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The New York Times Reports this morning (Sept. 6) that Fannie Mae and Freddie Mac, the big mortgage giants, may be bailed out by the federal government this weekend before the Asian markets open Sunday evening. "Shareholders would be virtually wiped out," says the Times. This could be another black eye for San Diego's Brandes Investment Partners, the beleaguered money manager which has made a lot of bad bets since last year. According to Yahoo, Brandes is one of the largest shareholders of Freddie Mac, holding 25.9 million shares of the common, or 4 percent of it. As I have reported earlier, Brandes had $125 billion under management late last year, and was down to $86.4 billion on June 30. "I am not concerned with our recent underperformance," chief executive Charles Brandes says on his current website. He says that the fundamental trait of successful investing is to "have enough knowledge of the companies and industries in which you're investing." But Brandes has gotten into some huge losers. The firm has had huge positions in faltering newspaper chains Gannett and McClatchy, and mortgage firms Countrywide, Washington Mutual, and Freddie Mac. In each case, he got in at a price substantially higher than the current value, as I have reported earlier. Weak performance has been stark through midyear, according to data on the Brandes website. For example, Brandes U.S. midcap value stocks are down 24.32% this year, versus minus 6.53% for Standard & Poor's U.S. midcap universe. Similar underperformance runs through various other categories of the Brandes portfolio. As reported earlier, Charles Brandes has built the most expensive home in San Diego County, a Rancho Santa Fe estate worth $60 million, according to Forbes Magazine. There he lives with his new, beautiful, young bride. The two are frequently pictured in high society. Investors would be justified in asking if Brandes has run into a string of bad luck, or is not minding the store. He is listed in the Forbes 400 as a multi-billionaire. If the portfolio continues to underperform and money keeps flowing out, it is a good question if he will be on the list this year.

Comments
21

Is this the man who paid Elton John to perform at their wedding?

Sept. 6, 2008

Response to post #1: Yes, Elton John played at his wedding. Also, Brandes and his new bride accompanied David Copley and Burl Stiff on their recent trip to Cannes, basking in the glitter and conspicuous consumption. Best, Don Bauder

Sept. 6, 2008

One of the rudest awakenings I ever got was when I realized how corporate executives were continually raiding corporate coffers, with impunity first of all and second, with hordes of other company employees trying to jump on the bandwagon and get their cuts too. Obviously this was not enough and corporate welfare became the standard. Hey, if we can raid corporate funds, why not get a bonus from the government. And it worked. Now the Feds are reporting that not only do they have to put Fannie Mae and Freddie Mac in conservatorship, but they find out that their capitalization has been overstated through the use of deferred tax-assets (sounds like San Diego a few years ago), and refusing to "mark-to-market" their securities. The companies' top executives will of course waltz out of there with bonuses that a normal person can't even earn over a life-time. That this affects homeowners needs to be powdered over since home-values will continue to decline as a result of these deceptive accounting shenanigans. Locally, as a proactive strike, the UT had nothing better to do on Friday September 5th, than to publish an article stating the SD homes are currently "undervalued" by as much as 17% (graphics added for emphasis). Obviously, both regionally and nationally corporate greed stops at nothing, even after their deceptive practices have been published over and over. I guess they think that the public is more interested in who will win some "real-life" TV show than in what is being cooked up around them to fleece them further. Sometimes I'm afraid though that they may be right in that assessment. At least a flicker of hope is that the UT is collapsing under its own lies. (stepping of my soapbox now)

Sept. 6, 2008

They claim you have to be patient but if these stocks are going to zero, patience is worthless. I would have more respect for Brandes if they just admitted they blew it. This economy is smacking everyone in the face.

Great article Don,

COLT

Sept. 6, 2008

Response to post #3: Yours is a very perceptive post. Top corporate salaries are utterly out of control, averaging around $14 million a year. Wall Street CEO salaries average $50 million to $100 million a year, despite utterly dismal performances. Corporate welfare is totally out of control. The Fed and federal government saved Wall Street by the Bear Stearns forced sale. Now it is bailing out Fannie and Freddie Meanwhile, banks and investment banks are exchanging worthless paper for gilt-edged paper from the Fed. The Fed's portfolio therefore smells. And still, the reigning elite doesn't want to have regulation -- just a little more than there is now. Far more is spent on corporate welfare than social welfare. Best, Don Bauder

Sept. 6, 2008

Response to post #4: Value investing is still valid, in my judgment, but it appears to me that Brandes got caught in a Graham/Dodd trap. The assets of the newspaper chains (McClatchy, Gannett) looked cheap, and they had good cash flow. But that doesn't do any good if the industry is dying. What good are assets and cash flow in a moribund industry? It's similar with the mortgage stocks he got into (Washington Mutual, Countrywide, Freddie): the assets looked juicy for the price of the stocks. Trouble is, there were far too many financial institutions, far too much consumer indebtedness, far too much fraudulent lending activities, wildly excessive housing prices, etc. The bubble burst and Brandes didn't get out. If you have a different theory, please send some more posts. This is a critical subject for investors these days and I appreciate your opinions. Best, Don Bauder

