It was sometime in the middle of 2006 when I met the management of a banking company for the first time. It was HDFC Bank, and I met one of their top executives along with my banking analyst colleague.
The bull market in banking and financial stocks was just beginning to pick up pace and, in hindsight, there we were at the right place and at the right time. We ended up recommending a ‘Buy’ on the stock, which turned out to be a big wealth creator for our clients. Trusting the analysis skills of my colleague, I wanted to buy the stock a month after she recommended it to clients, but stopped at the last moment.
Why? I did not understand the head or tail of HDFC Bank’s balance sheet (I still don’t). Of course, I understood how it made money – by earning interest on its loans, advances and investments – but my competence ended there.
I had no clue on how the bank priced its loans, how it tested credit abilities of borrowers (do they really test that?), and how it accounted for its investments and liabilities on the balance sheet. I knew that if India were to do well, banks would be a direct beneficiary. But it was a tough nut to crack for me, and I gave up there and then.
So, unlike our clients, some of whom would have made a 10-bagger in the stock, I missed this bus. Only that, unlike Warren Buffett who talks about sucking his thumb while missing such obvious opportunities, I had all my fingers tied behind my back, and it was my own choice.
Now the question that arises is – Do I regret my decision to avoid HDFC Bank and similar banking and financial stocks when I had the opportunity to buy them before they became multi-baggers?
The clear answer is – NO, I don’t have any regrets!
One reason I don’t regret my decision to avoid banking and financial stocks then – and ever – is that I made almost similar – though lesser – amount of money in other simpler businesses I invested in then.
But the biggest reasons I don’t regret this one decision is that –
- I did not understand banking and financial businesses (I still don’t), and
- I have never trusted a banker (I call my banker friends as financial ‘bakers’). 😉
Charlie Munger says…
The nature of a financial institution is that there are a lot of ways to go to hell in a bucket.
It was my conscious decision to avoid going to hell in a bucket, and that too with bankers. Talking of or dealing with financial institutions makes me nervous (I repaid my car and housing loans as soon as possible), and especially when these guys are trying to do well…like they were in the 2006 to 2008 period.
Munger says…
We fret way earlier than other people. We’ve left a lot of money on the table through early fretting. It’s the way we are – you’ll just have to live with it.
It’s All About Your Choices
Investing, like life, is all about the choices you make…and how you live with them. Avoiding stocks from few spaces like…
- Banking and financial services
- Real estate
- Pharmaceuticals
- Oil & gas
- Companies from Hyderabad (sorry, if you are from Hyderabad!)
- Few ‘reputed’ business groups that I know are scoundrels
…has been a choice I have made, thought over time and again, and stood by steadily. And that has made my investing life extremely peaceful.
Despite missing several multi-baggers from these spaces, as some sadistic people remind me from time to time, I am pretty happy with the performance of my portfolio over the years.
You may question me as I quote Munger talking ill about financial institutions, even as he and Warren Buffett have big money invested in the scam-tainted Wells Fargo. In fact, Buffett said this last year of Wells Fargo not being among the scamming banks then, “What Wells Fargo didn’t do is what defines their greatness.”
How do you define irony better? Even the likes of Buffett and Munger have failed to foresee the culture that can drive crazy even the best known financial institutions.
Relentless pressure, unrealistic sales target and a culture built on selling as many (dangerous) products as possible (they call it ‘cross-selling’) is what defines a typical banking and financial services business. Ask any bank employee and you will know the struggle they face at their jobs day after day.
Forget understanding their financial statements, what’s the point of investing in a business that does not treat its employees and customers well? I am not trying to tilt to the debate on what’s moral investing and what’s not, but financial institutions have their incentives all wrong.
And I am proud of myself for the fact, that I have not swayed in my 13+ years career in the stock market to deal with businesses I don’t understand, and managers I don’t trust.
