As for the concept Jay Weinstein raised of having very little physical assets, I don’t think it means much. It’s just a different “game”. Yes, everything that was said is true. Namely, you literally have NOTHING when you need to raise capital. But these firms benefit with high returns on capital when times are good. For instance, it is much easier for financials to expand or shrink. So the upside cancels things out.

If you never invested in companies with low tangible assets, you never would invest in other industries like media, technology, and so forth. I’m not saying they are identical to financials but if a technology company runs into problems, it usually has nothing left either.

If one is highly risk averse, it may be a worthwhile strategy to avoid companies with low tangible capital but you would be avoiding huge swaths of the invesmtent universe.

But this post is one of the best–I have been a pro for 21 years and hardly ever owned any financials for just the reasons outlined.

I have been amazed at the number of well-known but incompetent investors who have lost so much money by not understanding the simple principles that David has enumerated so well.

I sum up as follows: When an industrial company has trouble, you have plants, equipment, customer lists, inventory and finished goods that are of value even in a bankruptcy.

When a financial goes under, you have pieces of paper and desks–that’s it. That’s a lesson I never forgot from the 1988-1991 period.

Insurers can be good investments, as long as you can understand their lines of business–AIG is the perfect opposite of course. Everyone will want their insurance subs, but the rest may drag the equity to zero.

This blog is a rare gem amongst the blather that passes for most analysis. Thank you David.