Posted by Jill Kerby on April 28 2014 @ 08:00
BUYING IRISH BANK SHARES IS A PUNT, NOT AN INVESTMENT
There’s a little flurry of interest out there in bank shares…again.
A reader from the south-east sent me this note recently: “I am just wondering if you think buying bank shares are a good idea right now?”
Another wrote: “I would like to get your advice on buying shares. I have about €5,000 in savings and was thinking about buying shares in AIB or Bank of Ireland. My reasons are that share prices are reasonably low and the banks seem to be getting stronger along with Ireland's economy. It would be an investment for maybe 10 years depending on share prices.”
Finally, a third asked, ”Can you recommend a cheap stockbroker?”
First, and I am not being facetious, there is no such thing as a ‘cheap’ stockbroker.
Stockbrokers everywhere work on the premise that theirs is a business wholly and solely from which to make profits from the buying and selling shares of shares and the big ones trade not just their clients portfolios but more importantly, their own.
Stockbrokers who claim to give advice - as opposed to providing an ‘execution only’ service – involves recommending individual or lists of shares for you to buy, hold and sell. Often, these will be shares of companies for which they also act as the broker. The more you buy and sell, the more money the broker makes.
‘Advice’ should always be impartial and independent. If you think you are ever going to get that from a stockbroker, you are delusional. The recent Davy Stockbroker court case that highlighted that company’s total lack of duty-of-care to a vulnerable 20 year orphan with a learning disability, is a case in point.
Execution-only transactions are another matter. The commission varies depending on the stockbroker and online accounts are cheapest. A relative newcomer, Sommerville Advisory Markets (www.sam.ie), claim to take the lowest commission - only 0.15% to trade shares or ETFs. (Exchange traded funds are pooled groups of shares that spread risk and trade as single shares on stock markets, thus keeping transactions costs down.)
Now to AIB and Bank of Ireland. I think one of the reasons why so many older people (who should know better) are asking whether these shares are worth buying again is because deposit returns have been so pitiful.
When tax (41%-45% DIRT/PRSI) and inflation are taken into account, deposit returns are effectively negative, and savers who are dependent on an income from their capital are compelled to consider riskier options, like stocks and shares or buy-to-let properties or property funds. Unfortunately not enough of them consider the risks they are taking - volatility, management fees, commissions, charges and taxes.
So this is my answer to those readers and anyone else who considering “investing’ in AIB and Bank of Ireland:
The best time to buy shares – or any asset – is when they are cheap. AIB and Bank or Ireland certainly fall into that category if you are comparing their current prices of c13 cent and c28 cent respectively to their peaks of c€23 and c€18 back in 2007.
However, these penny shares represent banks that are still loaded with bad debts and mortgages assets of dubious value. Some continue to report annual losses in the hundreds of millions of euro. Let us not forget that they operate in one of the most indebted countries in the world. State-owned AIB, and BOI are both still a long way from lending at anything resembling normal levels (which is how banks make profits) or from paying decent dividends to shareholders. The ordinary retail shareholders who were wiped out between 2007-2010 can probably never realistically expect to recover their losses.
Meanwhile, Wilbur Ross, one of the prominent American vulture capitalists who invested in Bank of Ireland has already sold off a part of his holdings: the nature of these corporate bottom feeders is such that we probably shouldn’t expect them to stick around for the long term.
The same investment advisers that remind clients to buy really good quality shares at the lowest price, inevitably suggest that you also spread your money and investment risk in a large collection of such assets. Aside from equities, these also include properly weighted bonds, cash, property, commodities, etc in widely spread geographical locations.
Picking a single stock or two out of the tens of thousands on public markets, they would suggest, is just another form of gambling. Even Warren Buffett, one of the world’s greatest stock pickers warns that ordinary folk who don’t have his expertise (or capacity to absorb stock market losses) should stick with diversified, low-cost indexed funds.
Finally, and this is probably the best advice of all: Never gamble with money you can’t afford to lose. Just ask Sean Quinn how that worked out for him.