Important Investment Lessons I Learned this Month for Banking Stocks
Long story short, I made a mistake by not entering into banking stocks 2 weeks ago. I have previously stated an entry strategy for Malaysian banking stocks here, and was in the opinion that they were undervalued and had the opportunity to go higher. This is probably the best thing that happened to help me learn about how to invest. I am really not interested in talking about investments I got right, cause there really is nothing to learn from it. I am more interested in the investments I got wrong.
I set up the investment strategy to take advantage of historically low valuations for banks.
It is no secret that the banking sector has been hit hard by the Covid-19 pandemic and historically low interest rates set by Bank Negara. Banks make their money by lending out money at an interest rate to clients. The lower the interest rates, the less money they make. I looked at four big banks namely Maybank, CIMB, RHB and Public Bank for opportunities to enter. I selected these four banks by setting the criteria that they had to be big banks and have 20% to 40% potential appreciation in share price in the future.
I looked at the current price earnings ratio of these 4 banks and compared them to the price earnings estimates of analysts out there. I did this by taking the price earnings estimates from Rakuten where they were readily available. The highest potential here was CIMB with a 101.8% difference between the current price earnings ratio and its estimated one.
This was a great opportunity but I was of the opinion that they could be acquired at much lower prices then.
For context, there were 2 significant events that I thought would drive share prices down even further.
- Bank Negara’s interest rate policy: I was of the opinion that Bank Negara would lower their interest rates as Covid-19 cases were soaring. They didn’t.
- Malaysia’s 3Q GDP numbers: I was of the opinion that Malaysia’s economy will still contract in 3Q 2020. It did contract by 2.7%.
I did mull whether to enter into positions for banking stocks when Bank Negara didn’t reduce interest rates as they were still trading at very low valuations. I opted to wait for 3Q GDP results to come out, but I did not anticipate news of vaccines from the United States being over 90% effective to come out before the GDP announcement. That news alone brought the KLCI and banking stocks roaring upwards.
Cumulatively, if I entered in 30 Oct 2020, I could have been making about 24% return right now for these 4 banks. But the fact is, I didn’t cause I hesitated to enter. When I realised my mistake, it was already too late as I will be buying when share prices are going up and that invalidates my principles of buying low and selling high. The temptation is high to just buy them now, but I do not want to do so as this is a valuable lesson to learn — to stick to my investment thesis. If it’s wrong, it’s wrong.
Stick to my investment thesis and don’t be greedy.
I let the greed part of me take advantage of an opportunity to enter when prices were low. I was of the opinion that I could enter at much cheaper prices and as a result, I missed the train. However, it is a valuable lesson on how volatile markets can be. A single news on vaccine could trigger such a rally on share prices that it seems like everyone thinks that this is over. Right now, the KLCI is trading at the 1,600 level, which puts it effectively at pre-Covid 19 levels. I just worry whether that this will be a repeat of the July and August rally where it went up to 1,600 level before crashing back down to 1,500 levels subsequently. Let’s hope for our sake, this time is different.