Investing in Financial Companies

by Wes Bridel on October 8, 2010

in Stewardship

Investing in financial companies is a very intriguing way to protect against inflation.  We’ve been discussing asset management in a crazy economy.  We last looked at Treasury Bonds, How to defend against inflation with them, and How to short themToday we’ll look at this out of the box method that many of the world’s most famous investors are using today.

Have you ever wondered why Wall street and the US Government both continually do things which indicate they want inflation?  Ever wondered why this is?  We spoke about one of our government’s reasons for wanting this.  Another big one is that they get to pass out all these newly created Dollars.  The financial companies on the other hand are typically the place where this money goes first.  Therefore, they are able to make money on the new currency before it has had a chance to soak into the system and reduce the value of all other currency.  You could say that they are in the catbird’s seat!

If you believe that a heavy dose of inflation is coming, one of the ways to profit from this is investing in shares of financial companies.  Investing in these companies can be a dangerous and tricky game to play because financial shares often get hit hard in market downturns.  We think right now is a dreadful time to invest in most financial companies because we think they’re about to be found to hold alot of junk and many have been seeing trading profits plummet.

However, when the inflation does kick in, these financial companies will be controlling and making money on all this new money.  So their profits should easily rise with inflation.  We’re assuming of course that you’ve picked a solid company for investing in which doesn’t go under in difficult times!

Lately, many of the world’s smartest investors have been purchasing the shares of banks for just this sort of inflation protection and anticipated appreciation.  We feel like you better get in at a very low price to feel comfortable, but if you do enter correctly and purchase shares in companies that make it through any downturn, they will probably profit from inflation.

This is really a double edged sword because many financial companies are holding a lot of junk on their books (and not marking them to market) today because of the wild and free days of the mid 2000’s.  You can expect many of these assets to become worth very little and written off.  Many banks won’t survive.

This is probably an area where you would be wiser to hand pick stocks that are healthy and very cheaply valued.  If you have any thoughts or questions on this or other topics, we’d love to hear from you.

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