Saturday, June 15, 2013

Banks, buy-and-hold and where are my billions

Having lost 100% of principal capital in Bank stocks in the past, that question stays at van-ward on my mind.

When I express caution towards investment in Bank stocks, someone from my family enlightens the dark corners, "Invest in Bank stocks and retire rich. How many Indian Banks have you seen go bankrupt?"

While financial institutions may be cautious with lending to reliable businesses, it could be the macro factors that can sink them. I make no assumption of when and if that will happen. Reading page 30 of 172 from JK Banks 2013 annual report: Bank carries Contingent Liabilities of 32,282 Crores.Further on Page 79, Schedule 12 explains it as Liability on account of outstanding Forward Exchange Contracts and Other Obligations. Not only JK Bank but from Andhra Bank to HDFC Bank carry similar levels of contingent liabilities.

With Munger's admonishment that 2008 was just an aperitif, and that assets-good-until-reached-for in balance sheets of Banks (if not India) amounting to trillions of $ would blow up on us, I am not sure that Indian Banks would get a free pass to progress as the counter parties go down.

Some of this is reflected in valuations but a lot of it isn't. This makes banking overall unattractive from investing retirement funds.

It makes sense to buy those companies whose only fault is being too small, too remote where is institutional mandate is not to touch them. Other investment schools like single decision investing in Unilever/Nestle will also work sufficiently well but if your goal in life be on Forbes 100 (not that it is a laudable motto), I don't believe you can buy sufficient Nestle, Unilever and Coca Cola with your combined family's wealth in 2013 and still get there. You may have to do things differently! You can buy land in Zimbabwe which goes up by 10,000 times, or buy a Monopoly in Tonga Islands. But you can't buy Unilever India and expect to be on Forbes 1000 either (unless you are starting with 1 Billion $ to begin with.)

That is one terrible mistake people make when they equate Warren Buffet's 50 Billion USD = COCA COLA. Warren Buffett did not get rich by investing in these companies, he got rich by his business of taking 25% profits out of 100s of other people's money.




14 comments:

  1. Totally agree with you on banks. I even avoid NBFCs. I think during current uncertainty, one should avoid sectors which can get hit badly by any black swan events and banking sector is definitely one of them.

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  2. Amit
    Do you still hold Zylog. SEBI has barred the promoters for stock price manipulation, understating pledges and overstating the promoter' shareholding.

    http://www.business-standard.com/article/news-cm/zylog-systems-slumps-to-record-low-as-sebi-bars-promoters-113061400302_1.html

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    Replies
    1. Hiya,

      Yeah, wrote on 31st of May that I will sell out of it, now completely out. Liked Cera, Canfin and Infinite.

      http://multibaggersindia.blogspot.co.nz/2013/04/when-moat-is-not-enough.html?showComment=1369992904420#c8968734199214896579

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    2. Amit, how to evaluate such promoters then ?

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    3. But my tail is stuck in the rat box trap !!!! Really a very bad investment experience !!! Would like to forget as early as possible !!!! Waiting for the LC to open !!

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    4. I am still scratching my head over this. Not easy for me. We infer by dividends and communication. Zylog did not communicate towards the end.

      Business, Dividends, Promoters, Debt, Cash Flows, Staying Power of business.

      I expected 100% dividends to fall to 30% but not 0. For all I know they may be back in business and grow but a trade gone wrong.

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    5. Very difficult Amit ! They may be back in the business but certainly not in the stock market. Market has developed a trend whereby it's beating so severely that 500 becomes 5 within very short period. Almost 100% case of paraplegia ! Gone are the days when investors used to be doubt. Now the slogan is "If in doubt be out superfast" Even it does not allow to exit most of the times ! Just think over it and you will find atleast 50 scrips where valuations have been eroded more than 80% and in some cases beyond 90% within a year or so !

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  3. Hi Amit,
    Thangamayil promoters are aggressively buying the in the open market. Considering value of gold which may still weaken, how do you read this situation?

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  4. Got a report from friend. So, called strong companies ITC has only done 1.4 times Sensex over past 10 years (it is long enough for me), Nestle has done 0.64 times Sensex over past 10 years (huge underperformance) and HDFC Bank has done 1.3 times Sensex

    Major outperformers were few pharma, Axis Bank, 3.4 times, Amara Raja 8.1 times Sensex over past decade.

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    Replies
    1. Could you please share this report?

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  5. Photoquip promoters are unable to purchase shares from the market ! They have become too greedy ! Uptil now in the current quarter ending June 2013 around 46000 shares have been traded and delivered ! A good quantity out of which is circular trading and the average price is around 41 !!! but now they want to purchase below 40 !!! But hardly there are sellers below 40 !!! Let us see what further strategy they have up in arms to snatch the shares from retail shareholders !

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  6. waiting for such a person to take on vikas board
    http://files.shareholder.com/downloads/AMDA-NOTM6/2541564360x0x640808/218D0DC2-2409-47BE-9295-C4584F252E85/Investor_Presentation_06.13_vFFF.PDF

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  7. Hi Amit,
    But isnt there a still comfort in JK Bank as its contingent Liability/Total Assets is still around 45% and YES Bank has upto 251%. Also according to some disclosures, the losses are in the range of 0.02-0.05 % for forward contracts contingent liabilities. If we consider 19962 crore and consider even 0.1% losses, it will just amount to 20 crore?

    So isnt this high contingent liability just a big number and eventually wont matter that much in the long run?

    Since I am new to investing (1 year), this is my preliminary understanding?

    Your take on this. Does this (increase in contingent liability) demand extra caution from retail investors?

    Disc: Invested in JK Bank

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    Replies
    1. Hey Utkarsh

      When you buy a derivative, liability is limited to 20 crores as you have mentioned, but when you promise to SELL a derivative, liability is unlimited.

      I am not privy to what those derivatives are commodities or currencies, how much are Bought and how much are Sold.

      Banks have bought them on behalf of customers, if customer cannot pay then I believe Bank will have to make good the money. Many Indian corporates have suffered from derivative losses.

      JK Bank is one of the best banks. Only a rare Black Swan can wipe out banks. Just something to be aware of and that it is possible.

      All the best

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