Why Barclays Is A Buy At 139p

The problem with the banking sector from an investment standpoint is that it is more prone to volatility based on macro economic/financial issues than arguably any other sector right now. Your analysis may well be right, but when HSBC is considered one of the most stable yet has fallen nearly 20% in the last 3 months, this shows that any purchase is still a gamble right now on there being less bad economic/financial news to come. Greece defaults and UK banks could easily drop another 30-90% depending on their exposure? There is still too much bad news around to trust any analysis of an individual bank share to be able to withstand the bigger picture.

Banks are more a traders sector right now, unless you are prepared to accept the volatility of big down swings when the market feels grumpy about the euro, EU, world economy, US economy, sovereign debt, etc, etc.

The whole banking business is now a total mystery to me, how they make money and how they value their 'assets', plus the whole investment rationale seems to be based on confidence and not much else.

My purchase of HBOS shares in 2007 being a case in point, in particular buying in to a 'discounted' rights issue at £2.50 per share when they were reporting net assets of £5 per share. Subsequently turned out they were lying and should have been reporting net assets of 0p per share.

Don't understand how fractional reserve banking can possibly work without some form of blow up every cycle.

I and thousands of investors were severly cheated by heads of banks and there is no reason to think the current crop of chiefs are any different.

avoid

I think diddyda has a very good point. The £80k government backed guarantee is effectively a publicly funded subsidy, insurance funded by us. Huge bonuses/salaries - cut the subsidy; lots of customers run. Brilliant.

Great idea from Diddyda.

He should send his post to George Osborne who needs a few good ideas.

The £80k support should be shifted from government to insurers, so banks would have to pay for it at whatever rate the market dictates.

Corollary: a safer bank pays less, a riskier one pays more. An incentive to behave.

Then drop the £80k fixed sum, and let each bank decide what level to offer. Thus a current account might offer a smaller sum, while an account targeted at businesses or solicitors doing conveyancing would insure a much higher amount. Limit the role of the law to one of insisting every account is open and transparent about what it offers and can't 'pull a fast one' by, say, changing its rules on the sly.

Help! Am I stupid for thinking this?

Im 25 been playing with shares for a few months with about 5k,
I clear £1500 a month, and rent/bills is £300 my job is pretty secure.

I am thinking why not get a 15-20k loan at 6.5% for 3 years and stick is all on Barclays at 130-135 and hold out for as long as it takes to double my money hoping less then 2 years but even if I have to hang on for 10 years still seems to make sense.

Hopefully in a few years will have my deposit for a house. :)

What is the worse case scenario? Could I loss all my money? People seem to say that Barclays are strong and will not go bust, so am thinking If they do then a lot of others will. I which case I and everyone else will have more important thinks to worry about.

Would appreciate as much feedback as poss.


Thanks All

@Mrbeany

Your initial question depends on where you sit. As a member of Joe Public, you'll probably be called stupid. If you sat on a trade floor in UBS, BarCap, Goldmans etc, you'd be doing your job.

When Lehmans and Bear Sterns went bust, they were leveraged by 30-35 to 1 (i.e. they had debt owed of $35 dollars to every $1 in assets held, be it cash, shares, bonds, whatever). So a £15K loan to £1.5K in savings is 10 to 1.

So you're not doing anything different to the investment bankers, but the questions is, are you going to get a big bonus or lose all your money?

Re Barclays -

There were probably quite a few people thinking in 2008, hmm, RBS shares look cheap at £4, £3, £2, £1, surely I'll just double my money if I hold out for 3 years?

They're currently sat at around 22p each.

If RBS hadn't been so keen to ramp up it's Investment Banking arm by pricing BarCap out of the bid for ABN AMRO, it's Barclays that would be owned by us / the Government, so don't think that their management team is any better than Fred Goodwin.

The Barclays share price is currently at levels last seen in October / November 2008 time when it traded around £135-140. Then it dropped. Hard. To 50-60p if memory serves me correctly.

