From Whitney Tilson’s letter to investors for 2016 and Q1 2017 but first Q1 2017 excerpt on Fannie Mae

Also see

2016 Hedge Fund Letters

Q1 2017 Letters

Fannie Mae
Fannie Mae declined 33.1% in Q1 in the wake of an unfavorable court ruling in February. You may recall from the discussion in my annual letter that the stock nearly tripled in the wake of Trump’s election based on investors’ belief that the Trump administration would strike a deal to liberate Fannie Mae and Freddie Mac (the government-sponsored entities, or GSEs) from government control. Here’s an excerpt from an interview that Treasury Secretary Steve Mnuchin did with Maria Bartiromo shortly after the election:
Maria: “Would you move to have these privatized?”
Mnuchin: “Absolutely. We gotta get Fannie and Freddie out of government ownership. It makes no sense that these are owned by the government and have been controlled by the government for as long as they have. In many cases this displaces private lending in the mortgage markets and we need these entities that will be safe; so let me just be clear we’ll make sure that when they’re restructured they’re absolutely safe and they don’t get taken over again but we gotta get them out
of government control.”
Maria: “This is a big deal. These are huge institutions. You think that…if we saw that as not complicated, wouldn’t that have happened already…that it would get out of government?”4

Mnuchin: “Well, I think with this administration [Obama] it hasn’t been a priority. If it had been a priority it would have. And in our administration it’s right up there in the list of the top 10 things that we’re going to get done and we’ll get it done reasonably fast.”

In this scenario, I think the stocks of the GSEs could appreciate 4-10 times, but nevertheless, after the big run-up, I took some money off the table because this remains a highly risky situation.

The risks were underscored when a sharply divided appeals court recently ruled 2-1 to largely uphold a lower-court ruling that was unfavorable to the GSE shareholders. It was the wrong decision, driven, I believe, not by the legal merits of the plaintiffs’ case but rather by two judges not wanting to rule in a way that would enrich the investment funds who own most of the GSEs’ stocks, so I think there’s a good chance the decision is reversed on appeal.
But the primary way to win here remains a settlement between the shareholders and the Trump administration. This will take some time, but I think the risk-reward equation here remains favorable, especially at today’s reduced price.


1) I’ve posted my 2016 annual letter and Q1 ’17 quarterly letter for the Kase Fund  below




This is my 19th year of professional investing. Given that this is an experienced-based business, one would think my returns would be getting better with time, but in fact the reverse has been true. It is thin gruel that I’m in good company – it seems like every day I read about another iconic money manager who’s hit the skids. I do not think it is a coincidence that this has happened at the same time as: a) the rise of indexing (chew on this staggering statistic: in the last three calendar years, investors sank $823 billion into Vanguard funds, 8.5 times as much as the net $97 billion added to every other mutual fund combined); and b) the rise of supercomputers/artificial intelligence.


Regarding the former, indexing creates a cycle in which money pours into the biggest mega-cap stocks, driving them (and the indices) higher. This causes active money managers (who tend to own smaller stocks) to underperform, causing their investors to redeem, thereby forcing the active managers to sell their stocks, driving them down, further widening the gap with the indices, leading even more people to throw in the towel and embrace indexing. Lather, rinse, repeat.


As for the rise of supercomputers/artificial intelligence, in the past 5-10 years, computers have surpassed humans at such enormously complex challenges as chess and driving a car. Is it unreasonable to think they’ve done the same for stock picking (at least in a complacent market)???


The question for active manager is how to play this? I am not willing to suspend my valuation principles and chase performance, which is what I believe a lot of human beings, index funds, and high-powered supercomputers are doing. Instead, I continue to look for stocks that are either undiscovered or situations in which I believe I have an edge, often by knowing one or more of the key people (recent examples include Mondelez, CSX and Pershing Square Holdings).


I don’t know when this bull market will end – but all of them eventually do…and when it does, we will be ready. As Buffett wrote in his latest annual letter:


Charlie and I have no magic plan to add earnings except to dream big and to be prepared mentally and financially to act fast when opportunities present themselves. Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.


Our fund today is very cash-rich, at 61% long (meaning 39% cash), and well hedged, with 19% short exposure.


2) A dozen years ago I co-founded a newsletter aimed at serious value investors, Value Investor Insight, that every month features in-depth interviews with two top value investors, in which they share their investment philosophy and history, as well as 3-5 of their current favorite investment ideas. It’s only $349/year ($325/year if you subscribe for two years; half price for students). To subscribe, just go to or call (205) 722-2197. Our latest issue is posted here.


Also, be sure to check out VII’s sister publication, SuperInvestor Insight, which follows the trades and holdings of 30 top value investors. Our latest issue is posted here, and you can subscribe at:


3) A week from Saturday on May 6th I will be attending my 19th consecutive Berkshire Hathaway annual meeting in Omaha. If you’re going to be there, I’d like to invite you to two events on Friday evening and Saturday afternoon, both at the Omaha Hilton (I’m not sure which rooms; there will be signs):


  1. a) My friend Chuck Gillman and I are hosting our annual cocktail party from 8pm-midnight on Friday, May 5th. No agenda, no speeches, no dress code – just come, enjoy the drinks and snacks, and meet other value investors.


  1. b) Chuck and I are also sponsoring a casual get-together immediately following the annual meeting (~3:30) on Saturday, May 6th – just walk across the street or take the skybridge to the Hilton. It will end around 6pm.


To RSVP for either of these events, please email Ram at [email protected] and include:

  • Which event(s) you plan to attend
  • Your name as you wish it to appear on your nametag
  • Your city as you wish it to appear on your nametag


I look forward to

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