The Billion Dollar Mistake

[rjstc]

  Book written by Stephen L. Weiss. One of the chapters was about Richard Pzena a fairly good investor. A few items taken from the chapter.

   

    1) Pzena's superb track record as a deep-value investor rested on a tried and true formula. He would choose stocks based on the underlying company's normalized earnings, confident that a temporary disruption in the business was a short-term phenomenon.

        As it turns out, however for pzena vis-a-vis financial stocks- the tried and true formula is not always, and not necessarily the right one. Case in point: Pzena found himself with 40% of his portfolio invested in financial institutions at a time when financial institutions were being fundamentally restructured.

          Anotherward's there was no going back to the old normal, and nobody had any idea what the new normal was going to look like.

          Ralph Waldo Emerson  wrote "All history becomes subjective". "In other words, there is properly no history, only biography. What every mind does not see, what it does not live, it will not know".

    2) The second thing "Patience" the other tried and true strength of the value investor also didn't work. Financial stocks ran out of runway and sentiment continued to worsen. This time was different, but no one could see that.

    3) Perhaps the lesson is that history can be a guide to patterns of fact but not to psychology. The emotion of past events is lost within stock charts and data. The effect of sentiment-the power of market psychology- can be weighed only as part of an investment calculation with real-time experience-- on-the-spot, live assessment as events are unfolding.

    4)"The banks weren't out of money; they were out of confidence."

 

    So my question is. We know that the the US Fed and European banks can print all the money they want. But what happens amid defaults and the change in confidence factors resulting from that? What happens when  governments step in to fundamentally alter the capital  markets? What might happen with the banks? It's not like we're talking about a regular business.

   

[twacowfca]

  Book written by Stephen L. Weiss. One of the chapters was about Richard Pzena a fairly good investor. A few items taken from the chapter.

   

   1) Pzena's superb track record as a deep-value investor rested on a tried and true formula. He would choose stocks based on the underlying company's normalized earnings, confident that a temporary disruption in the business was a short-term phenomenon.

        As it turns out, however for pzena vis-a-vis financial stocks- the tried and true formula is not always, and not necessarily the right one. Case in point: Pzena found himself with 40% of his portfolio invested in financial institutions at a time when financial institutions were being fundamentally restructured.

         Anotherward's there was no going back to the old normal, and nobody had any idea what the new normal was going to look like.

         Ralph Waldo Emerson  wrote "All history becomes subjective". "In other words, there is properly no history, only biography. What every mind does not see, what it does not live, it will not know".

   2) The second thing "Patience" the other tried and true strength of the value investor also didn't work. Financial stocks ran out of runway and sentiment continued to worsen. This time was different, but no one could see that.

   3) Perhaps the lesson is that history can be a guide to patterns of fact but not to psychology. The emotion of past events is lost within stock charts and data. The effect of sentiment-the power of market psychology- can be weighed only as part of an investment calculation with real-time experience-- on-the-spot, live assessment as events are unfolding.

    4)"The banks weren't out of money; they were out of confidence."

 

    So my question is. We know that the the US Fed and European banks can print all the money they want. But what happens amid defaults and the change in confidence factors resulting from that? What happens when  governments step in to fundamentally alter the capital  markets? What might happen with the banks? It's not like we're talking about a regular business.

   

 

 

I think almost all US banks have been wards of the state since Roosevelt's bank holiday.  We merely pretend they are not after enough time has elapsed from the most recent rescue.  

 

It doesn't have to be that way.  Know your customers.  Keep in personal contact with them.  Don't lend money to people who don't pay bills on time or to those who don't calculate the balance in their checkbook.   Make sure loans are well collateralized.  Roll over loans to treasuries when the credit cycle expands to imprudent lending practices.  

 

Old school banking basics from a relative who owned and ran a small bank until he semiretired in the late 1980's after he turned 100.  His bank's balance sheet was so strong that he increased its book value 50% from 1929 to 1932 after converting most of his bank's assets to treasuries before the stock market crashed in 1929.  :)

[rjstc]

   

     So my question is. We know that the the US Fed and European banks can print all the money they want. But what happens amid defaults and the change in confidence factors resulting from that? What happens when  governments step in to fundamentally alter the capital  markets? What might happen with the banks? It's not like we're talking about a regular business.

     

 

This would have been an excellent question in 2006. They done already been rescued. It will be years before you have to worry about a bank stepping in do do again. But it May be years before you make any money in em either.

    Darn. As usual I was a  day late and dollar short with my question. Question is maybe it won't have anything to do with them stepping in do do again. 4)"The banks weren't out of money; they were out of confidence." But this.

    Your quote " But it May be years before you make any money in em either." Darn again. I'm inum C & BAC.

[rjstc]

It doesn't have to be that way.  Know your customers.  Keep in personal contact with them.  Don't lend money to people who don't pay bills on time or to those who don't calculate the balance in their checkbook.   Make sure loans are well collateralized.  Roll over loans to treasuries when the credit cycle expands to imprudent lending practices.  

 

Old school banking basics from a relative who owned and ran a small bank until he semiretired in the late 1980's after he turned 100.  His bank's balance sheet was so strong that he increased its book value 50% from 1929 to 1932 after converting most of his bank's assets to treasuries before the stock market crashed in 1929.  

 

    Those were priceless people. Like Buffett, Munger, Watsa, Cummings. But so few in banking business any more. Even fewer in government apparently. It looks like ideology is going to trump rationality. >:(

[Guest Hester]

I think almost all US banks have been wards of the state since Roosevelt's bank holiday.  We merely pretend they are not after enough time has elapsed from the most recent rescue.  

 

It doesn't have to be that way.  Know your customers.  Keep in personal contact with them.  Don't lend money to people who don't pay bills on time or to those who don't calculate the balance in their checkbook.   Make sure loans are well collateralized.  Roll over loans to treasuries when the credit cycle expands to imprudent lending practices.  

Many in the general population assume that BAC, C, WFC, etc... Are representative of the average bank, but they're not at all. Not even close.

 

There are literally thousands of community banks and just a handful of money centered banks. The amount of community banks that have had to be rescued since the Roosevelt days is a small fraction of the total, even during the S&L and recent credit crisis. Due to the FDIC system, their failings haven't cost depositors a dime and haven't cost the taxpayers a dime yet.

 

It's a fantastic system that is unfortunately often lumped with the terrible systematic nightmare that is the money centered/investment banks.