If the shares tanked to those levels, how long would it take for you to earn the money you had lost? Would you be prepared to just take it on the chin and put off getting a deposit in 8 years instead of 3 years time?

Re your strategy -

If you clear around £1500 a month, you're grossing about £25K per annum. IF YOU INSIST ON DOING WHAT YOU'RE PROPOSING, you could get a credit card with a fairly substantial limit, a certain well known brand who also happen to have the same name as a train company gave me one with a £9K limit, no questions asked.

A balance transfer to a current account would give you a fee of 4%, loaded onto your card (so you'll need to leave room on the credit limit for that).

Each month, put as much salary into as high an earning savings account as you can, so that once the balance transfer period ends, you can pay off the debt on the card and the interest earnt will have eaten into the 4% debit charge.

Then pray like mad you've not tipped your capital (the money you borrowed in the first place) down the sink by buying shares.

Remember than the central banks are fast running out of options without resorting to quantative easing mark II (Bank of England) mark III (the US FED) and the ECB haven't yet had to work out how they'll recapatilise the French banks like we did with RBS, Lloyds, when Greece defaults on it's bond payments and gives the idea to the other PIIGS (Portugual, Ireland, Italy, Greece, Spain).

When is the next good news story coming out? And the next? And the next? When they do, the market will go back up.

But for now, by the time you've got the finances in place, I'll wager Barclays will be trading around £1.20-1.30 (my point being it's going to keep dropping for a while, not that its a better investment).

jerryrc:

Yes the mistake i made with RBS was i thought it was cheap based on NAV.

When i did a post mortem of my mistake i realised i made an "obvious" mathmatical blunder.

To illustrate the difference between a bank and perhaps personal assets or business assets imagine the following:

You have £1million in assets and £300k in liabilities, what is nav? it is £700k right,ok so far ,so what would happen if your assets dropped by 10% ? not a whole lot you'd have nav of £600k still.

If you look at most people and business assets you see this sort of ratio.

Now imagine you have £1 Trillion in assets and £950 billion in liabilities, what is Nav? £50billion, right and if the stock price is £25billion it looks cheap.
But if the company lost 10% of its assets the Nav would be -50billion, a negative value.And bank balance sheets are more like that where small movements in capital make the NAV a worthless number.

Mrbeany: I applaud your bravery. As and when you go for something like this, best of luck for it and I'd love it to work out for you.

It's all very well to plan a leveraged investment like this, but quite another to watch what the rest of the world thinks eat your holding alive. Your strategy might prove right over time, but noone can know how long it takes to bring the return you have in mind.

Question one: "how bad would it have to get before you cut and run?" Question two: "would you have the discipline to pull out when your target is reached - or rather, how would you deal with the temptation to 'ride a good thing'?"

Would you get out when you're flat? Adjusted for projected inflation? Allowing for 20% drawdown? 40%? 80%? If it goes the other way, do you get out when you've got your deposit? Maybe you start thinking: "great, I've locked that in, now we'll go for more." "How about I go for more to bring down the mortgage payments?" "Hey, maybe even an extra bedroom..." It's all about how you rationalise things to yourself.

These are very difficult questions to answer until you're in the moment - in fact, there never is "the moment", and that's exactly the problem. But I'd suggest at least the honest admission that you don't know how you would react would be a great start.

Thanks, goodlifer. BARC is now 155p, so that's a 16p gain on my 139p buy price. Here's wishing you even bigger gains!

Cliff

ANuvver

Thank you for the feedback I don’t know if you wanted answers for the questions, but I will anyway :)

I am thinking it’s going to crash probably the same or worse then 2008 when Barclays was 50p ish so I would probably stick 4k in at 80p and hopefully the rest at/if it hits 50p

I would then sell half at/if 150p and hang onto the rest hoping for 300p

Q1 I would not sell at a loss

Q2 Would you have the discipline to pull out when your target is reached? I think so, that’s pretty optimistic, and would be very happy if it happened.


I am aware I could lose it all, I would be gutted but not end of the world.