The term “advances” is a bit of a chameleon in the investment world, popping up in two very different, but equally important, contexts. Primarily, it refers to the loans or credit facilities extended by a financial institution, like a bank, to its customers. Think of it as the core business of a bank: lending money out (advances) and hoping to get it back with interest. These advances are the bank's assets because they represent a future stream of income. For the borrower, of course, that same advance is a liability. In its second, more technical sense, “advances” refers to the number of stocks on a particular exchange that have increased in price over a given period, usually a single trading day. This version of “advances” is a key ingredient in measuring the overall health and sentiment of the stock market. Understanding both meanings is crucial, whether you're dissecting a bank's financial statements or taking the temperature of the entire market.
When you hear a bank talking about its “advances,” it's talking about its loan book. This is the bread and butter of banking. These are not just giant corporate loans; they come in all shapes and sizes. Common types of advances include:
For a value investor, the quality of a bank's advances is paramount. A bank can grow its loan book rapidly, but if it's lending to risky borrowers who can't pay it back, disaster is just around the corner. This is why savvy investors scrutinize a bank's portfolio of advances, paying close attention to the level of Non-Performing Assets (NPA)—loans that have gone sour. A bank that consistently makes prudent loans (high-quality advances) is a well-managed business.
This is where we switch from analyzing a single company to analyzing the market as a whole. In this context, “advances” are the stocks that won the day—they closed at a higher price than the previous day. They are always discussed alongside their counterparts: “declines” (stocks that closed lower) and “unchanged” (stocks that closed at the same price). This data is used to calculate market breadth indicators, the most famous of which is the Advance-Decline Line (A/D Line). This is a running total of the number of advancing stocks minus the number of declining stocks each day.
While a value investor's focus is on the intrinsic value of individual businesses, understanding the different meanings of “advances” provides crucial context.
If you're considering investing in a bank, its advances are the main thing you're buying. You're not just buying a brand; you're buying a portfolio of loans. A value investor must act like a detective, digging into the bank’s reports to understand the quality of its loan book. Is it growing its advances responsibly? Are its Non-Performing Assets (NPA) under control? A healthy, well-managed book of advances is a hallmark of a solid banking investment.
Value investing legends like Benjamin Graham and Warren Buffett teach us to be wary of short-term market sentiment, famously personified by Mr. Market. However, that doesn't mean we should ignore the market's mood entirely. Market breadth data, derived from advances and declines, can be a useful tool for a value investor. When the A/D line shows widespread pessimism and fear, it might just be the perfect time to go bargain hunting, as Mr. Market is likely offering wonderful businesses at silly prices. Conversely, when a soaring market is propped up by very few advancing stocks, it could signal irrational exuberance—a time for caution, not greed.