Prof. Sanjay Bakshi’s portfolio is studded with several multi-bagger stocks like Eicher Motors, Ashiana Housing, Podar Developers, Ambika Cotton etc. However, Bank stocks are conspicuous by their absence in the portfolio.
Given that Bank stocks are such huge super-duper multi-baggers, their absence in the portfolio has always puzzled the Prof’s fans.
In his latest blog post “When You Buy A Bank …”, the Prof has come clean on why he is allergic to Bank stocks.
The Prof explains that the reason that he does not like banks is because they are “highly leveraged” i.e. use borrowed funds.
He points out that to be able to buy into a bank stock the expected return on its stock should be materially higher than the expected return of owning a debt-free business. “But, if such an adjustment ensures that I will almost never buy a bank then so be it” the Prof says with an air of finality.
The Prof also quoted a comment by Warren Buffett where he (Buffett) pointed out that “The banking business is no favorite of ours” owing to the fact that the high amount of leverage magnifies mistakes. Warren was, however, quick to add that while he has no interest in purchasing
shares of a “poorly-managed bank”, he is very interested in buying into well- managed banks at fair prices.
Interestingly, while the Prof suggests that he will not buy any bank stocks, Warren Buffett is very fond of banking stocks.
In the article “Why Buffett is always betting big on bank stocks” it is pointed out that four of Berkshire Hathaway’s top 11 holdings in the stock market are in banks and other financial services companies with an investment value in excess of $50 billion.
In a youtube interview, Warren Buffett explained that “banks are in the best shape they have been” (owing to tight regulatory controls) and that they are a good business to have.
Even Mohnish Pabrai declared recently that he is fond of banking stocks because they are “low risk” and “easy to understand”. In fact, Mohnish’s debut into India was marked by his buying two banking and one NBFC stock, namely, South Indian Bank, J&K Bank and GIC Housing Finance.
Prem Watsa also loves banking stocks if you go by the fact that Fairfax Financial Holdings invested large sums in Bank of Ireland and Eurobank. Prem Watsa has also recently revealed that Fairfax will invest Rs. 950 crore in IIFL’s finance arm.
Other savvy investors have also pointed out that well managed bank and NBFC stocks make a good investment because they are a “proxy” for the entire economy.
So, it does look like Prof Sanjay Bakshi is striking a discordant note by being wary about bank stocks.
We must note that Prof Bakshi is a stickler for principles. He recently revealed that though he made a tidy profit from VST, his “stomach churned” because VST’s business is “harmful to civilization”.
The Prof also put off buying MCX (at the height of its crises and when it was a no-brainer buy) on the ground that its business “encourages gambling” and is “not good for civilization”. The Prof acknowledged that he has lost out on hefty gains by not buying MCX but made it clear that he is not regretting that.
Now, we have to see whether the Prof’s theory for not investing in Bank & NBFC stocks has any takers amongst his followers.
Every investor has aversion to some or the other sectors. What is important is the thesis for sticking with a business/investment.