BANKING STOCKS:
In the recent carnage, banking stocks have been beaten and badly bruised. Every day you watch television and you here more gloom and doom for this sector.
On the Bullish Percent Chart the Bankex shows a reading of “0” ( zero) indicating all stocks in this sector are on a SELL SIGNAL, and more pain is likely to continue in this sector. Suddenly this sector has become a leper, no one wants to touch or speak about.
There was a time when all were chasing YES BANK even at 400 levels and today no one wants to look at it. This is not a recommendation to BUY YES BANK. It is here and in such times value investors start making purchases for the long term and end up getting Multi Baggers.
This is what Warren Buffet did when a similar situation occurred in USA.
Warren Buffett and Wells Fargo
During 1989, Warren Buffett started accumulating a large number of shares in Wells Fargo & Company, abig Californian bank. Because of a huge bad debt crisis faced by the American banking industry at thattime, bank shares were down in the dumps. Moreover, Californian banks such as Wells Fargo werethought to be even more risky due to the specific risk of a major earthquake in the state. For this reason,Wells Fargo stock was even more in the dumps that those of other banks outside California and wasselling for less than five times after-tax earnings. Buffett did not agree with this valuation placed by themarket on the bank. According to him, even after considering the risks specific to Californian banks, the****price of less than five times earnings for one of America’s best managed banks was ridiculously low.
Then, in early 1990, due to another banking crisis - this time related to real-estate loans, shares of banksexposed to real-estate backed loans were hammered down even further. Because Wells Fargo had a largeexposure to Californian real estate, its shares fell in early 1990 to prices which were 50 percent belowthose paid by Buffett in 1989. Undeterred, Buffett continued buying more shares. His total investment inthe bank which cost him less than 500 million dollars is worth more than 2 billion dollars today. His****explanation to his shareholders made soon after the investment is worth noting. Here’s what he told them:
"Even though we had bought some shares at the prices prevailing before the fall, we welcomed the****decline because it allowed us to pick up many more shares at the new, panic prices.
Investors who expect to be ongoing buyers of investments throughout their lifetimes should adopt asimilar attitude toward market fluctuations; instead many illogically become euphoric when stock pricesrise and unhappy when they fall. They show no such confusion in their reaction to food prices: Knowingthey are forever going to be buyers of food, they welcome falling prices and deplore price increases. It’sthe seller of food who dislikes declining prices . . .
Identical reasoning guides our thinking about Berkshire’s investments. We will be buying businesses - orsmall parts of businesses, called stocks - year in, year out . . . Given these intentions, declining prices forbusinesses benefit us, and rising prices hurt us."
In my opinion, this is the best time to do your analysis and keep your shopping list ready. Buy great businesses at Bargain Prices.
Tony