Bank of America's Moves Today Teach a Valuable Lesson

Stocks move every day -- this is a given. Today, Bank of America (NYSE: BAC  ) dropped pretty rapidly, only to regain its momentum later in trading. The bank's moves today aren't fueled by any groundbreaking news headlines or new business ventures, so investors should really question the motivation behind such dramatic moves. 

So when investors check their stocks daily, they're inflicting emotional and psychological strain on themselves that's totally unnecessary. Here at the Fool, we believe in long-term investing, buy and hold, but will always advocate for increased awareness and education -- watching your stock's price rise and fall on the same day, or in the same week, achieves neither. Let's take a look at Bank of America as a case study.

The most talked about bank in the market
Bank of America has been taking plenty of strides lately to improve its image -- and it's working. With its financial house in order, the bank has been proving its metal as a solid investment opportunity through reduced exposure to risk, increased capital reserves, and improved customer relationships. The bank has also made huge progress on reducing its legal exposure to suits regarding past mortgage activity, with much of the future liability being removed through settlements.

Though some investors and analysts still believe that B of A has not improved enough, based on fourth-quarter financial results, it was the best capitalized of its peers leading up to new regulatory capital requirements.

Bank

Tier I
Capital Balance

Capital Ratio
Under Basel III

Bank of America

$128.6 billion

9.25%  

Citigroup (NYSE: C  )

$105 billion

8.7%  

JPMorgan (NYSE: JPM  )

$144 billion

8.7%  

Wells Fargo (NYSE: WFC  )

$113.9 billion

8.18%  

US Bancorp (NYSE: USB  )

$24.9 billion

8.1%  

Source: Company Q4 2012 earning presentations.

Wall Street favorite Wells Fargo's capital ratio actually declined between the third and fourth quarters of 2012. Yet no one wonders how that bank will continue to fare.

Bank of America's stock is highly traded, with volumes averaging above 160 million trades daily. And since Bank of America is so prominently featured in the news and in analyst predictions, that volume allows for a huge amount of volatility, without needing much justification.

Other companies, like AIG (NYSE: AIG  ) , also have a tendency to fluctuate wildly without needing a big headline to spur on trading. The insurance giant dropped 2%+ today (though has recovered by half already) solely on the news that investors George Soros and Och-Ziff Capital Management reducing their holdings in AIG during the fourth quarter of last year. Now, this news doesn't change any fundamentals of the company, so if you're questioning your investment based on others' moves, refocus on why you invested in the first place and if anything has changed since then.

The hazards of trading
Determining when to sell an investment is never an easy decision. And one of the most prevalent forces that work on your resolve to hold stocks long-term is emotion. When you see negative movement in the market, the emotional reaction telling you to sell is really powerful. So when an investor monitors the daily movements of stocks, emotions are abundant and can make it even more difficult to stay resolute in an investment.

With any investment, there is a margin of risk that you must accept before buying in. But the more frequently you trade, the more downside you take on. The average household investor can bring in a 17% return, but as soon as he starts turning over his portfolio through frequent trading (over 9% turnover per month), the return drops to 10%.

Keep in mind...
Mr. Market may be efficient, but he is not always rational. Of course you should keep an eye on your investments and be aware of changes to a company's operations or strategies. But be careful to not be a helicopter investor; if you hover, it may lead to more angst and anguish for you -- unnecessarily

We can see how Mr. Market feels about Bank of America on any given day based on how the stock moves, but that doesn't mean you have to feel the same way. Don't know enough about the bank to make up your own mind? To learn more about the most talked-about bank out there, check out our in-depth company report on Bank of America. The report details Bank of America's prospects, including three reasons to buy and three reasons to sell. Just click here to get access.


Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 15, 2013, at 4:22 PM, vkmo wrote:

    AIG has recovered since its rescue last year. It will leap to $50, then $100 and then climb up to its "pre-disaster" old 2008 value of over $500. With earnings over 35% of its current price, it's ready to shoot up.

  • Report this Comment On February 16, 2013, at 5:59 AM, kthor wrote:

    @vkmo

    what you been smoking lately?

  • Report this Comment On February 16, 2013, at 12:09 PM, PoliticalAnimal2 wrote:

    AIG is a fantastic company with a book which has been almost fully cleaned up while Mr. Market is pursuing to largely undervalue it as if we were in 2008.

    We can buy a company with a market cap BELOW its book value, it is a rare opportunity.

    I'm long on AIG.

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