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Read Richard Feynman Before You Buy Your Next Banking Stock…

First things first. This post is not about my analysis of banking stocks and how I expect them to do in the future. But it is something far more important than that. Thus, proceed only if you are interested to read further.

I am seeing a lot of research reports and recommendations these days on a lot of banking and finance companies – like Gruh Finance, Repco Home Finance, HDFC Bank, and Axis Bank, to name a few.

A lot of these banking and financial stocks are being recommended and bought because these companies are expected to be big beneficiaries of a revival in economic growth.

So, a lot of people I know who cannot differentiate between a bank and an NBFC, or NPAs and CASA, or GPMs and NIMs, are lapping onto these stocks…because their prices are rising…because a lot of “other” people are buying them.

What is more, a lot of others are buying some of these stocks because…

  • “CASA is going to increase”
  • “NPAs are going to come down”
  • “NIMs are improving”

If you are one of such people, and own these stocks for the above-mentioned reasons, or are looking to buy these, you must read this below note from the celebrated American physicist and a great teacher Richard Feynman.

I have picked this note from Feynman’s marvellous book – The Pleasure of Finding Things Out – and you will know by the end of it what it is doing here.

Read what Feynman writes…

The next Monday, when the fathers were all back at work, we kids were playing in a field. One kid says to me, “See that bird? What kind of bird is that?”

I said, “I haven’t the slightest idea what kind of a bird it is.”

He says, “It’s a brown-throated thrush. Your father doesn’t teach you anything!”

But it was the opposite. He had already taught me: “See that bird?” he says. “It’s a Spencer’s warbler.” (I knew he didn’t know the real name.) “Well, in Italian, it’s a Chutto Lapittida. In Portuguese, it’s a Bom da Peida. In Chinese, it’s a Chung-long-tah, and in Japanese, it’s a Katano Tekeda.

You can know the name of that bird in all the languages of the world, but when you’re finished, you’ll know absolutely nothing whatever about the bird. You’ll only know about humans in different places, and what they call the bird.

So let’s look at the bird and see what it’s doing—that’s what counts.” (I learned very early the difference between knowing the name of something and knowing something.)

Here is a video where Feynman speaks what you read above…


If you cannot see the video above, see here.

Knowing the Name of Something Vs Knowing Something
You got the point, right?

You can know the names of all the different numbers about a banking business – like NIMs, CASA, and NPAs – just like you know all the names of a bird.

But you are doing yourself a great disservice…

  • If you don’t know the implications of these numbers, or
  • If the implications are too hard to figure out, or
  • If you “pretend” to know the implications of the numbers.

You see, what separates successful investors from the unsuccessful ones is that the former know some things, while the latter just know the name of some things.

Stocks for the former are ownership in a business. For the latter, these are just ticker symbols or a medium to multiply money fast.

Now, the reason I have cited examples of banking and financial companies in this post is because these are among the toughest businesses to understand for any investor. Even most people working in a bank don’t know about their business.

I am talking here about understanding, say, a bank’s balance sheet and what lies inside it – which is a different and a difficult ball game than understanding the balance sheet of a manufacturing company.

While this is in no way my advice to avoid owning banking and financial companies in your portfolio, what I am trying to say here is that you must not own these (or any) stocks till you understand their key operating metrics and how they are going to be impacted, and how they will impact the company’s performance in the future.

It again boils down to the same point – Don’t buy something you know nothing about (or it’s a complex business to understand) for you will never know what can go wrong and when you can lose your capital permanently.

And remember – There’s a big difference between knowing the name of something and knowing something. Know this difference.

Must Read: The Pleasure of Finding Things Out ~ Richard Feynman



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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

Comments

  1. Anil Kumar Tulsiram says:

    HI Vishal

    Good one…

    For long I am looking for books which can explain Indian Banking and NBFC sector and various scams which have happened. By chance if you know any book, please share. Thanks [found one book on HDFC bank though…yet to go through]

  2. Even though I worked at senior level in manufacturing and construction industries, I fail to understand their cash flows, profit margins and growth factors.

    Take the case of cement industry, it takes 10 years for any cement company to double the production if mgmt aggressively pursue the expansion. That means it takes 10 years to double the stock assuming cement prices remain constant. For an efficiently run cement unit, the only variable is product (cement) price with constant output. The cement price history is also so fluctuating and does not give definite idea that YOY, to justify the rise in cement stock prices.

    In banking stocks or NBFCs, it is much easier to track the performance. If the customers are growing, loan book is increasing, reduced NPAs, one can at least understand that this bank/NBFC can grow over a period of time. While I understand the full process of cement production by closely associated with this industry, somehow am unable to grasp cement industry business dynamics. I have never bought cement stocks not sure whether I would ever buy.

  3. You do not adequately protect yourself by being half awake when others are sleeping.

  4. It is suggested to try and understand businesses before investing. Understanding is a process and therefore will take time. By no means can we ever perfect it but the hint is to stay inquisitive. I think prima facie if we get a sense of the business (atleast on Porters Five Forces) that is its demand and cost drivers and competition we should be good to go.
    For example, technology (not the typical IT etc) are hard to predict for example who will lead an amazon or google or apple, is very hard to guess leave alone understand. However, the rewards are very alluring. But we must remember for every Apple or Google there are many (possibly 100’s) in the technology space which would have fallen by the wayside.

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