What’s the best way to encourage a depositor to take his money out of a bank?
This question went around the office this week.
Answer: Tell him he’s not really a depositor. He’s a creditor to the bank. And from now on, he’s responsible for all the bank’s bad lending decisions!
That’s the pickle Dutch politician Jeroen Dijsselbloem got himself into this week. He said the bank restructuring in Cyprus would be a template for future problems elsewhere in Europe. A hasty retraction followed not long after as the implication became clear for European depositors: get your money out of iffy banks as quick as you can before they take it!
In the movie Margin Call there’s a quote from the head honcho of an investment bank that goes like this: ‘There’s three ways to make a living from this business. Be first, be smarter, or cheat.’ We’re not smart enough to know what will happen to the euro. But we do know we’d be first out the door if we had an account in southern Europe!
Cash Just Ain’t What it Used to Be
When you destroy trust in fractional reserve banking, you destroy the very thing that makes it work. Then you’re left with the naked truth that most banks borrow short and lend long.
On the face it, the situation in Cyprus is another bearish example of why the euro can’t survive as it is. But the bulls argue that the Cypriot case has shown once again that the political elites will stop at nothing to preserve the currency. No option is off the table. Perhaps the euro bearishness is a signal for contrarians to step in. Hmm.
Mind you, when the ‘safety’ of cash is called into question like that, shares suddenly look much more attractive as an asset class. At least they’re a claim on real assets.
That’s also a major reason editor Kris Sayce over at Australian Small Cap Investigator thinks the inflationary policies of the world’s central banks will continue to show up in stock prices. He sees the stage being set for a boom in the ASX that will take it over 7,000 points within two years.
‘Money doesn’t sit still in the financial world,’ Kris wrote in his latest report. ‘It moves constantly as the big banks and traders look to profit by investing in and betting on the next bull market. So here’s the important question for punters: where is the money heading next? Based on my experience, growth stocks are the next in line.’
Why You Want to Own Small Cap Stocks
This isn’t limited to a bit of market commentary, either. Kris has more open positions on the Australian Small-Cap Investigator buy list than at any time since 2010. If the rally comes, those positions should benefit. He’s got his subscribers in plays that range from high, medium and lower risk. And credit where credit is due. Mr Sayce called the rally since last year when a lot of others were wary of the market falling over.
This isn’t the first time the potential in small cap stocks has been discussed in Money Weekend. But we are not alone this week. The Australian Financial Review ran an article on Wednesday highlighting the opportunity in small-cap (and medium) sized stocks.
It noted the rally in the Australian share market up to 31 January had really only been in the top 50 stocks. If you take them out of the equation, the share market would only have been up 2.62%. It’s the major dividend payers like the banks that have rallied hard. But prices can only move so high before investors will start looking elsewhere for value.
To us, that means the best place to start hunting is the small to medium sized stocks that haven’t rallied. But that’s probably almost always true, anyway. Your best chance of finding mispriced companies will be in areas that don’t get as much attention from analysts. There’s less competition.
One strategy to use is classic value investing. That’s where you try to put a price on the company’s assets and overall position and buy under that price with a ‘margin of safety’.
Kris’ approach is slightly different. He’s looking for shares where the market may have mispriced the growth prospects of different companies. It’s always a subjective opinion, and certainly not without risk, but also why small cap stocks can often deliver gains of 100%, 200% or 500% if you get your homework right.
Callum Newman
Editor, Money Weekend
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From the Port Phillip Publishing Library
Special Report: Australia’s Energy Stock BLOWOUT
Daily Reckoning: Trade the Market Like a Stoic Philosopher
Money Morning: Silver ‘$100 Within Two Years’
Pursuit of Happiness: Spreading the Idea of Liberty
Australian Small-Cap Investigator:
How to Make Money From Small-Cap Stocks
