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This is one bet I am winning… and it’s not Commonwealth Bank

Close, but no chocolates.

Our main Melbourne Cup tip, Mount Ethos, ran a very respectable third in the big race, but never really looked like the winner. For all I know, the other two nags we suggested, Vole use De Course and Masked Marvel, are still running.

Such is a gambler’s life. Three minutes of hope, followed by a lifetime of despair and destitution.

Still, my Betfair account lives to fight another day. I’ve not deposited money into it for close to a decade, and even then, I started with a relatively modest amount. My Betfair account scratches my inner-gambling itch, without costing me a cent.

The same can’t be said for many regular gamblers. It’s a mug’s game where the bookmakers are the ultimate winners. The odds are firmly in their favour, not yours.

The one bet that turned into a 10,000% winner

With the next Melbourne Cup now a year away, we can focus our attentions back to the stock market. Unlike gambling, investing puts the odds firmly in your favour, courtesy of the wonders of compounding returns.

Speaking of compounding returns, shares in the Motley Fool Share Advisor recommended 3D printing stock that’s “revolutionising the world”, jumped higher again overnight on Wall Street.

I fully admit to being smitten by this red-hot wonder stock, and with some justification. I’m closing in on a gain of 500% in double-quick time, exceeding even my wildest dreams.

Yes, I’m a little nervous. Yes, the shares are very highly valued at these elevated levels. But I’m hanging on for the ride, following the advice of Motley Fool co-founder David Gardner, who virtually never sells his stocks.

David recently celebrated a 10,000% winner in the form of his 1997 investment in Amazon.com  (Nasdaq: AMZN).

During the last 16 years, David watched, and held, as the stock went from $3 (his cost basis) to $95 (during the dot com boom) back to $7 (during the dot com bust) and all the way back up through $100, $200, $300 and now to $359.

Simply stunning.

That’s not to suggest finding the big winners of tomorrow is easy. It’s not. Amazon, on that scale, is likely a once in a lifetime investing winner. But we can try…

CommBank — another record high

Speaking of big winners, Commonwealth Bank (ASX: CBA) shares are on the up again today. after reporting cash earnings for the first quarter of $2.1 billion, up 14% over last year.

The stock has been one of the biggest winners of the past two decades, especially for investors who reinvested their fully franked dividends along the way. Today, Commonwealth Bank shares are trading at another record high, up over $1 to above of $78.

CAN

So much for me saying on Monday that the best of the gains for our four big banks are in the past…

Still, unlike gambling, in the investing game, you can be wrong but still be a winner.

My family holds Commonwealth Bank shares. Although I still think, from here on, the downside risks outweigh the upside potential for our big four bank stocks, I’m not one for fighting the market. The SMSF Army want bank stocks, they want their fully franked dividends, they want them NOW, and they are not going to have it any other way.

Party on, baby boomers and retirees.

For bank investors, it simply doesn’t get any better…

Over the past 12 months, National Australia Bank (ASX: NAB) shares are up 42%. Commonwealth Bank are up 35%. Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) are both up 33%.

And that’s not coming off a low base, either. For large-cap investors, especially eastern seaboard investors, whose SMSF’s are heavily focused on financials and banks, it simply doesn’t get much better than this.

My advice?

Enjoy the gains. Bask in the wealth effect. Lap up the franking credits and the tax refund.

But don’t bank on it happening again in the next 12 months.

Bank dividends under threat?

Perish the thought, but the way the boffins at UBS are talking, banks stocks, and indeed their precious fully franked dividends, could be under threat as the economy continues its uncertain and slow transition away from the mining sector.

Citing research from UBS, the front page of The Australian Financial Review says…

“The major banks’ profits this year of $27 billion were propped up by near record low reserves for bad debts, raising concerns amongst analysts about the sustainability of the huge earnings and ever-increasing dividends.”

For those of us basking in wealth-effect of a significantly higher stock market and a growing property boom, it’s easy to forget unemployment is still forecast to rise above 6% for the first time in a decade.

Adding to the caution, just yesterday RBA head honcho Glenn Stevens warned yesterday of “considerable uncertainty” in our economic outlook.

No wonder then the AFR says, somewhat stating the obvious, that higher unemployment usually leads to bigger losses for banks from people who can’t repay loans.

Emergency low interest rates are here to stay

On the bright side, for stock market investors at least, it looks like we might be stuck with these low interest rates for many months to come. In fact, Bill Evans, Westpac’s economist, still thinks it likely the Reserve Bank will resort to further interest rate cuts next year.

It might be music to the ears of stock market investors, and property speculators investors, and it might see off significant increases in banking bad debts, but it’s another kick in the teeth for term deposit holders.

All the above arguably points to more gains ahead for the ASX, especially as there’s still a mountain of cash sitting in term deposits, earning increasingly pitiful rates of return.

Sure, some of it is going into the property market, but with house prices already looking stretched and rental yields not much more than bank interest rates, by comparison, the stock market looks much more attractive.

Remember, it was only recently when David Bassanese’s article in The Australian Financial Review said…

… we still appear to be in the early stages of a multi-year cyclical market upswing.

In today’s note to clients, Bell Potter’s Charlie Aitken says he thinks we could be looking at ASX 6,000 sooner than his earlier prediction of mid to late 2014, concluding with…

… I think there’s every chance of a very good end to the year.

Only 48 days till Christmas…

As ever, I wish you happy and profitable investing.

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Of the companies mentioned above, Bruce Jackson has an interest in Commonwealth Bank, ANZ and Westpac

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