Investing in the Banking Industry

Sep 28th, 2007 | By Christopher Hancock | Category: Investing Strategies

Our hero reluctantly crosses the marble threshold. Silence hypnotically reverberates between the lobby walls. No one dares make a peep. The room engenders a hush any Sunday church service would envy.

He slows his gait, with little improvement. His stillness stems from fear, not reverence. He stands between those velvet ropes with the apprehension that St. Peter himself sits at the end of the line.

He’s not alone. We all size up the people around us. He’s no different. He thinks: “Does he know I’m down to $50?” Or “ I bet she doesn’t have more than I… Just look at those shoes.”

He belittles a few others and begins to feel better. He then proceeds to march forward. He reaches his destination: the teller.

Oh, boy… She’s irritated. He can’t blame her. It’s Friday. Everyone feeds the rush. The lunch hour draws to an end. And he arrived late.

She quickly types his 13-digit account number… Clicks “enter.” The flat screen flashes.

He shakes his head. That’s it. A simple life itemized on a simple screen. He’s completely exposed, embarrassed, helpless and weak. He’s as naked as Adam.

“I bet she’s laughing behind that caustic little glance,” he presumes. “OK, OK… So I spent $45 on that 8 Minute Abs tape. I know, I know. I still look like I swallowed a tire. Just pass me my receipt so I can move on.”

She sighs…slides the tiny white paper under the glass and despondently yells, “Next!”

“I’ll see you in two weeks,” he mutters. She nods. So it goes.

I’m quite certain you’ve been to this place, dear reader. We all have.

You see, most people fear banks…and for good reason.

Banks are power-hungry, money-hoarding machines. They own your house…and your car. They may even own your degree. Banks are filled with pale, gray-haired men in pinstriped suits…the masters who sit in leather chairs behind large oak doors pulling the proverbial strings.

But I would argue there’s no better financial mainstay than owning a great, growing bank.

Most investors shy away from this sector…and for good reason. The financial statements are hard to read. The products are boring.

Headline: HSBC launches a revolutionary global climate change index. The benchmark index will track 300 global companies from industries such as alternative energy, recycling, water management and so on. That’s great…a great big yawn.

Headline: Apple launches its latest GlactoPod. Apple calls the boy wonder Optimus Prime. People cheer. They line the streets in fervid anticipation. Confetti falls from the sky. Hooray for Apple! Hip, hip, hooray! God bless Steve Jobs. Oh, yeah…backdating…who cares? Give me Optimus.

But as famed value investor Christopher Browne points out: “Banks are the one growth stock I’d love to own… The average person views banks as stodgy, old economy relics… But what would we do without ATMs, debit cards or credit cards?”

And what banks have a chance to grow?

The big banks, of course. The days of the small-town bank have come and gone. Banking success will rest on international institutions. It rests on the ability to deliver global products at a local price.

So it should come as no surprise that the world’s elite sovereign wealth funds (SWFs) are taking aim at the financial sector. They’re buying banks, securities houses and asset managers. And they’re taking more than a “symbolic” stake. SWFs have invested an estimated $35 billion since 2006.

The Financial Times reports these investments cover companies such as Barclays, Blackstone, Carlyle, Deutsche Bank, London Stock Exchange, NASDAQ and HSBC:

SWFs are thinking long term. They built fortunes on natural resources…resources with limited life spans. It’s time to invest for the next generation. Investors looking for similar stability should look in similar places. They should look at banks.

Banks offer a great place to dump some cash. International institutions, in particular, are the way to go.

Here’s why:

Income: They offer solid dividend income.
Diversification: International banks derive revenues from multiple countries worldwide. This offers great currency diversification.
Longevity: Banking isn’t going anywhere. Politicians come and go. Banking houses usually stay much longer than the empire they helped build.

Banking is the one industry that weathers time, financial meltdowns, empire collapse, wars, etc. It’s the one business that all other businesses depend on.

It’s no secret. He who owns the bank owns the world.

Until next time,
Christopher Hancock
September 28, 2007

P.S.: Obviously, many banks have been hit hard recently (you might have seen the run on Northern Rock in our sister Agora publication, The 5 Min Forecast). That inevitably happens whenever people forget the lessons their parents and grandparents had to learn for themselves.

But, I do think there is one bank that is not only the safest, but the best investment one could possibly make this year. I recommended it to my Free Market Investor readers last month.

Christopher Hancock

Christopher Hancock lives and breathes emerging markets. He travels extensively and utilizes his contacts across the globe to recommend the best international investments in the world. After working with Citigroup in Hong Kong on the challenges and opportunities associated with the forthcoming RBM flotation reform, Christopher left many of his friends behind and decided to return to the States to pursue a career in equity research.

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