5 Life Lessons to learn from Rana Kapoor of Yes Bank

There isn’t an investor I know who hasn’t got scathed in the Yes Bank carnage. From a high price of 400 in Aug 2018 it touched 28 in less than 12 months. For easy math – its was down 94% from its peak in a year and it will have to go up by 1300% just to regain the same top – if it ever does.

Much has been said and written about the bank in magazines and papers and some Astute and Prolific Journalists such as Andy Mukherjee of Bloomberg wrote about and predicted the troubles of Yes much before the meltdown began but this piece is about the philosophy of life and the specific lessons to be learnt from Mr. Rana Kapoor s leadership and conduct.

All style and minimal substance

Sift thru the internet and a few websites and one would see that Yes Bank managed to get almost every award in the banking space. Its alleged greatness was greater than thou and when the industry and all other banks were showing signs of slowdown and stress it kept declaring stupendous numbers with the lowest NPA s in industry (even lower than HDFC bank in many quarters)

Banking is a difficult industry. NIMs are 2-5 % in best case which implies – to earn a margin of 2% you lend an amount X and hope to collect all of it back thru the life of that loan and if one large account defaults, it can wipe out the capital of the bank

I kept wondering thru the meteoric rise of the bank – are robots evaluating, disbursing and collecting loans. If the same kind of employees are working across the industry how can Yes be an outlier. At its peak Yes traded at about 6 times book and 50 PE.

Lesson

Businesses that seem too good to be true are seldom that good. In its zeal to expand and a soon wanna-be HDFC, Yes took unmanageable risks and lent out money to every suspicious borrower (everything is in public domain now - the less said the better) and allegedly grew remarkably well. But most of its large borrowers had no intention / sources / business model to pay back. If you are in business or in a job - Aspire to grow in line or slightly better than the industry, you will be just fine and the power of compounding will take care of the rest. In a zeal to achieve stratospheric growth, you not only end up taking unreasonable risks but also put in jeopardy the existential probability. Greed kills.

The Business Model and its Conduct

All the readers of this piece would have taken a loan one or the other time in life and we all know that the .5% processing fees can be negotiated or even waived off at times. After all processing fees isn’t a fees for any effort or paperwork (which entails another fee), it’s part of the business model. It is heard that Yes bank developed an interesting model of charging humongous amounts of processing fees (in some cases upwards of 8-10% of the loan amount). This processing fees reflected in qtrly PnLs as fees income / other income etc and showed Yes bank to be a very intellectually superior bank that could generate such large amounts of fees as a proportion of its Net Profits. What everyone ignored was the fact that the relationship managers and senior officers on the field were expanding the lending book by taking undue risks, in some cases with collusion of the promoters, charging this large upfront fees that would make the deal look awesome from a short term perspective, earning hefty bonuses for themselves and eventually leaving the bank with rotten lemons. If Rana Kapoor was a part of this scheme, its even worse, if he was not, obviously as the Boss of the bank, he was distracted fighting his petty battles while losing the war. I would love to be wrong here but my gut tells me that all these loans would not even have a decent backing of monetizable securities. Time will tell.

Lesson

Hire people not only on the basis of fancy degrees or self-proclaimed past achievements. Build teams where the team members have superior sense of responsibility and unquestionable ethics. Senior executives should have as much knowledge of philosophy and psychology as of the subject matter. For only then will they remain grounded and steer clear of designs based on the foundations of greed.

Banking industry is rife with examples of executives working on extreme short termism, earning huge bonuses and leaving a trail of destruction and sometimes orchestrating the demise of the institution. Does anyone remember Dick Fuld. He brought down Lehman and still got to keep the bonuses.

If You are at the helm and operating and building large organisations, the bonuses of your key personnel should not be tied to short term paper profits, the sustainability of which is in question. The incessant pressure of QoQ and YoY growth will most certainly create a fertile ground for executives to cook books. And they will.

Karma

It was terribly unfortunate that Mr. Ashok Kapur was killed in the 26/11 attacks in Bombay. A bank that was jointly founded by the co brothers Rana and Ashok then befell to be managed by Rana Kapoor. Obviously Rana Kapoor didn’t want to give a sliver of board space away to his co-sister. What was the point in denying the rightful board seat to Madhu Kapoor and family.  Rana Kapoor fought tooth and nail to keep Madhu Kapoor away from the Yes Board. We used to hear about the law of karma and if we do a misdeed, it will come back to haunt us in our next life. God perhaps got worried that the present generation in this kalaguya doesn’t give a damn about the next life and therefore shortened the turnaround time dramatically. These days Karma comes around rather swiftly. And in less than a year when the meltdown started the diamonds of Rana Kapoor got withered away at the price of marbles.

