A ‘Dumb’ Deutsche Bank Investment Could Still Be a Winner

I’ve been investing for nearly 30 years. I’ve had my share of profitable investments. I’ve had a few clunkers, too. No one invests for any length of time without ringing up a loss or two. Such is the nature of endeavors undertaken by imperfect people with imperfect knowledge.
Investors frequently associate profit with intelligence and loss with stupidity. The relationship, though, is considerably more ambiguous.
Most of my large-percentage losses occurred in my early years. The losses were attributable mostly to ignorance. I was simply unaware of what I didn’t know: I would buy and sell in haste; I would buy on hype, while neglecting fundamental trends and capital structure; I would buy on margin.
When you’re in your early 20s, all losses are painful losses. Jamaica Water Supply, later JWP Inc., was my first stock purchase. I bought 100 JWP shares at $18. Within six months they were trading at $2, at which time I sold before the company declared bankruptcy. That said, I never considered JWP a dumb investment. It was the price of an education.
A reduced bank account – particularly when starting with a small sum – has the salubrious effect of honing processes and sharpening the mind. This is what matters most, because profits and losses aren’t always correlated with acumen and ignorance. Even the best analysis and most logical conclusion can lead to a loss. It’s impossible to account for all events.

A Deutsche Bank Blunder

A mistake made operating from ignorance is a learning opportunity. A mistake made despite knowing otherwise is a blunder. I view a recent High Yield Wealth recommendation and a personal holding in Deutsche Bank (NYSE: DB) as a blunder.
I view the Deutsche Bank investment as a blunder because I knew the nature of big banks: They’re black boxes whose financial statements obfuscate both the business and its risk. This fact was well documented in a 2013 bank exposé published in The Atlantic.
What’s more, I knew that big banks are repositories of moral hazard. They frequently bet the farm on leveraged directional derivatives. But unlike most businesses, all the king’s men have their back. The Federal Reserve will sweep Humpty Dumpty off the ground and reassemble him again.  Had it not been for the Federal Reserve’s extraordinary intermediary actions in 2008, Wells Fargo (NYSE: WFC), Goldman Sachs (NYSE: GS), Citigroup (NYSE: C) and Bank of America (NYSE: BAC) would have remained broken.
JPMorgan Chase (NYSE: JPM) CEO Jamie Dimon, in a moment of unedited candor, explained big-bank reality when his daughter asked him to explain systemic financial risk. “This type of thing happens every five to seven years,” Dimon said, referring to big-bank-instigated crises. I have no idea if Dimon’s nonchalance included a shrug.
With that said, I’m not terribly surprised – though I’m thoroughly disappointed (mostly with me) – that Deutsche Bank revealed it would write down $6.5 billion in goodwill and other intangible assets. Deutsche Bank could also scrap its dividend for the year due to a shortage of capital.
(For a list of rock-solid companies that definitely will not be scrapping dividends anytime soon, click here.)
With big banks, it’s nearly impossible to differentiate the real from the imaginary, as Deutsche Bank again proves. Of course, I knew this and recommended Deutsche Bank anyway on April 6, and then bought it for my personal account.
So I recommended Deutsche Bank, despite knowing the implied risks. That said, the 21% loss to date isn’t egregious, nor is it likely permanent. Deutsche Bank could very well turn out to be a profitable investment.
The ability to think on the margin is another requisite for successful investing. I can’t go back in time and change the past – sunk costs are sunk. But on the margin, big banks that have a kitchen-sink quarter – one where all losses are recognized at once – tend to perform well after the write-off. The SPDR KBW Bank ETF (NYSEArca: KBE), a fund of big-bank stocks, rose 140% after banks suffered massive losses in 2008 and early 2009.
Is a triple-digit gain in store for Deutsche Bank investors? Maybe not, but then again, maybe. All I know is that this will be the last time I find out.