UK Banks Time To Invest?

displaced dub

Hi All

What do you think of investing in FTSE listed UK banks?

They have been reporting good numbers over the last few days, so is it safe to get back into the water?

Raskolnikov

I have a few rules about investing in banks.

1. If I can't fully understand an annual report - I don't invest.
2. If the situation is still deteriorating (losses increasing, impairments rising, real estate owned increasing) - I don't invest.
3. If the bank is state-supported - I don't invest.

Lloyds, Royal Bank of Scotland are government supported, so keep away from these. HSBC are very, very complicated and have a lot of exposure in China. Standard Chartered are less complicated, but have a lot of Chinese exposure. The discussions of a property bubble in China mean that I am extremely hesitant about going anywhere near anything with that kind of exposure. That really only leaves Barclays as a realistic investment option. When I look at the numbers for them though, I think they're fairly priced.

If you want to buy a banking stock, I think you really have to look in the United States. What you're looking for is something that has/had no subprime exposure. Something that is well capitalised and is not shipping losses. Finally, it would be nice if you had proven, long-term management at the helm. I actually covered one bank which fitted the above criteria, and they've done very well for me since the start of the year - http://www.boards.ie/vbulletin/showthread.php?p=66414357

I am currently looking at a bank at the minute which is probably the best run in America. In five years, they haven't lost a single penny in loans that they've provided to customers. Considering we've had close to a depression and the biggest banking crisis in 80 years, this isn't just impressive, it's unheard of. They also have a tiny expense ratio and have been nicely growing the business, making stable but imroving profits. Also, the guy who runs it has a large part of his personal wealth in the business, and writes the most upfront and easiest to understand quarterly statements that I've ever read from a banker.

pocketdooz

Raskolnikov wrote: »

I have a few rules about investing in banks.

1. If I can't fully understand an annual report - I don't invest.
2. If the situation is still deteriorating (losses increasing, impairments rising, real estate owned increasing) - I don't invest.
3. If the bank is state-supported - I don't invest.

Lloyds, Royal Bank of Scotland are government supported, so keep away from these. HSBC are very, very complicated and have a lot of exposure in China. Standard Chartered are less complicated, but have a lot of Chinese exposure. The discussions of a property bubble in China mean that I am extremely hesitant about going anywhere near anything with that kind of exposure. That really only leaves Barclays as a realistic investment option. When I look at the numbers for them though, I think they're fairly priced.

If you want to buy a banking stock, I think you really have to look in the United States. What you're looking for is something that has/had no subprime exposure. Something that is well capitalised and is not shipping losses. Finally, it would be nice if you had proven, long-term management at the helm. I actually covered one bank which fitted the above criteria, and they've done very well for me since the start of the year - http://www.boards.ie/vbulletin/showthread.php?p=66414357

I am currently looking at a bank at the minute which is probably the best run in America. In five years, they haven't lost a single penny in loans that they've provided to customers. Considering we've had close to a depression and the biggest banking crisis in 80 years, this isn't just impressive, it's unheard of. They also have a tiny expense ratio and have been nicely growing the business, making stable but imroving profits. Also, the guy who runs it has a large part of his personal wealth in the business, and writes the most upfront and easiest to understand quarterly statements that I've ever read from a banker.

Enlighten me please !

woodseb

Raskolnikov wrote: »

I am currently looking at a bank at the minute which is probably the best run in America. In five years, they haven't lost a single penny in loans that they've provided to customers. Considering we've had close to a depression and the biggest banking crisis in 80 years, this isn't just impressive, it's unheard of. They also have a tiny expense ratio and have been nicely growing the business, making stable but imroving profits. Also, the guy who runs it has a large part of his personal wealth in the business, and writes the most upfront and easiest to understand quarterly statements that I've ever read from a banker.

i'm sceptical to say the very least......

delllat

u mean not 1 single person has defaulted on a payment in the last 5 years ?

i also find this difficult to believe

D-Generate

delllat wrote: »

u mean not 1 single person has defaulted on a payment in the last 5 years ?

i also find this difficult to believe

Not necessarily. If interest received on loan repayments is greater than the bad debts incurred by defaulters then they won't have lost a penny even though there might have been a number of defaulters.

royaler83

displaced dub wrote: »

Hi All

What do you think of investing in FTSE listed UK banks?

