[DesertCat]

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And what if you're wrong?

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I size my positions carefully based on risk and my portfolio size. I can afford for this one to go to zero and still have profitable year.

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I personally have probably not done anywhere near the amount of research on the sub prime market as you have, but to paraphrase Keynes- the market can be irrational longer than you can remain solvent.

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Not sure what Keyne's specific point was, I can stay solvent forever because I use very little margin debt.

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You expect to make back your basis on dividends, but isn't it possible (and imo, likely) that this "crisis" will force your company to cut dividends? You've already said that one went out of business.

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Many have gone out of business, including the one I'm investing in. It currently has about $43M in cash & equivilents, is pretty much a lock to receive $16M in cash flows in the next 4-5 months and has $51M in liabilities (some non cash that won't cost anything), so a net cash value of about $7M vs. a market cap of $18M. It also has $78M in securitization assets, loans, and real estate & a lawsuit worth up to $25M. So the market is saying those loans/real estate/lawsuit are worth about 10% of stated value (which has already been written down substantially).

The market is wrong here, mainly because there is no "market" for $18M market cap companies, i.e. wall street isn't looking at them. I think it's most likely that the company will end up being worth between $40M and $80M. And it's already committed to dividending all excess cash. And I think I have very little downside in this one.

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Going against popular view can be quite profitable, but the view is usually popular for a reason. I'm by no means an expert on mortgages, but the experts sure seem to believe that a crisis is on hand.

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I'm not going against the popular view, I actually agree with it. Subprime underwriting standards did go loopy, real estate values were in a bubble, and the fallout is far from over. But clearly subprime loans will be made in the future, just on financially prudent terms. And every subprime loan written in the last 5 years isn't going bad, not even most of them. In the worst securitization this company has in 2005 has a loss rate of 2.9% in total.

Think about it this way. If 10% of loans go all the way to foreclosure and the company takes a 35% loss on each foreclosed loan, that's a 3.5% loss rate. It's a little more complex than that, but at that loss rate even if every loan went bad a basket of subprime loans would still be worth something like 65% of face value. The loss rate is of course depending of course on the value of the properties at auction and costs of the foreclosure process.

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When the S&P500 was trading in the 700s in 1997(?) Greenspan said that the market was far too optimistic, yet we had a huge bull run for the next three years. The market as a whole has only been showing weakness about the "lending crisis" for a couple of weeks. Reports that I've read on the housing markets seem to indicate that barring some sort of intervention, the downturn will extend into 2009. Are you planning on adding more and more money into your positions (which could be black swans) while they keep going down?

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You seem to be macro focused. The housing market will have some impact on my positions value, but much of the value is already in cash, and even in worse downturn the remaining mortgage/reo assets will be worth a lot more than zero. Enough to pretty much guarantee a profit here. Every position stands on it's own.