Lesson

We often forget that when we are born we are a mere 3 odd kilos and when we die we reduce to the same in the ashes that are left behind. And we cannot take anything along. The amount of time and energy that Rana Kapoor invested in fighting with his relatives would have definitely taken a large share of his mind-space and attention, while his professionals ran the bank aground. Yes came to be respected as a reasonably good, technologically advanced, and a forward looking bank. But I will have my cake and eat it too  was the undoing that set the seeds of banks erosion of capital and credibility.

We teach our children a simple yet powerful lesson Sharing is Caring but forget the same ourselves along our lives – and then one day we lose it all or suddenly die. We all know that our time on this planet is limited but tend to generally disbelieve this for ourselves while remembering this for everyone else. And if we ever reflect peacefully, our significance on this ever evolving planet with millions of years of humanity and over 7 billion of us at any time on this earth is so negligible that a calculation or real reflection is humbling. So why be greedy and why not truly remember and imbibe in our personality the famous Chapter 2 , Verse 71 of Bhagwad Gita that says we came empty handed and so shall we leave.

Debt and the desire to acquire/hoard more

Pledging the entire holding of his stock to make alternate investments became a self fulfilling prophesy. When the value of the stock tanked, all the fair weather friends and lenders didn’t blink an eyelid before selling Rana’s stake.  

Lesson

We all know that debt is death. Debt works 24 hrs relentlessly, whereas factories and executives and organisations work for limited hrs in a day and take weekends off. The modern monetary theory that professes ever expanding debt and the new age entrepreneurs and managers who take its refuge might not be able to fully fathom the ramifications of the same. Some of the most successful investors and thinkers such as Warren Buffett have rubbished this vehemently. Avoid debt as much as possible. Depreciating assets and objects of gratification should never be purchased using debt.

Most Friends and Well wishers only offer umbrellas when its bright and sunny. The true umbrellas are seldom found when its pouring. Just remembering this is enough to keep you grounded, responsible and strategic.

When in doubt Disclose

I am reasonably certain that Rana and the top echelons of Yes knew that the loan book is far more rotten than what they were disclosing a few qtrs ago. Else why would the edifice of lies come crashing down just one qtr later when the new CEO took over. Obviously top guys were riding a tiger that they couldn’t get off without being eaten (I remember this line from Satyam’s Ramalinga Raju’s confession in Jan 2009). If these guys had taken RBI seriously and mustered the courage to come out clean rather than making up the lower than actual NPA numbers, coming clean on divergences and apologised and course corrected – which would have been possible only if they acknowledged the mistake, the markets would have been kinder.

Lesson

‘When in doubt disclose’ - This is what the legendary Sh. NR Narayana Murthy says about corporate governance. Inspite of all the personal criticism he stood his ground when he smelt impropriety in a few transactions at Infosys a few years ago. And I truly respect him for that. Omkar Goswami came heavily on Mr. Murthy – but then who is Omkar Goswami anyway.

Shareholders, media and public can pardon a few bad qtrs or a bad year of financial performance but impropriety and doubt over corporate governance (even if the net effect of the same is much lesser than bad performance) is brutally punished and brands can seldom recover from that damage thereby destroying shareholder wealth permanently. Corporates and Individuals should choose to lose money, if need be, as money can be recovered easily over time but a shred of reputation if lost never comes back. What takes a lifetime to build can be destroyed in just a second.

We are all born innocent and pure. The vicissitudes of life (everyone has them) can either derail us from the General Accepted Life Principles of Propriety or keep us firmly on track and make us want to be the Human Beings, Managers and Owners that we expect others around us to be like.

Manu also writes on the Huffington Post
Twitter @manurishiguptha

Electric Vehicles – Awesome Potential & Dream 'BUT' Very Distant Reality

I wonder how many readers of this blog have ever used Indian Railways but when I first saw the water mug (used by Indians to clean their derrière) tied to chain using a miniature lock – the contraption far heavier than the mug itself, I wondered, A country where a petty mug needs protection – what’s the future of our future and who will protect it with which harness or security.

The answer is a big ‘NO-ONE’.

This little example is to set the scene for this piece and hopelessness that persists because of a generally degenerate attitude of us Indians.

The Government’s 2025 vision is a thing that dreams are made of. Our economy is likely to be 5 Trillion USD, we would have sent missions to various planets by then. And some say, some influential politicians would already have amassed large tracts of real estate on moon and mars by that time, before anyone-else got a whiff.

