Betting on a company based on its historical performance is a dangerous move, and one some investors appear willing to make with Commonwealth Bank of Australia (ASX: CBA).
There's no denying Commonwealth Bank has been a great investment. It has generated enormous wealth for investors since it first listed on the ASX in 1991 – in fact its shares have risen roughly 210% since the depths of the Global Financial Crisis in 2009 – and that's not including dividends.
But when it comes to the biggest and best performing shares, investors can tend to become somewhat attached to their companies. A recent article from the Fairfax press even likened this tendency to a marriage, where investors can fall into the trap of putting too much weight behind their biggest winners, even at times where that mightn't be appropriate.
Commonwealth Bank of Australia hit an all-time high just below the $97 per share mark earlier this year. At the time, many pundits believed it would go on to breach the $100 point mark, but it has instead fallen into an official "bear market". It's down 23% since its record high and is now near a 52-week low of $74.13. Ouch!
Is this a buying opportunity?
While the bank's fall over the last six months or so has broken the trance for some investors – allowing them to realise just how expensive the company's shares had become – it has only enhanced it for others. Some believe that now is the time to buy, based on the idea that Commonwealth Bank will return to $97 and go on to new highs.
If anyone could guarantee that happening, you might as well sign me up for a bundle of Commonwealth Bank shares right now.
But there's the catch – no one can guarantee that. Just because it has done it in the past doesn't mean it will happen again, and that's where I think some investors are getting it wrong.
Leaving the past alone
Commonwealth Bank is a great company and, like any great business, should be bought when the price is right. But things have changed since March.
Heck, I thought it was well and truly overpriced then, and I still think it is expensive today. The fact is, the bank has enjoyed a period of record earnings but earnings growth will become increasingly difficult to come by – particularly with the sector becoming more competitive and with tighter restrictions being placed on the banks' lending standards.
At the same time, some experts are saying the banks will be forced to cut their dividends in the coming years. Solid dividend yields have played a key role in driving share prices higher in the recent past – if you take that away, investors will not be happy.
The point is, investors need to assess the company as if they had no idea what the share price had done over the last five, or 20 years – that has become irrelevant. The task investors now face is determining what the company will look like in five, or even 20 years' time, and determine if now is a reasonable time to buy the shares on that merit, and that merit alone.
