend ales ‘on forediosue sto, and milions more to atthe gas an pare {he stops and otheriss muntin the abandoned bausesanieon ‘15. could be found. At the moment, buyers Woe sane ‘The housing market i Aluka had ale deteriorated. Fortunately for Funie Moe, the Alasks hwsng market fs tery eal Jn ny mind, these negatives were oershadowed bythe amzing suecens of morigage-bcked securities —$100biloa Werth packaged inthis singe year: Also, Fane Mae id solved he problem foes nd downs. Ino longer quaied a8 3 cca Hwee begnnig resemble Bristol-Myers of General Elric. a Mealy pees ei reditabe earnings. But it was growing mach fater then Bry ‘Myers seaming had jumped from 3 cen to SSS {On Ociover 15, days before the Great Coreen, T company again. David Maxwells the CEO, ‘ent that sonfimed my suppositions interest tates mere ae $spetcen, he sid Fannie Mae's earings woul deine by oy 3) ‘gents. Never could such a thing have heen sud about the id Feoacs Moc. This was a watershed—the compacy wa tling ws they he \sansoumation had suscoded Along, ith the tet ofthe stocks, Fannie Mac got clobbered on Octobe 1, mesons were parichy ancommentars edited the ‘2d ofthe word, Twas comforted by the fet that whereas foes Mac's forectosute rte was stil ning Is Mh-ay dehngeenee oe falling. Since delinvencies lead wo foreclosure ths fall wae oe Hinguency ate snggesced that Fannie Blac ha racy seen te nace, 1 reminded myself ofthe Even Bigger Picture. thit souks in soed ‘ompanies are worth owning. 1 was convinced Fannie Mac se ees ee ‘As the end of the world upproached and oe ote paying obese ote ah hr any ul nen ea * ‘ould Be tee housek image beter pace oe tn 1988, re ate dierent shades of bys. ‘Tere’ the "Whales Lam loro ban? by. Ths hye i wot oon {ero ty ow and er”. Tere ste hy Sr rmober-iraw ty. The the “Buy for Your moter sa lth ant unk, and sous” boy Tetes he "Sele ows Sout the oey it bby. The' sh Sethe bee Sieh cat andthe barbed pt he money i ts” hs Ter’ the whl the hou, boa, ca, and tarbect, ar n Jour moter iim, aun, ance, und Sues Go te sae By. as wht Fave Mae was becmig Pi iessel Meplatiney espe keen ore 1988 The company eared $218, up fom 3.5. Sty percent of ‘temorgne porto hn ben acted nr the now, veh "mi a ford ia opp forth in te sie 9 Ist, he geomet tara soning ako he rrigize bases. Heretofore, morons omnent fess wate “Soot ax ico st soon ss Fannie Mac reed the. The couary night Teave SO wien Im Ges one quarter smd 1 tuo he nev. This courting Sse aie sere tons ‘namie Mac's are earings Tse anc or ForeMoe to report ow’ quter, whith woukl sear ivesor a create a seta inthe sock oe Under the new rues, ummm fs hd io be amortized one the tie ofeach new mortgage lan Fannie Mae bas not sffercd ‘down quarter since these rules weit ino effect 1999 Toed tha great nestor Warn Ballet onned 2.2 milion shares led tthe company sural ines July showed aie Ieonement in nopertorming sets, These nasa sal poo wi etal n Colorado, bt them pris es omg Seay, ‘of miracles: house prices were on the rise in Houston, thom the Nationa Deinuency Sate, ler Bie ent einen, {ease that Fae Maes day dligucny i fed dropped again, om 1 percent in IRS to 6 percent 10 ss sete ris othe mea heat eae mel that home prices weren't eolsing Tey were They nee tag ‘han vin. Th ss This was they ocd yp the tek Backing vp the rk” isaac Wal ot em for Ning ss ny heres sa stirs, Now 4 pete of Nageans ass were mee Rate Mae, and war the endo the yar edhe my 3 pscet a [easy lrg posto by a. Fannie Moe was no pckaing $25 bon woth of new mor ngebaced scares I woald om can $00 lon yea hg 2 este be hc aca OR Not on SAL a he {0 Freddie Mac or anit Mage on? “HPPOA em ao ny, Wal Sree sctcbng on tothe de hat thi company gould conto to grow ata 1-20 percent Te stock ne fs S610 42, atmo haleagger on seo, Asso olen Dapeng in th sock mart, several years woh of pene was ened ven ths higher price aon ac was sil undervalue, wth pic of. A negate atic onthe house markt ceed Gee bing Cases," sppeatd in Borns Deccnber Titans ra The Reason tm Res Este Han Omnis Inpleateng ie Beans niu Sruer 273 istration showed 9 two-story house wit a sg in the front yard that plead: For Rem, for Sale, foe Anything? Eat were forthe howing feat that reuse tod, Fannie Mae ‘would have cen $100 stock 1990 {tie ro mitsin the Spree nit, the maximum ake by the SES. Fannie Mac’ shares had cteased in price to the point that fora sort period the holding atl represented 6 percent of the fale of the fund. This was OK, a long a the 5 pete list had beemencecded becase the tock pice had pore up, and or Becase Pa bought more shares. Tie summer an fl T watched with iscination as more week cn eying sk this sock jus hen everything in the company vos pong ight, Saddam Fussen had invaded Kua nd we had invaded Skat. The worry this time wis thatthe Gul War would prove a national depression in realex, cost-o-cast version Br the Ress calamity, Hundreds of thousands of poople would be Stalking ana fom hit homes an! cringe ays 19 Fannie Mae Farnic Mae would bevome the nation’s tanlord, wasting all is talons on pat, orale sigs, and lawyers bills ‘ever ital iy years of sing worthy companics ge clohsred for no por reavon had seen one tha eseved i Tes. Fannie Mac's ‘Slingueney problens were now minescole, but silt sllered from fear by essciation, Io November 199, The Wall Ser Journal Published wn article entitled “Citicorp Lenders Lament,” which de. [ried tow that bank’ loan dlinguencies bal inerease fran 24 pecent to 35 poreen, This had nothing to-do with Fannie Mae Fit the price of Fannie Mc stock (long with that of many morgage relied sie) fll in sympathy ‘What ply forthe sharers who pai atteation to the big obit pctre seat ofthe going tte company and sold theit hares bocase ofthe coming depression n hosing. Except or the Taveat houses, there wap ao coming depression ip housing. The atonal Associaton of Realtor subsequently reprte tha in 19%, nc! gain in 1991, the price of a average house nreased in alu. ou kept up with the story, you know that Faanic Moe hada’ writin any Laeat orpages awe $ID, 0 wasn" ied2M Pee neh fetta mae serge mortage 30.0, You coe it had tightened is underwriting stands, and longer made Texas-style loans on 5 petcent down You knew that he age-backed secures usiess was sil erowing ats fst ep, Fannie Mac stock fell trom $42 0 $24 inthe Sata Selo, and ‘hea romp rove again 1 $35, oot {was gone from Magellan. It was up tony sucesso, Morris Sith to keep tabs on Fannie Mae, He did and the stock remained the ‘number-one holding. Te price rose again fom $38 $10. The company had record earnings of $1.1 Bilin, 92 Poth hein Maa aos Sek nt scting or) cringe even np Tish comparedey tence anes pars nee again tein sty a impr ae as sn su broth gee a Caso tov ne Me the igi yk fo encase Sil be trae whe sompanyecpesly ober ne ‘Shands ould eon me oe To alle nam pray ring clei dete isms pay por a of est at eg she tom wn mnt ow cst Burnt o Sete wa th ae he npc ing ea Satara im Mow tia 2-15 pect rove al ara, uta nascent atop Sone gen Se NINETEEN TREASURE IN THE BACKYARD The Colonial Group of Mutual Funds For several years 1 mised ope ofthe bes-perfoming groupe on Will iret, the mutulund indus. Like the mall manager who neglected 1 buy the Gap asthe sales results passed unde his nose, Thegleted vo bay Drevin, Franklin Resources, Colonia Oru, ‘T Rome Price, Sate Stoct Honk, Alliance Capital Management, snd Eston Vance, 1 don't know wy realy, PesbapeU cout tc ‘he tees fr the forest. The only ane Tdi buy was United Asset Management, cormpacy that hed Mi-d0 fund managers winder ew ‘rac an ited them) ou otberinstiatons “These companies are scaled direct sraal-fund play 38 op posed to, sy, Putnam, which ea sthsigiory of Marsh-eLengm, for Kemps, whish has nfnd snes but mostly sells insurance ‘All ight did wel in T988 and 189, asthe fear ofthe callpse of ‘he mtuafund industry ato