I admit that I have invested in two financial stocks in the past (IDFC and City Union Bank; based on my colleague’s analyses), but I could not hold them for the long term as I never felt comfortable owning them. But 99% of the time, I have played the investing game to my choice.
I hate cockroaches, and there are a lot of them in the banking and financial services industry.
Of course, hating an entire industry is certainly a bias, but I live proudly, peacefully, and profitably with it.
Also Read:
I know you are one of the most honest person have come across, who has actual guts to share the misses.
Can i please ask you to rate Rana Kapoor – Yes bank.
It will be a great help actually.
Thanks Ratnesh. But no comments, please 🙂
The leftovers are Media,FMCG,Chemicals,Auto,Agri…
Vishal sir, what is the “Checklist of principles” you scan a particular stock of a company before buying it? Is there a fixed criterion? We are overloaded with information and what I feel is we do not require so much info to make good investment decisions, infact we tend to make false decisions if we have too much info about the company…
What are the basic fundamentals we need to see in a company to be able to make our decision?
suggest a good book for the purpose..
P.S. – I am a complete newbie and just started reading your blog/internet/books related to investment and seeking ideas for value investing before making a jump into the market.
Hi Siddhant, this post may be of some help to you. Regards.
hi Vishal
Sharing my experience
I also have same feeling about banks , very difficult to evaluate . .Investor don’t know banks have given loan to whom , what conditions etc .I also sell all my banking stock very recently as a part of evolution in investing (earlier buy just in ignorance ) but able to manage reasonable returns .Nice article .
Thanks Giriraj!
Hi Vishal. May I please know the reason for avoiding stocks from Pharmaceuticals space?
Arjun, I simply don’t understand the ABC or ANDA of pharma 😉
Grapes are sour
I don’t like grapes, so no comments. 😉
Hi Vishal,
Awesome posts, as usual !
What are your views on the cement industry in India ? I have seen businesses such as JK,JKL zoom in past 3-4 years. Is the rally actually true-value based thing ? Is the sector worth investing in ?
Cheers,
Thanks Ajay! Sorry, I don’t provide sector/company-specific views. Regards.
//Companies from Hyderabad (sorry, if you are from Hyderabad!) // Could you elaborate why you avoid companies from this region? Someone else mentioned this to me too, but did not explain.
I have found governance standards pretty low in companies from Hyderabad. Now it’s a bias, you see. 🙂
In your mailer dated March 3, you quoted this statement from Munger.
Disliking/hating tendency also acts as a conditioning device that makes the disliker/hater tend to:
Ignore virtues in the objects of dislike,
Dislike people, products and actions merely associated with the objects of his dislike, and
Distort other facts to facilitate hatred
If you recall Peter Lynch, he practised the opposite of Liking Bias, i.e. look for companies that were in business that were dull, even revolting – and came out with winners no one else found !
So, is this dislike bias something you are aware of, and not remove it, i.e. its OK to not practice what one preaches? 🙂
Arun, it’s more than liking or disliking someone. It’s about what Feynman says about “knowing the name of something vs knowing something.” I just don’t know what lies inside banks and how things will pan out in the future. So I stay away. Plus, it’s about trust in bankers that I lack.
Oh no, sir, I was not referring to banks.
I was referring to Hyderabad based companies, which as you say you are biased against!
Hi Vishal,
Very informative post. Must appreciate your work. I alway read your articles.
Thanks Raju!
I definitely agree with you on Hyderabad based companies and endorse your views. There’s no stopping scams relating to some Hyderabad based companies
Thanks Mr. Krishnan. 🙂
This is not the first infarction of propriety by Wells Fargo. The current scam of opening false accounts is just the latest one in a series of wrong doings, and perhaps is the least financially damaging. For history of their previous wrong doings, see here.
Coming to the Omaha Oracle, can one believe for one minute that he did not know of all the wrong doings over the years!? If one hasn’t done so already, a simple google search of the chasm he leaves between his words and actions will result in a lot of hits…just take your preference of which one to start reading !
