pabrai, repco, and sell decisions

Mohnish Pabrai is a great guy, and I have immense respect for him. But, I don't make my investment decisions based upon his - or anyone else's - actions. I would like to hold myself responsible for my deeds. Sure, I will hear those I admire, and Mohnish is one of them. 

I don't know why he bought Repco Home Finance during April-September 2018. There must have been good reasons to buy. 

As per this report, his fund bought 3,719,265 shares during April-June 2018 quarter. 

During that period, the lowest quoted price was Rs.540.90, and the highest price was Rs.642.40. 

The fund made more purchases of the stock during the next quarter ended September 2018.

During July-September 2018, the lowest price was Rs.425 which was only at the end of September 2018, and the highest price was Rs.624.95. 

As of September 2018, the total number of shares held by the fund was 3,909,699. 

We don't know yet whether there were additional buys during October and November 2018. However, what we know now is that the fund sold some shares on 29 November 2018 at a price way below cost. 

BSE:

NSE:

A total of 948,535 shares have been sold. And again, I don't know why he sold the stock. There must have been good reasons to sell. 

It is fine to sell a stock only when our initial analysis turns out to be incorrect; or when the company's fundamental situation deteriorates subsequently for whatever reasons; or when we find a better buy. 

I don't know what the reasons are for the fund to sell the stock within such a short period of time. The stock has not even made profits yet for the fund. There must be something we don't know. Is there a much better opportunity for the fund to not only recoup the losses on Repco, but also likely make higher profits? Hmm...

In investing, these things happen, and we have to move on. 

yes bank, market, and rating

Yes Bank is taking its toll; rather its investors are. It is becoming too much, or it's not? In September, the RBI said, weak compliance, weak governance, and wrong asset classification. The CEO had to step down without extension of tenure. 

It was enough for the stock to plunge. On 28 September, the stock was staring at Rs.165 per share. Things seemed to be better in October and November as the stock was trading at around Rs.200, not moving much. October's high was Rs.248.90; and low was Rs.180.70. November's high was Rs.227.90. But then...

Some of the board members resigned later in November. The stock closed below Rs.200 for the first time in the month on 16 November. Here's the snapshot of the skin in the game that the board exhibits (as of March 2018).

Not all directors own shares in the bank, and those who own have insignificant number of shares.  This is not new to only Yes Bank; most of the companies in India have board members and even executive officers who do not own meaningful number of shares. I find that surprising, but want to keep the story for another day.

Whereas look at the volume of shares owned by the CEO and the CFO. I wouldn't conclude that they will act against the interest of their fellow shareholders. I don't know the inside story; but the RBI's remarks regarding corporate governance are serious, and should be taken seriously. There is time to repair the damage caused, and that should be the new CEO's top priority.

On 26 November, it was reported that the CEO, who is also one of the promoters, had raised money from two mutual funds through his associate firms by keeping his stake in Yes Bank as some sort of a guarantee. It was interpreted by the market as shares pledged, but not reported. This perception was bad enough for the stock, and it closed the day at Rs.187.90.

On 27 November, Moody's downgraded Yes Bank's ratings citing corporate governance and growth concerns. The stock had to react; Rs.182.65. On 28 November, Rs.162.10. And today, 29 November, it quoted as low as Rs.146.75, but closed at Rs.160.45. The trading volume was 292 m shares. I don't have any respect for the rating agencies, but the truth is that it becomes difficult for the downgraded business to raise cash on favorable terms; the cost of borrowing goes up. 

The two promoters must have felt it too. Let's do some math. Rana Kapoor, including Yes Capital and Morgan Credits, owns 245.875 m (10.65%) shares in the bank, and Madhu Kapur, including Mags Finvest, owns 213.987 m shares (9.27%). 

Based on the 20 August 2018 price of Rs.404, the market value of Rana Kapoor's shares was Rs.99.333 b ($1.419 b); and Madhu Kapur's was Rs.86.450 b ($1.235 b). As of 29 November, the respective market values are Rs.39.450 b ($563.580 m) and Rs.34.334 b ($490.489 m). It is still a lot of wealth. But, when the stock price falls 60% from its high, the value of shares goes down with it. Yet, it is important to remember that these are only paper losses until they are realized through transaction. 

Is the reaction from market an overreaction of some sort? While time will tell us about it, I guess, there are a lot of people out there on the media and social media giving enlightened opinions about how a badly managed business is a bad investment. Well, when the stock was going up, these naysayers were probably talking about some other stock. Never mind, it is the business of people to talk about other people. 