tho Groat Cotection of 1987 turned ful to have een exaggerated "That corecion gave me the chance te uy these fallow mt fund compies, which I had overlooked tere, Heres another of my favorite what porto Your money equllyabong these eight tock aad eld them from {he beginning nf 1988 to the end of 1959, you Would have outpor formed 98 percent ofthe finds that these companies promote PRA se276 Per Lynch _oving pers when muta ands sre poplar. etn i the compan sat the fds Hl to belpe evar than Investing n heir products. omit inthe Gold Res te ‘ope who sid pots and shove dd eter than the prometor ‘When nrest aes are devin, the Pond ana equ fasted so tact the mort cash, and the companies tha specialize i ach funds (Eston Vance and Colonia, for sntance) are exceptionally prottble. Dreyte manages Jt o money markt ast so when Inert rote te gogo ead pope ae getting out of he sock Iovist and owt of longterm fons, Dreyiis prone Ainse {Copal monegss mone for sstonl cents, 9d ko amass tua fs hee sold co ividal rowsh brokers. esteen {publi company since 1988. The sock pice ook ight din [and then eae! teal forthe ste. ‘ioe the blige of dla the revert ave ben pouring into ont Mocks nd toney-manet ssa fn dol en pie tht tse uae companies have outertrmed the Imac. thers ary sep ee, that body ase nunched the MutuasRnd Company Mutual Fund “The infomation about who geting in and out of which Kind of fan pulse the ins, and poessonals sd amateurs ike he a0 oportty to tke advantage you ois bay these teks alter the las bg cometon, you could have oveht thom dung the Sam Se ft thee of 1980, wiht ton ‘ance with» one-year dectin f 0 perent, Dry ath a esting {Gf eae pense, sl cee wh ser bt nontls ie rican desine wel ‘Once agin, rumors ofthe cols of his indy proved to be snounded Al you ado dt pe th latest fea wer fo look the sales fpres for mutual fund Decne 1950 and Jury {991 Ytio spite oy daterminaon wt to ever tony Od bbls, {ca nipping ce atin snd ed To reommend singe tnataltond company 16 the 198) Barron's pane. The fara of Tynes protons GF hore ate any, tier my wife) missed te ‘hound in Tran (475perent ain in 191, Dest (38 pe ‘ae Rare Pie (6 prot, United Auei Managemen (60 parse), Colo) Group pers) and State Sst Bank (177 Force) Our myst ural Fund Company Monel nd port fo mes doubled in al that Yee In defen, Yor Hos I pe Fm allowed ts mention hat rgibresommend Keng sn nsraes company oi sae take Beanso me Seer 277 in the maual-fond business va the $80 iion worth of funds it ftanager, This wos not th ste reason picked Kemper ina “ive sins was starting to tn around, ana so were is brokerage ‘Sibsarien including Presot, Bal, and Turben. Kemper’ stock “vodoubledin valu in 191, soto that extent maybe F'n redeemed, “Ati onset o 1992 {reminded sel not vo make these mis take Td nce prior to 19RT and again in 1981. This time, | took a ‘ay ose ook a he fad ation, With interest ates roping, and {ath bin in cerns of depos matting every month a great Tide of capital was emptying out oF the hanks and ring moa man et fue Ths eatin is lls forthe bg scven mentioned ove. On the ote hand, afer huge gains in LL, most ofthese ‘ecks seemed overpriced, The one that did't was Colonial Group, ait ofthe Ab pereentappecition in the stock in 2991, Com Joni Group was sing for the sme B47 i sid or i E985, 8 Tela pubie fering. Hack then, Colonial managed $5—S5 tion Worth bf mata! Tans amdl earned St share. Now, it managed 53 [ion worth of mutual funds und was earning VSS share, plas ithad amassed $42 share in cash and had bought hack 7 percent Seheestock So sn years eer the oflering a och stronger company hate purchnse forthe same rie, ap you subtracted the $4 ‘aca, sou were petlag it for $4 fess than in 3985. Te company af no debe. No Wall Steet salst ad utter w word about Colonial Group in two yeas “The trig of finding the weeralad tok within am trie soup icone ve often employed with good results. T. Rowe Price fio lng for 20 times earings, Franklin was seing for 20 es ‘erings ot Colonial Group was sling for oly Himes earnings ‘Gren, you had 4 8k youre why Colonial was wndervalued ‘One reason might have been tht those earings had stayed Hat fo! fous years Colonial had pesny doubled its ose und manage ene bt hs was only ikl nthe peat ide of enptl that had moved int fs in general People had heard of rey, T. Rowe ‘Price, and Eaton Vance, bet Colonial was no household wor ‘Bud this mean that Colonial deserved oe valid ofall the ging rate of ts competitors? Lead see wh. The compeny wes Srding money. It had a babi of caag is dividend and buying Back shares, It could use fuare profits do more of de same talked tothe corporate treasure, Davey Seoon, op Fay 3. Me said that busines had improved espetally inthe mani ond fads Colonial has several of hese, so ¢ wil benef from the singpopularity of mans as an escape fom higher axes, I had launched Some imeresting new fund, sich 38 Wty fund Tearned lon ago that you make I ingucs at 10 diferent companies, you are going fo discover a leat 1 unexpected devel ‘pment. Unexpected developrent ire what make stocks 0 apo tlown, and Sooon bad aa ineresing one 9 telat. The Colonial Group bad just been chosen by the Stace Steet Bank to market some new funds tht State Steet had concocted State Street 2 commercial hank that does the paperwork, aso known asthe “back of” work, for most ofthe mused i ‘ust. This back office faetion (ewstomer ePvice, recording of Puts chases apd sales, keeping up with who ons What) es Been ery Tocratv forthe nk, Sate Set tock alt percent gui 997 ‘When Scone mearioned Sate Suet i reminded me Of take Ta made with ny motho-ina. Some Seer ago, when i appeared hat moncymarket nat wren the devine, Liked my mothe {aw intosefing er State Sie shares, onthe ground thot (1) the om any’ eamings were hey Yo dop and (2) she'd doled er enone Inthe sock sendy. Since she tok this bla ave, Sate Stet Socks triled again, aad fac tha ha been hie ia her cone fusio aver Sate Steet tvee-orane stock split, Whe she looks inthe paper, i appears tha the stock prise hs gone nowhere since Fave the sell sal. She atencongrataltc me rth sory eal and until cow Ihave tad the courage to confess the tat, ‘Stock sli can be apa inthe nock, bat onc ofthe good hing shout thom sthat they cnalethe stockpickertoeover op thea ‘thang sod to0 son, at east om friends eatives who doa follow the marks In any event, Stute Streets experince inthe back ofce with ‘other people's sutul funds ied ito consider starting ow muta funds, to gen onthe font end ofthis bonanea, But State Suet ‘id not want to anger is lens by competing against them diet, which i why it decided to eamoutage the Sint Stest fonds by Bring the Colonial Group to market ther, Tis extra bit of business vi benef Calon Sock Sm 1380 ise TWENTY THE RESTAURANT STOCKS Putting Your Money Where Your Mouth Is Jn scm ei ns a ah Every ser seems, a DN Op appears a the apr oF the ‘opting alo ofthe exis of trikes Sine the 18, ‘nr fn food beeane an acesoy fo he sitomabe abd people Ibamed oct thir tnces, ben rein, and aly eon the sad etal chins ave Become peat growth compan, ith ne oes ote taking ver ere the 1 ones et of The potenti or restr proven men 1 oki any ever av Fy ama, en one ofthe et sie. ‘oot tomy atetion nas Rentuly ried Chicken, Resucy et Chien wan ested ot of pcan ater a superihay Ar ies tn Sandon ny eae. Bankrupcy dhe to a shoroge af esters his enerpring Seana wok tothe Toad in hs ateed Calin olerbg dhicun soap to bettered rexarants exchange or cl tes: He wore» date ot he mite pate scone te became hs aden KFC dock wenton le a1, Before tha, Dui’ Dons hud somes in Misch is ba 2 ea fons up ere Ingres) and Howard loknson, he punee of be tarp etry,250 Pater Lynch ‘had traded on the New York Stk Exchange since 1961 Bob Exas aims, amo nthe best, followed i 6) nd by the al ‘s, MeDona and Shoney's la math sock mare debut Haines