Perspective on JPMorgan's Wild Week

JPMorgan Chase (NYSE: JPM  ) almost tripled the S&P 500's returns this week, gaining about 2.7% over the S&P 500's 1%. What's the story?

The happenings
The week was definitely packed with JPMorgan headlines. Proxy advisory firms continued to encourage a split of the CEO and chairman roles for the bank's iconic top man, Jamie Dimon. Adding to the heat, the company faced a swarm of legal headlines this morning as the California State Supreme Court filed a suit claiming that the bank "committed debt collection abuses against tens of thousands of Californians."

Topping the week off with some interesting news, two ranking JPMorgan directors issued a seven-page letter outlining the boards unanimous support for Dimon as both CEO and chairman. A split, they argued, "could be disruptive to the company and is not in shareholders' best interests." If it weren't for Warren Buffett's vote of confidence in Dimon last week, who knows if the board would have had the courage to even write this letter?

Cause and effect
So what caused the nice gain? I have no idea. Maybe it's because I'm not an expert on short-term fluctuations (who is?), or maybe there just happened to be significantly more JPMorgan buyers than sellers this week. I'd argue, however, that it doesn't really matter -- at least not for the investors with a Foolishly long time horizon.

To illustrate, let's turn to the "father of behavioral economics" and Nobel Prize-winner Daniel Kahneman: "Maintaining one's vigilance against biases is a chore -- but the chance to avoid a costly mistake is sometimes worth the effort."

This quote translates beautifully for long-term investors. Think about it: One of the greatest challenges investors face in managing their portfolio is dealing with psychological bias. Here are a few common biases.

  • Anchoring, or the tendency to mentally "latch on" to a particular number or amount. In investing, this is often your purchase price of a stock.
  • Availability heuristic, or the tendency to overestimate the occurrence of an event that you dwell on frequently. For investors, frequently checking the news can unnecessarily sway your estimate of an investment's fair value.
  • Confirmation bias, or the tendency to seek out information that confirms your opinion. Do you read articles that agree with your opinion about a stock more thoroughly than those that don't? You may be suffering from this bias.

Avoiding these biases is tough work -- especially when you are checking stock prices every day. Even worse, maybe you're frequently scanning the headlines on Yahoo! Finance trying to figure out where the stock's headed next.

Why does constant oversight of your portfolio make dealing with psychological biases harder? Because it adds unnecessary noise, giving your brain opportunities to give weight to information that doesn't matter. This could lead to irrational selling when a stock takes a hit, or even cause you to sell too early when a stock is on the rise.

Take it from Nassim Taleb: "As you consume more data, and the ratio of noise to signal increases, the less you know what's going on."

Zooming out
Back to JPMorgan Chase. So what should JPMorgan investors care about? The business. There are two reasons for your ears to perk up:

  1. Something significant happens that could impact the company's core operation and, hence, your thesis.
  2. The stock becomes significantly overvalued.

So let's zoom out -- way out. What's going on with JPMorgan? Well, JPMorgan's stellar CEO still runs the show. He managed to steer the company through the recession on the foundation of common-sense risk management that many of its competitors seemed to lack. So investors are in good hands in this regard.

Yes, the company endured a multibillion-dollar derivative loss in early 2012. But good risk mitigation ensured that JPMorgan was prepared for such a loss. It continues to work through the problem with no surprises.

And of all the more recent noise, here's what matters most.

  • JPMorgan's first-quarter results came in without any surprises.
  • Its dividend yield is nice, at 3.1%.
  • The company still trades at levels far more conservative than before the recession, at 0.9 times book value.

Risk management
It's impossible for financial companies to eliminate risk, but it is possible for them to effectively mitigate it. On this front, JPMorgan continues to excel. Yes, banking is a cyclical business, highly dependent on the U.S. economy. So if low interest rates persist, margins will continue to be pressured. Estimating the degree of a U.S. recovery is something I'd rather not do. But in the meantime, JPMorgan continues to trade with a nice dividend yield while it effectively mitigates risk. This is something I can wrap my small brain around.

So where's JPMorgan's stock headed next week? I have no idea. And I don't really care.

All is well at JPMorgan, no matter what the noise might say.

With big finance firms still trading at deep discounts to their historic norms, investors everywhere are wondering if this is the new normal or if finance stocks are a screaming buy today. The answer depends on the company, so to help figure out whether JPMorgan is a buy today, check out The Motley Fool's premium research report on the company. Click here now for instant access.


Read/Post Comments (0) | Recommend This Article (1)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2424208, ~/Articles/ArticleHandler.aspx, 11/25/2014 5:19:48 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement