Bank of America Corp (BAC) – Seeing the Forest From the Trees

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Time heals all wounds (eventually)

If you were to survey the general investing public you would likely find that the vast majority are not investing in large cap banks, such as the three companies above. There is quite a strong disdain (as judged by media reporting from non-financial media) for mega banks. On the surface, this might appear to be a bearish sign. However, it is important to understand the market structure and market psychology, as these two factors will enormously impact the future share price performance.

If the great majority of people are not invested in a stock, say Citigroup for example, then this means there is a larger pool of potential buyers to come and bid up the price of Citigroup should the mood shift. This may seem like a somewhat vague statement, but it is critical to grasp.

In the boom days of 2007, the general investing sentiment toward large-cap banks was buoyant and positive. Great numbers of people were investing and making what seemed like easy money. Investors need to realize, if the great majority are singing the praises of a stock and are for all intents and purposes fully invested, then who is left to push the price higher? (Think of Apple – a great cash producing business, yet has seen it’s stock price fall from $700 to $400.) Times have since changed. The mood of the general market is significantly less positive towards large cap banks.

Opportunity

This presents a great opportunity for potential investors in these three stocks. While investor sentiment is still negative, these three banks continue to improve their businesses and quality of earnings. They have written down large amounts of bad debt and losses, they have recapitalized and reinvented themselves in a post-GFC world. Profits are generally growing and balance sheets are improving in their quality.

Traders are hares; will you be the turtle (who wins)?

Remember as a long-term investor to base your buying and selling decisions on what the long-term prospects of the underlying business are. If you combine this with buying when the stock is out of favor with the market, you stand to pick up shares in great businesses at a discount.

Let the short-term traders worry about the small moves. I am holding Bank of America Corp (NYSE:BAC) and am prepared to do so with the view of realizing a gain of $8 (from an entry of just under $12), whipsaw movements of a couple of percentage points are not of interest to me as a long-term investor. It might well pay to ask yourself this —  are you holding your positions as an investor or as a trader merely dressed in investor clothing?

The article Bank of America – Seeing the Forest From the Trees originally appeared on Fool.com and is written by Jarrod Bailey.

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