Every business has a price. A good business has a price, and a bad one has another. I am not too sure at the moment whether Yes Bank is a bad business. Yet, at the price it is quoting now, probably there is some value to be claimed by patient investors. Didn't I say something like that in early October too?

kotak bank stake conundrum

Kotak Bank has been a well run bank among the private banks of India. With gross npa of 1.94% and net npa of 0.73%, its track record has been extraordinary. The net margins are over 4%; business is growing. And the market is willing to pay the price for its equity. At current prices, it doesn't come cheap in excess of 4 times September 2018 adjusted book value. 

Yet I reckon, if it grows at 15% in the next 3 years and market allots a pb of 3.50, the investor will have about 8.50% annualized return. Is that enough, is a question for the investor as of now. 

However, with the RBI asking the promoters to reduce their stake from 30% (current) to 20% by December which we see likely not happening by the time, there are chances that the stock prices might get lower. Time will tell whether they will become attractive enough to meet the investor's opportunity costs.

This article presents options available to the promoters well; however, I don't think this will leave investors on edge. Investing isn't a short term game; so they should relax and take it easy. If they believe in the capabilities of the promoter manager, they should be fine.

At the moment though, the promoters have the following options to keep the regulator happy, unless the RBI accepts the current status of Rs.5 b perpetual non-cumulative preferred shares.

The promoters have the option of selling 191 m shares or issuing 477 m fresh shares in order to meet the RBI's directive. I am assuming that fresh issue will have to take place at discounted prices. With the first option, the promoters will have challenge of dealing with some Rs.224 b cash; they will not only have to pay taxes on it, but also will have to check out the alternative investment opportunities. If fresh shares are issued, the bank will get about Rs.530 b in cash which can be useful in meeting its growth targets. But then, Kotak bank has a Tier 1 capital ratio of 17.04%; so it already has enough cash for its growth requirements. 

It is an uneasy conundrum for the promoters for sure. To keep able promoters' stake high enough is a good idea so that investors benefit from aligned objectives. Whether 30% or 20% is a good stake, will have to be dealt with independently. Yet, the RBI cannot have a separative guideline for one bank and another for other banks. 

Kotak bank stock had a high price of Rs.1,417 in July 2018. I find that even at current prices which are much lower, it is not cheap. But then investing is a waiting game, isn't it?

index investing

Whenever I am asked for advice on investing, I recommend the broader index. I never suggest individual stocks to anyone. For the most, picking stocks is more of arrogance than of skill. Everyone is up to beating the index. But the truth is that majority of investment managers, forget individuals, fail to trump it. A simple, low cost S&P-500 is all one needs to move towards financial independence. Alas, stocks never cease to excite people. That's a behavioral problem, isn't it?

While S&P-500 is what I suggest, there are total market index funds too. Let's check out the index offerings from Vanguard. All information is taken from the Vanguard website.

The S&P-500 investment comes in 3 variants: ETF, Admiral shares, and Investor shares. All invest in the S&P-500 stocks representing 500 of the largest US companies. Consequently, they track the index returns. 10 largest holdings make up approximately 23% of the fund's total net assets. The net assets value of the fund is $459.3 b. The expense ratio is 0.04% for ETF and Admiral, and 0.14% for the Investor. Here's a quick summary of these funds.

The total market investment also comes in 3 variants: ETF, Admiral shares, and Investor shares. All invest in the CRSP US total market stocks representing the large, medium, small, and even micro-cap US companies. Consequently, they track the CRSP US total market index returns. 10 largest holdings make up approximately 19% of the fund's total net assets. The net assets value of the fund is $756.6 b. The expense ratio is 0.04% for ETF and Admiral, and 0.14% for the Investor. Here's a quick summary of these funds.

While it really does not matter which index is chosen, my preference is S&P-500. Many prefer the total market because smaller companies have the tendency to become big and give superior returns. It is true, but, my advice is to stick to the large businesses than bet on small and micro. The S&P-500 makes up a large portion of the total market anyway.

What is imperative is to choose an index, and then stick to it for a very long time. Throw the money each month irrespective of the market levels. And this is the best part of the index investing: pe ratios or pb ratios don't matter; implied equity premiums don't matter; whether the market is overpriced or underpriced is irrelevant for the investor. As the investing horizon gets longer, the risk in expected returns gets lower. With this you will be able to beat a majority of the investment managers in the country. 

Invest in the index, and move on with life. Do what you enjoy instead of fretting over expected returns. The index will take care of your financial needs. Isn't that cool?

Yet, there aren't many who pick this strategy or after picking it have the discipline to stick to it. That's altogether a different story.