Banks - Terry Smith

[stevensfo]

Is this it? https://www.livewiremarkets.com/wires/l ... g-shakeout

It is, yes. Stevenson is one of very few journalists worth reading on financial matters, iMHO of course. Probably helps that he still works in the industry at Fidelity.

Nice article for reminding people that a) banks are more fragile creatures than most realise and b) the secret is diversification in every sense!

I like:

No wonder banks used to be housed in such solid and imposing buildings - the show of strength matters.

They still are, only their names are across skyscrapers now. The opening credits of many series set in London have a birds eye view of the tall buildings with the names of the banks on them.

Steve

[dealtn]

Is this it? https://www.livewiremarkets.com/wires/l ... g-shakeout

It is, yes. Stevenson is one of very few journalists worth reading on financial matters, iMHO of course. Probably helps that he still works in the industry at Fidelity.

His conclusions are pretty solid.

Banks could be good investments, but his 3) Politicians and Regulators, ensures that 1) (excessive) profits in good times, are never enough to compensate for the opposite in the business cycle.

When it means you get a sub-standard business cycle return (and asymmetries generally) you will get low rated valuations.

[Arborbridge]

Investing is very simple, it's only the industry, abetted by social media, that wants to make it complicated because that is how the first lot make their money and the second lot try and appear smart by pretending to know stuff that is unknowable.

So why does the "simple" VT Munro fund have a charge of over 1% a year?

To paraphrase the old joke: 0.25% for hitting with a hammer and 0.75% for knowing wheree to hit it

[simoan]

It is, yes. Stevenson is one of very few journalists worth reading on financial matters, iMHO of course. Probably helps that he still works in the industry at Fidelity.

His conclusions are pretty solid.

Banks could be good investments, but his 3) Politicians and Regulators, ensures that 1) (excessive) profits in good times, are never enough to compensate for the opposite in the business cycle.

When it means you get a sub-standard business cycle return (and asymmetries generally) you will get low rated valuations.

We are really generalising on this thread, and as we have seen from GS picking up on the Irish banks a few years back, that any investment can offer a good risk-reward for a period of time when the market valuation is wrong. However, on a risk-adjusted basis, the banking industry makes for poor investments. Any industry that offers below average returns with elevated risk should be avoided IMHO. You only have to look at the ROE of most banks and compare with many other higher quality companies to know why they permanently look cheap on over-simplistic metrics such as PER and dividend yield. Yes, they often trade on a discount to book value, but I don't think anyone would really want to hang their hat on what the assets are really worth.

BTW I see today it is Deutsche Bank in the cross hairs... That gold I bought a year ago is looking better and better!

[OhNoNotimAgain]

PE of 22, in other words 22 years of earnings, suggests your second rule has been breached already.
Think back 22 years and to see how much the world has changed and then ask yourself if doing nothing since then would have worked out well?

Overpaying isn't best measured by a single observation of P/E in time though.

For example. You could have a company with positive future cashflows of billions with a current (or most recent year) earnings of literally £1 (or negative). Its value might be in the billions too. Are you saying that just because the current, as measured. P/E is approaching infinite the valuation is wrong? You really think such a company should be valued at, and available to purchase, for less than a tenner? Should loss making companies be available to buy for negative consideration?

Valuation isn't simple - for good reason - and those that seek simplicity in only using historic P/E are unlikely to be those I would trust regarding valuation, or investment performance.

That PE was for the whole fund.

[OhNoNotimAgain]

free cash flow is reality.

No [expletive deleted] sherlock

[OhNoNotimAgain]

It's actually been made very simple by the advent of cheap Global trackers. They may not do as well as genius good company spotters (supposedly) can but they've outperformed most active funds that have (supposed) genius analysts working for them.

There is a lot of vested interest out there in making investing appear as complex as possible. A shame that so many buy into that BS.

BoE

I agree something like a global tracker ETF is best for the vast majority of people, however, psychologically most people do not like selling down capital when they need to take money from their investments in drawdown. You see it writ large all over this website. I will possibly move more money into such vehicles as I get older and/or have less time to spend on investing activities. However, you'd still end up with exposure to banking and poor quality financial stocks. They also introduce currency risk, which is something I quite like to control given that my own costs are all in GBP.

Omigod, do you not know that the UK does not produce everything it uses and therefore every consumer is exposed to FX risk?
That is why a weak pound increases inflation.

[simoan]

free cash flow is reality.

No [expletive deleted] sherlock

There's no need for that tone, especially as you have not shown me you have the faintest idea how to value a share on this thread. Using a PER based on adjusted earnings per share is for muppets only.

[simoan]

I agree something like a global tracker ETF is best for the vast majority of people, however, psychologically most people do not like selling down capital when they need to take money from their investments in drawdown. You see it writ large all over this website. I will possibly move more money into such vehicles as I get older and/or have less time to spend on investing activities. However, you'd still end up with exposure to banking and poor quality financial stocks. They also introduce currency risk, which is something I quite like to control given that my own costs are all in GBP.

Omigod, do you not know that the UK does not produce everything it uses and therefore every consumer is exposed to FX risk?
That is why a weak pound increases inflation.

Again, there is no need for your dismissive tone. I made it quite clear I was talking about first order direct exposure to currency i.e. equities in my portfolio valued in USD and dividend income paid in USD (both from UK and US listed companies). I have some exposure to EUR as well but it's so small I don't bother. Any second order currency effects, such as the ones you mention are not things I can control and so are of no concern. Hopefully that is now clear.

[OhNoNotimAgain]

Omigod, do you not know that the UK does not produce everything it uses and therefore every consumer is exposed to FX risk?
That is why a weak pound increases inflation.

Again, there is no need for your dismissive tone. I made it quite clear I was talking about first order direct exposure to currency i.e. equities in my portfolio valued in USD and dividend income paid in USD (both from UK and US listed companies). I have some exposure to EUR as well but it's so small I don't bother. Any second order currency effects, such as the ones you mention are not things I can control and so are of no concern. Hopefully that is now clear.

You need to understand that 4 of the 5 largest UK companies declare dividends in dollars even though their share prices are quoted in pounds.
That is mainly because not only their revenues are dollar based but their costs are as well.

[simoan]

You need to understand that 4 of the 5 largest UK companies declare dividends in dollars even though their share prices are quoted in pounds.
That is mainly because not only their revenues are dollar based but their costs are as well.

Yes. And why would this be difficult to account for in a spreadsheet? Of the 5 biggest companies I only own Unilever and they report dividends in Euros. All ultimately convert into GBP. However, my spreadsheet importantly tells me when I have invested well, and when I just got lucky through beneficial currency movements. Last year was a classic case because my USD trading account ended the year up in GBP terms purely due to weak Sterling.

[OhNoNotimAgain]

You need to understand that 4 of the 5 largest UK companies declare dividends in dollars even though their share prices are quoted in pounds.
That is mainly because not only their revenues are dollar based but their costs are as well.

Yes. And why would this be difficult to account for in a spreadsheet? Of the 5 biggest companies I only own Unilever and they report dividends in Euros. All ultimately convert into GBP. However, my spreadsheet importantly tells me when I have invested well, and when I just got lucky through beneficial currency movements. Last year was a classic case because my USD trading account ended the year up in GBP terms purely due to weak Sterling.

Oh dear.