Nothing shocks me anymore. Bad budget, Irresponsible statements by politicians, the abject neglect of our beautiful nation by its custodians – Nothing. I have set my expectations so so low that I am generally happy and satisfied with my environment but yes I do get surprised more than often.

The recent reduction of taxation on Electric Vehicles (EV) was one such moment recently.

Not only was it a dichotomy to the present state of industry and the automobile sector, it was a reflection of the cluelessness of the ‘powers that be’, making policies that are likely to have a significant impact on this nation and eventually on our lives.

The automobile sales (combination of 2 and 4 wheelers) are down 30-40% in the last few qtrs., most of the auto plants are now going through planned prolonged shutdowns and analysts and economists predict hundreds of thousands of people losing jobs in the automobile industry alone.

The EV situation is akin to – Doctors planning to prep, a deeply wounded athlete, (who’s just reached the ER with a severe sports injury) for the next athletic event rather than providing him with the immediate treatment and putting him on a ventilator to save his life at that instance.

EVs are the future – no doubt. And while we are staring at fast depleting fossil fuels across the globe, the world will have to find alternate sources of assimilation of energy through solar, nuclear and hydro, but not unless there is a systemic evolution of infrastructure, culture, attitudes and character of nations.

For EVs to be fully implemented and assimilated into peoples lives – far before the crude is fully depleted and people still preferring the traditional internal combustion engines, the governments of various countries esp ‘The’ densely populated India, a network of charging stations, infrastructure to support, sell, repair and recycle has to be created, maintained and sustained. It’s a paradigm shift in the lifecycle of a nation that has to be effected with multiple catalysts not just a random reduction in sales tax.

A nation where a small 500 mts flyover takes forever to build – if it doesn’t fall off during construction ala Calcutta how on earth do we expect the EV infrastructure to take shape/establish in a nation where everything moves at a snails pace unless 2025 was a misprint in place of 3025. The idea and vision does solicit an entry into the Audacious Project List but then……

I am reminded of the vandalism on the first ever superfast luxury train Tejas where the people in the train destroyed the TV screens and stole anything that could be ripped apart and stolen and people outside simply practiced their cricket and bowling skills by throwing stones and breaking the panes.

Approx 2 yrs ago one of the projects that I was overseeing was vandalized by local goons on an alleged assumption of land encroachment (to the extent of .0055 cents approx. equal to the size of a shirt button). The protectors of their self defined virtuousness damaged property worth approx. 7 Cr that took 2 more years to rebuild and operationalise while the bank interest on the entire project kept piling up. All of these guys are walking scot free and still doing the narebazi. Till the time the corruption and ‘I can get away’ attitude from mind and souls of the citizens isn’t taken out through swiftly enforceable laws – the future is bleak.

Now imagine the effort to establish a Pan India network of charging fields, hard shoulders alongside the freeways and highways and the actual charging contraption that involves a pole, wire, socket and a network of charging grid or whatever.

Perhaps all the unemployed people from the present day automobile industry could be employed as security guards to protect these charging stations.

Sadly, where we need a chain and a lock to protect a petty mug inside a train toilet, we would need a far more robust strategy, execution abilities, set of security protocols and infrastructure even before we embark on this EV journey.

In the meanwhile can someone stop dreaming and look at the bleak present state of liquidity, employment, infrastructure and the massive slowdown that seems to have gripped the nation and its industry.

Follow manu on twitter @manurishiguptha
Manu also writes for Huffington Post

Why a NDA loss might actually be good for the Stock Markets, Investors and India

Markets seem to have a mind of their own and have historically demonstrated that they discount the future far ahead in their present values. Perhaps that explains why Foreign Institutional Investors have pumped in close to 10 Billion USD in 2019 alone whereas they withdrew almost the same in 2018 from Indian markets and barely invested a net total of 2.6 Billion USD in 3 years (2015 2016 and 2017).

Markets are almost certain that Mr. Modi will come back with a resounding victory and obviously for anyone vaguely connected to the markets, one cannot fathom a NDA loss.

But hang on! History is a great teacher and I make my argument that an NDA loss might actually be good for sharp investors and for the economy. When the obvious doesn’t happen, markets perform better. Lemme explain..

