In 2013, Lloyds Banking Group (LSE: LLOY) posted pre-tax profits of £415m. This year, City analysts following the firm expect Lloyds to earn around £7.5bn.

Many other trading firms would have rewarded investors handsomely with such a profit turnaround, but an investor buying shares in Lloyds on 1 December 2013 and holding until 1 June 2016 will have lost money.

In fact, buying shares on 1 December 2013 or at six monthly intervals thereafter would have delivered a negative result on total returns. Why is Lloyds such a dog of an investment?

It hasn’t all been bad

Although Lloyds made a poor investment for the past two-and-a-half years, investors made big gains immediately before that, which suggests that timing an investment in a cyclical firm such as Lloyds is more important than with other companies.

What catches many out is that the usual methods we use to time investments — such as seeking a low valuation — don’t really work with cyclical firms such as banks. Right now, Lloyds looks cheap on conventional valuation indicators but I think we should be cautious because cyclicals can be at their most dangerous for investors after a period of high profits and when the valuation looks low.

This is how you would have fared with Lloyds if you’d bought the firm’s shares at six monthly intervals from 1 June 2012 and held your purchase until 1 June 2016. I’ve ignored trading costs for this example:

Purchase date

Buy price

Price on 1/6/16

Share price gain/loss

Dividends

Total return in pence per share

Total return in percentage

1/6/2012

26p

71p

45p

3.5p

48.5p

187%

1/12/2012

46p

71p

25p

3.5p

28.5p

62%

1/6/2013

62p

71p

9p

3.5p

12.5p

20%

1/12/2013

79p

71p

(8p)

3.5p

(4.5p)

(5.7%)

1/6/2014

77p

71p

(6p)

3.5p

(2.5p)

(3.2%)

1/12/2014

80p

71p

(9p)

3.5p

(5.5p)

(6.9%)

1/6/2015

89p

71p

(18p)

2.75p

(15.25p)

(21%)

1/12/2015

74p

71p

(3p)

2p

(1p)

(1.4%)

The table shows spectacular returns for Lloyds’ investors catching the share price lows of 2012. But to invest back then you would have needed to look at Lloyds in a different way from most other non-cyclical investments. Lloyds posted a pre-tax loss of £3.5bn in 2011 and further losses of £606m in 2012. Faced with figures like that, your value investor’s toolkit would have let you down and probably kept you out of Lloyds.

It’s true that the discount to net asset value that the Lloyds share price offered back then might have tempted you, but on the potential for earnings and cash flow recovery, you would have had to take a leap of faith. Many are glad they did. As we see in the table, catching the up-leg with a cyclical share can deliver pleasing results fast. An investment in Lloyds made from December 2013 onwards, though, would have delivered a loss.

Risks ahead

Looking forward, at earnings levels like these today, Lloyds could deliver lacklustre returns at best for investors but now comes with the ever-present danger of potential for profit and share price reversals. Earnings look ‘peaky’ to me, and the stock market has every incentive to mark down Lloyds’ valuation progressively in an attempt to anticipate and discount the next cyclical downturn.  Such compression in valuation could drag on investor total returns from here. However, even that seems unlikely to succeed in stopping a further collapse in the share price down the road.

What to do instead

Rather than risk mistiming an investment in Lloyds and the other London-listed banks, I'm looking for steady, non-cyclical growing companies such as those identified in this special Motley Fool report. The big investing institutions are notably absent as holders of large positions on the share registers of banks such as Lloyds. I think we must ask ourselves why that's so. I suspect they know that the timing for an investment in the big banks is wrong. But the institutions are all over the firms in this Motley Fool paper and I think we should join them. To find out more, click here.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.