They have been reporting good numbers over the last few days, so is it safe to get back into the water?

I would recommend Lloyds Banking Group. They are back to their "breakeven point" with the government, 74p, ie any further SP increase will mean government is making a profit.

They can start paying dividends again in 2012 (18 months from now) which along with decreasing government stake will bring back institutional investors.

Their impairments have dramatically fallen in the last 12 months, they are now 1.6billion in profit for 1st 6 months of this year.

ps they are due a retrace after soaring from 56p-74 in a matter of weeks in expectation of the results.

I'd be wary of the PIIGS rising their heads again playing havoc with the SP in the short term which is why i sold last week to bank some profit and to buy again on any dips.

But if you're buying to hold long term they're a winner IMO

Raskolnikov

D-Generate wrote: »

Not necessarily. If interest received on loan repayments is greater than the bad debts incurred by defaulters then they won't have lost a penny even though there might have been a number of defaulters.

Nope, they have had no non-performing loans and before you ask, they are actually lending, they've increased the size of their loan book by about 20% in the last year.

Here's an extract from their quarterly report.


I know most people here can't be bothered, but if you want to pick good investments, you have to work incredibly hard. That means looking at company after company, most of which will be turds. However, the beauty of this is that all investing knowledge is incremental and the more that you know, the greater the possibility of finding bargains. Anyone who is just looking at the five British banks or three Irish banks is wasting their time.

Mort5000

Go on, be brave, feel free to name them.
Anytime now.

D-Generate

Raskolnikov wrote: »

I know most people here can't be bothered, but if you want to pick good investments, you have to work incredibly hard. That means looking at company after company, most of which will be turds. However, the beauty of this is that all investing knowledge is incremental and the more that you know, the greater the possibility of finding bargains. Anyone who is just looking at the five British banks or three Irish banks is wasting their time.

This is too true and I feel it is understated on this forum. Money isn't to be made by taking tips and can only be realized by doing your own research. Heck even taking analyst reports should be done with a pinch of salt especially when you consider their Buy to Sell ratios paint an image that perhaps their opinions are skewed.
I often get the undertone on this forum that people would be more willing to invest based on a tip about an equity/commodity of which they have no knowledge over say a football match of which they follow the sport avidly.

Good luck with the investment and I hope it all works out for you.

Mort5000

D-Generate wrote: »

This is too true and I feel it is understated on this forum. Money isn't to be made by taking tips and can only be realized by doing your own research. Heck even taking analyst reports should be done with a pinch of salt especially when you consider their Buy to Sell ratios paint an image that perhaps their opinions are skewed.
I often get the undertone on this forum that people would be more willing to invest based on a tip about an equity/commodity of which they have no knowledge over say a football match of which they follow the sport avidly.

Good luck with the investment and I hope it all works out for you.

Is reading a forum considered 'research'?

cooperguy

Raskolnikov wrote: »

Nope, they have had no non-performing loans and before you ask, they are actually lending, they've increased the size of their loan book by about 20% in the last year.

Here's an extract from their quarterly report.


I know most people here can't be bothered, but if you want to pick good investments, you have to work incredibly hard. That means looking at company after company, most of which will be turds. However, the beauty of this is that all investing knowledge is incremental and the more that you know, the greater the possibility of finding bargains. Anyone who is just looking at the five British banks or three Irish banks is wasting their time.

Seriously whats the name of the bank! Iv no money to invest at the moment even if i wanted to invest in banking shares. Im just genuinely interested in what bank didnt go the same route as all the others in the last few years!

Raskolnikov

Not revealing my pick, because it's quite illiquid and I want to buy more at a later point. Anyway, I only used it to illustrate that if you do your research, there are much, much better investments out there than British banks which are really, really hard to understand.

