Are there absolute “Nevers” in the investment management business? I have a few, mainly based on product rather than sector.
I wanted to spotlight this contribution to Barry’s blog from Peter Treadway (The Daily Optimist) because I think it’s very important.
Whenever people speak in absolute terms, I always look for the other side of their argument, because rarely does black-and-white thinking work forever on Wall Street. You’ve doubtless heard people say that “airline stocks are never an investment, only a trade.” That’s an example of an absolute that’s actually pretty true, it turns out – Chapter 11 is a permanent feature of the business cycle for this industry, a necessary cleansing that all companies must go through from time to time, and so the equity is never a hold over long stretches.
Peter Treadway’s premise that the world’s mega-banks have so many headwinds in front of them that they can almost never be owned again may turn out to be a truism as well.
At my firm we hate banks morally and for market structure reasons. Both my Barry and myself have written books on the topic of how crooked and fucked up these companies are. We’ve avoided all bank stocks for years and then chomped into the one we felt was the safest during Q1’s runaway bank rally. And we were up 15% in a flash, feeling confident and smug that we were able to turn off our anti-bank bias in order to make the right trade for our clients. A week or two later, it was revealed that our golden apple JPM was poisonous, hidden losses, London whales and talk of hundred billion dollar derivatives trades gone awry had erased our gains and turned the position into a net loss within hours. We were forced to pare the position in keeping with an emphasis on risk management that underpins everything we do on the asset management side of the firm, in good times and bad.
We’ve got a small amount of JPM shares left, it seems to have found it’s footing and we can live with it for the time being. But upon our complete exit, I highly doubt if I shall ever take single stock risk in this horrible group of stocks again…
From the Big Picture:
Too Big to Fail—Then Who Needs their Stock
From an investment point of view, there are several fundamental realities concerning banks which exist in virtually every country. These have led me to conclude that on a long term basis, large too-big-too-fail mega banks are always going to be an unexciting investment. OK, maybe someday when everything settles down the dull large banks can be bought as dividend plays. Maybe my Avoid Forever title is a little bit of exaggeration. But that day is a long way off.
First, large banks will not be allowed to go bankrupt. Therefore they should not and will not be allowed to take risks and earn high rates of return. Governments won’t allow these banks to take risks since the governments will have to pay if, as in 2008, the risks turn out badly. I cannot argue with this government logic. If governments are going to socialize the risks, then governments should socialize the profits as well. Or to put it another way, bank risks should be limited and bank capital should be enhanced to protect the governments from losses. Unfortunately, on a long term basis this makes for a rather unattractive equity outlook for global commercial banks. For a mega bank, if it’s too-big-to-fail, then you don’t want to own it.