Here’s my statistic of the week: Bloomberg reports that that Goldman Sachs, Merrill Lynch, Morgan Stanley, Lehman Brothers and Bear Stearns will earn a combined $28 billion this year down 8.3 percent from last year. Merrill Lynch and Bear Stearns reported some substantial write-downs from subprime mortgage/asset backed commercial paper. So, despite all of that, financial institutions continue to make money. But 2008 may be an equally rough year right? Bloomberg estimates these same firms will reach $32 billion in profit in 2008.
Financial institutions generally don’t lose money. Did they do some utterly crazy things such as lending out subprime mortgages? Of course. But, large, diversified financial institutions also have other sources of revenue- M&A, wholesale lending, wealth-management, foreign exchange, credit cards, wealth management, traditional banking, trading activities etc. etc. They just shift their resources elsewhere and they are doing it with our deposits. A financial institution is other people’s money to the extreme.
Stocks in this industry are taking a beating but it is compared to expectations. We have had an approximately 5 year run on banks and expectations got too high. RBC reports a 14% earnings increase two quarters ago and the market punishes their stock. Things are little out of whack when that happens but remember that the expectation is “how much money are you making” and not “are you going to make money?”
In an industry like tech, when the industry is in a slump, companies are going bankrupt. In an industry like financial institutions, when the industry is in a slump, companies are making good, but not obscene, money. Every once in a while, a player goes down but the industry keeps going onward and upward.
I am not going to guess if we have hit rock bottom but, if I was 25 again, I would sign up for a share subscription plan with a large bank with a lot of different revenue streams and just keep buying. In 10 years, I suspect one would be very happy. Instead, I spent my 20’s buying bad mutual funds.
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November 15th, 2007 at 10:12 am
I tipped my toes and bought BMO last week around $60 fully aware that it could drop further. If it drops much more from here, I’ll buy a bit more.
I agree with you that I should have spent my twenties chasing the banks instead of tech stocks. Still, I did buy TD Bank back then and still hold it and very happy with the results.
November 15th, 2007 at 12:18 pm
I guess youth is truly wasted on the young!
November 15th, 2007 at 1:55 pm
It is always easy to look back at what has worked in the past and extrapolate that into the future. With banks, insurance companies, and wealth managers though, I believe there is something else at play and I think they will always be better than average investments.
I am 28, and I bought my first shares in Royal Bank directly when I was 27. I wish I had bought some Royal bank back when I was working at McDonalds in grade 10…so I guess we all have our regrets, knowing what we know now…
November 15th, 2007 at 10:47 pm
[…] Periodically, the big banks runs into trouble and when they do it usually is a good time to invest in them. Thicken My Wallet wonders if this is such a time. […]
November 17th, 2007 at 8:39 am
Given the beating that they have taken in recent months, I have been tempted to put some money in financial stocks. BUT in the end I “remembered” that I am a believer in efficient market theory and decided to continue to stick with my broad market indexes. It’s a boring investment strategy, but it works for me.
November 18th, 2007 at 8:14 pm
At some point in the next 12-18 months we will look back and wonder “what-if” I had loaded up on the banks when they were trading at those prices. There may be more blood under the bridge before then, but these valuations are dramatic.
Best Wishes,
D4L