Is Concentration a better strategy than Buy and Hold?

[ICUMD]

Bank quality depends on their ability to manage risk through diversification and liquidity.

 

Large banks and systemically important banks technically are backed by central banks and governments, so they are socialized in this way. Hence bailouts and deposit insurances.  Further, they can have varied, highly profitable businesses spanning insurances, lending, credit cards and wealth management. 

 

I continue to hold a weighted portfolio in CDN banks, which form an oligopoly.  In my estimation, the risk of a CDN bank failure is exceedingly low due to their diversified revenue base and recourse loan books. 

 

It is arguably a better business than insurance ala Fairfax/Berkshire alone, when done correctly.  Long term CDN bank returns incl of dividends range in 8 - 14%.  

[Castanza]

 idk, the returns on banks aren't that great  looking back compared to general market (if risk is important) are worse. And with the current situation I'd expect more regulation which will most likely negatively impact returns. 

 

The chart below is 10k invested in 2008 with 1k cashflow a month and dividends reinvested. Not inflation adjusted.

 

Edited March 31, 2023 by Castanza

[Spekulatius]

4 hours ago, ICUMD said:

Bank quality depends on their ability to manage risk through diversification and liquidity.

 

Large banks and systemically important banks technically are backed by central banks and governments, so they are socialized in this way. Hence bailouts and deposit insurances.  Further, they can have varied, highly profitable businesses spanning insurances, lending, credit cards and wealth management. 

 

I continue to hold a weighted portfolio in CDN banks, which form an oligopoly.  In my estimation, the risk of a CDN bank failure is exceedingly low due to their diversified revenue base and recourse loan books. 

 

It is arguably a better business than insurance ala Fairfax/Berkshire alone, when done correctly.  Long term CDN bank returns incl of dividends range in 8 - 14%.  

Backed by government just applies to the deposits though. CS was backed by the Swiss government and so was Citibank in 2008, but the equity was wiped out. If anything, backed by government means that equity get's wiped out faster, because the government/ regulator will act before things are run totally into the ground and it gets expensive for tax payers.

FNM and FRE are also good examples what "backed by the government" means.

 

Thats something to keep in mind if you are bullish on TBTF banks for example. TBTF doesn't man to big to get zero'd as a shareholder.

[ICUMD]

38 minutes ago, Spekulatius said:

Backed by government just applies to the deposits though. CS was backed by the Swiss government and so was Citibank in 2008, but the equity was wiped out. If anything, backed by government means that equity get's wiped out faster, because the government/ regulator will act before things are run totally into the ground and it gets expensive for tax payers.

FNM and FRE are also good examples what "backed by the government" means.

 

Thats something to keep in mind if you are bullish on TBTF banks for example. TBTF doesn't man to big to get zero'd as a shareholder.

Not disagreeing with you.  Any shareholder of any company can be wiped out.

 

Having said that, I'd argue a JPM or BAC failure wiping out shareholders and uninsured deposits, would cause severe financial unrest and undermine central banks and government.  Pensions, trusts and corporations would fail also.  There is therefore a vested interest to avoid/bailout/backstop such situations.

 

I think this is exceedingly unlikely in USA and Canada.

 

But for those that are worried about this possibility, crypto, gold and hard assets may be attractive alternatives.

[bizaro86]

2 hours ago, ICUMD said:

wiping out shareholders and uninsured deposits

 

These groups are not necessarily wiped out together. In fact I think governments backing the latter makes them more likely to throw the former under the bus earlier.

[Spooky]

On 3/30/2023 at 3:32 PM, sleepydragon said:

But I think Buffett got it this time, and he sold all those bank stocks.

 

Buffett definitely saw this coming. Does anyone have any guesses why he kept BAC?

[Spekulatius]

15 hours ago, bizaro86 said:

 

These groups are not necessarily wiped out together. In fact I think governments backing the latter makes them more likely to throw the former under the bus earlier.

I see this the same way, Deposits are very safe and the regulators seem to dance around the issue of quasi guarantee for all deposits, insured and uninsured.

 

However, that does not extend to equity or even debt of the TBTF banks. I think if things go downhill, their equity would indeed get wiped out in a recapitalization and perhaps even the debt would get haircuts..

Edited April 1, 2023 by Spekulatius

[Spekulatius]

20 minutes ago, Spooky said:

 

Buffett definitely saw this coming. Does anyone have any guesses why he kept BAC?

He can’t get out of BAC, the position is too big.

[Eng12345]

Buffett is still in C as well. I haven’t seen any attempt by him to reduce exposure? (Not to say you’re safe for that alone)

Edited April 1, 2023 by Eng12345

[John Hjorth]

3 hours ago, Spooky said:

 

Buffett definitely saw this coming. Does anyone have any guesses why he kept BAC?

 

@Spooky,

 

I think it may have to do with a large deferred tax surfacing while disposing the BAC position, and taking that fact into consideration while assessing the risk involved continuing holding and thereby continuing deferring that tax versus whatever available investment alternative considered while reinvesting the BAC sales proceeds after that tax.

[sleepydragon]

4 hours ago, Spooky said:

 

Buffett definitely saw this coming. Does anyone have any guesses why he kept BAC?

Mega banks will never have to sell long term securities to overset any deposit runs, so those unrealized loss is just 0 loss for mega banks.  They will never have deposits runs and in fact their problems are having too much deposits.

 

[LearningMachine]

On 4/1/2023 at 5:18 AM, Spooky said:

 

Buffett definitely saw this coming. Does anyone have any guesses why he kept BAC?

 

Because if you can get out of other banks, and you talk to the CEO of your own bank regularly (Moynihan and Buffett have shared earlier they call each other), you can then help your own bank (BAC) plan for this at the expense of other banks potentially being counterparty to these hedges:

• Hedges on held-to-maturity:  "hedging of items that are not recognized at fair value on the Consolidated Balance Sheet". See footnote 2 to table 11 on page 52:  https://www.sec.gov/ix?doc=/Archives/edgar/data/0000070858/000007085823000092/bac-20221231.htm . Thanks to someone on the group for sharing privately. 
• Hedges on Available for Sale: "we don't have any capital impact from rising rates."  See https://app.tikr.com/stock/transcript?cid=19049&tid=2592914&e=1784038192&ts=2718283&ref=u8yosp .  So far resulting in about ~$800M quarterly floating interest income. 

 

If you have the patience for securites/loans to mature and get lent out at much higher rates, interest income will be much much higher than what it is today. 

 

Edited April 2, 2023 by LearningMachine

[CorpRaider]

I just think with the changes in the rules about bank ownership, he decided he liked BAC and Moynihan better than the others but didn't want to overdue the bank exposure.  

 

FDIC and Prof. Schiller wanted about this reach for yield and duration match back in 2017 (reading his book Narrative Economics right now and he just talked about it.  I doubt Buffett makes big changes based on such things these days.  You might be right but if you're 7 years early it probably does not matter.

 

Then again using the example of the Airlines, he might blow out of them if it looks like they're going to need government assistance.  No one would be surprised if Citi blows up again. 

Edited April 1, 2023 by CorpRaider