Saturday, July 18, 2009

Banks and Smarter Money

Notwithstanding bank advisors’ alleged “low risk” claims, their reluctance to finance Buy & Hold equity “investments” should raise some obvious questions. More likely than not, top bank management understand how financial economics really work.

If Buying & Holding really appreciated as claimed,

Then multiple profits could be easily obtained via insane leverage; e.g. if the stock indexes really return double digits each year, borrow a few million from the banks, and there you go, a work-free 5/6 figure net return!


Adjust the returns for the true rate of inflation, credit risk and voila, no more magical, risk-free returns. “Diversification” simply increases transaction cost. This explains largely why banks do not usually offer loans fund personal stock “portfolios”. They KNOW it invariably ends with a net-loss.

Bank analysts= less-dumb money

While they do not belong to the smart-money crowd, these guys still have an edge over the average public market participant. It pays to explore their incentives, critical thinking remains the best action!

0 Reflections: