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 –

1. I did not understand banking and financial businesses (I still don’t), and
2. 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.

“A lot of our respected financial institutions are just casinos in drag.” ~ Charlie Munger

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.