Thanks for sharing your thoughts, Arun. Regards.
Awesome Vishal.
Whenever i visit ur site, I learn something or other.
Thanks a lot!
Thanks for sharing your views, Vishal.
I had some contra views though running through my mind :
1) If you were to drop the biases against banking & pharma., & have a look afresh., would you still see the same picture ?
2) Can competence not be developed ?
Just my views.
Hi Mukesh, it’s not just about competence, but trust. I don’t trust bankers seeing the chequered history of the industry. Regards.
I totally agree with you on these points; I am glad you mentioned these:
“unrealistic sales target and a culture built on selling as many (dangerous) products as possible”
“Forget understanding their financial statements, what’s the point of investing in a business that does not treat its employees and customers well?”
In fact I do not hold any banking stocks in my portfolio. It didn’t happen as a result of my analysis. But, as a customer, I always got the worst service from my bank and other financial institutions. I wish to share some of my experiences:
When I married, I went to the nearest branch, and I submitted the necessary form to change nomination to my wife’s name. But to my surprise, when I enquired after two years, I was shocked to learn that the nomination was still not changed. Upon investigation I found that the employee concerned provided me the wrong form, and eventually they could not make the change, and the same was not communicated to me (of course, this time I made sure that the change was done).
The relationship manager changes every now and then. The new manager has a standard list:
1) Everybody in the family should have account in their Bank;
2) If I do not have a credit card from their bank, I should go for one;
(I deliberately do not have credit card from the same bank where I have my SB account so that they cannot touch my money in case of any dispute with my credit card spending)
3) Their knowledge is very superficial, but they will give investment advice;
4) Recently I invested in Sovereign Gold Bond (SGB). Money was taken from my bank account. Thereafter, I never received any communication from the Bank. I had to write escalation e-mails even to get a simple response from them about the status. Look at their standard response time over e-mail– it is 5 working days!
I understand the bank gets about 0.9% as commission for selling SGB. They receive trail commission when I invest in mutual funds through them. But they provide the lousiest service even for a normal banking transaction. The trail commission they receive is taken for granted, as if it is their birth right.
Recently, my personal protect insurance came for renewal on 28 September 2016. I have a cover for 1 crore. I received the renewal latter before a month. I immediately started the renewal process. I could not renew the policy online, which I should have been able to. When I contacted their customer support, all they said (rather what they repeated like a parrot) was that my policy cannot be renewed and I should go for a new one with 25L cover. When I told my requirement was to renew the policy, and I need a cover of 1Cr, they were repeating the 25L new policy like a broken record. Thankfully, I could get the policy renewed from their local branch.
From these experiences I feel the financial industry has reduced human beings into brainless (and heartless) parrots. I sympathize with the employees. But after seeing all these, what sense does one get about this industry? I am educated and a bit financially knowledgeable. Imagine a villager in the hands of these people—the visual is very worrisome.
Of course, the bank and the insurance company I mentioned are large-cap listed companies. They might appear very tall today. But if they continue in this heartless fashion, and inculcate a lousy indifferent culture with their employees, their future is certainly questionable.
I agree with you, I avoided investing in such companies. I heard that investing greats like Prof. Bakshi does not touch banking stocks (because of their leveraged nature and the inherent risk).
As a last note—after these experiences, I am not surprised about Wells Fargo; and, in my opinion, financial services is the worst sector in India. Look at the NPA mess—working and poor people’s money is distributed to the rich and politicians (the parasites of the society).
Thanks for sharing your thoughts, Mr. Arulselvan. Regards.
