Bad Bank Bets Dennis Butler, an investment advisor in Cambridge, Massachusetts, recently wrote in his monthly investment newsletter that banks are just like airlines. They ride with the cycles, but over time they are not a profitable investment for serious investors. That old saying that if you want to become a millionaire, start with a billion and invest in airlines, probably holds true for some banks, but not all banks. We decided to do a little checking of our own. We selected nine banks more or less at random, although we wanted to include the big three, Citigroup, Bank of America, and J.P. MorganChase. We arbitrarily chose October 31, 1992 as the starting point and October 15, 2010 as the end point for measuring returns. Actually, we rounded the period to an even 18 years. Here's what we found.
| Name of Bank | 10/31/1992 | 10/15/2010 | Percent Gain |
|
|
|
| Citigroup | 3.30 | 3.95 | 1.0 | JP Morgan Chase | 10.05 | 37.15 | 7.5 | Bank of America | 9.16 | 11.98 | 1.5 | Wells Fargo | 4.21 | 23.58 | 10.0 | US Bancorp | 5.88 | 22.54 | 7.7 | PNC Financial | 19.84 | 51.32 | 20.3 | HBAN | 6.69 | 5.69 | -.9 | Key Bank | 11.60 | 8.03 | -2.0 | STI | 15.73 | 24.38 | 2.5 | S&P 500 | 417.00 | 1176.00 | 5.9 |
Only three banks outpaced the S&P 500 over the 18 year period, JP Morgan Chase, PNC Financial, and Wells Fargo. If you looked at a chart, however, you would see great volatility in these stocks, and no wonder. They have a checkered history. JP Morgan Chase and Wells Fargo have great managers and great business models. In fact, Wells has been owned by Warren Buffett's Berkshire Hathaway for many years. We did not investigate PNC Financial and we did not compare the airlines for the same period. It is enough to just compare with the return of the S&P 500.
Mr. Butler has a more serious point, and I will modify it somewhat. Accountants, lawyers, doctors, and sundry other professionals are personally liable if malpractice occurs. Bankers are not personally liable for malpractice, although the banking service is certainly personal in many respects. Would the 2008-2009 recession have occurred as severely if bankers were personally liable? Would certain bankers have employed low-paid employees to "robo-sign" mortgage foreclosures if they were personally liable? We suspect there is a very good legal answer for the question that Mr. Butler poses. For now, most folks are more worried about the lack of lending. Imposing personal liability now for banking malpractice might not be the right time. John A. Epeneter, CPA/PFS, CFP®, CCPS, CFS, Master of Science in Financial Planning Copyright © October 2010 |
Subscribe to our Newsletter
