Investment Lessons From Citadel's E*Trade Deal

Citadel Investment Group ("CIG") is taking a big chunk of E*Trade (ETFC). CIG is taking ETFC's ABS portfolio for about 25 cents on the mark-to-market dollar (I'm assuming the ETFC's ABS portfolio is marked-to-market, admittedly a big assumption). CIG is also getting 10-year notes at 12.5% and a board seat. Including CIG's current EFTC holdings, they'll end up with about 20% of the company.

WSJ has a thorough synopsis of the deal, which WSJ.com subscribers can read here.

Now, by no means do I disparage rich people getting richer. In fact, I aspire to be one of those who does. What caught my eye in the article was CIG founder Ken Griffin's comment that "the time to be buying distressed securities was at the moment newspaper headlines were uniformly negative on the markets." If you act on the press's hyperventilation, there's no question you'll buy highs and sell lows.

I truly believe attempting to time the market is, except for only a highly select few, a fool's errand. It requires making two very good decisions (when to buy and when to sell) and having the intestinal fortitude to stay in/out when the trade goes against you at first, which it invariably does. Here are a few thoughts I keep in mind during the bad times:

• Generally speaking, stocks are substantially more volatile than the underlying businesses themselves.

• Volatility  is the market's way of moving money from weak hands to strong hands.

• I will not, not, not get rick quickly as an investor in public markets, so there's no need to rush into anything.

• Don't take the press (or the market calls of politicians) too seriously. They're best at whipping up a frenzy because it's good for their businesses and they don't have money at risk (unlike the Investment Directors at VesTopia).

Keep on keeping on, fellow investors...

Comments

[jswede]

regarding Ken's comment on timing with the press... in THIS case, when no one really knows what they're holding and are looking around to others for answers, when everywhere the ABS/MBS holders turn there is no bid, no color - the only color is every last media outlet saying the same thing - in THIS case, he's right. and I'm sure that's what he meant.

The ABS portfolio Ken bought for $.27 on the dollar is 58% AAA rated. He paid $.50 on the dollar for $1.35bil in AAA Prime Residential First Lien Securities (avg FICO 725), got the rest of the AAA and some AA for $.10-12 cents, and the remaining AA and BBB rated securities for ZERO cents on the dollar... Then issued a $1.5bil 12.5% 10yr note, and got about 18% equity stake, again, for FREE.

I'd say he timed it just about right. He's looking at a 100% return on the ABS portfolio in worst case, imo, by just waiting this out.