Federal National Mortgage Association (Fannie Mae)

Origin of Relationship

Berkshire had previously owned Fannie Mae shares and understood its business well. In early 1988, Warren Buffett decided to acquire a major stake (30 million shares, representing a $350-$400 million investment). He visited Fannie Mae's CEO, David Maxwell, in Washington to confirm that Fannie Mae would welcome Berkshire as a major, passive shareholder.

Major Milestones

• 1988: Berkshire begins buying Fannie Mae shares, accumulating 7 million shares before the stock price began to rise. Buffett stopped buying because he was unwilling to pay a higher price.
• 1989: Distasted by holding a relatively small, incomplete position, Buffett sells the 7 million shares.
• 1991: In the annual letter, Buffett confesses to the error of omission, estimating that the decision to stop buying and subsequently sell cost Berkshire $1.4 billion in foregone profits.
• 1994: At the annual meeting, Buffett analyzes the competitive advantages of Fannie Mae and Freddie Mac, noting their cost structure for intermediating money between investors and homebuyers was insurmountable for traditional banks, guaranteeing their market share would grow.

Strategic Importance

Fannie Mae is Berkshire's ultimate case study on:

1. Price Anchoring: How focusing on the initial purchase price rather than the business's long-term value can derail a major, lucrative investment.
2. The Sunk Cost of Pride: Selling an attractive asset simply because the position was not fully built out. This psychological mistake was one Buffett vowed not to repeat (which he successfully avoided when Coca-Cola's stock price rose during Berkshire's accumulation phase).

🔗 Connections

• People: David Maxwell
• Concepts: Errors of Omission, Opportunity Cost
• Sources: 1991 Letter, 1994 Meeting