Why you should cut down on your bank holdings

Founder and Publisher of the Switzer Report
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One of the greatest dilemmas for an investor is to separate oneself from both negative and positive short-term dramas and keep the focus on what the long term offers. This isn’t easy and means you must have the courage of your convictions linked to a sensible strategy that’s made less risky via diversification.

The risk taker will have a deep conviction and throw a lot of money at that play, and it can come with big rewards and the risk of big losses. Those who bought bitcoin in November 2022 at $25,000 have been big winners, with the cryptocurrency now at $81,600. However, those who bought at $106,000 earlier this year, (as one of my financial clients wanted to do but I talked them out of it), could be feeling more than 20% poorer because of this poorly timed ‘bet’.

Timing isn’t everything but it’s damn important.

Right now, I’m trying to invest money for me and my clients after selling out of GEAR, HNDQ and 15% of their bank holdings because I expect the rotation out of the past two year of winners, like CBA and big tech, into those stocks hurt by rising interest rates and other factors, is the sensible play right now.

However, while big tech is showing me to be right, with Nvidia down over 20% since August 19 and Microsoft down 14%, the CBA and its buddy banks are still going higher! This chart below shows the craziness that’s going on for CBA right now!

CBA

For CBA, that’s nearly a 29% gain since April 19 despite the fact that the profit story going forward isn’t looking promising and eventual rate cuts will hurt the bank’s bottom line. I won’t say “there will be blood” but there will be a sell-off. It might be starting now with the US worried about recession. That said, I think as soon as we believe the RBA is close to cutting rates, that’s when our rotation will begin in earnest and that’s when CBA’s share price will fall.

I don’t believe knowledge is a dangerous thing, but it can cause you to worry. Being a former academic economist, I’ve treasured the many observations of Lord John Maynard Keynes, who was also a legendary player of stocks, and I can never forget this quote from him: “The markets can remain irrational longer than you can remain solvent.”

Fortunately, I’m not geared into my investments, so I can stand the market being irrational about the CBA, but I still have to work out what stocks I want to buy with the 15% of CBA that I sell and when I buy these?

While the old adage that “it’s time in the market not timing the market” isn’t easily ignored, sometimes you have to make exceptions when you think the market is mad crazy.

Last year we stood by our belief in CSL, which went as low as $232 only last October, but is now $303.  In the same month, Macquarie was $160 and is now $225. Around the same time, Xero was as low as $99 and is now $142!

It pays to back quality when markets get short-term ‘hate’ sessions on these companies. The reverse can also work. Like last year, our support looked misguided until it wasn’t. I think the same applies to great companies such as the banks, Wesfarmers, JB Hi-Fi and others that have defied logic and shot to unbelievable heights.

By the way, just to show you I’m not alone on being suspicious about the longevity of CBA’s share price, here’s FNArena’survey of analysts on the company, where the consensus view is a target price 30% below the current price!

CBA

Of course, we could all be wrong on CBA, but I bet over time we’re the rational ones.

So, what will I buy? Well, what’s a quality company currently being beaten up because commodity prices are falling, China isn’t coming back as fast as expected and the global economy, while cutting interest rates is slowing down? Try BHP or Rio Tinto.

This is the analysts’ view on these companies: BHP has a 17.3% upside call, while they see a 18.9% jump for Rio. Here’s the individual calls below.

BHP

 

Note that six out of six like the company. The same goes for RIO.

RIO

I might gamble on Fortescue because it follows BHP and RIO but with bigger price moves. However, the news is short sellers are having a go at FMG. It could be a speculative play for the courageous, though the analysts only see a 12% rise ahead.

I’m also buying the ETF from BetaShares called EX20 to capture the rising S&P/ASX 200 minus the top 20, because I do think that rate cuts (or the expectation of them) will eventually help stocks in the December quarter rolling into 2025.

Of course, my timing could be out but my belief in great companies and the market moves following rate cuts are things I can be patient for, if only for money reasons!

Over coming weeks, I’ll look for other great companies that the market has hit hard to see if lower interest rates or other factors are likely to make them buys now for price gains in the not-too-distant future. Just like our call on Resmed last year when the market was ‘anti’ this good company, there are undoubtedly a few more worth supporting going forward.

 

Important informati on: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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