Reflections on the week ending May 23, 2010

Fear returned to the markets and the share prices of wealth managers were hard hit.  It is important to remember that, while a 10% drop in markets is highly likely to drive a roughly 10% and 10%+ drop in revenues and earnings, respectively, of wealth management companies, a 10% drop in their share prices implicitly assumes that the 10% drop in markets is permanent.  We do not believe this to be the case.  It is important to remember that fear, and the volatility associated with fear, is the value investor’s friend – volatility provides the opportunity to purchase mispriced assets.

Continuing with the theme noted above, Ben Graham had said that you need both cash and courage when investing.  As banks in the US continue to fail and be taken over by the government / regulators, the opportunity arises for these banks to be acquired in a “cleansed” state and at attractive prices.  Earlier in the week, TD Bank acquired South Financial Group Inc. , a Florida bank with almost USD$10 billion in deposits.  When TD acquired Banknorth and later Commerce, it was building a platform.  Now, with the integration of that platform completed, a well capitalized balance sheet and “courage”, TD is able to take advantage of the opportunities being presented.