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Portfolio Insights by Brett Arends Archives | Email alerts
Dec. 6, 2011, 12:01 a.m. EST
By Brett Arends, MarketWatch
BOSTON (MarketWatch) "” When it comes to Wall Street, a lot of people are like Dilbert's boss. Anything they don't understand, they figure, must be easy to do.
A front-page story in Sunday's New York Times announced that "Financial firms are preparing to dole out huge amounts of stock at depressed prices, the value of which could rise substantially in a few years."
The race is on to create the $300 house for use in developing countries. Professor Vijay Govindarajan explains how the competition came about and how reverse innovation is an opportunity for multinational companies in developed countries.
"'This year is the perfect situation where they can say it is a modest bonus season, but in the end, it could end up making many of them zillionaires,'" said Jonathan R. Macey, a professor of corporate law and finance at Yale. "?Not all banks may do well in the long run, but most will.'" Read New York Times story on bank bonuses.
It must sound plausible to people who don't follow the stock market. It's enough to make angry readers pound the table.
My suggestion? If you think it's that easy, try it.
Shares in Goldman Sachs /quotes/zigman/188479/quotes/nls/gs GS +2.64% , aka the Vampire Squid, have nearly halved this year to just $100 amid fears of a Greece-inspired financial crisis. They were $170 at New Year's. Way back in 2007, before the wheels came off, they touched $248.
At today's prices, anyone who is even remotely bullish on the economy "” or even on Wall Street "” ought to be a buyer. The stock trades on a bargain-level eight times forecast earnings. It's barely 70% of book value. That's a distressed valuation scarcely ever seen since Goldman went public in 1999. Just once "” briefly, during the 2008-9 crash "” has it been this cheap in relation to net assets. For most of the past decade it's traded at twice book value, and in 2007 it traded at three times.
Anyone who knows for certain that the stock is going to boom again can simply go out and buy it.
You could, indeed, buy call options. For about $23 you can buy $100 options, good until January 2014. So long as the stock crosses $123 at some point between now and then, you'll make money. Maybe even "zillions." If it doesn't, all you lose is $23 a share.
The picture is similar at Morgan Stanley /quotes/zigman/182639/quotes/nls/ms MS +6.77% . The stock, $28 at the start of the year, is down to around $16. That's half book value, and less than eight times forecast earnings. Back in 2007 the stock topped $70.
You can buy $15 calls, good until January 2014, for as little as $5.40 a share. Indeed, if you want to take a leveraged bet you can buy $30 calls for just $1.65 a share. If the banks boom, you'll make a fortune.
Let the good times roll.
Okay, if you really wanted to emulate the bonus boys on Wall Street, of course, you'd place your bets with other people's money.
Just move all your current assets "” home, life savings and so on "” to where creditors couldn't touch them. Rack up your credit card debts, and buy fistfuls of these options on margin. If Wall Street boomed, you'll make a fortune. If it tanked, just file for bankruptcy, like Lehman Brothers, and walk away.
Cynical? Me?
Brett Arends is a senior columnist for MarketWatch and a personal-finance columnist for the Wall Street Journal.
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Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S... Expand
Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S. He has received an individual award from the Society of American Business Editors and Writers for his financial writing, and was part of the Boston Herald team that won two others. He was educated at Cambridge and Oxford Universities, and has worked as an analyst at McKinsey & Co. He is a Chartered Financial Consultant (ChFC) and Accredited Asset Management Specialist (AAMS). His latest book, "Storm Proof Your Money," has just been published by John Wiley & Co. Collapse
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