Stock Markets

The stage had been set in 2004 for a Vajpayee comeback. India was shining and just to prove this point, it is believed that close to 500 Cr (approx. 109 Mill USD at that time) was spent by NDA in 2004 and on that historic day of 13 May 2004 as the results started pouring in, the obvious didn’t happen – markets crashed from a high of 10^th May 2004 to a low just 7 days later by a whopping 28.4%. That’s some fall in 7 days for a size of Indian economy. That was the lack of confidence in UPA or Congress+allies at that time. Yet from the low on 11^th May 2004 to the same years high, the markets rose by 69% in just approx. one year. And from the same low (1292 Nifty on 17 May 2004) went on to rise all the way by 392% by 2008 (to 6357 sometime in early 2008).

I still horrifically remember a CPI leader A.B Bardhan (the moment he realised that CPI would end up being an important ally of UPA) on national television saying “to hell with divestment of PSUs and to hell with the economy, and within minutes the markets were locked in lower circuit. God rest his soul in peace. He did succeed in causing a serious consternation with his irresponsible statement on that historic day.

India still shone irrespective of the government. And whilst the obvious didn’t happen in 2004, the investors ended up making tons of money and the wiser ones who weren’t in love with their stocks and could muster the courage to buy when India allegedly stopped shining in May 2004 and sell sometime in early 2008 smiled all the way to their banks.

In 2008 the UPA govt took some stand on the nuclear deal, survived a near death experience when the now defunct CPI withdrew its support and the general public at large was not expecting the Manmohan Sigh Govt to scrape thru in the 2009 polls. In so many years nothing happened on the nuclear front, no new reactor came to be made and nothing changed for the nuclear energy landscape of this country……………….

But Boy.. +- 4,5 days from 16^th May 2009 (election results date) the markets went up by 18% around the result time and eventually up by 50.6% in that year alone from the lowest point. And 90.3% in the next 5 years till sometime in 2014.

When the obvious doesn’t happen investors make money and governments have little or no role to play in how the markets and the economy performs.

Acchhe Din started on the 16 May 2014 when Mr. Modi stormed against all odds to become the 14^th PM of India. And that year, because he was the obvious choice and in line with expectations of the nation, the markets rose a mere 7% in +- 4-5 days of the election results and a mere 66% in subsequent 5 years of his Prime Ministership.

I have always believed and the same has been historically and statistically proved that the best prime minister can add 50 basis points to the GDP of a democratic nation and the worst can at best (with great effort) shave off no more that 50 basis points off the GDP.

Now just imagine if NDA was to lose this election against the common belief of the nation, what all opportunities would that scenario throw for the prudent and the hungry investor.

Real Estate

Between 2004 and 2008 , people could buy an apartment or a piece of land in the morning and sell it at a neat profit in the evening. That was the kind of frothiness that existed in the real estate market. Brokers in Gurgaon roaming around in antique scooters in 2004 were driving Hummers and Porches by 2008.

The global recession in 2008-2009 didn’t help but the real estate kept going up. The economy progressed at a better than expected rate despite a financial crisis that, some say, was the worst in 100 years.

Real estate that was always considered a safe heaven and an asset class giving guaranteed return bled to death between 2014 and 2019. Some of my friends who bought prime real estate in Gurgaon and Delhi and Bangalore aren’t able to sell their assets at 70 cents to a dollar after holding their apartments and real estate for 5 years.

The point is – NDA has been a disaster for the real estate market that has historically been a safe heaven and some estimates say that the unsold inventory of apartments at a national level is at approx. 7 years. The top 7 cities have an unsold inventory of approx. 700,000 apartments.

A recent article in the Mint pegs UPA II to be significantly ahead of NDA II in almost all parameters in spite of the worst recession of 2008 and oil at lifetime high during that period.

Obviously much is left to be desired from the performance of this Govt wrt to real estate.

Corruption

Genetic mutations (Darwins theory of evolution) occur over hundreds of years. Character of homo sapiens cant be changed overnight. India over the last 100 years (reasons unknown) became a seriously corrupt nation. NDA tried hard to remove corruption overnight - Stricter policy of Aadhaar, Demonetisation, Watertight rules laid down by MOCA and GST.

Any nation across the planet would have hailed these steps as revolutionary and positively earth/nation shattering. But we poor Indians just couldn’t cope up with this setback. Majority of the people were not ready to weed out corruption or stop dealing in cash or deal in real estate without cash.

Result - : The growth of this nation, Vibrancy in the real estate market (a measure of national growth) and the common man suffered. And suffered hard. Because no one knew how to use the digital means and banking effectively. And this inherently smart and corrupt nation wasn’t ready for this dramatic shift and that’s why the entire demonetised currency found its way back into the system (as people figured out ways around this), much to the surprise of the Powers that Be.

