My Investing Journey with Morgan Stanley Stock
My Investing Journey with Morgan Stanley Stock
I bought Morgan Stanley (MS) at $23.27 on 12 February 2013 and
sold at $46 on 14 February 2017. Including after-tax dividend, the absolute return is 102%.
About Morgan Stanley
MS is an investment bank firm. Before sub-prime crisis, MS
had done similar operation like Goldman Sachs. After sub-prime crisis, the new
CEO, James Gorman, who is still around leading MS, champions a new corporate strategy that MS
places more emphasis on wealth management. It is because CEO has experience in
wealth management business at his previous employer. Strong emphasis on wealth
management significantly reduces trading risk and bring more predictable cash
flow stream over years.
Rationale of Investing in MS
I first
looked at MS and never went on to invest because I had investment opportunities
with better risk-reward profile. One
year later, I was finding new investment opportunity. I re-review MS and found that it had interesting
risk-reward profile for me to invest in.
Firstly, I had strong conviction that the new CEO, with new
corporate strategy of placing more emphasis on wealth management, will improve
MS' post sub-prime crisis earning power.
Secondly, being familiar with how wealth management is done
in Singapore, I have no doubt that wealthy people and well-to-do people are
seeking the professionals' advice on how to grow their net worth or savings.
Almost everybody seeks interesting financial plans from professionals.
Lastly, I am looking for investment bank that does not depend too much on trading in order to boost the bottom line. MS fitted in that bill on my investment thesis.
With just three points above, my valuation is based on its
earning power. Although I am late to the ‘party’, I believed that it was
relatively undervalued. It is reasonable that financial firms can easily move
the money through many means in order to make profit. Accountants of
non-financial firms often found it difficult to collect money from credit
customers and hold money for later payment to suppliers – hence non-financial
firms cannot generate profit easily. With that in mind, it is fairly reasonable
to value its earnings power.
Happenings during the Holding Period
The Federal Reserve (the Fed) prolonged keeping interest
rate low, very close to zero interest rate. This negatively affect the banks'
ability to generate profit through net interest margin.
At the same time, the Bernanke and Yellen chose
to delay to raise the interest rate. This also negatively affect the banks'
trading department to make huge profit.
MS has underperformed its KPI. Despite of that, MS was able
to get approvals from the Fed to increase dividend per share 3 times during our
holding period.
MS redefined its compensation structure that all employees
were so driven to secure deals for MS. MS is successful to generate profits
through its wealth management driven strategy. It shouldn’t surprise anyone.
MS’ CEO was interviewed on a financial magazine for the MS success.
I am surprised that MS can complete evenly against GS over IPO and M&A advisory.
However, as mentioned that financial firms are so driven to
generate profit, they often incur compliance risk – failure to meet the
requirements. They do it since they have no issue to pay hefty fine as long as
they can generate enough profit. MS is no exception to it – You can find news
about MS paying the fine.
Rationale of Selling MS
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