| BANKING ON A PROFIT
June 2008
What would you do with £10 million? Splash out on a big house or a new car? At the moment, I’d be buying shares in UK banks.
I know you must think I’m mad. Banking shares are not a good bet during a credit squeeze, right? But I’m not a gambler – I’m a long-term investor.
Banks traditionally offer shareholders a dividend. This means if you buy when prices are low, you receive a much greater return on your investment. Let’s say shares in the Bank of Alex were selling for £100 each last year and investors received a 5% dividend, i.e. £5 per share. In recent months the price may have dropped to £50 a share, but the dividend remains the same, increasing the yield to 10%.
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Unless a bank goes under (and that’s unlikely to happen) you get a fantastic return while share prices are low and you will make a profit when the credit crisis is over. So, why doesn’t everyone buy shares in banks? Well firstly, people who understand the benefits are in the market anyway, so they have no spare cash at the moment. Plus, traders have a very short-term view. They want to sell shares they bought 10 minutes ago for a profit, which is what I call gambling, whereas what I advocate is making investments with long-term potential.
At some stage, the city will decide the worst is over for the banks and their share prices will start to rise. That’s why now is the time to buy. Unfortunately, investors are reluctant because they worry about shares dropping further, so they wait until prices start to rise again, by which time they’ve missed the boat. How many entrepreneurs make money by buying high and selling low?
Even if share prices do fall again before they start to rise, you will make a significant long-term gain on any investment made at the moment. You’ve just got to have the patience and the funds to leave your money tied up for as long as it takes, possibly the next few years. With that in mind, I’m advising clients who already have a share portfolio to adopt a strategy of ‘active inertia’ – actively taking the decision to do nothing. As always, seek professional advice.
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