원문 보기
hey investor friends I'm Michelle marking have you ever wondered about investing in any bank or financial service company stocks especially when their annual dividend yields are north of two percent and are around five percent seems kind of enticing right well there are a number of questions to have to ask yourself if you're truly capable of understanding what these Banks or insurance or other kind of financial service companies really do and what's really under the covers of their financial statements because even though we might think that it seems pretty straightforward and a lot of banks have been passing stress tests instituted by the Federal Reserve after the Great Recession like they did pretty well in 2022 how is that any guarantee that we can be assured that we can invest in these companies safely and that they won't have a repeat of what happened during the great financial crisis where some famous Financial companies like AIG were on the brink of bankruptcy and had to be bailed out in 2008 so these are some questions to ponder and one was asked by a famous investor Bill Ackman of Pershing Square Capital Management to Legendary investors Warren Buffett and Charlie Munger at the 2005 Berkshire Hathaway annual meeting and he asked about how can we really trust AAA rated companies when they've been up to a bunch of financial Shenanigans and there are financials aren't always correct and we will have to see what Warren Buffett answers and it's kind of interesting because they answered this about three years before 2008 so it's incredible how much Bill Ackman had the foresight to really question if he was even capable of understanding these Financial companies because we know that he's a really great investor so let's listen to what he says and if you also appreciate content like this please be sure to like And subscribe and enjoy Bill Ackman from New York New York for the handful of AAA rated companies AIG Fannie Mae Freddie Mac and mbia are under formal investigation for accounting Shenanigans and are in the process of restating their financials like Charlie said before I think of AAA rated company as an Exemplar a company that should behave in the with the highest accounting and ethical standards my questions this leads me to are how can investors comfortably invest in any Financial Service Company when even when a decent percentage of the AAA rated companies have false misleading financials and I guess the follow-up question is why don't the rating agencies do some independent due diligence from an accounting standpoint so that they can help serve as a watch on this issue well Financial companies are more difficult to analyze than uh than many companies I mean the it is more if you take the insurance business you know the biggest single element that is very difficult uh to evaluate even if you own the company uh uh is is the lost and lost adjustment expense reserve and that has a huge impact on reported earnings of Any Given period and the shorter the period the more the impact can be from just small changes in assumptions uh you know we carry we'll say 45 billion of loss reserves but you know if I had to bet my life on whether 45 billion turned out to be a little over a little under I mean it said it'd be it I think a long time and uh uh you could just as easily have a figure of 45 and a half billion or 44 and a half billion and if you were concerned about reporting given earnings in a given period that would be an easy game to play in a bank you know what it basically is what whether the loans are any good and I've been on the boards of Banks and that's you know I've gotten surprises at stuff to tell uh it's Financial companies if you're analyzing something like WD-40 you know or See's candy or um our brick business whatever you know they they may have good or bad prospects but you're not likely to be fooling yourself much about what's going on currently but with financial institutions it's much tougher then you can add throw in derivatives on top of it and you know it's it's no one probably knows you know perfectly what some of it or even within a reasonable range the exact condition of some of the biggest you know banks in the world and but that brings you back to the due diligence question of the agencies you had very high grade very smart financially smart people on the boards of both Freddie and Fanny and yet you know one was five billion and one was apparently nine billion those are big numbers and I don't think those people were negligent and it's just it's very very tough to know precisely what's going on in a financial institution Charlie and I were directors of Solomon and Charlie was on the audit committee and I forget the size of a few of those things that that you found but you know what that you found but you know what what what wasn't found and that isn't that doesn't mean the people below are Crooks or anything like that it just means that it's it's very tough with thousands and thousands and thousands of complicated transactions sometimes involving the computations involving multiple variables it can be it can be very hard to figure out where things stand at any given moment and of course when the numbers get huge on both sides and you get small changes in these huge numbers they have this incredible effect on quarterly or yearly figures because it all comes lumped in those adjustments come lumped in a short period of time so I just think you have to accept the fact that insurance banking finance companies we've seen all kinds of Finance Company both frauds and and just big big mistakes over time just one after another over the years uh and that it's just a more dangerous field to analyze it doesn't mean you can't make money on it we've made a lot of money on it but but it's it's difficult now obviously a Geico where you're insuring pretty much the same thing Auto drivers and you get your statistics are much more valid in something like that than they will be if you're if you're taking something that uh like asbestos liability uh you're subject to far greater errors and estimation doesn't mean that people aren't operating a good faith but you know I would take just take the asbestos estimates of the 20 largest insurance companies I will bet you their way off but I don't know in which direction and that's uh that's sort of the nature of financial companies I wouldn't fault the rating agencies in terms of not being able to to dig into the the uh financials and find things that that uh you know all of the companies that you've talked about have had big name Auditors and uh our auditors at Berkshire how many hours did they spend last year you know I don't know whether what it would be probably 60 70 000 hours uh and I'm sure another you know if you take major Banks they're spending more than that but you know can they be certain of the numbers I I doubt it Charlie yeah Warren is obviously correct that where you've got complexity which by its very nature provides better opportunities to be mistaken and not have it come to notice or to be fraudulent and have it not be found out you're going to get more frauded mistakes than you are if you're selling a business where you shovel sand out of the river and sell it by the truckload and just as a business that sells natural gas is going to have more explosions than a business that sells sand a business like these major financial institutions by its nature is going to have way more problems and that will always be true and it's true when the financial institutions are owned by governments in fact some of the worst financial reporting in the world is done by governments and governments institutions like government banks in China Etc so if you don't like the lack of perfect accounting and financial institutions you're in the wrong world and so after listening to How Warren Buffett and Charlie Munger answered Bill ackman's question the moral of the story is that it's really tough to know if financial service companies and banks are really reliable to be able to invest in because even if you have near perfect accounting records you never really know what's truly under the covers as sometimes the audited reports are just the tip of the icebergs and you don't really know how deep and far derivatives contracts could go and how entangled a company could really get in some of those if they have to end up paying out what they owe on some derivative contracts and the like so some of the things that we can also just keep in mind is that we should definitely make sure we are truly thinking that we know what a bank is all about and what Warren Buffett says is some of this boils down to the quality of the loan so there's a psychological element and if some of these Banks may have figured out some algorithms to correctly predict what kinds of people will be able to reliably pay back their loans maybe they'll be able to do somewhat better and one piece of the puzzle that I think some of this boils down to is how much you feel like you can trust management and what they say because you could possibly have invested in Berkshire Hathaway even if you didn't really understand its biggest business of insurance just because you trusted Warren Buffett and Charlie Munger and you knew that they would never do anything against what's in the best interest of a shareholder and maybe other similar insurance companies could be like that of Markell Corporation with CEO Tom Gainer leading the way and Buffett seems to be believing in this company because Berkshire Hathaway has invested in Markell so maybe that's another indicator of if you see some management that you trust also investing in other bank and insurance company stocks then that could be a potential sign that maybe you can trust these companies but of course that doesn't just relieve you from do doing a ton of research and thoroughly understanding what you're investing in before you were to invest so even though this is just one question out of many I hope that this helped you get a little bit of an understanding of what you can expect to have to look into if you were to consider investing in any bank or financial service company stocks and so your journey to being the best investor you can be till next time
Comments 0