by Jeff Reeves | August 25, 2011 6:40 am
Bank of America (NYSE:BAC) has seen a wild ride over the last week or two as the market has seen volatility in the wake of an August correction. Well, that’s not completely accurate — when you think about it, Bank of America stock actually has been pretty crazy for the past few months. From the Fed’s refusal to grant BofA a big dividend increase to news of continued mortgage woes, the financial stock has had a rough 2011.
Now that we’re talking about it, though, perhaps I should also point out that BAC shares were volatile in 2010. And 2009. And 2008. Heck, Bank of America stock has been going haywire since Q4 2007 when shares lurched down 35% in just three months.
That wild ride continued today with news that Warren Buffett is investing $5 billion in Bank of America stock, sending shares soaring in early trading as much as 25%.
You might think Buffett’s endorsement is a buy signal. But let’s get one thing clear before we go any further in this discussion of Bank of America stock: This is an investment for speculators and aggressive traders only. You could make a bundle in a hurry or lose a big chunk of change just as fast. Like MGM Resorts (NYSE:MGM), Sirius XM (NASDAQ:SIRI) and a host of other so-called “cult stocks,” Bank of America stock is a highly liquid and highly jumpy investment that moves more on sentiment than on actual facts or numbers.
Sometimes we can tie a headline to why BAC stock did what it did. Other times, you’re just left to the mercy of how the market feels that day.
Those who want to psychoanalyze the market and make a risky bet with some “play money” outside of their bedrock investment portfolio find this appealing. High volume and low stock prices mean the potential for killer gains if you’re on the right side of the trade.
BAC stock leaped 10% yesterday. On Aug. 11, it leaped over 7%. Other big moves have been seen in the past and could be seen again. If you buy in, you can make a nice profit in a matter of hours.
The million-dollar question, of course, is when to buy in. And unless you have supreme confidence in your abilities as an investor, you should avoid BAC stock like the plague.
I put $1,000 of my own money in Bank of America stock at the beginning of this year because I thought the headlines and the fundamentals of the stock were improving. But the reality is numbers don’t really matter. What we don’t know about financial stocks is what’s driving the market right now.
As a result, I bailed out of my position a few weeks ago. (I tried to share the lessons from my 30% loss in a previous column) Strangely enough, it seems that was a “good” move based on the recent mayhem.
The bottom line is that the long-term trend for Bank of America is murky at best, and at worst a slow decline to zero. Heck, even the short-term trend appears ugly. Only an hour-to-hour view of the stock provides enough opportunity to warrant a buy — and that means that 99% of investors shouldn’t touch BAC with a 99-foot pole.
Warren Buffett is the exception, in that 1% of investors, because his sheer stockpile of cash gives him the privilege of buying preferred stock. Don’t think for a second that if you buy a few grand in common stock you are getting the same deal. Buffett’s 50,000 preferred shares of Bank of America will pay a 6% annual dividend. Common stock pays a measly penny per quarter, a yield of less than 0.5%. What’s more, if things go south, Buffett’s preferred shares will give him the ability to exit and make a soft landing. Try selling common stock during a downturn and you’ll get eaten alive.
Bank of America still is toxic, even with the Oracle of Omaha behind it.
Trust me, I wish it were different. Not just because of my own loss, but because such uncertainty in financial stocks like BofA and Citigroup (NYSE:C) was a hallmark of the 2008 meltdown, and that doesn’t bode well for the rest of the stock market.
Check out the other FREE stock picks that make up InvestorPlace.com’s Top 10 Stocks for 2011.
Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.
Editor’s note: This story was updated at 9:30 a.m. to reflect Buffett’s investment in the stock.
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