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Why Royal Bank of Scotland Group plc Is A Bad Share For Novice Investors

I have to confess that when I started pondering Royal Bank of Scotland (LSE: RBS) (NYSE: RBS) from a novice’s viewpoint, I was torn.

You see, I have a general downer on banks unless you really have the knowledge and experience to understand them, and I think novices should steer clear — we’ve seen only too painfully how apparently rock-solid banks can turn out to be carrying festering heaps of high-priced but actually worthless “assets”.

Buy when cheap

But on the other hand, one of my favourite times to invest, in whatever the company or sector, is at a time of maximum pessimism. And we were clearly in that not so long ago with the UK’s two bailed-out banks. I think it was clear, and not just with today’s hindsight, that the commitments made by the government to rescue RBS and Lloyds Banking Group made them into good investments — because it neutered the biggest risk, the risk of actual collapse. From then on, they were always going to recover.

But then, I have a couple of problems with that.

Firstly, I really don’t like encouraging newcomers to try timing things too much and going on short-term valuation. Sure, buying when a share is cheap is always a great lesson to learn (and it’s a surprisingly difficult one — it’s quite amazing the number of beginners I’ve seen piling into popular shares after they’ve soared to stupidly high prices).

But a better lesson, and one you really should learn first, is that at the start of a decades-long investing career you should be looking for companies that are simply good companies, not looking for short-term bargains.

Too late!

The other problem, of course, is that RBS is obviously past the point of maximum pessimism.

At 370p today, the RBS share price is up 40% over the past 12 months and it’s more than doubled since late 2011 — and more than trebled since the depths of 2009.

After the eye-watering losses of recent years, RBS is set to record a pre-tax profit this year. Forecasts put the shares on a P/E of 22, which is significantly ahead of the FTSE average, although for a first year back in the black we shouldn’t pay too much attention to that. But forecasts for the next year only bring that down to 13, which is close to that average.

And, of course, there are no meaningful dividends on the horizon yet — there should be a payout in 2014, but it’s expected to be only around 0.5%.

Now, I’m not trying to work out a stance on RBS from a current-valuation point of view here. But what I am trying to do is show that the “screaming bargain” stage that might have overridden my longer-term opinions of the bank has been and gone.

Bare bones

So we’re just left with a bank, with its opaque day-to-day business, impenetrable accounts, and the appalling examples of corporate governance they’ve shown in recent years.

And RBS has shown how utterly incompetent banks can be, giving us the legend of “Fred the Shred” along the way.

There’s new management, and RBS might actually be a profitable investment right now, but it’s one for when you’ve been around the block a little and know what you’re doing. For now, dear novice, I’d say stay away.

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> Alan does not own any shares mentioned in this article.