Sept. 6, 2008

Reply to #6 Theory is Inflated Egos and Cockiness and being too stubborn to change with the markets. Read the articles on their website. They are so convinced that if they only buy what is not wanted by Wall Street that they will gather bargains. Well, in previous downturns this worked. We are now in one of the worst times ever in our Country. I think when you are a Billionaire, you can not relate to how bad things are for the average person and thus see turnarounds in things like Autos, Homebuilders, Mortgage Companies, Banks, etc when there may not be one before many of their so-called contrarian plays go belly up. Joe and Sally Smith even realized that it was pretty dumb to buy homebuilders and mortgage company stocks in 2007. You even are savvy enough to know not to buy newspaper stocks. This isn;t the first time a brilliant investor was brought to his knees in the markets and won't be the last. I don't know how they could value stocks using Graham/Dodd or any other model when you can not figure out the true book value of these things. Maybe they will prove everyone wrong but it seems like their approach to investing is as obsolete as an 8-track player. Sad thing is that the worst is probably yet to come in Financials as many of the crazy loans are coming to a head next year and 2010. Best wishes Don, COLT

Sept. 6, 2008

I'm always amused by investment "professionals" who urge small investors to stay the course, and claim that you cannot time the market, who are themselves jumping in and out of bed with every new fashion.

I'll repeat my theory of investing: When everybody is saying "this can only go up", time to sell.

Sept. 7, 2008

Response to post #7: Your post is full of wisdom. Brandes has done poorly for two years in a row. So he talks about "long term investing" and urges people not to fret about the short term. To many investors, two years is a lifetime. A pension fund administrator could get fired for two years of underperformance. A money manager could get axed for two bad years. Personally, I invest for safe (hopefully) yield and slow growth. But I realize if I were managing somebody else's money, I might get canned. I agree with you that financial stocks have a brutal time ahead, even though they have been through brutal times. For two decades, economic growth has been based on excessive leverage. Now the nation is deleveraging. It must do so to survive. Financial institutions are in a treacherous environment. Best, Don Bauder

Sept. 7, 2008

Response to post #8: The 2000-2002 bear market in stocks and the 2006-present bear market in real estate prove your theory. Best, Don Bauder

Sept. 7, 2008

Reply to #9

Don, how much longer do you think investors will want to pay Mercedes type fees for awful performance. Can you imagine losing 30-40% and then getting a monster bill for fees?

Sept. 7, 2008

Response to post #11: Already, a lot of money has flowed out of Brandes. There has been a lack of performance in a number of different categories of funds -- domestic, foreign, fixed, equity, midcap, small cap, blue chip, etc. Best, Don Bauder

Sept. 7, 2008

Response to post #15: It could be the law of averages, or reversion to the mean, catching up. Miller had such a great record for so long. I knew he would stumble. I have never seen any money manager -- or economist, for that matter -- have a seemingly infallible record that eventally didn't come down with a thud. Possibly Brandes was on a roll for several years, then his good luck finally ended. It happens in Vegas and at racetracks all the time. Best, Don Bauder

Sept. 8, 2008

Reply to #16

The only one is Jimmy Rogers...he had an amazing return running a hedge fund and has been saying to short the dollar and Fannie Mae for years. He even called the commodity boom. These value managers are losing money so fast. It makes you wonder if it is worth it to pay crazy fees to have someone manage your money. Just dollar cost average into index funds with low expense ratios!

Sept. 9, 2008

Reply to post #16: Good question. You might be much better off simply putting X amount in a S&P 500 index fund, X in a bond index fund and X in a cash index fund, and not pay fees. Best, Don Bauder

Sept. 9, 2008

And now the CEOs of FNM and FRE are going to get millions in severance! Our Country is so messed up.

Sept. 8, 2008

Response to post #13: Mudd of Fannie gets a departing gift of $9.3 million and Syron of Freddie Mac gets $14.1 million to go away. Yes, it's a great system. Best, Don Bauder

Sept. 8, 2008

Don, What do you think Value Managers like Brandes, Pzena and Bill Miller of Legg Mason saw in these stocks? I think Brandes had an average price in the $20s-30s. Could these guys be that out of touch with Main Street?

Thanks

l

Sept. 8, 2008

Reply to 16 - Are you suggesting Wall Street is one big racetrack/casino? I agree! Why pay some money manager to lose your a^^ in the market. There is more money made off the market than in it. It is all a scam. Lesson learned. I got burned by greedy execs who left middle class guys like me holding the bag. Just criminal. Even my stocks that have had decent earnings and book values have tanked. Finance means nothing in the stock market. It is all such a royal scam.

Oct. 24, 2008

My Uncle lost a fortune with Brandes and now is in trouble. Meanwhile, they are basking in $60 million homes and bragging about fancy weddings and ferraris. What about the poor guy that trusted their money with these guys? Does he get a bailout? He gets to drive an 8 year old car and is stressed about massive losses.

Oct. 23, 2008

Getting worse and worse for Brandes. They truly suck of late. About 1/3 of their stocks are headed for bankruptcy. I guess more planning went into that elaborate halloween ball than investments.

Feb. 28, 2009

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