If you want to learn about investing in banks, then I highly recommend chapters 12 and 13 from the Peter Lynch book, Beating the Street. You can buy the book online for about €6-€7 and it gives a great introduction into banking stocks. When Lynch looked at banks, the most important thing (from what I gathered at least) was that the bad loans situation was improving, and that the bank was reasonably strong from an equity perspective to absorb loan losses. Basically, Lynch invested in banks that were in good shape, but were beaten down by the market malaise for financials (he called these Jimmy Stewarts). He set down some minimum criteria for the banks he invested in.

Equity to asset ratio: This is a measure of the strength of an institution. Lynch says anything under 5 and you're in the danger zone. Peter Lynch likes 7.5

Book value: A lot of banks are selling below book value (mostly bad ones), there are good banks out there with with equity/asset ratios of great than 7.5, that are selling below book though.

Price/earnings: The lower the better, obviously. There are so many cheap banks out there that aren't making losses, so I think you can discard the ones losing money consistently. Anything under 10 is worth looking at.

Construction/real estate loans: Stands to reason that if housing is in the toilet, these loans. Lynch suggests anything over 5-10% is too high. Although in this climate, I think it's ok to relax that standard a little to 15% or so.

90 day non performing loans: This should not be greater than 2%.

Real estate owned: This really means foreclosed property. If this number is high, or on the increase, avoid the bank.

I also use two measures that Peter Lynch doesn't.

• Interest Margin: This is the difference between what a bank pays customer for deposits and what it lends out at. The very best S&L companies will have a 4% margin. Anything over 3% is great though.
• Efficiency ratio: Good managers run tight ships and managers who run tight ships don't tend to make bad loans! Anything under 60% is great.

When you apply these criteria to Irish banks, they rank as some of the worst on the planet. So if you're looking for better options, then you'll have to look abroad. The United States probably has at least 1,000 banks that are listed on the stock market.

I would suggest that you start at the A's, and go through all of them, using the criteria the Peter Lynch uses. There are lots of great, solid investments to be had with low capital risk. This isn't rocket science either. It's 90% mechanical and 10% common sense.

The great thing about this approach is just how much safer it is. I know that my banks are going to generate 10-15% returns quite easily in a year. The great thing is though, that because they're well run, I am more likely to be surprised on the upside, then the downside. Not only that, but I sleep at night.

Mort5000

Raskolnikov wrote: »

Not revealing my pick

Unbelievable.

Idu

Mort5000 wrote: »

Unbelievable.

Why's it unbelievable. He's trying to protect the investment in time and research he's put in and anyway there's more info in these posts than you could dream of yet all you want is the easy route. Typical of this forum to be honest. Nobody willing to put the effort in, just want someone else to do the boring stuff for them on the chance of a quick profit

Mort5000

Idu wrote: »

Why's it unbelievable. He's trying to protect the investment in time and research he's put in and anyway there's more info in these posts than you could dream of yet all you want is the easy route. Typical of this forum to be honest. Nobody willing to put the effort in, just want someone else to do the boring stuff for them on the chance of a quick profit

Don't post anything if it is such a secret.
What makes you think I want the easy route? Stupid assertion that.
The Name is all I want.
Get it?

Mod: forum suggestion. Split this forum into two.
"1. Investments & Markets."
"2. Investments & Markets for the secret lads club with secret info that know everything and look down on people that dare to ask questions and try say 'if you don't know that you shouldn't even be...' as regularly as possible"
Sure that'll work.

Idu

Mort5000 wrote: »

Don't post anything if it is such a secret.
What makes you think I want the easy route? Stupid assertion that.
The Name is all I want.
Get it?

Mod: forum suggestion. Split this forum into two.
"1. Investments & Markets."
"2. Investments & Markets for the secret lads club with secret info that know everything and look down on people that dare to ask questions and try say 'if you don't know that you shouldn't even be...' as regularly as possible"
Sure that'll work.

That post is idiotic. And he told you the reason for not wanting to give away the name of the company anyway.