These are some of the stereotypes we should avoid, evaluate each business by its merit . There are many good businesses from Hyderabad, why don’t we look at them. Crooks exist every where. Banking is a leveraged business, easy to blow up, but good management’s have given excellent returns to share holders. Business risks can be curtailed to some extent by management quality and position sizing. If I have to trust 3 Indian business houses, they will be tatas, Indy, hdfc
Agree to your point about avoiding stereotypes, Bala. But I go here with what Mr. Munger says – “You don’t have to pee on an electric fence to learn not to do it.” Regards.
Nice Post as always.
“checklist manifesto” by Atul Gawande is a good read on similar topic.
Yeah, it’s a nice book. Thanks Parag!
Thanks for your honest views.but we have made real money from both banking and pharmaceutical.sector.In the banking sector day Kotak seems to be a genuine and honest man and has created lot of money for retail investors.hence my view is that there is nothing wrong in investing some amount in those sectors.after all investing is done to create wealth for oneself in his life time
Thanks for sharing your thoughts, Suresh.
I avoid Delhi based companies – remember DLF !!!
I am scared of them too. 🙂
Really surprised to read the blog post. More than 30% of BSE market cap is on account of BFSI.
What I see through the entire post and all the comments so far, we are judging or evaluating the ‘financial performance’ of a bank as a ‘customer’ and probably not as an ‘investor’.
When Colgate gives you a lousy and outdated product for decades, no body complains. When GSK gives a horlicks or boost with wrong or doubtful formulation, no body complains. When P&G gives you a lousy product, no body complains.
Do you know that HDFC Bank is among top 50 banks of the world. Market cap of HDFC Bank (globally at 30th place) is more than 7 largest European banks. I am sure we all understand that you don’t earn such kudos consistently if you don’t perform well and that too consistently. And btw, your business comes from your customers only (?).
Thanks for sharing your thoughts, Kamal.
Appreciate your courageous expression of your views re spaces to you avoid. As to business groups which are scoundrels, you may like to add
wrong capital allocation (intentional or unintentional) as a criteria for avoiding them. Many of them use capex as the means of siphoning money. Also, mis-allocation of capital leads to poor ROCE.
Thanks Dilip! Yes, capital mis-allocation is one big reason here.
Now the question that arises is – Do I regret my decision to avoid HDFC Bank and similar banking and financial stocks when I had the opportunity to buy them before they became multi-baggers?
The clear answer is – NO, I don’t have any regrets!
this article and the above Q&A itself result of inner conscience of your mind.
psychology of regrets,commissions or omissions will come out at some stage. now by this article, regrets came out.
you may accept it or not. but the fact is this is the output of your article.
FACTS MAY BITTER.
Vishal, I would like to mention here that Financials and Pharma as sector have build enormous wealth / market cap in last 10 / 20 / 30 years.
It is not wise to completely avoid the sectors, may be with our limited understanding we should have exposure, knowing well some will miss some will hit. Knowing fully the hits will make hugh wealth and very easily take care of whatever losses we have, because these sectors are wealth creating sectors in india as well in globally.
thanks ajay
Hi Vishal, two quick points for your views when possible. 1) I remember in the (not so distant) past you had done a review of the annual report of Gruh Finance. Although I distinctly remember that you had stated a disclaimer that the sector (read Banking) is not in your circle of competence but had found your review of the annual report quite insightful. Just curious to ask; is it that you still do consider investing in the sector but back out for the reasons stated in your post or you just track the interesting companies in the sector (like Gruh) for purely academic purpose? 2) Talking of multi-bagger ideas; do you consciously look for (or advice looking for) multi-bagger ideas in the sectors within your circle of competence? Thank you and Regards; Jay
Hi Jay, nice observation. 🙂 However, investing is not looking at a still picture (like one year’s annual report) but like watching a movie. That is where I am constrained as far as the BFSI sector is concerned. I don’t trust most companies in the sector, and for the few that do have credible managements, I don’t know how the movie will unfold. One way is to blindly go by the fact that if it’s a good management and the sector is growing, I should invest. But that is not part of my process or investment philosophy. For instance, I like the management of HDFC Bank, but have great doubts about their business practices that are now similar to what other sale-sy, aggressive, growth-chasing banks do. Regards.
