Voices from the Past Warned about Bank Stocks

Weren’t bank stocks supposed to be “conservative?” Weren’t bank stocks the solid, low growth, dividend producing investments that are great for retirees?

That is what a lot of investors and, unfortunately, financial advisors thought prior to 2008. During that crash many financial institutions lost 80% or more of their value, almost as if they were fly by night tech stocks. Remember Bank of America, AIG, Citigroup, Washington Mutual (don’t forget Fannie and Freddie). The list goes on and on.

A few days ago I struck up a conversation with a retiree. I was saddened to hear about investment losses he took in bank stocks during the 2008 crash.

How could an investor have been aware that bank stocks could be so risky?

There were voices from the distant past that were shouting that warning, if an investor was willing to listen. I’ve written before about the great knowledge we can learn from materials written in the 1932 -1934 era. If the greatest threat to an investor is an event like the Great Depression coming around again, why not take a look at what happened during that time period.

How about the passages below

Here is some wisdom on bank stocks:

“The fact that the operations of financial institutions generally — such as investment trusts, banks and insurance companies — must necessarily reflect changes in security values, makes their shares a dangerous medium for widespread public dealings. Since in these enterprises an increase in security values may be held to be part of the year’s profits, there is an inevitable tendency to regard the gains made in good times as part of the ‘earning power,’ and to value the shares accordingly. This results of course in absurd overvaluation, to be followed by collapse and a correspondingly excessive depreciation. Such violent fluctuations are particularly harmful in the case of financial institutions because they may affect public confidence.”

“The securities analyst, in discharging his function of investment counselor, should do his best to discourage the purchase of stocks of banking and insurance institutions by the ordinary small investor.”

It’s as if someone was describing 2008, but with the literary eloquence of ages past. This is basically what you get when you read good investment writings from the Great Depression.

These particular quotes were taken from Security Analysis by Benjamin Graham, 1934 Edition.

Understanding history won’t help you pick stocks or forecast the market, but it can certainly help investors avoid dangerous errors. And when I say history, I don’t mean going all the way back to the 1970s. I mean understanding events that go back to the 1600s….maybe even farther. The world is an amazing and complex place. You never know when a voice from the deep past will give you insight for today.

Image in Public Domain