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Blind Faith


I'm going all-in on FNM based on a strong gut feeling!


Last weekend it took 232 hands of no-limit Texas hold'em for Australian Joseph Hachem to capture the World Series of Poker title and the $7.5 million payoff. The winning hand was somewhat anti-climactic as Hachem, holding a 3 and a 7 and looking at a flop of 4-5-6, went all in against Steve Dannenmann's Ace and 3, the probabilities well in his favor.

Watching some of the past World Series of Poker tournaments on television recently, one thing that stood out to me was that the best players well understood risk versus reward. The best players rarely, if ever, played out hands where the probabilities were not tilted in their favor. Of course, there is a vast difference between probabilities and outcomes. I saw more than a few players beat the odds, pulling dramatically improbable results from final-card draws. But in the final analysis, the players who made it to the final table almost always chose the path of favorable probabilities over sheer gambling and bullying tactics.

If only Wall Street were the same. In the July 18 issue of the New Yorker, writer Kevin Conley, no stranger to the world of high stakes gambling - in 2002 he authored "Stud," a behind the scenes look at the world of thoroughbred racing and breeding - spent time in Las Vegas with some of the up-and-coming professional poker players who have forsaken the traditional path of day jobs and corporate cubicles for the world of high-stakes card games. Daniel Negreanu summed up for Conley the career choices now facing college students: "I went to Ohio State and I ended up jokingly saying that I'm starting my Stay Out of School program," Negreanu told Conley. He added that for kids who are eighteen, nineteen years old, going to college just so they could get a dead-end job making fifty or sixty-thousand dollars a year, he can take that kid and teach him to play poker and in a few months show him how to make more than he could ever dream of stuck in a dead-end job.

""The stock market is gambling, right?" he continued. "This kid studies and he makes money in the stock market, and that is considered by society O.K. A poker player, a kid, sees all these idiots making poor investments on these poker hands and says, 'Wow, I could do a better job than they're doing,' and he studies, and he makes it. How is that different from a stockbroker?"

I'll tell you how it's different. Poker players are better at evaluating risk and reward. Good poker players don't operate on blind faith, they never assume an outcome that is improbable, and they never enter a hand unless they fully understand the risk/reward dynamic. Now, contrast that to the way Wall Street works. Use Fannie Mae (FNM) as an example.

According to the most recent data from Thomson/First Call, the recommendation trends for FNM from Wall Street this month show Fannie Mae recommended as a Strong Buy by two firms, a Buy by 10 firms, a Hold by six firms, and a sell by just one firm.

Meanwhile, the last time Fannie Mae filed a 10Q with the SEC was August 2004. The form 10Q typically features more in-depth information on a company than the basics of financial reporting contained in a company's annual filing, also known as a 10-K. Oh, but wait... looks like Fannie Mae hasn't filed a 10-K since 2003.

OK, let's look at the facts: Fannie Mae has not filed a quarterly report since August 2004, and the company hasn't filed an annual report since 2003. So what are the firms who maintain their Strong Buy, or Buy, or even their Hold ratings basing these recommendations on? Blind faith? Your guess is as good as mine. If only it were that easy at the card tables in Vegas.

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No positions in stocks mentioned.

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