Buying low and selling high is the way to earn the best returns on your investments. This sounds easy enough, but in reality most investors go after what's hot at the moment. The fall of U.S. financials has spurred David Bonderman of the private equity fund Texas Pacific Group (TPG) to put the buy low strategy into action with a $7 billion investment in Washington Mutual (NYSE:WM). Investors poised in a wait and hold position should weigh the risk of moving in too soon in search of the elusive bottom for financials.
TPG's investment in the residential mortgage-laden bank WaMu was announced in early April of this year. At the time WaMu was trading below $12 per share as non-performing loans and credit related losses mounted in the financial services industry. The stock took a brief move north of $13 before continuing its downward decline below $5 per share.
TPG and an unnamed group of investors participated in the $7 billion investment. In exchange, TPG and the group of investors received 176 million shares of common stock at $8.75. That's not all. Additional preferred stock was converted to common stock treating TPG to 227 million shares and the other unnamed investors to 418 million shares. All of the investors have agreed to not sell any of its shares until the 18th month of the deal's anniversary.
What's An Investor To Do?
True, an investment at this point means that an investor is getting in below the break-even point for TPG shares, but the risks are high. WaMu reported $5.91 billion in loan losses and $2.17 billion in write offs of bad loans for the second quarter ending June 30. Paired with slow job creation, tighter credit restrictions and higher delinquency rates on existing loans, WaMu has a long road to travel to profitability. If you have an appetite for risk WaMu maybe an option, but for the crowd seeking more safety a specialty-finance exchange-traded fund may be more in line with your goals. (To learn more, check out Debt Reckoning and Analyzing A Bank's Financial Statements.)
Vanguard Financials ETF (AMEX:VFH) delivers broad financial sector exposure for investors thinking of dollar-cost averaging their way in. If there's a large financial services firm that has written down debt, or reported negative earnings, more than likely it's in this ETF. Top holdings include Citigroup (NYSE:C), Bank of America (NYSE:BAC) and American International Group (NYSE:AIG).
Make sure you can swim before tangling with the big fish. TPG has price protections in place that would lower its $8.75 stock price to protect it from further dilution or a takeover of WaMu. If an individual investor buys in, the last time I checked his or her only protection would be to utilize options or setup a stop-loss order. Perhaps the best choice of all would be to simply choose an investment more suited to their risk appetite.
For more on protecting your assets, read Forget The Stops, You've Got Options.