It seems safe to say that not all of America’s financial-services companies will go out of business. In fact, over time, some might even recover a bit. So it’s tempting to try to snap them up at the bottom.
Careful! Some of the smartest investors in the world have been trying to do this for the past 6-9 months, and almost al have gotten burned. (The smartest so far appears to have been Merrill Lynch investor Temasek, which insisted on a provision that reset the price of its investment if the firm sold stock at a lower price–which it just did).
For example (WSJ):
Private-equity specialist TPG bought into Washington Mutual at $8.75 a share in April. The stock price Monday at 4 p.m. was $3.95. Warburg Pincus bet on beleaguered bond-insurer MBIA in January at around $12, after an initial investment at $31 a share. Monday the stock was at $4.27. A bargain-hunting fund recently launched by Fortress Investment Group is down about 30%.
A bunch of brilliant folks including Hank Greenberg bought Lehman (LEH) at $28 two months ago. It closed around $15. The list goes on.
One sign you might want to take your time. John Paulson, a hedge-fund manager who made $15 billion shorting the housing market, is getting ready to go long…but he hasn’t even finished raising his fund yet.
And then there’s the last problem with your “buy at the bottom” plan: You’re going to have a lot of competition (WSJ):
Debt-trading specialists already have a combined $100 billion that they are getting ready to put to work, according to participants in the market. Now, a growing number of hedge funds are raising more money from investors to buy beaten-up debt products or to purchase stakes in struggling financial companies.
John Paulson’s Paulson & Co. is the latest to cause a stir, with plans to launch a fund late this year to make equity investments in financial companies. When a bear like Mr. Paulson senses bargains, it could be a sign that the worst is over.
Other firms, like Morgan Creek Capital Management and Credit Suisse, have begun raising money that they will invest with hedge-fund traders looking for cheap financial assets. Private-equity firms specializing in financials, such as J.C. Flowers & Co., also are raising money to make purchases, according to investors.
“Everyone’s trying to raise a ‘distressed’ or ‘dislocation’ fund,” says Brad Alford, who runs Alpha Capital Management LLC, an Atlanta financial-services company.