During his recent interview with Patient Capital Management, Bill Miller explained how Peter Lynch helped him 50x on one investment. Here’s an excerpt from the interview:
Miller: So when I got in the business I had someone who knew Peter Lynch. Got me to talk to Peter and said yeah I’ll talk to this guy.
And I went in to see him at Fidelity, and he’s running the Magellan Fund, obviously the most successful portfolio manager of his time.
And he said, oh yeah you guys at Legg Mason, you started a fund right?
I said yeah we started a fund about a year and a half ago.
And he said do you have your portfolio?
I said sure, so I give him the portfolio.
He’s like wow this is a really good portfolio. He said you got your Banks. You got your savings and loans. You got your autos. You got your early cycle apparel stocks.
And he says but where’s your Fannie Mae?
And I said, Peter I’ve actually looked at Fannie Mae and I couldn’t figure it out.
And I said I actually talked to some of my colleagues and they said it’s way too complicated.
And he said oh it’s my largest position, and he said would you like me to explain it to you?
I said sure.
And he said, well you got banks in there right?
He said, well Fannie Mae’s a Bank, except it doesn’t have any branches.
So it doesn’t have any branch costs. It’s got one branch. One building down here in DC.
And he said, and it doesn’t take any deposits. What it does it gets its money from the capital markets.
And he said, because it’s a quasi-government guaranteed institution it borrows just a little bit more than what the government borrows out. And then it takes all that money and it invests it in the same stuff that Banks do. And like basically mortgages.
And he said, oh it’s got an insurance business where it also insures those mortgages.
And so he said, so it’s got a lower cost of funds than all Banks do. It’s got a lower overhead than all Banks have.
And he said it’s got the same rate of return that Banks are earning profits on, and it’s got insurance business which is a really good business.
And I said well why does it lose all this money then? Because it was reporting fast losses.
And he said, well that’s for you… I’ve explained it to you and you go figure out why it’s losing money.
So I went back and I spent about four hours reading the stuff and the footnotes. And I called him up and I said is this thing really trading at one times what it’s going to earn in three years?
He said you figured it out. And we made 50 times our money on it.
You can watch the entire discussion here:
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