And it's not secret information - they're public companies. Their info is out there for anyone to find

Mort5000

Idu wrote: »

That post is idiotic

As is this.

Obviously it isn't secret.
Obviously they're public. *sigh*
You've completely missed the point of a forum.
Not to worry. Better luck next time.

woodseb

Raskolnikov wrote: »

Not revealing my pick, because it's quite illiquid and I want to buy more at a later point. Anyway, I only used it to illustrate that if you do your research, there are much, much better investments out there than British banks which are really, really hard to understand.

If you don't want to reveal your pick that's fair enough but from the information you've given here i'd still be skeptical on whether its a good investment given the fact that its illiquid and it has not lost on loans - this suggests it has not taken risk and may struggle to generate profit

what you've said about doing your research is bang on - but i've always thought that if something is too good to be true it usually is, play the devils advocate with yourself - ask why nobody else is investing in it if all the indicators suggest otherwise? how much is the owner taking back out of the business? Are the minority shareholders vulnerable to the whim of the owner? etc

good luck

Raskolnikov

Here is one of my ideas, it's not my best, but it's in the top ten.

Bank of Hawaii (BOH)
Forward P/E: 12.5 (Good)
Price/book: 2.2 (Not cheap)
Dividend yield: Nearly 4% (very good)
Return on equity: 20%+ (5 year average, very good)
Net interest margin: 4% (5 year average, Excellent)
Non performing assets: Less than 1% (Very good)
Equity/asset ratio: Close to 7 (5 year average, very good)
Expense ratio: 52% (Excellent, 5 year average)
Real estate owned/construction loans: Tiny/not significant (very good)

After dividends are factored in, this company has been growing by ~15% a year for the last five years. This is excellent performance, considering that they've taken very little risk. Someone suggested Lloyds as a good investment, let's see how my pick stacks up against theirs.

Lloyds TSB (LYG)
Forward P/E: 34 (Poor)
Price/book: 1.9 (For a bank in poor shape, this is expensive)
Dividend yield: 0%
Return on equity: 15% (this hides the fact that recent ROE has been 7% (2008) and 9% (2009), these figures are likely to be closer to the market for the next few years.
Net interest rate margin: Less than 2%
Non performing assets: Over 2% and rising
etc!

My suggestion is a little more expensive on a book value basis, but the rest of the numbers are twice as good as LloydsTSB, and that's before I even go into things like Tier 1 capital and leverage ratios, which Bank of Hawaii ranks at least twice as good as Lloyds does.

I used the mechanical criteria that I outlined earlier to find my pick. Who would have thought that we could find such a great investment in Hawaii of all places!

Raskolnikov

woodseb wrote: »

If you don't want to reveal your pick that's fair enough but from the information you've given here i'd still be skeptical on whether its a good investment given the fact that its illiquid and it has not lost on loans - this suggests it has not taken risk and may struggle to generate profit

Banking stocks are funny, because the numbers can lie (look at AIB and BOI). However, when you get a financial collapse, you see just who is swimming naked when the tide goes out. The tide is well and truly out, yet my bank is posting great numbers. If you have a bank that can do that in a crappy environment, they'll certainly do the same in a good environment.

woodseb wrote: »

what you've said about doing your research is bang on - but i've always thought that if something is too good to be true it usually is, play the devils advocate with yourself - ask why nobody else is investing in it if all the indicators suggest otherwise? how much is the owner taking back out of the business? Are the minority shareholders vulnerable to the whim of the owner? etc

My picks aren't cheap when you compare them to their peers. However, like Bank of Hawaii has shown, these are fantastic businesses (probably some of the best in the world) and they are trading at prices that are still quite cheap (relative to historical prices).

pog it

Rask- excellent. I'm glad you are being secretive, it should actually make people go mad trying to learn more so that they can at some stage undertake the research at the same level you do. What you did is something a fantastic teacher would do, and that's one in a 100,000 so fair play.

Can I ask you what are your top 5 or so books to get to learn about researching and analysing companies in general. I've read Intelligent Investor, and have a good grasp of fundamentals, but I now need to study financial analysis indepthly.

