You can know it Bank of America(NYSE: BAC ) As one of the world’s largest financial institutions. Today, it is a leading consumer-facing bank with over $3.2 trillion in assets. In the year He may be best known for the controversial bailouts he and his peers received following the 2007-2008 financial crisis.
You can also associate Bank of America with prominent investors. Warren Buffett.Who owns shares in it Berkshire Hathaway For years. Bank of America is Berkshire’s third-largest holding, accounting for approximately 12% of its portfolio.
Either way, it makes Bank of America the talk of the town by investing in companies that most people (myself included) know. Needless to say, Bank of America is probably the fastest growing stock. The company is already huge, with a market cap of $350 billion today.
But Bank of America can make you rich. Slowly? Can it compound over decades, making you a millionaire during your investment life?
At first glance, banking is simple. A bank pays you interest on the money you deposit. The bank takes your money and lends it to someone else at a high interest rate. The bank makes money (net interest income) from the difference between the interest they earn on the loan and the interest they pay on the deposit.
Big banks like Bank of America are very complex. They affect almost every sector of the economy, including personal and commercial banking, mortgages, student loans, commercial real estate and financial markets. When the economy is firing on all cylinders and people and businesses borrow heavily, banks can be very profitable.
But it goes the other way. When something goes wrong in the financial markets or the economy, it usually affects the banks. Remember the housing bust and financial crisis of 2007-2008? That’s partly because of the subprime mortgage bubble — to which, as you might imagine, Bank of America and other big banks were highly exposed. Their huge losses led to government financial intervention.
The American economy has been a long-term stalwart, but sometimes things fall apart for one reason or another. When that happens, Bank of America and its peers will feel it, too. It comes with the most entrenched region in the world’s largest economy. This creates a booming and turbulent nature for large banks, and their size and prominence sometimes make them targets for regulation.
Over time, the occasional crisis or recession has reduced American bank reserves.
In the chart below, you can see that Bank of America’s 2008-2009 collapse wiped out decades of investment returns. Most bank stock declines aren’t that severe, but Bank of America stock is no stranger to steep declines. Sometimes, it can take years to recover.
Even today, there are potential dangers. Rising interest rates have resulted in $108 billion in uncontrollable losses on reserve-to-maturity securities on Bank of America’s balance sheet. Now, as long as nothing happens that forces Bank of America to touch those securities, it doesn’t have to realize those losses. Eventually, these loans will be reached unscathed.
Still, investors shouldn’t abandon the risk entirely. Who knows what will happen in the future? In the year Who predicted the global pandemic in 2020?
Bank of America has been a favorite stock for Warren Buffett since he invested in it in 2011. But as great as Buffett is, don’t buy Bank of America just because he does. Warren Buffett has made special deals for preferred stocks and bonds when a big bank is needed. It is not the same as buying common stock on the open market today. Berkshire He cut his share In the last year in the company, although it is the main holding of Bank of America.
The lesson? Don’t buy (or sell) just based on someone else’s actions, even legends like Buffett.
There’s a lot to love about Bank of America. It is still one of the world’s largest banks and will continue to grow alongside the US economy. Analysts expect annual revenue growth of roughly 10% over the next three to five years. The company pays a steady dividend yield of 2.2% today, making it a solid holding in a diversified portfolio. And, if you buy and hold all the downsides, the stock has returned more than 3,000% since the early 1970s.
But a millionaire today? Probably not. Big banks are risk-averse, and Bank of America is now too big and mature to provide the explosive growth you need for life-changing investment returns anytime soon.
Before you buy stock in Bank of America, consider this:
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Bank of America is an advertising partner of Motley Fool Money. Justin Bishop It has no place in the said shares. He has positions in the Motley Fool and advises Bank of America and Berkshire Hathaway. The Motley Fool has Disclosure Policy.
