I have been mulling getting out of BofA position for awhile. The buyout of Merill Lynch have changed my outlook on the bank. Mainly due to the integration risk and the diverse cultures of investment banking and retail. This merger would have been difficult to complete in normal circumstances but with the stress of bad economy and credit crises this could be impossible to pull off.
Also the financial landscape has changed a lot since my investment in BofA. BofA, as I reasoned when I made my investment, held a competitive advantage over its peers by being the largest retail bank with coast to coats network of branches, which ensured that it held a relative competitive advantage in its economies of scale to its peers. Now with the rapid continuing consolidation in banks, that is no longer the case. Other banks like JP Morgan and Wells Fargo achieved that position by buying Wachovia and Washington Mutual. So that relative competitive advantage disappeared, which can lead to margin compression over the long term.
Buffet also sold out of BofA so I get my confirmation to my thought process.
I am not saying BofA will perform badly, but there are more risks associated with the business. BofA management is still good and have a lot of experience with merger integration and the opportunistic acquisitions they made in the last 6 months can secure their position in the global banking industry. However the return is more speculative than say with AXP or JPM.
My cost basis for BofA is $42 per share I sold it at $18 for a loss of 57%. That hurts. But I will not dwell on it, as I need to find the best risk/reward proposition for my capital and at the moment BofA does not fit that bill. American Express, on the other hand, will offer me a better return, I think, once market settle down. I bought AXP at $20 per share.
AXP has several competitive advantages that makes it a unique investment.
- brand: BusinessWeek ranks it 15th out of 100 most valuable global brands.
- network that akin to toll bridge earning fees on transactions from retailers and interest and fees from users
- retailers have limited bargaining power in this industry. Credit card networks can increase fees with little of resistance from retailers.
- what will be good for BofA will be good for AXP, while the opposite is not true. BofA will have specific risks associated in its operations that can overwhelm its earnings.
- Buffet ownership gives a backstop for any permanent loss of capital in AXP, while with BofA government involvement present a risk for permanent loss of capital, think of AIG.
- With the sale of BofA i generate some tax loss amounts that will be used to offset some of my earlier capital gains in the year, something I think I will not discuss for awhile.
Here is a good case for AXP as undervalued investment by Vitaliy N. Katsenelson.
I think by redeploying capital from BofA into AXP I will be better served. I will sell my investments when I believe that I could redeploy the capital in investments that offer more attractive risk-reward profile. I will always be willing to sell an existing holding at a profit or a loss, if I can find a better use for the funds.