TO Ikidyou: 我的MBI投资心路，关于MBI近来的下跌

Here is my discussion on MBI posted on 中长期投资群组 about recent MBI decline from $8 all the way to $3.2. It may help you a little if you are thinking to buy some MBI.

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2009-10-09

Zengjp warned me:

watch RDN/ABK/MBI closely. all three of them are having sign of falling off cliff. Next move might be sharply lower.

2009-10-11,

My reply:

Anyway, I am only worried about mbi now, I am out of most of rdn and abk already. I hope RDN drop, so I can do it second time, like UCBH. It is not that I do not know the risk of mbi dropping,especially from TA point of view, but stocks is fundamentally news driven, a stock with good fundamentals just means the probabilities of good news out weighs bad news. If at the time of good news release, you do not have the stock, you would be in a very bad position, especially considering the years you have spent waiting for the stock to soar, the opp cost you took for it. I have taken opportunity cost for mbi on the things like dndn, xl, rdn, and so on.

so what to do with mbi? not decided yet.

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2009-10-29

I still keep all my mbi, I was worried about mbi way before it started dropping, since it should be climbing in a big bull market, but it lagged, I was comforting myself that maybe it is due to a lot of people trapped last year, and they wanted to get out.

Anyway, I am not trading on its way down since I have no faith on my trading skills even though I did make some good calls either on paper or small amount. But I always find out later that it would be better if I do not trade, trading ruins your perspective and your harmony. makes you win smaller and lose bigger, not backwards. My SCSS is a great example, I should have made much bigger profit on it but I failed. SCSS was up big three days in a row. That is a good time to make some short term profit. So I sold and expected to buy back as soon as I have 10% profit. But as it dropped next day right after I sold, even though I already I had my original 10% profit margin, the market seems very shaky just like last couple of days, at that time, my scss has doubled for me, so I was thinking I can afford to wait a little more either to have a more clearer view or maybe a little more profit. Well SCSS did drop a little more, I thought myself as a genius, bought and sold at the right time. Since I have a job and I can\'t watch the market all the time, I somehow missed loading it back when it bounced back to over $2, I started to hope for a correction since general market was still very shaky, people were all bearish. I watched it tripled from $2 to $6 all the way helplessly until I sold all shares at $6.5

As for mbi, the reasons for my initial investment are still all there. That is why I do not want to throw in the tower. The latest insider transaction for mbi is a director exercised his option 52373 shares at 4.91. He did not sell the shares right away. I considered this option exercise as the same as buy from public market, it happened on 2009-06-18. This transaction happened when mbi was on its way down from $8. It eventually hit a low at 3.6 on 2009-07-10. The hidden information for me is that until 6/18, there is not serious thereat that mbi will bankrupt. We all know that economy is picking up after 6/18. So fundamental for MBI is not deteriorating. My original belief is still valied that MBI could worth much more if it does not die in the crisis.俗话说“救急不救穷”！I have this kind of view on all financial companies.

MBI is not like banks, when bank has a bad loan, the entire loan amount is charged off right away. On the other hand, when a bond guaranteed by mbi goes bad, the junior tranche takes the first loss, then the senior tranche guaranteed by mbi will take loss, also mbi will not pay out all the loss at one time, it just need to pay out the interest due at that quarter at that time, until the bond is performing again. Even if the bond is completely dead, it will take mbi several decades to pay it off gradually quarter by quarter. On the other hand, there are so many bonds out there, every cdo is custom designed. different bond insurers guarantee different tranches from different bonds, every bonds, cdos are different on their economics, hardly anyone really understands the real ramifications of one cdo product, not to mention all cdos, bonds guaranteed by mbi. You can put your entire career on just studying these commercial products. What I am trying to say is virtually no one on the stock market really understand what is really going on, and have some kind of confidence to predict the outcome. That is why MBI are so volatile, since every body is guessing, driven by greed and fear. If there is somebody in the market has a little edge of predicting the outcome, it should be those insiders.

Finally, there is indeed risks inside bond insurance business. Buffet created his own bond insurance company in the middle of financial crisis, during which time MBI and ABK were almost in run off mode, very few new business for them,which means bond insurance demand is bigger than supply. Buffet\'s bond insurance business did not thrive, the only explanation is that Buffet is being cautious about the risk, he is not aggressive taking on new business even though he has plenty of capital.

So, in the end, you need to take into consideration of all these information to form your own judgment of risk/reward: the housing bubble, the mortgage fraud, the insurance working mechanism, the stock market behavior, the insiders, the gurus, recovery of economics, inflation/deflation, accounting method, mark to market. It is a very complex picture, I am just following insiders.

(now I have doubt on the following statement Even if the bond is completely dead, it will take mbi several decades to pay it off gradually quarter by quarter. I do not know the real answer. The above statement is the impression I got from reading Third Avenue\'s quarterly letter to shareholders last year, maybe Q3 2008.)

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2009-11-10:

right now, at 3.73, it is time to buy mbi [编辑] [引用]

make your own mind, do not blame me if you lose money later. Yesterday\'s ER is not bad.

bought mbi at 3.5 and 4 today. MBI\'s drop is due to worry about abk\'s bankrupt risk. perfect opp.

Whether MBI could go to $1 or 2 is not that important, the important thing is that it does not BK. I think now is almost the peak of fear for bond insurance company. I did not realize at the beginning that MBI today\'s drop is about ABK (risk of BK disclosed in its SEC report), at the beginning I thought it is due to earning report (of MBI, published a day earlier after market close).