Corruption is the engine of growth for a nation like India and ‘cash economy’ the fuel in it. NDA tried to remove both in a dramatic manner and displeased the nation. The preceding governments allowed a certain free run to everyone across the board (individuals and corporations) and the nation progressed. Cut this fuel supply and everyone suffers.

It is anyone’s guess about the benefits of extolling the virtues of corruption in a diverse, large and a disorganised country like India.

Jobs

This has become a contentious issue in the last few months. Some leaked reports (authenticity unconfirmed) pegs India’s joblessness at 45 year high. Have a heart,… this is bound to happen. The Govt has endeavoured to change the character of the nation overnight and removed the grease (corruption and cash) that drives the engine. How can anyone expect the nation to thrive? And perhaps that’s the reason why most of the citizens of India are roaming around like headless chickens and putting the NSSO in a spot because they released a report that was a true reflection of the state of the nation.

Alongwith the issue of jobs, everyone is talking of the rural distress. We guys living in urban cities can neither see the distress nor feel it. But speak to an Uber driver, or a ricksawwallah, or a vegetable vendor – the guys are in trouble. No one is feeling prosperous or happy. People love Mr. Modi, they say he is a man with a mission and a clear intent but the distress hasn’t reduced. Approx 12000 farmers commit suicide each year because of financial difficulties. For us urbanites, it’s just a statistic. But what a shame that a nation with its bedrock of progress and prosperity that was based on agrarian economy is in shambles. The farmers that feed the nation are happy to destroy the crop and give up farming because selling it to the middle man is more expensive. Forget 12000 suicides – even a single suicide by any farmer should be a national issue requiring attention from the topmost echelons of politics and strategy (read niti aayog or whatever).

I just read that the food inflation is at a 27 year low. Isnt that counter intuitive – if the population and fuel prices are increasing and area under cultivation is decreasing, such low inflation only means 2 things – either our supply chain management has become hyper efficient or the farmer isn’t getting his due. 

The final Take :

If the obvious happens, which is the NDA win, the markets and the economy isn’t going anywhere – for Indian stock markets are trading at 28-30 times their earnings that make the markets one of the most expensive in the world. If at all - these will come crashing down unexpectedly and against everyone’s wishes when the euphoria is over.

But if a majority of Indians doubt the promise of ache din, and begin to question the 15 lacs that were to come to our accounts, and the regime actually changes, the storm in the tea cup might actually bode well for all of us.

Ye Indians! – figure our where your bets are.

Manu also writes in the Huffington post

Earlier articles that created a flutter…..

In Defence Of Vijay Mallaya – The King of Good Times

‘Skin in the Game Reforms’ – Game changer in the Asset Management World

The Invaluable role of Chief Business Obstructers in the modern corporate world

Follow Manu on Twitter

In Defense of Vijay Mallaya - The King Of Good Times

Disclaimer : I only know of Vijay Mallaya thru information available in public domain. I feel sorry for the few of his employees (who had to take their lives in distress) and their families.

I have come across more than a few people who used to tell me with an accent, pseudo enough, that they only flew kingfisher and took pride in it. The parties that Mallaya threw and the host that he was, made national news and was hot topic among the socialites during the man’s good times.

All his alleged friends turned critics who have now denounced him and written him off – I personally feel, have neither been his friends, nor ever accompanied him to the shoot of the famous kingfisher calendar and maybe due to that have felt jealous enough to see him wrapped by young damsels – perhaps often a third his age.

His nemesis was his blatant show of his hobbies even during the times that were bad for the king of good times.

But lets get the record straight. We know that he owes some 1 billion USD approx. 6000 to 7000 INR Crores to the banks, and the banks are claiming some 1.3 Billion USD as recovery of dues including interest. That he left the country in a hush was definitely wrong, perhaps his own interest in General Knowledge was poor for he was a small ignorable fish in the pecking order of defaulters even on the day he fled India.

But what a shame on the fugazi of a system of political patronage in India that a well meaning entrepreneur cannot fail and irrespective of all past successes one failed business decision brings down the edifices of success and remarkable history.

Just imagine that Indian banks are happily taking haircuts under the aegis of the government and are made to own 51% of Jet airways and I fail to understand why Jet wasn’t meted the same treatment as Kingfisher.

If the promoters of top defaulting companies and siphoning agents of this country can still continue to thrive and enjoy and use the sloppiness of our legal system to wade their way through and still lead luxurious lives – something in this nation isn’t right while the financial systems and institutions of this nation are on their knees.

