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Home Decor   by Barry Kennistion

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Banking stocks have been among the worst performers within the market over the last four months. This fact is no secret to investors and is a result of financial turmoil in Europe and our lack of knowledge regarding the exposure of these banks to sovereign debt. Another reason that I believe these stocks have fallen is because the worst financial crisis in American history since the Great Depression was less than three years ago and investors are refusing to take the risk of losing there investments once again. However, with Europe seemingly stable, with a plan that could at least control the many nation’s debt, I believe it’s likely that banking stocks will now trade on fundamental progress during the next few weeks. I have watched the performance of the banking stocks during the last four months and I believe that now is the time to buy.

“There’s an old saying in Tennessee — I know it’s in Texas, probably in Tennessee — that says, fool me once, shame on — shame on you. Fool me — you can’t get fooled again.”

The above was famously spoken by former president George W. Bush during one of his many speeches. And although the quote was incorrect and was suppose to finish with “Fool me twice shame on me” I believe we all get the picture. This was just one of the many mishaps by the former President whose public speaking was definitely not his strength. But I believe the old saying is true and may describe the price performance of banking stocks over the last few months. We were fooled once during the recession and were blinded to the severity of the crisis which resulted in a large number of investors losing nearly everything. But we will not be fooled twice nor will we hold banking stocks if the word “recession” is whispered or will we take a chance on getting burned again.

“I’ve learned that mistakes can often be as good a teacher as success.”

Life is all about making mistakes. Learning from your mistakes, and then correcting the mistake so that it doesn’t happen again, is what I believe Jack Welch was attempting to instill in above which places the importance on “messing up.” During the recession of 2009 the mistake of holding large banking stocks was costly, and was an experience that changed our outlook on banks. If you would have bought $10,000 worth of Citigroup shares on February of 2007, it was only worth $350 two years later.

However, many investors purchased the stock hoping to ride out the recession and capitalize on a cheap price regardless of the fundamentals that were pushing the stock lower. This example has deep personal meaning to myself because Citigoup was the first large position that I ever bought. And although I wasn’t one of the many who lost nearly everything, with an investment in this company, I did lose money because of my fear and my failure to consider what was pushing the stock lower.

In March of 2009 I initiated a large position in Citigroup which was trading under $3 a share (pre-split). It was my belief that the stock would make a good investment since it was coming off its lows and had risen from just over $1 at the time. As the stock reversed from its lows I purchased C at $3.50 and planned to hold the stock, but when investors took profits and the stock fell, I panicked and sold for a 25% loss. The funny thing is if I would have waited one month longer I could have capitalized on a 30% gain from my purchase price.

I like to believe that my investment in Citigroup shaped my current investment strategy. When I first purchased the stock I didn’t really take into consideration the fundamentals. I only viewed the stock as cheap and purchased shares on the concept that I believed it was cheap. I believe there were a large number of investors who invested in Citigroup, and others alike, during 2009 and are now trading the stock very similarly today. I believe that when we start to feel good about banking stocks there is a catalyst that creates panic and we are psychologically reminded of the events in 2008 and 2009 and fear overwhelms our logic.

I have spent a significant amount of time analyzing the charts of the large money center banks and below I have charted a small portion of the data that I believe is relevant to better understanding the mindset of investors regarding banking stocks. The chart shows 7 stocks and each stock’s performance over the last four months including 7 dates that each represent different periods of market value.

The first thing I notice from the above chart is that with the exception of Barclays every stock is trading near the same level as it was on August 10 when the Dow’s valuation was 1500 points lower. What does this tell you about our perception of banking stocks? It tells me that we are not confident and that we anticipate European issues to carry over into the U.S. financial system. Even when the markets had risen, banking stocks have been slow to gain but quick to fall. The truth is that we’ve been so pessimistic, yet there really is no reason to believe that one of these large banks will fall. Or we will wake up one morning and find that one of the larger banks is declaring bankruptcy. And now that some of the issues in Europe have been silenced, I believe that investors will now buy back into banking stocks now that the global picture is becoming clear.

Let me ask you a question: are the fundamentals of the banking stocks even remotely similar to 2008? For the most part the answer is no the financial system is much stronger in 2011 than what it was in 2009. However, our perception, fear, and past experiences are causing us to react and speculate on the potential impact of a European collapse. Several of the stocks charted above are trading near the same range as during the recession yet are worth much more than its current value.

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About the Author

The rub of this approach is that no matter what, an investor must stick with this plan when tested. If an investor doubts his resolve, a more traditional 60/40 Stocks/Bonds allocation is more appropriate. However, for seasoned equity investors like my buddy Chris, Barbell Diversification is a viable option.
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