I was giving a ride to a friend some time back when he asked me ,
“Isn’t it risky to invest?”
Aha! If you are a friend of mine, you know that whenever the topic of investment pops up, it will turn into a seminar. And unfortunately for my friend, he is a captive audience with no place to run.
“Where should you put your money then?” i asked.
“Well, typically, i guess it would be the bank.” he replied.
“I agree. I put a lot of my money with the bank as well.” I smiled.
“Oh really? I thought you invest most of your money in the stock market?” He questioned.
“Yes i do. But like you, i have confidence that banks are safe. But since they are safe, instead of putting money in as deposits, I use my money to purchase bank stocks.”
“… …” My friend was speechless.
I therefore continued, “Well. Banks are generally safe, and that is why people put money in as deposits. But think about it, if banks are safe, it means that they are operating their business in a profitable manner to allow them to be able to safe keep our deposits. What they do is to take our deposits and lend to other people. They are almost like a legalize ‘loan shark’ (pardon this lousy analogy), but they are way cool, because they don’t even lend people their own money, they lend people our money”
“oh… that’s right. But is that safe?” My friend asked.
“Well, they are lending YOUR money to others. If it is not safe, the money you put into the bank is probably not safe as well.” I answered. “And if it is safe and probably profitable, we might as well become the banks’ shareholder and let the bank make money for us?”
“oh….” my friend’s eyes brightened up.
I smiled. Another friend enlightened!
That being said, we already know that NOT all banks are strong and solid. Lets take a quick look at the performance of the banks for the past ten years, i.e. 2002 to 2012.
Below are the EPS of 6 big banks in US.
US Ban Corp, Citigroup, Bank of New York Mellon, Wells Fargo Company, JP Morgan, Bank of America
A quick glance tells me that most of the banks are well able to survive the fall in 2008, 2009 and then recover.
JP Morgan seems to have the strongest record, while Bank of America is still recovering (not fully proven yet).
As we want to invest, we should compare within the industry to see which business makes the most sense to invest in. The one that makes the most sense would be the one that has strong performance and is selling at a good bargain.
Lets take a quick look at the price currently (Dated today)
Ooh. I can see that JPM is at a PE ratio of 8.6 which translate to an Earnings Yield of 11.6%. I look at the strongest performer first before I look at the rest. WFC and BK are stocks that Buffett has been stocking up, so it may be a tell tale sign that he has confidence in them. (He also gets good deals on them too)
Beside performance, we also need to look at efficiency of equity and assets as well as the amount/ % the banks set aside for bad debts.
Looking across the banks, they have reduced the provision for bad debts since 2010 up to 2011. This is a indicator of them having more confidence in the economy or they have become more stringent in their loans.
Personally, the confidence in some of these banks are high. WFC, USB, BK, JPM has shown strength. C and BAC is still questionable for me and I will continue to keep an eye on them.
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To your dreams,
Mind Kinesis Research Team