Our big four banks have had a stellar run over the past 12 months, and indeed over the past 20 years.
I should know — my family has made hundreds of thousands of dollars over that extended period, practising a form of investing seemingly considered boring or out-dated in this era of 'fast media'.
Called buy and hold investing, beautifully augmented by dividend reinvestment plans, we have turned quite modest initial investments into vast sums of money, life-changing amounts for our family.
Yet, over the past months, I've been gradually selling my family's long-held bank holdings.
I'm taking advantage of the stretched banking valuations and redeploying the cash into some specially selected smaller stocks. These companies also pay a dividend, yet have much better growth prospects than those of our major banks, two of which — Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) — are now capitalised at more than $100 billion.
Have I lost the plot?
I'm the first to admit the bank shares could run even higher, and that's despite respected columnist Matthew Kidman in The Sydney Morning Herald saying it's unquestionable a share price bubble is forming in the Australian banking sector.
If there are two things I've learnt in almost 25 years of investing, they are…
1) Timing the market is impossible. You never buy all your shares at the bottom of the market, and you never sell everything at the top. Thankfully, however, there's a whole big area in-between where you can profit. That's where I prefer to play. To emphasise the point, in the past 5 years, Australia and New Zealand Banking Group (ASX: ANZ) have traded as low as $12 and as high as $30.
2) Bubbles almost always inflate way bigger than you can ever have imagined.
ANZ kicks off the bank reporting season this week, with Westpac following suit on Friday. National Australia Bank (ASX: NAB) reports early next week.
Expectations are for more of the same — solid if unspectacular profit growth and increased dividends.
No end game for this bank stocks party
It's those precise qualities that have driven the share price gains of the banks over the past 12 months. And, even though I'm a seller of bank stocks, there is no obvious end-game to the banking shares party.
Interest rates remain low, and are potentially going even lower. Lower interest rates will support the housing market. The mining boom is looking likely to end with a controlled slow-down rather than a total bust. Nothing to worry about here, then…
But there are times, when even Foolish Investors, like me, get that old feeling that if it sounds too good to be true, it usually is.
That's how I feel about banking stocks today, and although I might be leaving the party a little early, I'd rather do that than risk the mother of a hangover for my family's portfolio.
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The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. Motley Fool General Manager still has a beneficial (but shrinking) interest in ANZ, CBA, NAB and Westpac. This article contains general investment advice only (under AFSL 400691).
