If your time frame is that far forward, just jump right in. If you are worried about a correction, you could ease in over 6-12 months and take advantage of dollar cost averaging.
“buying something like a bank stock when it’s at an extremely low price, when the chances of it going lower are fairly low.” Wow - nice analysis! - this reminds me of the same people that were harping about the Homebuilders back in the summer of 2006 when the sector was trading below Book Value. " Sure there’s a little bit of risk, but it’s something I’m willing to stomach. " A little bit of risk. Merrill Lynch just got a capital injection via a convertible instrument. The deal was announced last week that Temasek will have the option to purchase Merrill’s shares at $48. What is the stock’s price right now? You’re telling me that there is only “a little bit of risk” in bank stocks? IMHO, there are still skeletons in the closet to be found in many of the banks/broker dealer stocks. Why would you invest in a stock where you can’t even trust their balance sheet (eg. SIVs)? Oh wait, the stocks look cheap.
cfa_gremlin: isn’t that the personal risk/return preferences you are talking about? Some people will take on the risk associated with uncertainty thinking the expected return is worth it, others will not. Every firm has skeletons in the closet. The question is, what size are they and is the stock price low enough for me to dive in? I would think, if you pick a bank with strong retail business and reasonably depressed stock price right now, you might be looking at a solid return in a 1-2 year timeframe. For myself, that risk/return ratio has too little risk and too little return, for others, it may be too much of both.
cfa_gremlin Wrote: ------------------------------------------------------- > “buying something like a bank stock when it’s at > an extremely low price, when the chances of it > going lower are fairly low.” > > Wow - nice analysis! - this reminds me of the same > people that were harping about the Homebuilders > back in the summer of 2006 when the sector was > trading below Book Value. > > > " Sure there’s a little bit of risk, but it’s > something I’m willing to stomach. " > > A little bit of risk. Merrill Lynch just got a > capital injection via a convertible instrument. > The deal was announced last week that Temasek will > have the option to purchase Merrill’s shares at > $48. What is the stock’s price right now? You’re > telling me that there is only “a little bit of > risk” in bank stocks? > > IMHO, there are still skeletons in the closet to > be found in many of the banks/broker dealer > stocks. Why would you invest in a stock where you > can’t even trust their balance sheet (eg. SIVs)? > Oh wait, the stocks look cheap. Yeah, because the big 5 in canada are collaborating to collectively tank within the next year. I’ll take a wild stab in the dark and say oh, you’re not from around here.
Somewhatdamaged… I think alot of us have been in the same situation as you’re in when stepping in to the investment game and imho I think that your entrance in to it may be setting you up for some unexpected failures. Outside of all the analytical elements (portfolio management, valuation analysis, economics, etc.) that you need to consider, there is one fundamental element that no amount of studying and analysis will ever reveal and which will likely play a much bigger role in your success or failure: your emotions. I don’t care how long you’ve been in the game, how much money you have at stake or how intelligent you think you are. A large portion of the investment decision is governed by these emotions and by using such ‘valuable’ money (i.e. money you need to achieve a significant personal goal), you are setting yourself up for failure. Please don’t confuse my remarks as a suggestion to stay away. In fact, on the contrary. I think getting in and starting to invest is the only way any one can ever become a successful investor and the first year or so is full of personal learning curves, which simply can’t be taught to you from a book or a course. All I’m suggesting is that you keep your hard earned down payment safe in the bank and open another account with funds not yet earmarked for this. Alternatively, take a small portion of the down payment (a portion you think you can earn back in the year should you lose it in the market) and start with that. I realize that this probably puts off the actual act of investing until a later time, but you’ll be much more successful with the money if there are no emotional strings attached to it. As for your comments about the bank stocks… I’m afraid I have to agree with a few people here… there is much more risk in them than you think (including the CAD bank stocks)… just take a look at the 1 month implied vols on any of the big 5 and you’ll see that the market is pricing in the potential for bigger swings than has been seen in the recent past. Hope these comments help and let us know what you end up doing.
MER is by no means a bank stock.
I would be hesitant to buy into financials now. Just because they have fallen so far doesn’t mean that they can’t fall further. Some folks thought the home builder’s nose dive was nearly over after the fed lower rates late this summer. If you had bought HOV then, you would only be down 50%, even though at that time it was trading at only a little above 50% of book value. Be careful.
Update: Bought 1000 shares of CHD (on the tsx) at 90 cents a share a couple of days ago and last traded at .97 today so far. I’m thinking of putting in another 500 and letting it sit for almost 1.5 years. I’m ok with losing 1-1500 bucks even if it tanks, the rest I’ll be more careful about. Not planning on buying any bank stocks…YET. I’ll try to get a better feel for it over the next 4-6 months, they’ve pretty much been hovering around the same price for the past while (again, talking about cdn banks). Me getting into bank stocks is not something that’s been set in stone, it’s just an idea I was tossing around. I fully expect them to drop a bit more. PS. I guess you guys aren’t active traders or just don’t care to divulge any info? How boring.