Would you recommend CFAs, even if you're not looking to have them for the sake of your job/work/cv but just for personal knowledge? And do you think an accounting book or two would have to be studied also? If so which one?

Sorry, hope you don't mind my asking this! I'm ready for the analysis part now though and good guidance at the beginning can't be beaten.

One other question - is it very common for not everything to be disclosed in companies financial reports? And how do you detect that, does it take years and years before you can sniff that out, if ever?

woodseb

The tide is well and truly out, yet my bank is posting great numbers. If you have a bank that can do that in a crappy environment, they'll certainly do the same in a good environment.

Not necessarily, a bank with a low risk loan book will likely underperform the market in an economic recovery

Raskolnikov wrote: »

My suggestion is a little more expensive on a book value basis, but the rest of the numbers are twice as good as LloydsTSB, and that's before I even go into things like Tier 1 capital and leverage ratios, which Bank of Hawaii ranks at least twice as good as Lloyds does.

I used the mechanical criteria that I outlined earlier to find my pick. Who would have thought that we could find such a great investment in Hawaii of all places!

Lloyds is up 38% YTD while BOH is up 3.6% - don't blind yourself with figures and ratios - look at the story of the company and the bigger picture too

don't take my posts to harshly, it's refreshing to have a decent discussion on actual numbers - i'm just trying to help you make a good decision. unless you've just posted on here to have others pat you on the back

pog it

woodseb wrote: »

unless you've just posted on here to have others pat you on the back

Given Rask's track record, that's clearly not why they post here.

Raskolnikov

pog it wrote: »

Can I ask you what are your top 5 or so books to get to learn about researching and analysing companies in general. I've read Intelligent Investor, and have a good grasp of fundamentals, but I now need to study financial analysis indepthly.

The Intelligent Investor is a good book, but it's outdated, contains a lot of useless examples and has some awful some terrible commentaries in it (my copy has an awful lot of waffle from Jason Zweig in it).

The two Peter Lynch books, Beating the Street and One Up on Wall Street are good starting points. You Too Can Be a Stockmarket Genius (the title makes me cringe). Value Investing From Graham to Buffett. The Snowball. Buffett: The Making of an American Capitalist.

pog it wrote: »

Would you recommend CFAs, even if you're not looking to have them for the sake of your job/work/cv but just for personal knowledge? And do you think an accounting book or two would have to be studied also? If so which one?

You can do without these if you're just interested in investing your personal funds. You will need to know how to interpret financial statements, but I don't think you need a book to do this, I certainly didn't use one.

pog it wrote: »

Sorry, hope you don't mind my asking this! I'm ready for the analysis part now though and good guidance at the beginning can't be beaten.

The best thing to do, it to just dive in and start looking at companies. Try picking one area and becoming an expert in it; why not banking? Get a list of all the banks, have your criteria for measuring them, then start digging out the annual reports and applying the critera. This is not a black art. 90% of the work is mechanical, 10% is a mixture of intuition, common sense and skill.

The beauty of investing is that investing knowledge is incremental. This is why Warren Buffett even better now then when he was 30 years younger.

pog it wrote: »

One other question - is it very common for not everything to be disclosed in companies financial reports? And how do you detect that, does it take years and years before you can sniff that out, if ever?

It depends. Irish and British reporting is a little different to American reporting, I personally find American reporting more transparent. I guess what you're trying to get at is, if you knew your stuff, would you have gotten stung by the meltdown in Irish banking stocks? Well, let's apply some criteria that I suggested to the 2006 annual report for AIB.

1. Capital ratios in Irish banks were quite low.
2. The growth of the loan book was ballooning.
3. Impairments were rising.
4. Expense ratio was quite high.
5. Return on assets was good, but not great.
6. Deposits weren't covering loans.
7. Leverage ratio was extreme.

When you got past the bumper profits, you could see that these weren't been generated because the bank was being well-run, it was because they were lending money hand over fist. If you had been using my criteria, you probably would never have owned AIB or BOI.

