Stock Quotes in this Article: FNMA

CHARLOTTE, N.C. (Stockpickr) -- Is a company that records a pre-tax income of $8.1 billion for first quarter of 2013 a good investment? What if that company is Fannie Mae (FNMA)?

It's not like Fannie is one of those dangerous pump-and-dump penny stock schemes. It's backed by the government, and it's too big to fail, right? Plus, in 2012, Fannie Mae recorded over $30 billion in annual profit for the first time in recent history, yet the stock entered 2013 at well under a dollar a share, trading in value around at one-three-hundredth of its onetime highs seen in the early 2000s.

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With numbers like that, this stock seems like a steal to me. I'm going to be rich!

Surprise, surprise -- that's not how things work out. Over the last year, Fannie Mae's common stock, FNMA, has increased by over 750%. Keep in mind that this "incredible" recovery all happened based on "an improving U.S. housing market," even though Mr. Government still owns, and receives (and plans to continue receiving indefinitely), 100% of all profits and dividends going forward.

Less than three months ago, on March 13, FNMA was trading at a mere 29 cents per share. Once this penny-popping giant began its epic balloon ride, it ran from under $1 to a brief high of $5.44 (on May 29) in about two weeks. It closed on May 29 down 44% fro that high at $2.90. Yesterday, it closed at $1.82. I may be dating myself here, but this stock fell faster than Mike
Tyson's opponents before he started nibbling on other men's earlobes
instead of boxing.

Remember, never chase the crazy train. Volume is only a sign of strength until it has lost its grip on actual facts and gets lifted into cyberspace on ridiculous amounts of hot air. That's when the balloon ride is going to burst.

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Action like this, although it might appear to be lucrative "easy money," is one of the most telling signs that a whole bunch of sheeple are about to be really sad. Welcome to the madhouse!

Of course, like every transaction in the stock market, there is always someone who profits from another person's loss. So take the time and do the research necessary to be on the winning side -- which means never chasing the crazy train, using proper money management, staying smart, being technical and fundamental in your research and never following the crowd.

When I was growing up, my mother used to ask me that old expression that every mother asks: "Well if someone jumped off a bridge, would you jump off with them?" It's amazing how many people will follow a crowd over a bridge, even when there are warning signs and bright flashing lights telling them to stop. Isaac Newton reportedly said about the South Sea Bubble: "I can calculate the motions of heavenly bodies, but not the madness of people."

Think of it this way: If most people didn't follow a crowd, there wouldn't be a crowd to follow!

I believe if you can at least understand and accept that that the stock market is full of "madness," you are one giant step farther from the edge. And as Newton taught the world, but never fully understand himself, gravity loves madness.

-- Written by Ben Brinneman in Charlotte, N.C.

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Trader Ben Brinneman, featured on MarketWatch, Bloomberg and Reuters, resides in Charlotte, N.C., and is the owner of C Squared Trading. Brinneman started his career trading bonds for U.S. Bancorp and was an analyst for a wealth management firm. Brinneman and his team at C Squared Trading have taught hundreds in a one-on-one mentorship setting via Skype or live in Charlotte.

 

You can also follow some of their free trades and tips on Twitter at @csquaredtrading.