Banks, Smarter Money
Rocko Chen
July 19, 2009
Notwithstanding bank advisors´ alleged "low risk" claims, their reluctance to finance Buy & Hold equity "investments" should raise some obvious questions. More likely than not, top bank management understand how financial economics really work.
If Buying & Holding really appreciated as claimed
Then multiple profits could be easily obtained via insane leverage; e.g. if the stock indexes really return double digits each year, borrow a few million from the banks, and there you go, a work-free 5/6 figure net return!
Reality
Adjust the returns for the true rate of inflation, credit risk and voila, no more magical, risk-free returns. "Diversification" simply increases transaction cost. This explains largely why banks do not usually offer loans fund personal stock "portfolios". They KNOW it invariably ends with a net-loss.
Bank analysts= less-dumb money
While they do not belong to the smart-money crowd, these guys still have an edge over the average public market participant. It pays to explore their incentives, critical thinking remains the best action!
If Buying & Holding really appreciated as claimed
Then multiple profits could be easily obtained via insane leverage; e.g. if the stock indexes really return double digits each year, borrow a few million from the banks, and there you go, a work-free 5/6 figure net return!
Reality
Adjust the returns for the true rate of inflation, credit risk and voila, no more magical, risk-free returns. "Diversification" simply increases transaction cost. This explains largely why banks do not usually offer loans fund personal stock "portfolios". They KNOW it invariably ends with a net-loss.
Bank analysts= less-dumb money
While they do not belong to the smart-money crowd, these guys still have an edge over the average public market participant. It pays to explore their incentives, critical thinking remains the best action!
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