Underestimating the Housing Slump

The WSJ’s James Stewart, in Personal Journal, said yesterday that a value investing strategy in mortgage banking right now is a great way to lose money:

Regular readers of this column are familiar with my strategy for buying lower, selling higher, using targets on a broad market index like the Nasdaq. Recently I’ve been deluged with emails and calls asking whether I use the same strategy for individual stocks.

The short answer is “no.”

Before elaborating, let me explain that the reason for all these inquiries is the precipitous decline in shares of American Home Mortgage Investment, a mortgage real-estate investment trust that I have recommended.

I bought shares myself, thinking that the carnage in the subprime-mortgage market should be reflected in its share price, especially since AHM has almost no direct exposure to the subprime market. My reasoning turned out to be wrong, to put it mildly …

My initial recommendation was based on the good reputation of the company’s management, its excellent liquidity and its lack of exposure to the subprime crisis. None of that has changed. But what started as a subprime-mortgage crisis is working its way through the financial system in some unexpected and unpredictable ways. The current level of uncertainty is simply too great for any but the most risk-tolerant investors.