The contents of the banking industry discussed in my book “The Rules of 10 Baggers” are as follows, especially the 3-8 subsections have a more in-depth discussion of the investment in the banking industry.
- 3-2 Fintech
- 3-8 Financial Services, pp. 174 to 176
Characteristics of the banking industry
There are about 4,500 banks in the U.S., and the U.S. banks have complex tiers, with large differences in scale and business, unlike Taiwan, which has only 38 banks. Bank stocks are very special, with the following characteristics:
- It requires a license to operate. It is the top two industries affected most by regulations in all industries. The first one should be the medical and biotechnology industry. In terms of broad coverage of these two industries, financial banking accounts for about 8% of the US GDP, and the healthcare industry is a little bit higher than 8%. The healthcare industry is still growing, but the financial banking industry in a broad sense is growing slower.
- It is fully linked to the economic boom, especially if interest rates are raised, all bank stocks must rise sharply; because banks mainly rely on interest rate differentials to make profits, this has not changed for hundreds of years.
- The bank itself is non-productive. Apart from earning interest margins and handling fees (because the franchise license grants it these rights), the bank has no other skills and is an industry that cannot produce products.
- Most of the valuation methods in the stock market are not applicable to bank stocks; to put it another way, the valuation of bank stocks is unique in the stock market. If you are determined to invest in bank stocks, it can be sure that you must lose many of your previous valuation methods. It is particularly important to mention that bank stocks pay special attention to the balance sheet.
Hard to make big money from bank stocks
First of all, basically no one would expect bank stocks to rise sharply. Most of the time, the performance of bank stocks will underperform the market. The reason is simple. You can refer to the characteristics of the banking industry listed in the previous section to understand why.
There are only two kinds of people who will buy bank stocks:
- The first is the ability of the banker, such as Buffett, which will be discussed in detail later.
- The second is those who want to have dividends and cannot withstand stock price fluctuations (I am referring to the decline here, because no one expects the stock price of bank stocks to rise and fall to exceed the market performance, no exception in all stock markets).
Taiwanese bank crotch
Taiwan’s banking stock investment is very deformed, let me explain slowly. Investors in Taiwan stocks are probably the most enthusiastic enthusiasts of investment banking stocks among the global stock markets. This phenomenon is very common in Taiwan stocks, and it has become an unwritten law that all investors have “accepted and recognized” in the past 20 years. I think there are several reasons:
- In the past 20 years, most people in Taiwan (excluding the technology industry and foreign businessmen) have hardly increased their salaries.
- Taiwan’s interest rates have followed a long-term low-interest policy for 20 years, and market funds have nowhere to go.
- Any financial product that does not have regular interest payments can hardly be sold in Taiwan. This is also the reason why Taiwan’s savings insurance policies are proliferating. The design of such policies has actually lost the meaning of insurance. From a foreign perspective, Taiwanese savings insurance is actually an annuity concept.
- Strictly speaking, apart from TSMC (ticker: TSM), it is difficult for Taiwan to find a perfect target for long-term investment. Please note that I mean that if you only consider Taiwan, U.S. stocks are not the case at all, because there are at least a few hundred better choices in U.S. stocks than TSMC. For example, in terms of growth stocks and rate of return, if TSMC is placed in US stocks, it is not a very good target.
- In the past 30 years, no new industries have appeared in Taiwan. Without new industries, the stock market would not have a lot of motivation for new life, and there would be no comparison.
- These reasons have caused Taiwanese investors to flock to deposit stocks and regard deposit stocks as buying savings insurance, because bank stocks will allot dividends. Bank stocks usually do not rise very much, and if dividends are not distributed, it is unattractive. In comparison, if the stock price does not move, the public does not care that much, because there is no comparison.
- In short, in a stagnant environment, if peers only get meager rewards, after a long time, most people will take this investment method for granted. If you buy US stocks with dividends, this is not the case at all. US listed companies attach importance to growth. Even companies that distribute dividends, most of their stock prices will still rise; it may not be as volatile as technology stocks, but they will not crowd the bank stocks like everyone in Taiwan stock market.
This once again confirms what I often say — everyone’s views are not necessarily correct, especially when it comes to stock market investment.
If readers are interested, please refer to my other blog article “Why I prefer growth stocks instead of value stocks?”
Bank stock investment case from famous investors
Can you think that Citi (ticker: C) fell below one dollar in the years after the financial tsunami, and Bank of America (ticker: BAC) also fell to US$2.53 in 2011?
Duan Yongping once revealed that after the financial tsunami in 2008, bank stocks fell really badly. He did a lot of homework and research, and also consulted many of his friends. Although he knew that he bought at that time, he would definitely get some money in the future. However, in the end he reluctantly gave up because he thought he really didn’t understand the banking industry and was beyond his ability. I personally think that his decision is right, which is also one of the main reasons why his investment can be successful.
Bank of America was fined $16.65 billion by the U.S. Department of Justice for packaging and selling inferior real estate mortgage bonds (Mortgage Backed Security: MBS) before the financial tsunami, of which $9.65 billion must be paid in cash immediately. Buffett took the opportunity to enter the market to take advantage of the Bank of America, participating in a $5 billion share purchase program, including a purchase of 700 million shares of Bank of America common stock at $7.14 per share. This is one of the main reasons why Bank of America is now Berkshire’s second largest shareholding (43.2 billion US dollars, second only to Apple’s 115.6 billion US dollars).
At the height of the financial tsunami, Buffett also took advantage of the danger of Goldman Sachs (ticker: GS) and insisted on asking Goldman Sachs to pay a very high interest rate. Buffett rescued and bought Goldman Sachs’s preferred stock at a price of $115 per share, and obtained Goldman Sachs US$5 billion warrants.
These two extreme examples tell us that as long as you are in the banking industry, you can still invest in bank stocks and make a lot of money. But timing is very important. Normally, there is no possibility that bank stocks will skyrocket. Investors must figure out this first.
- “How does JPMorgan Chase make money?“
- “Wells Fargo, a major holding once praised by Buffett and Munger“
- “Citigroup, a downward companies“
- “What caused Citi to abandon its retail banking business in 13 countries“
- “Why I prefer growth stocks instead of value stocks?”
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