Raskolnikov

woodseb wrote: »

Not necessarily, a bank with a low risk loan book will likely underperform the market in an economic recovery

That's not investing, that's speculating. Anyway, if you're getting a steady 15% annual return, you're outperforming ~99% of the market.

woodseb wrote: »

Lloyds is up 38% YTD while BOH is up 3.6% - don't blind yourself with figures and ratios - look at the story of the company and the bigger picture too

don't take my posts to harshly, it's refreshing to have a decent discussion on actual numbers - i'm just trying to help you make a good decision. unless you've just posted on here to have others pat you on the back

The share price over a half year period is irrelevant. By your logic, if you had went with the story and not the facts and figures back in 2006, you would have loaded up on AIB as the growth was spectacular and the story could not have been better.

woodseb

Raskolnikov wrote: »

That's not investing, that's speculating. Anyway, if you're getting a steady 15% annual return, you're outperforming ~99% of the market.

I don't know what you mean by this. You are picking individual stocks so you think you can outperform the market, otherwise you would have invested in an index. What you have identified here is what looks to me is a safe investment but as i pointed out, it may not outperform its peers based on the metrics you've posted above

The share price over a half year period is irrelevant. By your logic, if you had went with the story and not the facts and figures back in 2006, you would have loaded up on AIB as the growth was spectacular and the story could not have been better.

That's neither here nor there - i was just illustrating the difference in performance of the two stocks this year even though the other looks a lot better on paper.

By the way, if you went with facts and figures on AIB in 2006 you might have been more likely to invest because of high asset values, low impairments and a much lower P/E than its peers. The story was that house prices looked liked they were peaking and economy slowing - you need to look at both to make a good decision which is my point

Raskolnikov

woodseb wrote: »

I don't know what you mean by this. You are picking individual stocks so you think you can outperform the market, otherwise you would have invested in an index. What you have identified here is what looks to me is a safe investment but as i pointed out, it may not outperform its peers based on the metrics you've posted above

The short-term is irrelevant. The average stock market return going back over 100 years is about 9% annually. If you're getting 15%, you're not only beating the market, you're outperforming 99% of all other investors. To give you some perspective, Warren Buffett is generally regarded as the best investor of all-time, and his annual returns are 20%.

woodseb wrote: »

By the way, if you went with facts and figures on AIB in 2006 you might have been more likely to invest because of high asset values, low impairments and a much lower P/E than its peers. The story was that house prices looked liked they were peaking and economy slowing - you need to look at both to make a good decision which is my point

Nope, read my reply to Pog It. AIB earnings were great, but things like capital ratios, leverage ratios, expense ratios, etc. weren't great or were scary. For the record, I only had one bank stock my portfolio (Wells Fargo) back in 2007. The only reason it was in my portfolio was not because my system failed, it was because I started to relax the criteria.

woodseb

Raskolnikov wrote: »

The short-term is irrelevant. The average stock market return going back over 100 years is about 9% annually. If you're getting 15%, you're not only beating the market, you're outperforming 99% of all other investors. To give you some perspective, Warren Buffett is generally regarded as the best investor of all-time, and his annual returns are 20%.

Where are you getting 15% from, if you think you can get that return - that's great but you only named one stock here BOH which is in your 'top ten'. I can't comment on the other mystery stock as there isn't enough information. BOH's yearly returns over the past 5 years (2009-2005) were +4%, -12%, -5%, +5%, 2%. And its up less than 2% this year. Now that peformance is actually not so bad giving the market in 07 - 08, but why did it underperform the financials index in every other year?

All i'm saying is that your process seems to be too cautious (ie avoiding real estate exposure) in identifying banking stocks and you'll struggle to outperform in an upturn. I don't know what your market outlook or risk tolerance is but if you're expecting a recovery you'd want to be in stocks geared to that, otherwise you might struggle to earn a decent return

Raskolnikov

woodseb wrote: »

Where are you getting 15% from, if you think you can get that return - that's great but you only named one stock here BOH which is in your 'top ten'. I can't comment on the other mystery stock as there isn't enough information. BOH's yearly returns over the past 5 years (2009-2005) were +4%, -12%, -5%, +5%, 2%. And its up less than 2% this year. Now that peformance is actually not so bad giving the market in 07 - 08, but why did it underperform the financials index in every other year?

