Sunday, 9 February, 2014

Significance of the Financial Sector

Why you MUST be overweight in the Financial Sector while investing ...

Came across a rather interesting article on how the Financial sector enjoys an undue and highly exaggerated status, certainly disproportionate to their true contribution to society (some would be tempted to add - "If any"):

The above article, which is set in a global context, is a bit "high-funda" and more relevant for those who have a predisposition to read such esoteric stuff. For the large majority of you, I would recommend that you simply take a quick and brief glance just enough to get the general drift of what the article is all about.

What's relevant for us is that

  • For the same quantum of capital deployed the financial sector generates much greater revenues vis-a-vis most other sectors- due to leverage
  • For the same quantum of capital deployed / revenues generated, the financial sector generates greater profits than a good chunk of other sectors
  • Ditto for the rate of growth of the firms in the financial sector - For instance, banks which started around a decade back like Kotak are far bigger today than similar-sized firms which started off around the same time in other sectors.
  • Due to systemic risks, more often than not, the governments around the world will NOT allow financial sector firms to go bust. They may allow a steel manufacturer or a real estate player or an automaker to go under - but not banks.
  • Due to all the above, the ever increasing proifts of banks accrue to the shareholders, but the downside risks due to issues like leverage are "sort-of" protected by the governments around the world.

Hence, while investing in shares, it may be a good idea to keep a keen eye on financial sector players and be willing to be significantly overweight in players in the financial sector vis-a-vis the market as a whole.

The gains will belong to you but not the losses.

Caveat: The last line above will obviously depend on your prudence, your entry levels, your fear and greed levels. But then, that's always true while investing in shares!



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