Are there such rules? Although we don't believe in academic formula of measuring risks, we do believe in practicing sound investment principles. Hence, the rules of the game to invest in financial companies are:

- Focus on financial companies with strong fundamentals and run by shareholder-friendly management team that will benefit from the government's actions and investments.

- Focus on financial companies with strong insider ownerships and market shares.

- Focus on financial companies with low exposure to sub-prime and Alt-A loans and low exposure to real-estate and commercial loans in overpriced areas.

- Focus on financial companies that have high probability and possibility to be able to grow their revenues and profits over the long-term.

Examples of financial companies that fit the bill: 

- JP Morgan (JPM)

- Wells Fargo (WFC)

- American Express (AXP)

- Goldman Sachs (GS)

- Morgan Stanley (MS)

In general, financial sector is still in the long-term deleveraging process which could last for a decade. This could cause more write-offs and losses going forward. Hence, financial companies may still need to raise significant amount of capital to improve their balance sheets later. Shareholders should be aware of this risk.

Disclosure: Author does not own shares in any of the companies mentioned here at the time of publication. This may change without any notifications.