Essar has made a mockery of the system by trying to skittle the NCLT process by throwing in financial googlies without any locus standi. If they actually had the monies to clear off their debts, why did they default in the first place. Shouldn’t just this statement be enough to punish them for their deeds or intentions?

And yet we cant stop vilifying Mallya who was driven to elope inspite of making infinite efforts to keep his airline afloat, to make an effort after effort to persuade the government to change policies to make airline business viable, to believe in his conviction to run a world class airline and giving personal guarantees to raise debt for his beliefs.

Different strokes for different folks – is what the broken political value system of this country stands for. Crony Capitalism, Promoter Banker nexus (a’la ICICIdeocon) must have shaved a percentage points off our GDP.

If Mallaya is to be made a global spectacle of bringing a defaulter back and hung out to dry, shouldn’t our government or the powers that be, be putting atleast 5 dozen top defaulters behind bars and setting an example immediately. Mallaya’s debt seems like a small speck in the ocean of frauds and delinquencies in the Indian Banking space.

And yet big defence contracts worth tens of billions of dollars are being doled out to the very people or their companies who are not in a position to pay a couple of million dollars to their vendors in other businesses and are declaring bankruptcies. Isnt this a sham of gargantuan proportion.

It would be interesting to watch how the top indebted companies fare over the next decade as it is quite possible that most of these are hiding behind the fine art of evergreening their debt. Uday Kotak mentioned in his article of June 2018 that the NPAs of Indian banks could well be over 150 billion USD and we all know that the real number could be much much higher.

Give it to the Mallaya - atleast for academic interest - that :

He brought order to Indian liquor industry and created the worlds largest liquor company (by cases)

Took on some of the biggest global brands and had the audacity to buy some top liquor brands globally.

It would be worthwhile to calculate the downstream taxes paid by United Spirits and United Breweries over the last five decades.

Hubris makes people do wrong things at wrong times and Mallaya was wrong to have called Enrique for his 60^th while his employees were suffering for non-payment of salaries. He should have kept a low profile while his troubles were surmounting and demonstrated remorse and an intent to resolve.

And fear after hubris made him to run away for he was riding a tiger from which, he couldn’t get off.

I think more than a few times Mallaya has offered to pay the entire principle back to the banks if he is given time to resolve. On the one hand the financial and administrative machinery of this nation is taking haircuts on delinquent loans to the extent of 30-50 billion dollars and on the other it is hesitant to allow a guy to make an amend to the only mistake he made in his life - of founding an airline.

For Mallaya – Come back, satiate the ego of the government by going behind the bars for some time and take control of your businesses and assets and genuinely say sorry to your ex-employees. You can still bounce back as you are in a business that never suffers from an economic cycle or a recession.

For Govt – Have a fair policy that’s similar for everyone, allow this man to set his business straight, leave an impression that its perfectly fine for an entrepreneur to fail and restart. By sending that message, you would have set an example for an ocean of entrepreneurs, some of who fail and want to succeed and keep trying.

Because say what you may – Mallaya was the  ‘king of good times once upon a time’.

Manu also writes in the Huffington Post

Follow on twitter @manurishiguptha

'Skin in the Game' Reform: A Game Changer in the MF and Wealth Management World to Save the Retail Investor

Indian benchmark indices are at a lifetime high and hundreds of stocks that have been the market darlings are at their yearly and some 2-yearly lows. This fall has been precipitated in a matter of last -mere 5 months.

Obviously most of the fund managers (mutual funds, private wealth, PMS schemes) are finding corners to hide where they can find respite and concoct some solid theories and reasons for wealth destruction last seen only in 2008-2009 – after all these were the very same guys on CNBC, just very recently, who were chuffed at their stellar performance and recommending shares ala Vakrangee Manpasand and PC – forgetting that it’s a unusual proxigean spring tide. And as we have all heard before --  that all s*^@# rises in a high tide.

Some fund managers like Porinju (having faced perhaps the maximum erosion in their recommended portfolios) have been graceful enough to publicly accept the same and have learnt their lessons. I have great respect for people who have a clear intent and are quick to concede defeat when defeated and are quick to self-deprecate and crack a joke on themselves. Hats off Porinju. Your recent confessions hold you in good stead with small yet well informed investors like me.

Some relatively bigger names in money management business who have destroyed a much larger share of the savers wealth are finding ways to repackage some established theories  of legends such as Benjamin Graham (BG) and Buffett (WB) to avoid backlash and scrutiny. Some are repeating BG’s theories of quotational losses and appearing in full page interviews.

