Why You Should Avoid Bank Of America Stock

  • Small investors need to think differently than institutional investors.
  • Buying Bank of America stock because its fundamentals align with value investing hurts the small investors account.
  • It is better for the small investor to buy higher priced, volatile stocks in an uptrend.

An overwhelming majority of analysts on Wall-Street are bullish on Bank of America (NYSE:BAC) stock. Apart from the two main financial ratios that align with a value investor's way of thinking, I am pretty confident it has more to do with a cheap stock price than any other factor.

It is possible for me to do a deep dive and give you a bullish, bearish, or even flat case for the stock. This type of analysis will make me look intelligent as long as I am able to defend my view no matter which direction the stock goes as it will depend on how I interpret the data in fundamental analysis. I am choosing to stay away from that because it will not be helpful for the small investor because he or she needs to think differently as he or she has a different set of objectives compared with big institutional investors with large sums of cash.


(Source: Yahoo Finance)

While institutional investors are focused on getting value on a long-term basis defined as 10 years or more through share acquisition, is this concept beneficial to you, the small investor? (I will assume the small investor's capital to be around $10,000 going forward.)

For the small investor with limited capital, more share acquisition via low price stock does not equal more price appreciation opportunity.

From the table below, when you look at Bank of America versus a Goldman Sachs, notice the price movement based on the 52 week ranges. Higher priced stocks tend to have a wider range, meaning the stocks actually move (An important concept that will be explained later on.) In other words, small investors, which most of us are, are better off steering clear of Bank of America and purchasing higher priced banking stocks such as Goldman Sachs (NYSE:GS).


(Source: Yahoo Finance)

Now if we move on to the charts, you can have a visual that will help you understand the point I am trying to convey.  The small investor with capital allocated to BAC would have experienced a few rallies. However, the numerical value would have been under whelming. (Yes, tops and bottoms cannot be caught. Taking this crucial fact into account, a 3 dollar rally may have resulted in a loss because the movement was so small. There is not enough room for a margin of error.) Another thing to keep in mind is that this should begin to give you a feel of how long catalysts tend to last. Some catalysts may last from a few days to a few weeks. Again, notice that the stock barely budged even with all the catalysts that caused each individual rally.



(Source: Yahoo Finance)

Compare the magnitude of the moves to that of GS. You should see a noticeable difference.


(Source: Yahoo Finance)

Each of the rallies were much larger in magnitude overall. The average rallies were worth approximately 20 points.  This is key because the small investor does not need to really try to perfectly time the market or hold for the long term. GS gives you plenty of room for error. Knowing this, you can allocate a small sum to take advantage of this fact.

You might be thinking of the volatility and how a small investor could not take that kind of swing in his/her account. As I have shown, the small investor would not blindly hold for the long term and be able to weather the fluctuations that occur as typical finance states, which is a detriment to the small investor. Unfortunately, volatile swings only seem to be the focus on the downside, never the upside.

Even an investment  in JP Morgan Chase (NYSE:JPM) would have provided decent swings in its rallies.


(Source: Yahoo Finance)

This brings up another valid argument concerning the infamous 10% annual return.  The majority of the investment community will speak of the long-term and decade holding period. Again, if you are the small retail investor this concept does not apply to you. The reason is you can get in and out if you believe that the catalysts for the banking sector are temporarily over without roiling the markets. It’s not about catching tops and bottoms. It’s about not being afraid to take profits, which is what no mutual fund manager or research analyst you see in mainstream finance will preach.

If you held for the past decade, notice that you would have lost out on price appreciation which would have resulted in a permanent capital loss. There is just no way to recover from a fall like that. In addition, the small investor should not concern himself or herself with dividends as BAC clearly shows below.


(Source: Yahoo Finance)

No dividend could protect the small investor’s account from the sheer destruction it suffered. Remember, there is no shame in protecting your capital and taking profits.

If there is a catalyst in the banking sector, the higher priced stocks that are currently trending higher should benefit even more. Don't buy Bank Of America stock because it is low priced and has "potential." The potential may never be unlocked.

ScroogeMC ScroogeMC   on Amigobulls :
Author's Disclosures & Disclaimers:
  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
Amigobulls Disclosures & Disclaimers:

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