Why don’t I think Barclays (LSE: BARC) (NYSE: BCS.US) is a good investment for newcomers to the investment game? Let me count the ways…
Is it because I lost money on Barclays shares back in 2008? Well, no, not in itself, though that did make me focus on a glaring mistake I made, which I’ll come to shortly.
Is it because I, along with millions of others, lost trust in banks as a business and in senior bankers as a class? That’s part of it, yes.
You need trust
Now, unlike the tabloid newspapers, I don’t excoriate bankers for making vast profits for their shareholders and for making sometimes-risky investments along the way. That’s what they’re supposed to do — their only reason for being in their jobs is to make as much money for shareholders as possible.
But they must do it honestly.
It’s a dog-eat-dog world and “Buyer beware” should be a cornerstone of anyone’s investment strategy. But when greed leads banks to miss-sell products under the guise of providing “advice” to trusting customers, well, they’ve crossed a line.
As we sadly know, Barclays was responsible for a big chunk of the miss-selling that was going on. It miss-sold payment protection insurance to private customers, and miss-sold complex interest-rate products that were entirely unsuited to the needs of small business customers. The total bill for the shameful episode was last assessed at around £5.5bn.
Then there was Barclays’ part in the Libor-fixing scandal, in which the bank was fined £290m for attempting to manipulate the setting of daily interbank rates. That was quite astonishing.
Okay, we’ve seen some management shake-ups since these events, and we’re assured that all is squeaky-clean and as honest as can be now. But I think I can be forgiven for not trusting senior bankers any more — and I think trustworthy management is one of the key factors for novices when they consider an investment.
But back to my mistake…
Buy what you know
It struck me that when I’d bought Barclays shares I was breaking one of my golden rules — I was buying a business I did not understand. What’s that you say, the banking business is simple? If you think that, try having a read of Barclays’ 2012 annual report and see if you can understand all 356 pages of it!
The financial statements themselves don’t actually start until page 231, and there are just seven pages covering the standard income statement, balance sheet, etc. But they’re augmented by 74 pages of Notes, with Note 1 alone taking up the first four pages! I’ve got no chance of understanding all that, let alone getting a glimpse of the mass of financial shenanigans being described by it all.
I can, to some extent, look at profit figures, dividend payments and a few financial ratios and get some clue for valuation of the shares. But I have absolutely no idea at all about risk — Barclays could be on the brink of the world’s next financial disaster, and I just wouldn’t know.
And neither, dear novice, would you.
Stick to what you understand and trust.