You're looking at share price, not book value growth and dividends.

woodseb wrote: »

All i'm saying is that your process seems to be too cautious (ie avoiding real estate exposure) in identifying banking stocks and you'll struggle to outperform in an upturn. I don't know what your market outlook or risk tolerance is but if you're expecting a recovery you'd want to be in stocks geared to that, otherwise you might struggle to earn a decent return

There seems to be this belief out there that banks are safe and dependable. If they're well run, yes; but if they're poorly run, you can be wiped out. Remember that banks can be leveraged as high as 50 times the equity base. In that instance, only 2% of your loan portfolio has to go bad and you're bankrupt. http://seekingalpha.com/article/121157-latest-bank-leverage-stats-some-still-high

If I have learned anything from the banking sector collapse, it's that even great banks can get into trouble if leverage is too high.

woodseb

Raskolnikov wrote: »

You're looking at share price, not book value growth and dividends.
.

Book value growth?

I don't see what relevance this has to your return.

Raskolnikov

If you don't see the point of book value growth, then I don't think you'll ever see the merits in a systematic approach to valuing a business. Nothing wrong with that, if you have methods that work for you, then by all means stick with them.

woodseb

Raskolnikov wrote: »

If you don't see the point of book value growth, then I don't think you'll ever see the merits in a systematic approach to valuing a business. Nothing wrong with that, if you have methods that work for you, then by all means stick with them.

I fully understand the merits of using book value growth to value a business. What I don't understand is how it relates to your return as a shareholder like you said here...

The average stock market return going back over 100 years is about 9% annually. If you're getting 15%, you're not only beating the market, you're outperforming 99% of all other investors. To give you some perspective, Warren Buffett is generally regarded as the best investor of all-time, and his annual returns are 20%.


Originally Posted by woodseb View Post
Where are you getting 15% from


You're looking at share price, not book value growth and dividends.

You buy a share of equity in a company, not a share of its balance sheet, computing your returns vs the market on any other basis is dangerous IMHO

Jim2007

woodseb wrote: »

Where are you getting 15% from, if you think you can get that return - that's great but you only named one stock here BOH which is in your 'top ten'. I can't comment on the other mystery stock as there isn't enough information. BOH's yearly returns over the past 5 years (2009-2005) were +4%, -12%, -5%, +5%, 2%. And its up less than 2% this year. Now that peformance is actually not so bad giving the market in 07 - 08, but why did it underperform the financials index in every other year?

All i'm saying is that your process seems to be too cautious (ie avoiding real estate exposure) in identifying banking stocks and you'll struggle to outperform in an upturn. I don't know what your market outlook or risk tolerance is but if you're expecting a recovery you'd want to be in stocks geared to that, otherwise you might struggle to earn a decent return

My investing objective is to earn a sufficient rate of return that will allow me to retire at 55, without taking on unnecessary risk. And like Raskolnikov, I follow a similar strategy, although I prefer asset management and insurance companies to banks. Having said that, I can fully accept that a return of around 15% pa is possible over the long haul - I have averaged 13.71% pa over the last 16 years (over 12% pa doubles your money every 5 years!).

I'm really not concerned about how a stock is doing in relation to the market in a given year or trying to catch an up turn in the market, I'm concerned that the businesses I've invested in are executing their business plans with success, thus growing the business and in due course that will be reflected in the market place too.

You on the other hand seem to be concentrating on the market and what will happen in the short term, which would seem to suggest that you're a player rather than an investor. But here's the deal, there is not much evidence around to suggest that it is a good way to grow your assets in the long term!

Good luck with that,

Jim.

Jim2007

woodseb wrote: »

I fully understand the merits of using book value growth to value a business. What I don't understand is how it relates to your return as a shareholder like you said here...

