Sunday, April 27, 2008

Why I'm Not Buying Investment Banks Yet

So you think you're a contrarian and are buying stock in troubled investment banks? I got news for you, you're aren't. Everyone is looking at these stocks and trying to call a bottom. Banks go through boom and bust cycles, often following the real estate market. Following those periods, they adjust their risk. Right now, all a bank has to do is say they aren't going bankrupt, their write-downs aren't too massive, and they think conditions are improving. Poof! The stock surges. But there will be a time, I believe, that this will wear off, and investors realize that the earnings are just plain bad right now (if they are making money at all). They will be tightening up on their lending and its no secret why. Less risk will mean less potential return, especially for those banks who rely on trading for a large percent of their income.

All I'm saying here is its too early to get excited about these stocks. Many of these companies have world-class brands that are well respected. But when a lot of people lose a lot of money, it takes some time to get their confidence back.

1 comment:

Bill G. said...

I have never understood why anyone would want to buy stocks with poor or , worse yet, no earnings, but people do it all the time and think they are making a good investment. Anyway, great blog, I'm adding you to my favorites. Thanks...