2017-04-17 18:30 谷闷恒 阅读 30044

JP Morgan 2016Annual Report


I haven't posted much about JPM recently asit's still basically the same story. Great CEO building an awesome companyperforming really well etc.  After even a couple of posts, they are basicallythe same.


But since I haven't been too active here recently, I figured why not? Let'stake a look at this. There is a lot to learn here, not just about banking andthe economy, but about markets and investing too.


So first of all, let's look at how well JPM has done in recent years. And it'snot just because of the huge bull market since 2008. If you look at theperformance figures below, they go back to 2004, and the performance chart inthe proxy is from 2007, which is the benchmark I use to get 'through-the-cycle'returns.

首先,我们看看JP摩根这几年创造了多少成绩,这些成绩并不只是因为2008年以后迎来来了一波牛市。从下面的业绩数据你可以看到JP摩根的良好经营可以追溯到2004年,不过年报里的业绩表现图是从2007年开始的,我以2007年的数据为基准算出了“周期之后”的投资回报。Check out the total return of JPM stock over various time periods:


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This is really crazy given what hashappened since 2000 and particularly after 2007. Back in 2000, I don't thinkanyone would have guessed JPM stock would outperform the S&P 500 index overthe next 16 years. People were bearish the financials after the collapse of the1999/2000 internet bubble, especially JPM which had a large investment bankattached to it with trillions in notional derivatives outstanding. For years,JPM has been considered the first domino in the coming financial collapse.


And yet, look at that! Yes, bears willargue that JPM got bailed out during the crisis etc. I've talked about that alot here so won't go into it too much, but I disagree. I agree that thegovernment bailed out the whole system, which is what it should do (that's whatthe Fed is for, and that's what the government has the power to do inextraordinary situations).  But I don't think JPM was in any danger unlessthe whole system itself collapsed, in which case nothing would matteranyway. 


So let's look at the performance of thecompany itself:


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This is just totally insane. TBPS has increased even more than the stock (totalreturn).

这真的是疯掉了,有形资产的账面价值(TBPS)增长甚至超过了股票本身(总回报)Here's a chart from the proxy that is indexed to 2007:


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That's a 10.5%/year returnsince 2007.  That's crazy. Let's say you knew that theworst financial crisis would come and almost destroy the country. People wouldhave called you an idiot if you said, "Fine. I don't care. My stock willreturn 10.5%/year over the next 9 years!".  In fact, I did own JPMand didn't sell in front of it, even when cracks appeared. I didn't sell anyduring or immediately after either. 


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 Investment Lessons


And here's sort of the lesson on investing. It was widely known that Dimon wasa super-competent manager when he took over Bank One. I think he was alreadyconsidered at the time one of the best managers in finance. When he leftCitigroup, many thought C would collapse because Dimon was the detail guy thatmade sure everything was OK.  Sandy was a big picture guy while Dimonchased after the details. No Dimon == noone looking at the details =>eventual blowup. (I heard this from someone that was there at the time andwatched how they worked up close too.)

这儿有一些关于投资的经验教训值得吸取。吉米·戴蒙的超强管理能力人尽皆知,他接管了第一银行,我觉得他当时是金融领域里面最好的经理。他离开花旗集团的时候,很多人觉得花旗集团可能会垮掉,因为戴蒙是一个事无巨细的稳重的管理层。而戴蒙离开之后,喜欢画大饼的桑迪·威尔接手。失去戴蒙=没人掌管一切→最后崩溃。(我是从一个当时还在花旗银行工作的人那儿听到这些的,他很清楚他们是如何紧密合作的)But a lot of people didn't invest in JPM because it was a large money-centerbank and banking cycles tended to be severe. Everyone remembers the bankingcrisis of the 1970's and the late 80's/early 90's.


So the thought was 'thanks, but no thanks'.  I confess I was one of those.I've owned Bank One since forever and JPM too, but never allowed it to become ahuge position because of that. (On the other hand, I would not mind being 100%in Berkshire Hathaway, even though BRK has gone down 50% on a number of occasions).


In 2007, bank stocks were expensive and we were at the tail end of a very longcredit cycle. Contrary to the claims of some best-selling books, the leveragebuilt upon shrinking credit spreads was pretty well-known within the industry.It would have been wise to not be too exposed to financials at this point.

2007年,银行股票非常的贵,而且当时处于长期的信贷危机的末尾阶段。跟那些畅销书中说的恰恰相反,在信用贷息差收缩的基础上放高杠杆金融杠杆的做法在业内无人不知。这时候,不暴露在金融股的风险之下是很明智的做法。But, when you own a great business run by great people, it is often better offto ride out the cycles. And that's another lesson here with JPM stock. This isnot really hindsight trading either, as I would have told you back in 2007 thatJPM and GS would be the survivors in any crisis, and they would come out theother end bigger and stronger (as Charlie Munger says about how great companiesgrow; they grow in bad times).

不过,一旦有了杰出的人运营杰出的业务,平安度过周期性的危机就轻松了很多。这是JP摩根带给我们的另外一个教训。这绝对不是放马后炮,早在2007年的时候我就说过JP摩根和高盛可能是金融危机中的幸存者,危机过后它们会发展得更加强大(就像查理芒格说的一样,伟大的企业无论是不是身处好的时代,它都会增长)。The argument back in 2007 really focused a lot on the notional derivativesoutstanding at JPM. This was one of the major red flags that kept someinvestors away. I have managed derivatives before so I understood that notionalamounts outstanding is not a measure of risk. When you are abig banker and dealer, you end up with huge amounts of notionals outstandingbecause, for example, if you issue bonds for an issuer, you sometimes dointerest rate swaps to accommodate the client's cash flow needs. Same with FX.As a major FX dealer, you often use swaps as a tool to help risk-manageclients' risk exposure.  Those 'straight' swaps often have very littlerisk.


