I have a long-standing aversion to banks. To me, they represent the perfect collision of two really bad ideas:

i) Regular investment in bonds & loans – a strategy offering little prospect of capital gain, but which will (quite often) attempt to wipe out your capital. And the paltry yield you earn offers little compensation. I’ve never understood how people ever find this ridiculously biased risk/reward proposition attractive.

ii) The answer lies in leverage, I guess… Another terrible idea, but this is the incredible solution people usually seize upon to juice low returns. And it usually works just long enough for everybody to forget how savagely leverage can impact liquidity & solvency, when things take an inevitable turn for the worse.

Banks, of course, take this bad marriage to its ultimate & ludicrous extremity. [And require even more leverage to overcome the drag of their cost:income ratios]. But consider the private & public incentives – why wouldn’t they?! When times are good, leverage multiplies profits…which multiplies bonuses! And leverage makes it far easier to reach that ideal bank status: TBTF, where the taxpayer’s forced to pay for your mistakes (& bonuses).

Now, I’m sure you’ll occasionally make money investing in bank shares, but their pro-cyclical nature always guarantees the next disaster’s coming – you’re really just trading on the greater fool theory. Far better to focus on finding a decent investment, or two – and we don’t need to stray v far:

What I like to call the non-bank sector offers up v attractive opportunities. OK, I’m being a little flippant, call ‘em what you will – but (generally) these are banks with drastically lower leverage, misunderstood businesses, and/or substantially mis-priced market valuations… Basically, they’re NOT banks!

I own a few of them (with another handful on my buy list): For example, I have an undisclosed holding which is ostensibly a bank, but in reality is a distressed asset/work-out investor. Actually, I tell a lie…it’s really an attractive (indirect) agri-business play, which may offer eventual upside potential of 400-500%! Another holding is Tetragon Financial (TFG:NA) – ostensibly an investment fund, but really a bank (by proxy). Again, I’m telling fibs…I now own TFG because I believe it’s transforming itself into a listed alternative asset manager, complete with fund seeding platform & portfolio. But the largest & best holding…

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