Monday, April 28, 2014

Bank of America's Royal Screw Up -- OR -- Pray for cousin Rich...

Every so often a client asks me about adding an individual stock to his/her portfolio. Typically he has a specific company in mind that he heard about on CNBC, or via a whisper in the ear from his cousin, Rich, who's been bragging about how rich he's getting buying stocks on eTrade. By the way, cousins Rich always discover their innate stock-picking talents during bull markets.

Generally I'll offer to forward him someone else's research on the company with my translation of what it all means. While I'll definitely tell him if, based on what I see, it looks attractive to me, I'm virtually always hoping he decides not to go there. Oh, and early in the conversation I make sure to tell him "if you go there, go with money you can afford to lose a good portion of."

Now, as you may know, I am a huge believer in the long-term holding of the stocks of the companies that will produce the goods and services to a desiring world of consumers for eons to come. That---emphasis on "long-term" and the "s" after stock---is a no-brainer. "Long-term" allows for the living through of the inevitable, yet unforeseeable, periodic declines in stock prices, "s", as in many stock"s", allows for the diversification of business risk (the exposure to the unique business decisions of one particular company).

I'm throwing this out there this morning because of a case in point that emerged over the weekend. Bank of America, frankly, royally screwed up its accounting and is having to renege on a share buyback program and an increase in its dividend. As I type BofA is down a whopping -6.2% in today's trading. 

The thing is, the financial sector, by the metrics I track, is among the most attractive sectors in today's market (oh, and by the way, XLF, a financial sector etf we use---and which BofA is a component of---is only down -0.37% as I type). And of course BofA is no small player. One, cousin Rich for sure, might have concluded that BofA was among the more attractive players and, rather than diversifying away the concentrated (and potentially much larger) gains of a strong company in an attractive sector, decided to concentrate his financial sector exposure there. There's a term for that, it's called "greed". Which, by the way, is fine when we're talking about that little bit of money one is willing to risk losing a good deal of, but not fine when we're talking about the long-term money one plans to retire on.

Pray for cousin Rich...

P.s. BofA is by no means And, therefore, I'm not suggesting, while anything's possible, that the shareholders who decide to hang on will see their position go to zero. I'm just thinking it's wiser, certainly safer, to buy the sector instead...

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