The public opinion is rife as to why the regulator of markets (SEBI) has introduced a volley of measures to simplify the mutual fund industry by reclassification of schemes and defining the size of companies on basis of market cap of companies and % of funds invested in a category of companies.

What’s wrong in it. Actually nothing.

Mutual funds and fund managers had created an ocean of incomprehensible financial products where schemes were being launched such as special situations, arbitrage, emerging companies, vultures picks, future stars etc etc. Just the names of the new schemes were being used and repackaged to amass fortunes (read expense ratios and bonuses).

Basically, all of this is a demonstration of the fund manager's alleged belief and necessity at that point of time to launch  new schemes using publicly available information based on specious research.

And the market regulator tried to streamline this so that the gullible investor, reposing trust in the mutual fund – basically the fund manager, sees some method in madness.

Indian markets are most volatile for the following reasons. The size of speculation is 29 times the real market capitalization. For the record some of the most sound and advanced and mature markets such as the USA, Germany and the UK have just 3-5 times the size of derivatives markets in comparison to the  cash market.

So I am in absolute awe of the regulator that all the recent froth in the market was removed judiciously by introducing mechanisms such as ASM and increasing the margin money requirements in the F&O trades. And it surprises me that investors are acting and reacting adversely because SEBI has introduced measures that will allow overheated and irrational markets to cool off and that will reduce the sheer gambling in the garb of investing.

I know of 2 middle class retired uncles who leave home every day with 10k of their pension money, leverage and take positions worth 8-10 times, get wiped out with just a 5-7% volatility in the prices and come hope sheepishly only to restart the next day to recover their losses. Derivatives are definitely weapons of financial destruction as they have no underlying asset/value and are merely an arbitrage between one person’s fear and another’s greed

I am shocked when people ask me questions – do you play markets. PLAY? I ask – is it a sport?

Statistically speaking, If you simply play an odd even on a roulette in a casino you have a better chance of making money than investing in the markets.

So, in this maze of multiple schemes, thousands of options, there is just one reform that SEBI needs to implement that could be a game changer in the interest of a common small investor.

That reform should be called the ‘Skin In The Game’ reform.

I have a 10-point recommendation for the entire MF and PMS industry where creative marketing and false promises disclaimed by reams of fine print are called out.

• No advisor who gives advice on TV or print should be allowed to give a disclaimer.
• Irrespective of the size of the AUM, every fund should have a max cap of expense ratio not as a % of size but as a pure number. Why should a fund with AUM of 2 billion dollars or more charge over 3-3.5% in fees that amounts to close to 60 million dollars. After all incremental effort required to manage a larger or a much larger fund is just the salaries of a few more research analysts.
• Distribution fees offered by the fund houses should be reduced to less that 30-40 basis points and distributors mustn’t be offered perpetual commission on the funds brought in.
• All fund houses must be forced to have a similar fee structure for distribution and fund management fees (expense ratio) to disincentivise mis-selling.
• Why should an investor pay 3% for the first 7% ROI when Indian treasuries or Bank deposits are guaranteeing the same with zero risk. Fund houses and managers should get no or negligible fees and salaries respectively for generating returns up to the yields on Govt Bonds.
• The fund manager should swear under judicial oath that they and their close relatives as defined by the regulator for the purpose of gifting wealth would only invest in the fund managed by self and except for real estate and liquidity as desired by any individual, all investments in financial instruments will only be that fund that’s managed by the family member.

Some advocates of democracy might start jumping and call this preposterous. But how else do we curb counter actions by people acting in concert against the interest of small saver.

Yes, it’s a tough proposal but then if a fund manager wants to earn hefty bonuses, he must figure   this out and have a complete skin in the game.

• Fund managers only get a fractional % of their salaries if they return up to or less than the return offered by Govt treasuries.
• Infinite bonuses make fund managers take risks and positions that neither the gullible and ill-informed investor nor the regulator approves. Every fund manager must have a cap of a maximum performance bonus irrespective of a stellar return or a flash in the pan performance in any particular year.
• Is there any exit load on bank deposits? NO. Why should fund houses charge any exit load. An investor wont exit if the fund is performing and if the fund isn’t, and an investor wants to book losses and exit, why should the fund house be allowed to screw the investor twice over. Exit fees should be scrapped.

And lastly the law around this should be so robust and penalties so humongous that no one can pull off a Houdini on investors.

