Tell me what's wrong with this investment idea!!?

Question

say I had $## and wanted to invest it to make money. Lets look at Fannie Mae - it is at 10.31 as of right now, but the 52 week high is around 70, with the 52 week low around 7. If I took some of my money$##(not alot, lfor the sake of example lets say $4000) and invested it in Fannie Mae now, wouldn't when it went back to around 35 points I would have more than doubled my money?? why wouldn't I do this? what are the downfalls to an investment plan like this??

Answer 1

This is not a bad idea. The reason not everyone wants to do this is time. It might take Fannie Mae 5 years to get to $35. And its possible it might not ever get there (although unlikely). Also, it could go to $5 in the meantime. Most professional investors buy stocks on margins where they borrow money from the brokerage to invest. If the stock goes down even 15% after they buy, they have to either sell it or sell something else to raise money to cover the 15% loss. So people think twice about investing in a company which can go down further.

Also, remember $7 is the 52-week low until the company hits $6. By the same token, one might say Citigroup, Bank of America, Washington Mutual, Ford and E-Trade are all companies that should be much higher in 5 years. If that is your time horizon, rest assured, all these companies are good bets. But who knows where they may be in the next 6 months.

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Answer 2

You may be right. But most people are saying you will be wrong. That's markets. It's about risk and reward. How is it going to grow over the next few years? Better off investing in one of the major oil stocks like Conoco Phillips

Answer 3

"Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it.

If it don't go up, don't buy it."

....Will Rogers

Answer 4

First thing:  You are assuming that 70 was a reasonable value and that 7 was an aberration and someday it will return to 70.  What if the reasonable value was 7 and 70 was an aberration?

Second thing.  You talk about it being a government based company.  All companies are government based in that they have a government charter to operate.  FNMA is unusual because it has a charter from the federal government instead of a state, but it's still  private, stockholder owned company.  FNMA trades bonds and  Federal Signal makes lighting products.  The "Federal" in the name doesn't make either a government agency.  When the government took over Continental Illinois or Indymac or Arlington Heights Federal Savings and Loan, the private shareholders where wiped out/  I guarantee that the US government is not going to buy out FNMA shareholders at 70.

Answer 5

common equity is going to be completely wiped out in both GSE's.  it's cheap because it isn't worth as much as it used to be.

assuming that the price will EVER get back to where it used to trade isn't being a contrarian - it's being an idiot.

Answer 6

It's a great plan - as long as the stock does in fact go back up where you're predicting.  What if it doesn't?

Answer 7

This is a very speculative plan, and I would not advise it for someone who is new to the stock market.

Just because the stock was once $70, that is no indication that it will ever trade at that level again, or even half that.

Take a look at Microsoft,  It is a very profitable company, but it has done NOTHING for 5 years.  Its is way down from the days of the the tech rally.  Same with Cisco, Ebay, Intel.  

Financials will probably take years to recover, and Fannie and Freddie have the additional burden of political risk.  

There are better companies to invest in, with less risk.

Answer 8

If you have a long time frame its not a bad idea.  Its a gamble but I bought Ford below 5 with the same idea.  I may have thrown away a few k but who knows.

Answer 9

I hear what you are saying.

You have to keep in mind that the $70 price of that stock was not the true value of the stock, hence based on what we know now (plunging real estate and soaring foreclosures, tight lending after years of lax lending).

I don't think it is realistic to think the any bank, broker, GSE, etc, are going to double any time soon.

If the gov bails out FNM or FRE, they have stated they are not going to guarantee the stock holder equity. This means if in the event these companies fail, the stock will be wiped out.

I think this is highly speculative at this point. Every person who has tried calling the bottom in financials over the last 2 years has been dead wrong.