A Regular Fool's Retirement Portfolio: Finance Stocks
Jason is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When I left my former career in January to work full-time as a writer, including the writing I do here as a Blogger for the Motley Fool, I also rolled over my 401K. Today, I'm starting a series of posts that document the companies that I am investing in, and giving each of you a chance to follow along on this journey. Will you learn from my successes, or from my mistakes?
Today's topic: The Foolish finance sector
The banking industry has a well-earned reputation for thievery and vagabondism, causing serious, very real harm in the form of trillions of losses to the global economy, and hundreds of billions in lost wages and asset value to tens of millions of Americans. One can nearly draw a direct line from the Great Recession to the sector, as the mega-banks tossed risk management out the window like a spent beer can on a Saturday night.
Despite that, the world we live in doesn't function without this sector, and I've chosen to invest heavily in it, and its sector-sharing sister, insurance, to help fuel my retirement in 30 years.
Bank of America (NYSE: BAC) is the bank everyone loves to hate. Its position of strength coming into the Great Recession quickly became one of severe weakness following the 2008 acquisitions of Merrill Lynch and Countrywide Mortgage, especially the latter as the housing crisis ground its mortgage business to a halt.
Half a decade- and tens of billions of dollars in losses and lawsuit settlements -later, it's still not all roses, but much of the worst is past. Today B of A is a leaner organization that's slowly returning its focus to its customers, and becoming a more efficient operator at the same time. Factor in a relatively positive result in the 2013 "CCAR" stress test, and regulators have agreed to allow the company to begin using capital to reduce share count, a real positive for investors. Indications are that within another couple of years, it will significantly increase a dividend that barely exists today, and that's one of the main reasons I see strong long-term opportunity, and why I've chosen to invest around 2% of my retirement account into BofA.
Many people call Wells Fargo (NYSE: WFC) "Warren Buffett's favorite bank." And while that may or may not be true, Berkshire Hathaway (NYSE: BRK-B) owns nearly $17 billion in Wells Fargo shares. As a comparison to B of A, Wells is the better operator, and has been much more successful as a mortgage lender over the past few years as Countrywide continues to weigh heavily. And already paying a dividend of nearly 3% based on recent share prices, this is the best of the mega-banks to own, whether it's uncle Warren's favorite or not.
Insurance giant American International Group (NYSE: AIG) is so poorly thought of, it's nearly been given status as just another four-letter word, despite coming up a letter short. Investors coming into the recession had done incredibly well with AIG, seeing their investment returns absolutely destroy the S&P 500 over nearly any period of time. That all ended in 2008, and long-term investors will probably never recoup their losses, by some as much as 90%, after seeing long-term returns of well over 500% for some twenty-year periods.
And after this you think AIG's a good investment? You're nuts
It may sound that way, but AIG today, led by the capable Robert Benmosche, has returned to its roots of solid risk management. It is once again writing insurance policies that aren't likely to cripple the company, or to cause serious losses. To the contrary, its future as both an industry leader and solid investment, looks a lot like its past. And despite the public perception, AIG's customers are very loyal, to the rate of well over 80% retention. And this repeat business is at the center of why it's a solid investment.
What about growth?
I wish I could claim that I found Bank of Internet (NASDAQ: BOFI) on my own, but that wouldn't be true. You'll see it's listed in the disclosure at the bottom as being a recommendation by the Motley Fool. And while banks aren't typical (at all) of the newsletter that it's recommended in, this internet-only bank has some classic characteristics that immediately drew me to it when I first saw it recommended a few months ago:
- Industry disruptor a la Amazon
- Huge runway for growth
- Easily dismissed as just a "niche" player
Internet-only banks are gaining traction, and in the age of online brokerages, the vast majority of us have grown much more comfortable doing business and keeping large sums of money with a virtual location. And as Amazon, eBay, have shown us, we can still get great service and prices without having a physical location to go to. Banks are quickly becoming viewed in the same way. But here's the real keys behind why I am investing heavily into Bank of Internet:
With less than $3 billion in assets today, it could grow 1,000% larger and still not crack the top 40 largest banks in the U.S. And if it grew this much overnight, it would still only be about 1% the size of Bank of America or JPMorgan Chase. Sure, it's Price/Book ratio of 2.5 is about double that of the biggest players and 4 times that of Bank of America; but that's the premium price of massive upside.
Speaking of Warren Buffett
No long-term portfolio is complete without Berkshire Hathaway. And while its ownership extends far beyond Financials, Berkshire's foundation is built on the "float" generated by its insurance and reinsurance businesses. And while the core insurance businesses are just part of an incredibly diverse company today, Buffett and understudies Todd Combs and Ted Weschler continue to put that massive float to work investing in great companies, further increasing Berkshire's earnings power and value for shareholders like me and you.
Foolish bottom line
While B of A and AIG (and Wells, to a lesser extent) were right in the middle of the events that nearly crippled the economy, the banking and insurance sector is a very central part of the increasingly global economy. I am convinced that all of these companies will help me beat the market over the long-haul, and I've put my hard-earned (and very real) money where my virtual mouth is.
If you want to see how I'm doing, visit my portfolio online here. Have comments? Share them below!
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Jason Hall owns shares of Berkshire Hathaway, Bank of America, Wells Fargo, American International Group, and BofI Holding. The Motley Fool recommends American International Group, Berkshire Hathaway, BofI Holding, and Wells Fargo. The Motley Fool owns shares of American International Group, Bank of America, Berkshire Hathaway, BofI Holding, and Wells Fargo and has the following options: Long Jan 2014 $25 Calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!