Another Reason To Avoid Financials

Includes: BAC, BCH, CIB
by: Roger Nusbaum

Nassim Taleb and Mark Spitznagel had an article at CNN offering a different perspective on avoiding bank stocks. The starting point was the reasonably familiar notion that the banks have mostly been bad actors in terms of the risks they've taken, the benefit gleaned by certain bank employees, and the bailing out of the banks when the risks blew up on them.

This has been a part of the equation that has made them fundamentally unattractive for so long. I know some think they are fundamentally attractive but the above argument is not new.

The interesting twist that Taleb and Spitznagel take is that investment advisors are violating their fiduciary obligation by investing in companies that so reward employees at these companies that give little to nothing to society. This is an interesting idea to the extent these companies exist to enrich themselves; I'm not sure it is that cut and dried, but many certainly believe it is.

They seem to imply that the market should favor the banks, on a relative basis, that take appropriate risks, with the implication that this is not already what is happening, which I found to be odd. Over the last five years, Bank of America (NYSE:BAC) is down 85% while Banco de Chile (NYSE:BCH) is up 115% and Bancolombia (NYSE:CIB) is up 131%. That would appear to be the market's way of sorting out the points made in the article. Obviously the market will occasionally misprice this sort of thing but I think a five-year sampling is a form of weighing as opposed to voting.

The argument put forth by Taleb and Spitznagel, whether you agree with them or not, seems a little less solution-oriented although there might be more work done in the running of the Universa Fund. I've had good luck in a couple of areas in this sector but, given the nature of how fouled up so much of the sector is, I think it is crucial that people with narrow-based portfolios spend time on studying what to avoid here because most of it is going to be bad for a long time to come. I think people with broad-based portfolios should consider products that are relatively underweight the financial sector; these funds do exist.