Last month I described a 3-stock Wall Street portfolio that I believed offered a good – and diversified – approach to investing in Wall Street’s activities. However, I’ve had a change of heart and have cut two of the positions.
The three holdings were Goldman Sachs (GS), JPMorgan Chase (JPM) and KKR (KKR). Now, the one holding is KKR.
The problems with Goldman
Goldman Sachs has been the crown jewel of Wall Street, attracting (and keeping) the best and brightest. Its financial results through the 2008/2009 recession and financial meltdown showed its strength.
However, now we get the report that the firm is no longer keeping its senior people.
An unusually high number of partner retirements have been announced internally at the Wall Street bank in recent weeks…. More than a dozen partners have announced plans to leave recently, a much higher number than in the same period in past years.
For a business dependent on its human resources, this unusual drain is not positive news.
In addition, CEO Lloyd Blankfein has “predicted that Goldman's clients would become vocal in warning regulators that proposed new rules could stop the firm from providing services they need….” This vision of a corporate Occupy Washington, D.C. to tout Goldman Sachs is odd, at best.
Goldman will likely do fine in the long run, but it’s looking like the stock’s attractive valuation could be a sign of uncertainty about its future.
JPMorgan Chase’s slow growth policy
I previously described Jamie Dimon’s reined-in growth strategy as being appropriate and wise, given the weak competitive environment. I still believe that Dimon is an excellent leader, and that JPMorgan will likely be a good long-term investment. However, my desire is to search out higher growth potential.
A word about financial regulations
Blankfein's and Dimon’s harping on how bad the new financial regulations are going to be is unsettling. First, it seems that those regulations should help both Goldman’s and JPMorgan’s competitiveness, not weaken it. As leading companies with strong finances, they should be able to use the new requirements to enhance their positions.
Second, and most importantly, the financial industry needs rules to protect the financial system. Proper money flow management is necessary and constructive for maintaining a well-functioning economy; unfettered money activity by financial firms is not. As history has shown numerous times, financial firms, left to their own devices, can be destructive, undermining the economic system and its potential.
KKR remains a desirable holding
As I described before, KKR’s high quality private equity portfolio and its good management skills provide the opportunity for natural growth (from the holdings) with a significant growth potential (from IPOs of selected positions, when the time is right). Those prospects remain unchanged.
The bottom line
In investing, it’s important to remain flexible. If conditions change or confidence flags, selling might be the best route. Holdings should always represent our best thinking at the time. Although I fully expected Goldman Sachs and JPMorgan Chase to be long-term holdings, recent developments have changed my mind. My 3-stock Wall Street portfolio is now 1: KKR.
Disclosure: I am long KKR, and hold positions in other U.S. stocks and U.S. stock funds.
