Wednesday, October 01, 2008


A reader asks the proverbial $64,000 question? If you like bank stocks, which ones do you buy? And the corollary question, do you buy an ETF?

There are good things and bad things about ETFs. Numerous popular books come down for and against EFT's. I like good old American stocks. I dislike having to buy both the "see" and the "saw" of an industry. Buy a health care fund and you are buying the hospital that is a labor intensive buyer of drugs and you are buying the drug company that spits out expensive pills at a mile a minute and sells them to hospitals. (After spending millions to develop them). The two stocks are very different animals.

I like regional banks. The smaller ones are going to be take over targets for years to come. One way to buy a boat load of them is in the Russell 2000 Value Fund, symbol IWN, however, when you buy this fund, you also buy a boat load of basic materials stocks. You are buying the "see-saw". You are also paying an annual fee to hold those shares; the combination of up and down minus a fee will make your average return average less the fee.

The IAT EFT is a pure play on regional banks. It holds mid sized banks such as BBT, a bank that I like which is about 5% of the fund. Here again, you pay an annual fee to hold the shares. The fee is only .48% but over the long haul we are talking about serious money. A good strategy is to look up the bank holdings in the IWN and buy a few bank stocks at random. Test after test show that random selection helps eliminate negative selection biases. Also select two or three from the holdings in the IAT fund. The idea is to buy a mix of small and middle sizes. You can find a list of the holdings at Yahoo Finance or at Google Finance.

Don't delay. On average, the market recovers something like half of the bear market losses in the first month or two of the turn. It is a huge mistake to wait for a clear market bottom. Part of the reason not to wait is that the market bottom will be made when the big capital goods, energy and basic material stocks hit bottom. This will not happen until bank stocks are well on their way to recovery.

Please note that the bottom in bank stocks (which apparently happened months ago) is accompanied by the bottom in real estate. If you ever plan to buy a second home, now is the time to get the best deal. Since fixed rate mortgages do not yet reflect the full decline in bond rates, one should start with a low spread variable rate loan.