🙂 noted, thanks Vishal! Also, in my humble capacity, want to thank you for the really insightful yet simple posts on this website, its part of my regular read now.
Dear Vishal
You have touched on a minefield😂.( Industry- Banking, Pharma, Management- Reliance, Region- Hyderabad!! As for me, though I didn’t understand the banking industry, I went just by gut sense and pedigree, when investing in HDFC bank around 1996-97 and am still holding it😂.The older generation in Madras, when they retired in the 60’s and 70’s, simply put their money in Sundaram Finance- they trusted the TVS as much as, if not more than a scheduled bank! The trust was not misplaced and that continues even today.
When I was recruiting for the IT industry, one of my US clients, simply didn’t want Hyderabad candidates. During and post Y2K boom, the US consulate had blacklisted Osmania university, as many fake degrees originated from there and companies like IBM, Wipro and others likewise with recruitment firms aiding and abetting in this crime. When I was interviewing candidates at Kakatiya Sheration, Hyderabad, CID sleuths having seen my Ad in Deccan chronicle, walked in and only after checking my antecedents, allowed the interviews to go on. Those were the times!!
.
Hi Vishal,
really admire your taught, i worked in a international bank and i also don’t buy bank shares, reason is same, no ethics, every now a then we get training on values and ethics, in all such training we see only scams and fines imposes on various banks.
the favorite time pass talk in coffee breaks are fines and job loss due to that, i was surprised and shocked to know that not a single big bank without fine and its not one time, its quite regular things.
They do wrong, Govt or authority catches them, they pay fine and journey continue, sad to say but it’s habit among all major banks.
i don’t know about Indian banks, but in India if they do wrong and govt catches also, corruption level is so high, they get escape easily also so we don’t hear much fine in india, so you cant assume they are doing every thing good that’s why no fine, in summary, its hard to manage money with ethical way and hands get dirty.
overall i 100% Agree to your point and i also stay away and why to invest when there are so many other options are there.
Thanks for providing the insider’s insights into banking, Manish. 🙂 Regards.
I invested in HDFC Bank when it was offered for payable at par price to existing HDFC share holders way back in 1990s. Payable at par meaning, I could subscribe to it at its face value and I did. And boy what a multibagger it has been. Besides being a multi bagger I get dividend every year which is in multiples of face value of share. Taken together with HDFC dividend, I can live for eight months of the year. And for remaining 4 months I rely on my pension and I invest leftovers again in HDFC bank . I am enjoying the fruits of my patience of last 26 years. Even if don’t understand banking, HDBANKS history should convince you that it is a good business.
Glad to hear that. Thanks!
Frankly speaking, reading annual report of Nifty 50 companies confuses me a lot. Honestly, I could not understand any business model at all. Too many subsidiaries, products, services, geographies, I was not really sure which one was driving the company. Never made head and tail of L&T, Infy, Sun pharma reports and many others.
The only simplistic model that I could understand is banking and NBFCs. While I understand they get fee income from many services/products, interest derived from lending is the major one (90%). It is easy for me to focus on lending part and ignore others. No wonder my portfolio is skewed towards Banks/NBFCs.
Thanks for sharing your thoughts, Krish.
Hi Vishal!
I would like to understand why you labelled the entire BFSI space as difficult to understand. As you mentioned, cross-selling is a problem with diversified product offerings, but what about NBFCs especially focusing on a single product primarily like Gruh/Shriram Transport?
Furthermore, would you club the micro-finance institutions in the same bracket? I know there is SKS, but also a seemingly honest Ujjivan/Equitas and Bandhan(now a Bank).
Thanks!
Hi Pradyumn, it’s because I have not ventured closer to that sector which is largely a result of my lack of trust in BFSI companies. But this is just my personal opinion. Regards.