Five strong long ideas (I personally own): Covidien Embarq Waste Management Kinder Morgan LP Yahoo
Bank sector sounds like an area for pairs trading to me. We don’t know if the pain is more or less… but we might be able to make sensible guesses about who was more or less crazy with their assets.
SomewhatDamaged Wrote: ------------------------------------------------------- > Update: > > Bought 1000 shares of CHD (on the tsx) at 90 cents > a share a couple of days ago and last traded at > .97 today so far. I’m thinking of putting in > another 500 and letting it sit for almost 1.5 > years. I’m ok with losing 1-1500 bucks even if it > tanks, the rest I’ll be more careful about. Not > planning on buying any bank stocks…YET. I’ll try > to get a better feel for it over the next 4-6 > months, they’ve pretty much been hovering around > the same price for the past while (again, talking > about cdn banks). > > Me getting into bank stocks is not something > that’s been set in stone, it’s just an idea I was > tossing around. I fully expect them to drop a bit > more. > > PS. I guess you guys aren’t active traders or just > don’t care to divulge any info? How boring. A fool and his money…
Charlie Munger likened a pairs trade to a stick with sh!t on both ends when Berkshire bailed out Solly. I still think they can be fun though. For a multi-year time horizon I’d consider stable retail banks with rock solid dividends, mainly for the yields. I think if you can afford to wait, it makes sense to get paid 6% or more to own leading banking franchises at P/Bs around 1. Even though a rough 4Q is priced in for financials, I think the market will get sticker shock at the worse-than-expected write-downs at guys like C and MER. I’m not trying to call the bottom, but I’ll be keeping my eye open for long-term entry points after earnings season.
One of two things will happen with your intro into the investment world. The first scenario is that you will lose money at the end of the year. This may or may not have the effect of forcing you to delay purchasing your condo. It really depends on the degree of loss. The second scenario is that you make money. Being that this is your first investment, you will undoubtedly assume that this was not just a lucky coincidence. You will instead assume that you have the knack/gift for investing, and you will immediately take all of your money and go swinging from the chandeliers with it. At that point you will lose it all and again be forced to delay purchasing your condo. The idea of putting it into a money market makes sense. If you can’t stand the idea of doing that consider this. Set your sites on a condo purchase in 2 years instead of one. Begin saving your money and put half into the money market and the other half you can invest. In two years you will at least have the money that you put into the money market and if things do go well for your investments you will be able to purchase the condo before the 2 years is up.
I was in the same situation than you SomewhatDamaged but it was in 2003. I had around 20% in cash of the price I finally paid my flat. Of course I wanted to have more but didn’t want to take too much risk. I didn’t know the CFA at that time but invested 10% of my savings in a single speculative stock and the remaining part in a riskfree savings account. A year and a half latter I bought my flat but my stock had collapsed of 70% so I didn’t sell it. I finally sold it in 2007 with a +250% performance 
CFAin2009 Wrote: ------------------------------------------------------- > I was in the same situation than you > SomewhatDamaged but it was in 2003. I had around > 20% in cash of the price I finally paid my flat. > Of course I wanted to have more but didn’t want to > take too much risk. I didn’t know the CFA at that > time but invested 10% of my savings in a single > speculative stock and the remaining part in a > riskfree savings account. A year and a half latter > I bought my flat but my stock had collapsed of 70% > so I didn’t sell it. I finally sold it in 2007 > with a +250% performance That’s pretty much what my gameplan is at this point. Have around a 10% downpayment, so around 20k to put down (obviously would like more) and at the most have 10% of that in that stock and the remaining in a savings acct/money market. If the stock goes well, hey all the better, if not, no biggie i’ll just hold onto it (if anything remains) Congrats on the purchase btw.
Wow…I wish I could find a condo for $200K.
negativefcf Wrote: ------------------------------------------------------- > Five strong long ideas (I personally own): > > Covidien > Embarq > Waste Management > Kinder Morgan LP > Yahoo Buy these; thank me later. No need to think about “downside” No need to think at all. =)
jg1996business Wrote: ------------------------------------------------------- > Wow…I wish I could find a condo for $200K. I’m actually going to be looking in the 220-230 range. What city are you in?
SomewhatDamaged Wrote: ------------------------------------------------------- > jg1996business Wrote: > -------------------------------------------------- > ----- > > Wow…I wish I could find a condo for $200K. > > > I’m actually going to be looking in the 220-230 > range. > > What city are you in? I’m in Jersey City (across the river from NYC). Typical one bedroom condo will run about $350K.
SomewhatDamaged, 2008 is far different from 2003 but I know you’re aware of it.