How does Buffett handle questionable projects?

Fannie Mae and Freddie Mac are the two largest mortgage companies in the United States with a strong government background, and they are also the backbone of the U.S. real estate finance market.

However, these two companies were deeply involved in the financial crisis of 2008, playing a rather disgraceful role alongside other financial institutions.

As a result, my impression of them has always been negative.

But to my surprise, while reading Buffett's shareholder letters from the late 1980s and 1990s, I found that the old gentleman had bought shares of these two companies during those years, and both Buffett and Munger praised the companies after purchasing the stocks.

Later, I discovered that around the year 2000, the old gentleman informed shareholders in his letter that they had completely sold off their shares in these two companies and had not touched them since.

Unfortunately, in that letter to shareholders and in the subsequent years' letters, the old gentleman did not mention the reasons for his divestment.

It wasn't until I read the Q&A transcript from the 2001 shareholder meeting that I saw a shareholder actively asking about this matter, prompting Buffett and Munger to respond.

The reason they sold the stocks of the two companies was due to concerns about their risk situations. However, the two gentlemen did not elaborate on what specific risks they were referring to during that Q&A.

In the following years' letters and Q&A transcripts, the two gentlemen explicitly criticized the derivatives that were prevalent in major financial institutions at the time, believing that these derivatives were like time bombs. Munger even stated that he thought derivatives would cause trouble for financial institutions in the next ten years.

As a result, just a few years after the two gentlemen criticized derivatives, and eight years after they sold their shares in the two companies, financial derivatives (subprime derivatives based on mortgage loans) exploded across the U.S., plunging the world into a financial crisis.

I checked the relevant data, and the stocks of Fannie Mae and Freddie Mac were around $50 and $60 around the year 2000. After that, from 2001 until just before the 2008 financial crisis, the two stocks peaked at $71 and $74, respectively.

In this case, the old gentleman's handling of risk was quite decisive: once he discovered that the companies he invested in contradicted his principles and judgment standards, he would sell the stocks without hesitation, completely indifferent to the subsequent fluctuations in stock prices.

The performance of these two stocks after the 2008 financial crisis also plummeted, both never exceeding $5 again, and for a considerable period, they hovered below $1.

From a short-term perspective, it seems that the old gentleman's sale in 2000 was "premature"; but from a long-term perspective, his sale in 2000 was a very wise move.

After reviewing this case, I compared it to my own handling of past projects during my investment in crypto assets.

I found that projects I dealt with promptly when issues arose later proved to be timely and appropriate; whereas those I hesitated on and did not liquidate immediately ended up being dealt with later, but with greater losses.

Therefore, it ultimately comes down to adhering to one's principles: when to cut, one must cut; hesitation will only exacerbate the problem and increase the losses.