thousans of estos who sul seta hee oes wee very prftable had hance to prot rom te ose aban, ‘A the tne, Wall treet would ave set at the ie ha & tune dni shops an umbungr jit could compete the famous Nity Pity so, oly choy esha proved To te highly overated, we Shoney's became 8 Totus te fe 2 cone a shat, jst for split, to gh of $862), Bob Evans Farms at S-bappe, and McDonalds 4 40-bagger Hod John was 8 0-bage by the Sines ken ria ad Ree ‘wy Fried Chiken 2 taper when wes acuted by Pope if3on mest 0 Din thes ve es, pting our money te our mouth wi, by the ea ofthe 198 ou mow hve Bore Suton at cat hs ney and you would have Bee tlonaite Tow tes ort ad yeu pul the entire 10000 tn “MeDonal's alone. MeDonsi'shis ht one othe most temaditg sockemorket promenade history die ois lua tore ‘nits wel ana scott westructuring of Hs menu wi a MeDishes.s ell ts practice of exporting Hs olden artes Hamburg joins, eaters (at's, Morro), fam ak houses Fondeross, Boras) al purse estes (Denny's, Sho 17), cam ic, ot i, domes ean, interatoal fod resrants, cafes bars, pa parr, my Bonds, and bute nove cach pred on or wore ps nso ‘inthe sock marie. under the noms fan ene ation of wrens ‘We al now which pices sre poplar sd wel nine, which are diheeled and pane, hich haw reached the satrton pst ad which ave oo 10 pow jou the restarats in the 19, wate bay ome vere geting er fist ives hence an taming thee eas ovale lr couters, you could Fave mae porn the 1s Ey haying Inteatonsl Day Qacon Wendy's Lay Teo Bel Pa tan ac when Lone Joba iver ppearedon te seus You would have done especialy wel had you tsetse bat smarker of 172, when solid franchises wore sling hrs pane, “Tho el, which hd never had a gpg quater, oped 0 314 bare, prompily rebound 2 84, aad then wes aed hy epiCo, whi hes 9.0mm food sompanis because thy help el Pop's som da eanne ni Seer 281 Inthe 1960 you mia have dicnerd Cracker Rare, wit is agit sop an dso eaood and ics or Chis which Sn pbc 9 an ohne: or Share (08S) Ra's Fam Stak Howes (943, td Uo Resaurants (98) Coes set anoter renin iestnen-cvetay tan bona Ot very region af the country his been te acoso for one ox amore of te smabionn cee tat went on to cpfoe he oman and wallets ofthe covey: Lay Ry and Cho {he Southwest, MeDonaids inthe Miwes, CA-Chts and ater ‘onal Deity Queen in Minneapolis, Sbarro in NewYork, Dui Donuts in Net England Sones’ aid Crasher Bate inthe esp South, Ser and aco Bet nthe Far Wes "Avctaurun chai ie retaer,he 15-3 yeas of fet growth ane ofitanit apa Tiss supposedto be acto snes. ‘ith Reding extaran copay i pote fom competion in may that a lecuonescompaty or shoe company ot Tt there's new fvand chips chain Caforia and beter ons to Now York whats he ipa fhe New York cao he Corin hat? Zo Trak long tine for a rearan company to work is way actos the country and mesnoe there no impetion om Arend. Demy of za Hur never hus to wory about ow-cs ore inet “What contin to separate the rang fom the ops moog the restaurant ins cape management, adequate Rane tn x meth approach to esanan, Sw bt steady ay mi ‘im he Inaapot 30 htm hs Kd fe “The ele of tre hamburger faneins, his and drach, ss fst, Both trod in Tae (Chis Dalla, Frock’ tn Sen Anos). Both ested he gourmet burger. Beth rested plement anh dots sounding, albough Chis hod De {Srvoe and Fader was ets ale One Deca famous Shuler fortune, we hc ose shed Ko ame ad foto "Why? One reason wos that Chis diner sr men Ram: burger went ut of ale, while Fudrsher' tek withthe Borger Butte lay difrence sth Padruters expended tee ply ‘Whe compan tes to open mor han 10D new ait 8 ear, Tk vo sm to problems Tae un to lay ema pk he wrong ster or the mrong manogets, py oo mac fo he el esate 0 fn eo proery tain the employees. ‘acdsee ap al wen te way of ate es,22 Peer Lymch ‘Winners, nd TGT Fridays al of which ved 100 fast and steed fori. Chis, o she oder band, hss maiataine sensible pace of ‘alding 30-38 new units yor: Revenues, sales, and