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Goldman Sachs Group Inc (GS), JPMorgan Chase & Co. (JPM): The Unheard Defense of Wall Street

Long-term greedy
From an investor’s point of view (Full disclosure: I own shares of Goldman Sachs and JPMorgan), these stories about Goldman Sachs and Wall Street’s involvement in the mostly unknown aluminum storage market (Full disclosure: I am not an expert in aluminum storage) has actually increased my confidence that these two companies are superior long-term investments. Warren Buffett may have said it best when questioned about his investment in Goldman Sachs, saying that he likes to “bet on brains.”

Despite the presence of these brainiacs, shares of Goldman Sachs and JPMorgan Chase & Co. (NYSE:JPM) are both trading at price-to-tangible book value per share multiples, a common bank valuation metric, significantly below historical norms. One driver behind these depressed valuations is the expectation that regulation will ultimately crush many of Wall Street’s most profitable endeavors.

Source: S&P Capital IQ.

However, if there is one thing bank investors learned from the financial crisis, it’s that banks are almost always one step of ahead of regulators.

The other half
For investors or potential investors, the trading multiples (P/TBV) are only one half of the equation. The other half lies with the firm’s ability to generate sufficient returns on its equity, and thus create value for shareholders. Despite regulatory headwinds and muted merger and acquisition activity, both JPMorgan Chase & Co. (NYSE:JPM) and Goldman Sachs have continued to post double-digit returns on equity — JPMorgan still posted a return on tangible common equity of 15% in 2012 despite the London Whale trading fiasco.

Wall Street is seldom a warm and huggable entity, but casting these companies and their stocks off to an investor-deserted island without looking beyond the salacious headlines could prove costly in the long run.

LeBron James photo credit: Steve Jurvetson.

Few investment banks, business-people, or investors can do what Goldman Sachs Group Inc (NYSE:GS) or JPMorgan Chase & Co. (NYSE:JPM) can do, but getting upset at these companies when they play by the rules and regulations established out of their control is a little like getting angry at LeBron James for dominating because he is just too strong and too fast to be stopped.

The article The Unheard Defense of Wall Street originally appeared on and is written by David Hanson.

You can follow David Twitter. David Hanson owns shares of Goldman Sachs and JPMorgan Chase. The Motley Fool recommends Goldman Sachs. The Motley Fool owns shares of JPMorgan Chase.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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