Awful investing advice of the day, distressed-mortgages edition

By Felix Salmon
October 14, 2009
Michael Osinski has an interesting article on about how he, a CMO-structurer-turned-oyster-farmer, is playing in the riskier end of the distressed-debt market.

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Michael Osinski has an interesting article on about how he, a CMO-structurer-turned-oyster-farmer, is playing in the riskier end of the distressed-debt market.

I have no illusions about the risk of what I’m doing. Buying mortgage-backed bonds today is putting your finger to the wind in a storm, like you’re standing on a seawall facing a nor’easter. You know the second wave of defaults is coming. It’s forming out past Montauk, swelling in Gardiners Bay, about to smash into your seawall. Will it knock you down, rip your boat from its cleats, and scatter your oyster cages all along the rock pile?…

I buy my bonds through a former colleague named T…

You have to treat every bond like a time bomb, carefully assessing how much time you’ve got before it blows up in your face.

T. is selling me CMO bonds. I’ve bought seven of them in the last three months.

It’s a good, well-balanced piece, which shows how a sophisticated financial market professional is taking very careful and calculated risks with money he can afford to lose. He also knows, of course, that if he does end up losing that money, he has no one but himself to blame.

And then, at the end, it goes horribly, horribly wrong:

So how can you consider joining Michael Osinski and invest in toxic assets?


The answer to that question is Do Not consider joining Michael Osinski. Do Not invest in toxic assets. And, whatever you do, Do Not start buying shares in things like BKT and HSM and TSI and FMY and HTR — ticker symbols all helpfully provided by — especially if you think that in doing so you’re somehow replicating what Osinski is doing. You’re not.

Osinski is buying a very small number of very carefully-vetted bonds. This is the classic “PA” trade, where financial market professionals buy obscure instruments for their personal account in sizes which simply don’t scale up to the sort of money thrown around by institutional investors. Osinski’s bought seven bonds in three months, and I’m sure he went over each and every one in great detail with his friend T. That’s small-scale, highly-informed investing — the exact opposite of throwing your money at the Helios Total Return fund and hoping for the best.

Yes, the website does urge its readers to “be especially careful here”. But that doesn’t excuse spending 600 words on what you should do if, in a moment of recklessness, you decide that you want to ape the investing strategy of an oyster farmer who has just written a feature article for, and who knows much more about what he’s doing than you ever will.


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I wholly disagree. Given the knowledge & connections this person has, he is in a unique position & carries the requisite experience to know quite well the risk. It gets down to structure & collateral, and knowing someone in the biz that is capable of porting that information properly to you. It is certainly not for someone off the street.

He didn’t mention Bloomberg or Intex models..the stuff ain’t cheap to model at home. It’s a cheaper option, relatively speaking, than becoming a landlord & having to fight liens & utility bills & contractors (let alone any auction experiences).

Osinski also doesn’t need the CMO pricing to gradually improve back to par to get healthy yielding returns.

Posted by Griff | Report as abusive

Griff, I think you missed Felix’s point here. While the person in question may know what he is doing and have a good knowledge of the risks involved, the point is that retail investors should not be thinking this is a strategy they can easily replicate themselves.

Posted by Kramer | Report as abusive

well, Id still disagree. Individual investors might actually learn about distressed debt investing in the process, even a very minor risk allocation to any of those funds mentioned (the “better of breed” where possible).

if it worked for the houses of Morgan or Rothschild, why not me ?? heh heh

That being said, might get crushed doing so like he said. But that’s for me to decide, not Felix

Posted by Griff | Report as abusive

Investing in these ETFs won’t teach you anything as they are some of the most opaque ETFs around. Trying to get more than a general idea about what your money is invested in would leave 99% of individual investors utterly befuddled. Don’t invest in it if you don’t understand it. To understand this junk you need to spend weeks and months reading 150+ page prospectuses and 400+ page Pooling & Servicing Agreements.

Posted by Structured Products Guy | Report as abusive

Felix, I think you misread the article. The article is pretty clear that the risks are high and that there are no real “pure plays” on what Osinski is doing. It even says that most small investors will not be able to replicate what Osinski is doing via the usual discount brokers. Anyone who doesn\’t understand that should not even have a brokerage account.

Anyone reading the article knows Osinski bought the specific bonds. NYM refers to diversified ETFs and funds. Your article implies that I should never consider buying XLF if I see Buffett buying Wells Fargo simply because he knows more or has inside information. Nothing could be farther from the truth. Those ETFs are probably much safer that what Osinski is doing. Whether you want to hold toxic debt in your portfolio is a whole different story, however.

Posted by FDS | Report as abusive

Eh, sorry Felix, think you missed the point on this one. I think they pretty obviously say they’re not condoning or advising, and that these plays aren’t mimicking what the “oyster farmer” does. And i think the information provided is pretty informative / interesting as well. Telling us what’s out there doesn’t seem like such a horrific thing to do.