Bank of America Corp (BAC), American International Group Inc (AIG): Why Loss Aversion Can End up Costing You

Currently trading a Price to Book Value 0.59, I think Bank of America offers exceptional value. I believe Bank of America Corp (NYSE:BAC) will continue to perform decently. I am not expecting bumper profit growth. If it can just maintain earnings, then over time, investors will gradually reprice the stock. Repricing the stock to a Price to Book Ratio of 1 will see Bank of America trading around $20 (about a 75% gain from current prices).

To me, this represents a good investing scenario, one though I think many will miss out on because of the influence of Loss Aversion. Most investors will look at Bank of America Corp (NYSE:BAC) and see the huge losses they took during the GFC rather than evaluating it for the potential performance of it in the future.

I see a similar situation emerging in Citigroup Inc. (NYSE:C). Currently at $45, Citigroup is trading at a P/B of just 0.72.

My view is that Citigroup has had 5 years to restructure and write down the toxic after effects of the GFC. Citigroup just announced their quarterly earnings with good profit growth. I think that investor sentiment towards Citigroup is still bearish, with many people still believing that in the world of slow growth, mega-banks such as Citigroup will struggle. With billions of dollars of idle cash sitting on its balance sheet, Citigroup is positioned to take advantage of the opportunities as they arise.

It is important to remember that even if earnings don’t grow, and Citigroup Inc. (NYSE:C) just maintains current earnings, it is still trading at a significant discount to Book Value. Over time, as the fear whatever the next ‘crisis’ will be fades, we can expect Citigroup to be repriced back towards a Book Value of 1. This would offer a gain of approximately 36% from current levels.

If there ever was a company that engendered the feeling of wanting to avoid losses, it is American International Group Inc (NYSE:AIG). After having wiped out virtually all of the equity common shareholders had in the company, AIG has possibly removed entire sections of the investing community from ever wanting to invest again! The losses many experienced in owning AIG were truly breathtaking.

However, time waits for no man, and the world keeps moving forward, even if the psychology of investors doesn’t. With a current Price to Book Value of 0.58, I believe American International Group Inc (NYSE:AIG) represents excellent value. As with Bank of America and Citigroup, AIG doesn’t even need to grow its earnings but just maintain them and have the market believe in their sustainability.

Should the market do this, and remember time heals all wounds, American International Group Inc (NYSE:AIG) might be repriced over the next few years to a Price to Book Value of 1. This would translate into a gain of some 75% based on today’s stock price of $39.

With an understanding of Loss Aversion, I look for stocks that I believe are fundamentally sound, yet are viewed by most investors with disdain. This disdain creates a temporary disconnect between price and value. I believe these three stocks fit this mold. I expect to see the market shift its view towards them over time, and for my portfolio to be the recipient of gains as the Loss Aversion most investors are currently gripped by fades.

The article Why Loss Aversion Can End up Costing You Big Time originally appeared on and is written by Jarrod Bailey.

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