Taking the results on face value, banks in general could starting to recover. At some point the businesses will start to get healthy and maybe this has already started. Anyone believing this to be the case might have received a green light of sorts yesterday.
I have two reasons why I will still say Ni to domestic banks.The first one has to do with the book value argument that some, like Barron's, have been making repeatedly since at least 2009. The counter argument to being cheap on a book value basis is that book value might be incorrect because there are very likely still more real estate write downs to come--I believe there will be more write downs. Anyone believing there will be no more write downs or that any future write downs will be negligible may use this argument as a reason to buy.
Another reason to avoid them in my opinion is the example set by tech stocks in the aftermath of their implosion. Actually I would say ongoing aftermath given how many of them are still way below where they were 12 years ago. In many instances the earnings have gone up plenty since 2000 (obviously part of the problem) yet there are plenty of stock prices that are just a fraction of what they once were.
Although the circumstances behind tech stocks and banks are very different I think the market action for the two will be very similar. Actually it could be worse for the banks because tech companies were allowed to fail based on their own lack of merit and this was not universally the case with bank stocks--some were allowed to fail but many were not and no one should be surprised if there are negative consequences for this.I continue to believe that banks from many foreign countries are on firmer fundamental ground (ex Western Europe, ex Japan and ex China) and I also think that select small, domestic banks could be considered but they are more difficult to research.
2 comments:
Off topic, i've heard you say you do not allow any one position to get above 2-3% of the total portfolio for a given client - is this a hard-and-fast rule? I'm thinking of apple, which i own and which has grown in my own portfolio to around 16% of my total protfolio. My feeling is, let my winners run and cut my losers, as long as the story is intact. I'd like your thoughts on this happy dilemna.
A slight clarification positions in individual stocks are typically initiated at 2% or 3%. They often grow a little larger but nowhere near the 16%, I trim back long before something might get that larger.
The question is about risk management not any single stock. With that in mind, what would be the consequence to you if at 16% it went to zero tomorrow?
Would that be too big of a hit?
What if you sold half right now and the remaining 8% went to zero? Would that be too be of a hit. Put in any other number you want to sort this out.
If you live on $100,000 a year and you save $200,000 a year then maybe you don't need to worry about it going to zero.
I want to stress that sorting this out for yourself must be about risk management not the merits of the name in question.
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