Why one Fool finally walked away from his abusive relationship with the banks.
On 30 December, I sold my full stake in Barclays (LSE: BARC) and Lloyds Banking Group (LSE: LLOY). It wasn't quite as painful as I expected, given the size of the losses I was crystallising, although it still hurt.
Why I had to walk away
It was liberating, clearing out of UK banks. It felt a bit like leaving an abusive relationship. Friends said I should have walked away years ago, but I kept going back for more, convincing myself that the bad days were behind us, things would be different this time and it would all work out in the end. Now it's time to move on.
My experience of trying to catch the two lethal falling knives of Barclays and Lloyds was a near-perfect illustration of another wise old investment rule: never invest in something you don't understand.
I don't feel bad about failing to understand the banks. Nobody else does, either. Senior management didn't understand what their derivatives traders are getting up to. Credit ratings agencies failed to spot the risks until too late. Even the taxman doesn't appear to understand the complex legal structures Barclays uses to avoid tax.
The politicians don't understand banks either, and don't want to either. They could order the banks to come clean about the toxic secrets on their balance sheets, but they don't.
I suspect the answer scares them too much.
If you're a trader, rather than a Foolishly long-term investor, you may still be fatally attracted to the banks. Anything that can rise 7% one day and fall 5% the next -- repeatedly -- is a trader's dream.
Better still, these sharp movements follow a fixed pattern. Banking stocks soar every time the EU had another one of its 'save the euro' summits, and somehow convinces the world it has done just that. The next day they collapse, as the world snaps out of its self-induced stupor.
Yer daft apeth!
There is a danger in quitting the banks. First, you are exiting at a lousy time. The chances are you will be taking out a lot less than you put in.
If a solution to the eurozone crisis mysteriously emerges (miracles do happen), this sector could soar. At time of writing, Lloyds trades at 27p. It doesn't take a great stretch of the imagination to see it trading at 54p.
If that happens, I'll be writing an article saying why I was daft to sell the banks. And you can all laugh at me.
At least I will be diverting some of the money into low-cost FTSE 100 trackers. These will give me some exposure to any banking recovery, when it comes, but with much less risk.
There are big dangers in hanging on to banks as well. Given the paucity of dividends, it could be some years before you start making any money from this sector.
I haven't sold my loss-making stake in Aviva (LSE: AV), for example, because it currently yields 8.5%. That gives me something meaty to chew on until I'm served a sweet slab of capital growth.
Banks also face a lot of hard work before they can be welcomed into polite society again. Simply deleveraging isn't enough -- the sector needs fundamental restructuring. Politicians are still gunning for them. The volatility is likely to continue.
Gone for good?
The most immediate threat is the single currency crisis. If that worsens and we get default and contagion, banking stocks could fall even lower than they have.
That's the final reason I'm feeling relatively relaxed about waving goodbye to the banks. Given current volatility, there's always a chance I can buy back into the banks at an even cheaper rate than I sold.
But for now, I'm happy to be out of this abusive relationship.
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