Yes Bank investors are a bruised lot.
Thanks to the bank’s aggressive lending strategy and concentrated exposures, the quality of its loan book deteriorated. The bank then erred by trying to hide the stress using technicalities. And the downfall was rapid.
In hindsight, all of us are smart. Yet, there are valuable lessons we can all learn from this saga.
Stock and Ladder tackles this by looking at the red flags that were evident all along.
1) Promoter feuds spell trouble
Make no mistake about it: a management’s acumen, foresight, integrity, and motivation all make a huge difference in shareholder returns. - Seth Klarman
The management plays a pivotal role in investor’s wealth creation. Corporate history is replete with examples of feuding promoter families involved in boardroom battles , public spats and an “open war” to wrest the management control.
Not only does this tarnish the company’s image, but diverts the attention of the management towards managing the adverse PR and firefighting, when it actually should be focused on strategizing and overseeing the direction of the company.
Needless to say, over time this could lead to destruction of shareholder wealth.
Something similar happened in Yes Bank’s case too. The differences among promoter families (Kapur Vs Kapoor) began as early as 2009 when Ashok Kapur met with an untimely death. Ever since, his wife Madhu Kapur has been fighting the Kapoor’s in the court. You can read some background on it here.
LESSON: Promoter infighting is a red flag. There is no one-size-fits-all formula. Do a careful analysis with the available information before deciding the next move.
2) Corporate governance matters
Managers that always promise to ‘make the numbers’ will at some point be tempted to make up the numbers.- Warren Buffett
Minority “outsider” shareholders are mostly at the mercy of the “insider” management when it comes to shareholder wealth creation. Managements perceived to be honest with a history of actions supporting their integrity are usually rewarded with a premium by the market. The opposite is also mostly true.
Does the mention of Satyam, Kingfisher airlines, Fortis, Ricoh India ring a bell? All had issues of corporate governance to outright fraud which resulted in massive destruction of shareholder wealth.
In the case of Yes Bank, the massive under-reporting of non-performing assets to the tune of Rs 6,355 crores in 2016-17 should have been a case for concern. The difference was three times the originally disclosed figures.
The second instance is a conveniently structured financial deal done to raise money on the strength of Yes Bank shares to tune of Rs 1,700 crores by Rana Kapoor’s family investment vehicles. (The actual modus operandi of sophisticatedly structuring the deal is in itself worth reading to comprehend how influential promoters can game the system.) The management chose to keep the shareholders in the dark on this transaction. Recently this very transaction caused further misery for shareholders due to the invocation of the pledge by the lenders.
LESSON: Corporate governance is a serious matter and shortcomings in this area are severely punished by the market. Your investing antenna should be up for such instances. After a thorough assessment of the situation, if you are unsure, it is better to err on the side of caution and exit.
3) There is no buy-and-forget strategy
When the facts change, I change my mind. – John Maynard Keynes
Even if you are a long-term investor, you cannot turn a blind eye to key market developments. Should you do so, it could be financially disastrous.
The Yes Bank stock has plummeted by 85% over a span of six months, and not without reason.
The trouble started with the regulator not giving the incumbent CEO an extension and insisting that a new one be appointed. Then the proverbial skeletons started tumbling out of the closet one by one and the counter was hit with a flurry of bad news. The latest being the invocation of pledged shares at a fraction of the original price.
Please do not conflate buy-and-hold with buy-and-ignore. Just because you have a long holding period doesn’t mean you ignore developments and act accordingly. Neither does it mean that you blindly hope that things will change. Hope is not a sensible strategy.
Warren Buffett, who epitomizes long-term investing, has also shown that when facts change he has the flexibility in thinking to quickly change his mind. His U-turn on airline stocks or liquidation of his entire position in Tesco just a year after hiking his stakes are classic examples on how you need to regularly validate your investing premise.
Buffett explained the Tesco investment in his 2014 shareholder letter:
At the end of 2012 we owned 415 million shares of Tesco, then and now the leading food retailer in the U.K. and an important grocer in other countries as well. Our cost for this investment was $2.3 billion, and the market value was a similar amount.
In 2013, I soured somewhat on the company’s then-management and sold 114 million shares, realizing a profit of $43 million. My leisurely pace in making sales would prove expensive. Charlie calls this sort of behavior “thumb-sucking.” (Considering what my delay cost us, he is being kind.)
During 2014, Tesco’s problems worsened by the month. The company’s market share fell, its margins contracted and accounting problems surfaced. In the world of business, bad news often surfaces serially: You see a cockroach in your kitchen; as the days go by, you meet his relatives.
We sold Tesco shares throughout the year and are now out of the position. (The company, we should mention, has hired new management, and we wish them well.) Our after-tax loss from this investment was $444 million, about 1/5 of 1% of Berkshire’s net worth.
LESSON: When facts change. re-validate your investing thesis. Learn to cut your losses and not let your losers run. Do not try to catch a falling knife; buying more of the same on the basis of hope, just to average your purchase is not a sound strategy. Always keep in mind that risk is permanent loss of capital.
4) Don’t be gullible when it comes to market predictions or analyst calls
If stock market experts were so expert, they will be buying stock and not selling advice. – Norman Augustine
Not too long ago, one could see an entire spectrum of analyst recommendations right from an outright BUY to an outright SELL with a HOLD in-between. Obviously some got it very wrong and absolutely no one had a target less than Rs 100, leave alone the 40’s level where the scrip is currently hovering around. An article in Economic Times noted that while FIIs offloaded the stock, and Rana Kapoor’s holding declined drastically, it was individual investors who were the biggest stakeholders.
Bold predictions made with confidence can sway many. I find it extremely strange and slightly unnerving to think that a section of the investors look up these pundits and analysts for tips and insights to make their investing decisions.
Unless one has the powers of a Nostradamus or is related to Paul the Octopus, the chances of predictions being consistently right is virtually non existent. Paraphrasing what j K Galbraith said, “The only function of stock market forecasting is to make astrology look respectable”.
The CXO Advisory group published a fascinating study on forecast accuracy of equity market experts. They collected 6,582 forecasts given publicly for the U.S. market from 1998 to 2012. The average forecast accuracy % for a market expert came around only 47%.
LESSON: Seek information but never seek tips and advice. View analyst recommendations skeptically. Take stock market predictions with a pinch of salt.
The original version of this article appeared in StockandLadder.com
Ravichand tweets at @stocknladdr
