Though we've passed over the cusp of March, I thought it still might not be too late to offer bank investors some sage advice for 2013. The year is still young, and investing adventure awaits. Without further ado, then, here are three bank-investing mistakes to avoid for the rest of the year, and beyond.
1. Not investing in banks, period
This one is here just in case you've never invested in banks, but are interested in trying and perhaps a bit hesitant. And maybe I'm addressing how I felt about investing in banks not so very long ago.
For beginning investors, I think banks can be a bit daunting, especially if you come from the Peter Lynch school of investing: Essentially, invest in what you know and what you can get your head around. Hence, I think it's easier for most people to start off their lifetime investing adventures with classic consumer-goods companies, like Starbucks, Procter & Gamble, and Apple. Companies that you "get" right away. It's what I did.
But with a little homework, you can learn enough about how banks operate -- along with some basic do's and don'ts -- that should leave you feeling quite comfortable with the idea of plunking your money down in the banking sector. And it's worth the effort, because there's money to be made, here.
People who had Bank of America (NYSE: BAC ) stock at the beginning of last year saw share prices double by the end of the year. I bought my first shares of Goldman Sachs (NYSE: GS ) at the end of last November, which have so far returned me better than 25%. Banks as investments are simply too potentially profitable to be ignored.
2. Not investing in too-big-to-fail banks
Once you've decided to invest in banks, you might be put off by the too-big-to-fail banks, so-called because so many weren't allowed to fail on their own -- as they almost surely would have -- at the height of the financial crisis, without government intervention. This elite-for-the-wrong-reason group includes Bank of America, Citigroup (NYSE: C ) , JPMorgan Chase (NYSE: JPM ) , and Wells Fargo.
But again, there's money to be made, here, as spelled out above in the case of B of A. Also, in the past year, Citi has returned 27% to its shareholders, JPMorgan has returned 21%, and Wells Fargo more than 15%.
And stop me if I'm being too cynical, but as long as these banks remain too big to fail -- that is, until they're broken up or otherwise configured to be unable to single-handedly take down the economy if they go under -- you the shareholder have an all-but-explicit guarantee from the federal government that your investment will never go out of business.
3. Not paying enough attention to balance sheet quality
This is what separates the JPMorgans from the Bank of Americas, and the Wells Fargos from the Citigroups: what's on the balance sheet.
It's no secret that B of A and Citigroup got caught up in some of the worst aspects of the behavior that led directly to the financial crisis, particularly subprime lending. It's also no secret that JPMorgan and Wells Fargo kept their noses (relatively) clean in this regard. As a result, JPMorgan was doing so well as other banks were simultaneously crashing that it was able to buy up the quickly failing Bear Stearns (insolvent due to toxic-mortgage issues) at a bargain price.
Likewise, Wells came through the crisis by keeping its lending practices conservative. Alternately, B of A paid out billions in 2012 and will pay out billions more in 2013 for the junk it loaded onto its balance sheet in the run-up to the crisis. And while Citigroup spun off the worst of its toxic assets into a "bad bank," ultimately, Citi is still responsible for dealing with them.
In banking, what happens on the books stays on the books.
Foolish bottom line
Like in any other sector of the economy, there's money to be made by investing in banks. They may require more time and attention than your run-of-the-mill consumer goods company, but the benefits and payoff -- as noted above -- can make it very worth your while.
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