Six long years have passed since the financial crisis of 2008.
Times change — and the stock market moves faster than you can blink. As circumstances alter the very nature of an industry, it pays to think twice before assuming the status quo will always remain intact.
This was true on the way down for banking stocks, as investors lost their shirts betting on the revival of the likes of Lloyds (LSE: LLOY) (NYSE: LYG.US) and RBS before massive dilution caused serious — perhaps permanent — loss of capital.
But the same could be true, and has been true, on the way back up for Lloyds. The market, in my view, has been too quick to damn banking shares for eternity — a lingering pessimism that persists to this day.
I’ve been guilty of this too, so bear with me!
I think investors have been quick to dismiss or cast aside Lloyds as “uninvestable” over the past few years, despite the recovery in the share price, pointing to the seeming inevitability that another crisis could cause investors even more hurt. How could a business model that has periodically destroyed value be trusted with your hard earned money as a long-term investment?
(Not just during the crisis, but in the decade prior, Lloyds did not delight shareholders…)
But investors betting on a brighter future for Lloyds have been rewarded tremendously since 2011, with the shares gaining 121% in the last three years. And now that the bank appears to be on a more stable footing, I think it’s time for long-term investors to take an unbiased, fresh look at the new and improved Lloyds.
Lloyds is no longer the lumbering, troubled bank it once was — its financial strength, measured by its Tier 1 Capital ratio, has improved from a weak 8% in 2006 to almost 15% today. Lloyds is Britain’s biggest mortgage lender. It is cleaner, leaner and is on track to become a profitable, dividend-producing enterprise — far removed from the toxic wasteland it was once considered.
There’s a lesson here in my view, and one that I’ve learned myself in recent years — you can miss so much by judging a business solely on its past. You can avoid many common mistakes by responding better to change as it happens — and make better decisions, too.
In my view, Lloyds is well worth a closer look through fresh eyes. It’s not so simple to apply Lloyds’ previous pitfalls to itself — and it might in fact be more worthwhile comparing the new company’s model to Wells Fargo in the US.
Wells, the leading lender in the US (with a reputation for common sense practices), has a history of creating value for shareholders through tough times, and has delivered a total return of 3,500% to shareholders since 1990. It’s clear that this type of model can produce satisfactory returns for shareholders — could this be the future for Lloyds?
We're long-term investors here at the Motley Fool, and in our flagship Share Advisor service, we focus on investing in businesses for years rather than months. It's over that kind of time horizon that we can make sensible judgments on how a business is likely to perform, and whether the price is right.
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Mark Rogers 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.