et facome Ihave grown steadily under the experienced ye of Norman Brinker, founder of ths chain aswel se Steak & Ale and Bennigan's, Chis ‘expect to reach a cling of 400-450 restaurants in 1996-98, which it hopes wil prnduce SU billion in sakes, Thote are several mas restaurant cain can increase is carvings 1k sam ad mone restaurants, a8 Chis ding, oF ica ieprone isenisling operations, x» Wendy 'shas done, Some restaurants make money wiih high turnover at the Tables and low priced meals (Cracker Barrel Shoney's. and McDonald's fit this category), while ters have low rumover und higher-priced meals (Outback Stake house and Chact House ate recent examples). Some make their Digest profits an food sls, and some have gift sbops (Cracker ‘rel. Some havo hiph profit margin Because thet food 6 made From inexpensive ingredients (Spaghetti Warehouse), others becsuye ‘heir operating costs ae low: Toe resturant company to beak ete, the sales have to equa the amount of capital ivested inthe operation. You flow & ee Taran sory the same way you follow a retailer. The key elemets are growth ate, det, aad same-store sales. You'd Hike to see the Samestore sales increasing every quarter. The growth rate should not he too fasta 109 mew tet year, the company nk potential danger sone Ded shou be fw fo moneusont, posible, "Montgomcry Secures in Caloris keep regular tate on the ete restaurant group aad produces exellent reports Hs Tatest nals that hamburger Joints such as MeDonald’s and Wendy's fre sulleriag ftom ovetexposute (the top Be chains have 24,00) location inthe U.S), and thatthe baby boomer generation ara ing away fom fas food The momentum has shifted wo riche ro {aurants sich sr Aw Hon Pain and Spagheti Warehouse, snd ‘medium price fay restaurants that fer a varied menu TF you had bough the top eight tocks on Montgomery Sects" recnimendod restaurant Ista the Beginning of 191, you woul have ‘doubled your monoy by Docomber. These winners were flows Berta (Griker Barrel Brinker Internationa (Chi) Drsme we Stas Spaghetti Warshowse Shoney's Ralls Applebee's Ontback Steakhouse _omleyeraan armen ase Pa Seem apenat a ite ok iti ait tahoe weet ela taie ence ialine, Ais oaemen es Siete sme titiea sea in we ee iat nce ae en a cheat ET ttagn wh ela tagcat hata rm tn os et weet eae tet ame aautmatniearteaeet fern eee nde tee spot selma fo ac ed See it og is etre et iat hetec a rl ca ss a rare eae eee ect i ay Sek a es esti auc ge vip eT Seat tie anki eees oeTWENTY-ONE, THE SIX-MONTH CHECKUP A beslty portfolio requires a vesular checkup—perhaps every ait months or so. Extn withthe Bue chips, the big names the op ‘smpanics inthe Forte 500, the baci forget step ean Be ‘unproductive and downright dangerous, gute 2-1- 21-2 and 2. 5 ita the pint Tnsestors who bought and ong IDM, Seis ‘and Eastman Kodak ate srry tht they di ‘The simon eheekup is ot simpy a mater of looking wp the stock prie inthe newspaper, an exer that often pases fo Wall Steet esearch. Asa stockpickes,youcan assume aapthing. Youve ot foo the stores. You are tying 10 get anywets to too BIE Suestions: (1) the stock fil attractively iced relative 10 ear ings, and (2) whats happening nthe company to make the eae me ete you ean reach one of thee conclusion: (1) the story has den betes, in which ease you might want to increase yuk Ia. ‘estment, @) the story has gotten morse, in which case you can sderease your investment, of (3) the 01's ncn, in mh ‘ee you ca either sti with your investment put the money in ‘nother company sith move exciting prospect ‘Wi dim mind, in ly 1992 Tdi seo checkup onthe 2t selections I made in Baron's in amon. As & group. these 21 had performed extremly well ina vo-s0 market. The “portato ‘bad increased in vale by 19.2 pereat, while the S&P 300 had ‘returned only 1.64 percent. ('ve adjusted al these numbers fo the ‘rious stock spits, special dividends, ete, that were declared i FIGURE 21.1 ‘is si monthperisd)