So this is the final part of the Tournament of Banks. The first two parts are on SeekingAlpha (part 1 and part 2). I am holding the finale here because the analysis is done. I do not want to rehash all of that again. I do not think we’ll have a winner here, because each company is a suitable investment for a different kind of investor.
The finals are between Bank of America (BAC) and Wells Fargo (WFC).
Bank of America – For the Options Traders and the Risk Tolerant
Bank of America has some nice options plays developing. Obviously when options are involved you are looking at a different kind of investor. You can look at my trade idea in part one above. The first thing you need to do is decide your risk tolerance, and what you are looking for. Bank of America might be a fire and forget, but I do not see it as safe as Wells Fargo.
The point is that if you’re looking for an undervalued play and want something quicker and bigger then go for Bank of America. When I say bigger I mean relative to the time frame. I think Bank of America has the potential to make some rapid gains quick. That is why I like the option play, because you could get a lot for a smaller investment, though you risk a 100% loss on what you do put in. It is so deeply undervalued that a good macroeconomic environment will make this run like a cheetah in my opinion. Not sure when, which is why I would go for the January 2013 or later options. When I say fast, I mean in a short period of time when it does happen, not soon.
Wells Fargo – For Buy and Hold Conservative Investors
Wells Fargo is for those people that want to hold their investment for a long time. I like the way Wells Fargo has handled itself in recent years. No big scandals and not overly exposed to toxic assets. Management seems like it knows what it is doing. Bank of America is the riskier investment, even if it is undervalued. I mean go for both, but with Wells Fargo you can take a bigger investment and look at it maybe once a week or once a month. I would be on top of Bank of America. You’re better off selling once the big move there happens, because it will likely pull back before continuing.
Wells Fargo is part of the long game. You take your time on this one. I would not even rush into taking a position. I might take half and then use the other half on writing puts. It is a great way to chip away at your average. I like to think of writing options as a return of capital not as extra cash that I get. It is only after I get to a zero adjusted cost basis that I think of it like money in the pocket. Too bad the IRS does not agree with me.
Conclusions and Life Lessons
Remember this one is all about where you stand risk wise. Also, how often you pay attention to your portfolio, and what you’re overall plan is. I like Bank of America because it offers me a shorter time frame and less at risk. I also like Wells Fargo, but I am far younger than many people and have far less to place into Wells Fargo. If I had a large portfolio $10k might seem worth it, but $1k does not seem worth it. $1k in Bank of America might take me further.
However, if you have a large portfolio you can risk diversify. You can invest at the different levels of risk even in the part of your portfolio devoted to securities. It does not need to be riskiest stocks in risk part, and bonds in the rest. You can always have different gradients if your portfolio is big enough. Imagine your portfolio as a triangle. The top bit is the peak where you look for ones that blow the lid off the universe. The base is made up of those staunch investments that can take a thrashing. Bank of America is a bit higher up on the narrower bits. Wells Fargo is a bit lower, though not at the base.
Be aware of the risks to banks in general. Banks are still in rough waters. As the lull in job creation might continue to weigh on people’s ability to pay off their obligations. Macroeconomic risk is not unique to banks, but it does hit them at the very core of their business.
This was a quick one, but I will probably look at the banks specifically one day.
Fundamental Analysis