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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