“The big money is not in the buying and selling…but in the waiting.” -Charlie Munger
Some of the large banks have reported earnings for the 4th quarter of 2014 and the results were underwhelming. Much of this had already been forecasted as the decline in interest rates and incredible volatility pressured fixed income trading and net interest margins. Also, banks such as Citigroup settled much of their outstanding litigation matters in the 4th quarter, which had a large impact on earnings. Along with the general market sell-off that has occurred this January, the financials have declined by quite a bit, creating what I believe is without a doubt the best opportunity since 2011. Citigroup for instance now trades at about a 16% discount to tangible book value, which makes absolutely no sense when you see the progress the company has made over the last several years and the increasing likelihood of greatly improved earnings, dividends and stock buybacks moving forward. AIG is trading around $50 and Bank of America is trading around $15. These companies have greatly bolstered their balance sheets and are now entering into a period where they are going to be able to increase distributions to shareholders’. Both stocks could easily climb by 50% from current prices. Some clients are taking advantage of this opportunity to add to their accounts and I’ll be doing the same.
For those of you that don’t remember, 2011 was a year in which the European Crisis stole the show forcing the S&P 500 down about 19.5% at one point. The financials sold off considerably with tremendously negative headlines. At that time, the companies weren’t nearly as strong as they are now and they hadn’t put in the efforts to cut costs or resolve the litigation that they now have. This recent decline in prices creates an extraordinary buying opportunity and I believe we’ll see a strong recovery over time. Of course things can get worse, before they get better, but to me this situation is quite obvious and the stage is set for strong returns. Coming out of 2011, T&T Capital Management posted extremely strong returns in 2012 and 2013. Obviously, past performance is not indicative of future results but this is by far the best opportunity I’ve seen since that time. In 2012 we did 30% and 2013, we did 38%, trouncing the S&P. Seeing severe stock fluctuations can be frustrating and taxing emotionally but it is 100% par for the course. It is impossible to make real money investing without being willing to accept volatility, otherwise your option it to invest in treasury bills at well under .5%.
I’d want my money manager talking to me openly about opportunities and risks, which is why I wanted to make sure I communicated this to clients. These prices for financials make no sense to me whatsoever, so when the panic subsides, I’d expect to see meaningful appreciation. Thank you very much for your trust and business as we are extremely appreciative and I’m excited about what the future can bring due to this volatility. As always, please don’t hesitate to contact me (805-886-8140) if you have any questions whatsoever, as I look forward to speaking with you!