Financial institutions that continually grow book value do very well for the investor in the long run. So book value is a very important consideration if one is going to invest in banks or insurance companies for that matter.

woodseb wrote: »

You buy a share of equity in a company, not a share of its balance sheet, computing your returns vs the market on any other basis is dangerous IMHO

Seems like you've got your own definition of equity

I would suggest measuring one's performance against one's financial objectives as that is the only real measure that counts and market gazing usually costs money in the long term.

Good luck with that,

Jim.

Raskolnikov

Jim2007 wrote: »

And like Raskolnikov, I follow a similar strategy, although I prefer asset management and insurance companies to banks.

Hi Jim,

I have definite thoughts on insurance companies too. I try to apply similar criteria as I would with banking stocks i.e. book value (the composition of which is also important), combined ratio, expense ratio, reserving, loss ratio. Trends in the changes of lines of business are also very important. Would you care to discuss one of your favourites? I will of course oblige with my own pick, with tangible reasons as to why I picked it, of course

Jim2007

Raskolnikov wrote: »

Hi Jim,

I have definite thoughts on insurance companies too. I try to apply similar criteria as I would with banking stocks i.e. book value (the composition of which is also important), combined ratio, expense ratio, reserving, loss ratio. Trends in the changes of lines of business are also very important. Would you care to discuss one of your favourites? I will of course oblige with my own pick, with tangible reasons as to why I picked it, of course

I particularly like US title insurance - the idea of insuring events in hindsight is always attractive . Although cyclical, these companies don't really have the typical down of such companies - they just have great years and not so great years... Here are a few advantages to this business line:
- Mono line insurance so limited competition
- Easy business to scale up and down depending on the business cycle
- Title databases are proprietary so a difficult business to enter
- It's a repeat business, once you have done the research the first time, you usually get to insure the same event over and over as the property changes hands.
- When it all goes pear shaped, it only takes a couple of hundred bucks to put it right!

I have held a large position in FNF for almost 20 years now and during that period I have received about $150 in cash on an original average share price of about $13! Here are a few of the events I recall:
- Share dividends of 3 and 4 to one on a couple of occasions
- a $10 dividend per share on one occasion
- Several spin offs that went very well
- Regular quarterly dividends

Of course they have had a few bad years recently, but they are still paying dividends, so if you get in at the right price it can be a nice little cash generator.

Good luck with that,

Jim.

Raskolnikov

Jim2007 wrote: »

I particularly like US title insurance - the idea of insuring events in hindsight is always attractive . Although cyclical, these companies don't really have the typical down of such companies - they just have great years and not so great years... Here are a few advantages to this business line:
- Mono line insurance so limited competition
- Easy business to scale up and down depending on the business cycle
- Title databases are proprietary so a difficult business to enter
- It's a repeat business, once you have done the research the first time, you usually get to insure the same event over and over as the property changes hands.
- When it all goes pear shaped, it only takes a couple of hundred bucks to put it right!

I have held a large position in FNF for almost 20 years now and during that period I have received about $150 in cash on an original average share price of about $13! Here are a few of the events I recall:
- Share dividends of 3 and 4 to one on a couple of occasions
- a $10 dividend per share on one occasion
- Several spin offs that went very well
- Regular quarterly dividends

Of course they have had a few bad years recently, but they are still paying dividends, so if you get in at the right price it can be a nice little cash generator.

Good luck with that,

Jim.

I am coming around to your way of thinking.

Buy a great company at a reasonable price and just let it compound.

I currently own a little CNA Surety, I think it might actually squeak your choice.

1. Price to book of 0.75 - one day we'll get a hard market, and insurance companies selling this cheaply will rocket.
2. Forward P/E of 6 - ridiculously cheap for a company that has been consistently profitable during the recession.
3. Book value/Free cash flow growth of over 15% for the last few years.
4. Combined ratio of just over 80%.

CNA Surety is a wonderful, wonderful business that I would love to own for 20 years. If it performs as well as it has in recent years, I shall retire a millionaire.