Cyclical or Secular? 


The other lesson is that markets have cycles. After the financial crisis andafter JPM has shown its resilience and management competence, it traded cheaplyfor a long time. Even the most prominent bank analysts would say things like,"Yes, it's cheap, but there is no reason to own it as regulations make ithard for them to make money...". I've heard that argument over and overagain post-crisis.

另外一个经验就是:市场是周期性的。金融危机之后,JP摩根展示出了自己的复原力以及管理能力,在很长一段时间内它的交易价格都很便宜。不过,就算是业内最优秀的银行业研究员说出来的话都是:是的,它(JP摩根)很便宜,但是在危机后出台的法规下, JP摩根想盈利实在是太难了。金融危机之后,我不止一次听到过这番言论。

But these folks held a linear, static model in their heads. They didn'trealize, or underestimated how the industry would adjust to new regulations andrequirements. If the regulatory capital burden got too heavy in a line ofbusiness, they would drop it. They can cut expenses. They can reprice productsas new regulations apply across the industry.  


Maybe this was due to the short-term nature of Wall Street; with regulatoryheadwinds and low interest rates, bank stocks were simply not recommendable.


Either way, long term value investors look to invest in great businesses atreasonable (or cheap if available) prices.


And interestingly, now, hedge funds and others seem to bepiling into banks.  Nobody wanted JPM at $20 or even $40, and now they arepiling in at over $80!  And people say the market is efficient, pickedover etc.


I think all of this sort of just illustrates the cyclical nature of markets.The key in successful investing is being able to see the difference betweencyclical and secular. It's true that this is very hard a lot of the time. But Inever thought banking itself was in secular decline. Every year, Dimon hasshown how much business needed to be done over the long term in banking.


Regulations tend to be cyclical too as the pendulum can swing wildly from oneextreme to the other. We are now seeing the pendulum start to swing back theother way. As Dimon says, a lot of this can be done (simplify regulations)without congressional action.


I do believe that this max exodus out of hedge funds too is cyclical, as is themove towards machines (vs. people) / indexing. I do believe that most hedgefunds probably don't deserve to exist, and machines will more and more takeover money management, but I think it will still be very cyclical.  Wehave seen this before in the past; move to quantitative money management,indexing vs. active, hedge funds vs. index etc...


Buffett and WFC 


And this sort of thing explains why Buffett has been buying WFC for all theseyears, even right before the crisis. I always heard comments like, "doesn'tBuffett see this big trouble brewing? This huge storm?  Doesn't heunderstand that the era of big banks is over?". He has been buying before,during and after the crisis at 'high' prices. 


He focuses on what a business can earn on a normalized basis over time, so hedoesn't care about the short term outlook. He doesn't care about what otherpeople say. He doesn't worry about downturns as strong institutions should bemanaged to survive and grow in such situations. Trading in and out to avoidsuch dips is a loser's game.


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2004年到2016年富国银行有形资产帐面价值及平均每股股价2x Tangible Book


Dimon says it was a no-brainer to buy back stock at 1x tangible book, but saysthis year that it still makes sense to buy back stock at 2x TBPS. That would beover $100/share


That sounds insane. Who would have evenguessed JPM would be closing in on $100 just a couple of year ago? 


Assuming a 50% payout ratio on $6.00 or soin EPS, that would be $3.00/share in dividends.  Usinga $100/share price, that's a 3% dividendyield.  Assuming JPM grows along with the economy (4% nominal), that's anexpected total return of 7%/year against what I would assume anormalized long term rate of 4% (actual is 2.3%).  As a sanity check, EPSgrew around 4%/year from 2007 to 2016. 

假设EPS6美金的派息率是50%,那么股息是3美金一股。假设 JP摩根的增长跟整体经济增长水平保持一致(通常是4%),那么每年的总体回报率是7%,我给出的长期平均回报率是4%(实际上是2.3%)。再核对一下,EPS2007年到2016年每年增长4% 

OK, students will immediately jump on meand argue that earnings growth should be 6.5%/year for a 9.5%/year return(50% retention at 13%). Well, JPM is a big bank so it may not be able to growthat much more than GDP over time, so let's just say earnings grow at nominalGDP.  That would just mean that payouts would be higher as capital can'tbe invested at a 6.5% growth rate.  


In that case, payouts may be 70%.  Ona $6/share EPS, a 70% payout is a $4.20/share dividend for ayield of 4.2% (again, at a $100 stock price).  4.2%dividend yield plus 4% growth is 8.2% expected return. 


Of course, as we wait for things tonormalize, bad debt may normalize too; JPM is sort of over-earning in the sensethat credit trends are really good now. This has probably bottomed out andshould head higher. I don't think there are any time bombs at JPM, but it willsort of be a race on the economy picking up steam and interest ratesnormalizing versus credit trends bottoming out. 


Cheap Labor


The great thing about JPM is that we get all of this for so cheap. We paidDimon 0.1% of profits. Compare that to other financials! Let'snot get into hedge fund fees here.


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