November 19, 2007

Value Investing vs. Price Decline

Are financials now considered a barging and worthy of buying? Are they a value idea? Many bloggers are viewing the 20% decline year to date as a signal to buy banks as the sector price became significantly lower from its highs. It seems that every day the sector is getting "cheaper" and "cheaper".

Value investing is not about a stock becoming cheaper in price only. There is a little bit more to it. You have to have an understanding of the economics of banks and their operations. One has to arrive to an assessment of asset value and earning stability and predictability in the future. A combination of assets and earnings represent a banks value if it is less than the price offered by the market then it is a barging. But the mere decline of stock price by 20%, 30% or 50% does not represent value to me.

Every day investors get to know these companies better and better. News about problems and worthless assets keep coming up and write downs have mushroomed to $44 billion, see my earlier post about write down. I am expecting more deterioration in earnings, see my earlier post. Also banks became so complex that expert analysis can't figure their operations, let alone the average investor. So far, to me at least, a predictable earnings stream is not established, there is so much confusion about their assets and their valuation. Banks themselves can't value what they have! How can I?

I am not saying they are not a bargain, but it has to be for the right reasons. I think there is some banks that represent a good hold for the long term as their earnings did are predictable somewhat and are relatively immune from the credit problems.

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