As I mentioned in a previous article on JPMorgan Chase (NYSE:JPM), even though the bank made a few missteps in 2012, the year was good overall for shareholders. The stock price is up 32% year to date, while its index, the Dow Jones Industrial Average (DJINDICES:^DJI), is up a mere 8%.
But before I get into what I believe will drive the bank higher in 2013, let's consider what another organization has to say about JPMorgan in the coming year.
Every year, Barron's publishes a list of its top stocks for the coming year. In 2012, the top 10 stocks Barron's analysts picked gave investors an absolute return of 17%, which beat the market by four points. The list for 2013 was recently published, and JPMorgan Chase was one of the top picks. My Fool colleague Michael Lewis noted that Barron's called JPMorgan a "best in class bank, trading at a below-average price." Michael wrote, "While it's certainly one of the cheapest big banks on the market today, it is a difficult one to evaluate for retail investors." I have to agree with Michael that it is a difficult business to fully understand. In fact, it's a difficult company for even the most experienced investors to value. I'll go even further out on a limb and say that due to certain events that happened this year (e.g., the London Whale mishap), the company's inner workings are difficult to evaluate even for the individuals the company pays to do just that.
When you look back at the London Whale experience, the traders involved -- and even the top management -- miscalculated the amount of risk involved in the trade. But as an investor, you take on certain risks with any business model. So long as you understand and accept that there are certain unknowns involved in the banking industry as a whole, investing in these kinds of companies is to invest in their top management more than anything else.
The people running the show
Many investors buy shares of companies they fully don't understand, either because they believe in the CEO's abilities or because they trust other investors' opinions on a stock. A perfect example of such a company is Berkshire Hathaway (NYSE:BRK.B). Berkshire is an extremely difficult company to evaluate due to the large number of diverse businesses the company has purchased over the years. But because its renowned CEO, Warren Buffet, has such a strong, proven track record, investors have flocked to the company in droves over the years. Some analyst's even put the company on their lists of top stocks for new investors, even though for a newcomer, it would be extremely difficult to fully understand the inner workings of the company.
Another great example of trusting other investors' opinions would be (self-promotion coming) The Motley Fool's own Stock Advisor service or any of the other subscription stock-picking services we offer here at the Fool. The Stock Advisor team has an unbelievable record when it comes to beating the market with winning stock picks. Therefore, other investors act on those recommendations, even if they have never heard of the companies before reading The Motley Fool's investment thesis.
Now, back to JPMorgan. While the heart and soul of the company is banking, JPMorgan deals in difficult derivative trades and other complex investments, as most of the nation's large financial institutions do these days. So we must look at its leadership and decide whether or not we trust that its CEO, Jamie Dimon, can perform the job of limiting investors' risk without dramatically hampering profit.
Before the London Whale incident, Jamie Dimon was regarded as the industry's best risk-manager, and even since the nealry $6 billion trading loss, most still believe that to be true today. He managed to guide the bank into and out of the financial crisis with the least amount of damage. Since his tenure began, he has attempted to instill the idea that "high risks are not always worth their return" into the company's top management and key traders. Recently it was reported that under his direction, the company has taken further steps in limiting risk from London Whale-type traders by using counter-terrorism-style technology.
It is believed that JPMorgan now uses a data-mining program to crunch large amounts of data to spot hard-to-detect patterns in the market or in individual behaviors that could increase the company's level of risk. The program would review not only what is happening on the open market, but what positions JPMorgan's traders are in and how they may be negatively affected. Going to such lengths to control risk may seem like overkill to some, but I believe it is what sets JPMorgan apart from the other big banks.
As I stated above, JPMorgan's share price was up 32% in 2012, and although it was badly beaten by Bank of America's (NYSE:BAC) 103% return during the year, JPMorgan also didn't fall as much during the financial crisis, because it had a lower risk profile managed by the company's leadership. I and many others believe that Jamie Dimon remains the best risk-manager in the business, and that gives JPMorgan the advantage over its competition heading into 2013 and beyond.