Wednesday, March 12, 2008

We Know That Big Banks Are Hurting, But What About Local Banks?

I think that most people are wary about investing in big banks like Citi-Bank, Bank of America, or JP Morgan at the moment. Even though they appear to be undervalued, who knows what baggage (subprime write-offs) they still have hiding in their closets. It seems that every time they start to rebound and people begin to think that things are turning around for the better, they drop another hammer and the stocks plummet. The yields being offered are appealing, but what if you fear that you might have a heart attack the next time that there is another big adjustment? Are there any banking sector investments out there that might offer something different?

Interestingly enough, it is possible to invest in your local community banks. Of course, some community banks invested in the same troubled subprime debt that big banks did, but many other local banks have taken a different, very conservative approach. For example, there are several community banks in the Midwest that specialize in lending to farmers (who, by the way, are making money hand over fist right now), and subprime debt isn’t even in their vocabulary.

These opportunities aren’t available on the stock market—at least not yet—so not only do they potentially offer access to the banking sector, but they also offer a tremendous amount of growth potential. It is not without risk, as small banks can and do fail much more frequently than large banks. However, there is potentially much more opportunity with small banks, and by getting in on a new bank (or niche one) you can avoid many of the mistakes and problems currently plaguing the industry.

One of our contributing writers recently wrote a “how to” article called, “How to Invest in Community Bank Stock with a Self-Directed IRA.”I recommend reading it if you are interested in learning more about how to do this. As the article title suggests, it is possible to buy this stock inside your self-directed IRA, which can be a nice way to diversify assuming that you have a large enough IRA balance.

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