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Another day. Another $700m fine

There’s something to be said for a market that is ‘happy’ that Commonwealth Bank of Australia (ASX: CBA) is fined ‘only’ $700 million dollars in an agreed settlement.

Well, $702.5m, to be exact. For 53,750 breaches of the Anti-Money Laundering and Counter-Terrorism Act.

Which is, well, good?

It seems to be the case, with CBA shares jumping 1.6% yesterday on the news.

If you feel like we’re through the looking glass, you’re not alone.

It’s good news, apparently, because the market was expecting worse. Which says it all, really.

The stock market, as if you didn’t know, is an expectations machine. It’s how companies that deliver record profits can see their prices crash, while others turn in horrible losses, and the share price climbs.

A wise man once said that happiness equals reality divided by expectations.

I don’t know if he was an investor, but with that insight, he should have been.

But back to CBA. The market expected a higher fine. When it was lower than expectations, investors cheered. At least a little.

But the banks — once the surest of sure things on the ASX, are down 15% from their 52-week high, measured by the ASX 200 Financials index. They’re down 17% from their 5-year high. They’ve gone exactly nowhere in over four years.

So much for the invincible profit machines, huh?

Now, to be fair, those numbers don’t include dividends, and as some of the higher-yielding companies on the ASX, that’s not nothing.

We spent a lonely few years trying to tell investors that banks weren’t the perpetual motion machines that many thought they were. It was, quite frankly, a lonely message to deliver.

Those who owned banks didn’t want to hear. Those who made easy money recommending the bluest of blue chips to their clients sneered in our direction. Telling an investor to buy a bank stock qualifies as the easiest sale in the world. After all, just look at the last three decades of growth.

Ah, if only trees grew to the sky.

Don’t get me wrong, I take no great delight in being right. It’s nice to be (for now at least) somewhat vindicated, but if banks make up a decent proportion of your portfolio — just as it does for many, many Australians — it’s been a tough few years.

We have almost no bank exposure in any Motley Fool service. Not because we have some house view — in fact, we have no house view about anything — but because almost none of our team believes that the banks are sufficiently likely to be market-beating from here.

Why? I’m glad you asked. There are a couple of reasons:

First, profit growth for years has been fuelled by rising house prices. And they’re currently going nowhere, fast.

Second, there’s that pesky Royal Commission. I don’t know what it’ll find, or how governments will choose to respond, but I think we can all agree that, at best, profits will be under pressure and at worst, lower.

Third, and this is key, especially if you haven’t been convinced by the first two: there are simply better opportunities out there.

It’s okay, in investing, to say ‘I don’t know’. In fact, I’d encourage it. Not sure if CBA will be a good investment? Good, move to the next idea. You don’t have to have a view. And you certainly don’t have to buy or hold the shares if you’re unsure.

Look for better ideas. For companies with stronger growth prospects. Fewer headwinds. Fewer motivated QCs looking to tear you apart (though to be fair, the banks themselves have made that job much easier than it might have been, given their alleged misconduct). And no, that’s not even including the recent allegations of cartel behaviour being levelled against one of CBA’s Big Four compatriots.

Find companies that are growing.

Find companies that are delighting their customers.

Find companies that have the promise that CBA held three-decades ago.

In short, look for the winners of tomorrow, not yesterday.

Our market is somewhat belaboured by miners and banks. It’s not exactly a ‘growth’ market, right? And before you say ‘Ah, but it’s a ‘value’ market’, have another look at those bank share price falls, above.

I’m regularly asked on telly what I think the ASX will do by Christmas. My answer is usually in two parts:

1. I have no idea, and neither does anyone else, no matter what they think; and

2. Where ‘the market’ goes is largely irrelevant unless you have 60% of you money in banks and miners.

Now, over the longer term, I think the ASX is going to struggle to keep pace with the US markets, because of the limited growth potential, in aggregate, of the largest companies on our exchange. I’ve explained why, in part, above.

But that doesn’t mean you shouldn’t invest.

Indeed, the very opposite.

While the media, stockbrokers and talking heads (yes, yes, I know) are focussing on the big end of town and the index, guess where they’re not looking?

Yep, at the rest of the market. The mid- and small-cap companies, some of which are absolute duds.

But some of which are creating new markets, delighting new customers and releasing new products.

Premier Investments Limited (ASX: PMV) Smiggle and Peter Alexander retail chains are defying the ‘retail gloom’ headlines.

SEEK Limited (ASX: SEK) is growing, here and overseas.

Freedom Foods is launching new products and creating new markets.

And there are many, many more.

You know how much influence those companies have on the nightly ASX 200 headline numbers? Almost none.

They get almost none of the headlines. None of the airtime.

But which would you rather own? Those lesser-covered, growing companies that are becoming more relevant to more customers in more places?

Or yesterday’s heroes?

I thought so.

The former group — the ones creating bright futures — are the companies we specialise in at The Motley Fool. Oh, we won’t turn our nose up at a great opportunity to recommend a high-quality blue chip if the price is right (we recommended Cochlear under $90 per share, and the price recently cracked $200), but we’re not bound by the general market orthodoxy.

Which is probably not surprising, given our name is The Motley Fool.

Maybe you’re not ready to abandon your broker’s favourite blue-chips. Fair enough. I won’t ask you to.

But maybe you’re also ready to see if there really is opportunity outside the old-faithfuls that are fast becoming were-faithfuls.

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Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Premier Investments Limited. The Motley Fool Australia has recommended SEEK Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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