Rajat Gupta – the poster boy of Indian diaspora was pulled up badly and almost destroyed by the US law for one small mistake of his. The readers of this blog all know in their heart of hearts that almost every promoter and every insider of a listed company in India indulges and misuses the insider info for personal benefits. Would anyone accept that ever anywhere else in developed economies? And would Indian law be robust enough, ever, to instil the fear of God??

Only God knows……...

manu also writes in The Huffington Post

Financial Harakiri Made Easy

My first stock market investment was in year 1992 when my dad gave me some 100 shares of indo gulf fertilizers and I remember it was a bad trade as I traded all my life savings of Rs 17000 in a savings account to the then market price of those 100 shares that was Rs 7600.

But laissez-faire prevailed and I got a share certificate with a green transfer form attached to it. I still felt nice and confident because I saw an opportunity to learn the nuances of stock markets at 17 and make sense of those 2 pieces of paper.

How those 100 shares panned out in life is a matter of another piece at a different point of time but for the record that and all additions of life earnings added to timely systemic investments as on date have returned 17.8% CAGR since 1992.

Someone tried hard to sell me the Portfolio Management Scheme of MotilalOswal 12 months ago claiming that they have consistently returned 38% to their investors since inception. Financial advisors and relationship managers have a unique ability to make muppets out of gullible investors for whom a marginal delta in comparison to the AAA rated securities means the world and 38% is as good as it can get.

More amusing was, that, my research revealed that Warren Buffet’s life to date CAGR has been close to 20% and Motilal and its agents claimed a CAGR of 38%. I closed my eyes and visualised Buffet serving tea to Mr. RaamDeo Agrawal and Mr. Motilal Oswal if they have consistently been able to beat the Buffet hurdle.

Of course I never invested in Motilal or any of its alleged schemes but did keep a track on their presumptions and in July 2016 when they came out with a public research report on a share called manpasand beverages and a follow up report reiterating their stand in May 2017 and eventually in Jan 2018, I bought some shares only to follow and keep track. Look at these reports and you would have wanted to sell your house and invest in their recommendation.

Cut to May 2018, Manpasand Beverages is down  72% from its price, has eroded an ocean of investor wealth and small gullible investors are left holding their MTM losses in the hopeless world of being treated as muppets.

Recently I was invited to join a concall addressed by the same Mr. Raamdeo Agarwal as he was opining on Crude Oil prices. I thought WTF….. How can anyone opine on crude prices when even the King of Saudi Arabia might be clueless on the same. In a VUCA world where a tweet by trump can make DOW rise or fall by 2% or take crude prices thru the roof, where a posturing by Kim where Kim fires a useless missile - roils the world markets – oh by the way I am talking of Kim Jong Un of Korea and not Kim Kardashian, here is an Indian commentator commenting on the crude oil prices.

So when I asked him whats his accountability on Manpasand, because I invested my entire bonus and savings on the basis of his company’s research report, he was flustered and advised me that the concall was on Crude, refused to take ownership of his company’s recommendation and gave me the contact of his head of research Gautam Duggad. (GD)

Pronto – I called Mr. Duggad for some insight as I wanted a word of solace and advice as to the way forward to an investment that eroded approx. 75% of my wealth entirely on his and his company’s recommendation.

GD was flustered and angrily asked me who my relationship manager was. I asked him – ‘how is that relevant. Did your research report mention as a disclaimer that Motilal is answerable to only those people who reveal the names of their relationship managers when the shit hits the roof'.

And Mr. Duggad banged the fone down on me. I became a complete full-circle muppet. Or at least was treated like one.

Whats the point…….

1. Any financial advisor claiming to outperform the Buffet hurdle is making a Charlie out of you.
2. If you are able to beat the returns offered by bonds issued by central banks of your respective countries – without taking a risk – you are doing fine.
3. Keep investing your surplus and believe in the power of compounding rather than relying on specious research reports by companies finding and feeding their army of muppets with erroneous asymmetric information.
4. Invest in the quality of management rather than the sweetness or sexiness of companies like manpasand.
5. Capital protection is far more important that elusive returns on investments.
6. Endeavouring to marginally beat the returns offered by robust central banks will hold you in far better stead than endeavouring to beat the inflation rates of Zimbabwe and Venezuela.
7. Be patient in markets – they can be irrational on either side for prolonged periods of time. If your holding period isn’t forever then you shouldn’t be in markets even for 10 minutes.
8. Don’t follow any stock advisor blindly – Do your research and it takes no rocket science to identify stable well managed companies.
9. A boring company that is debt free, out of market favour, consistently giving dividends and growing at about 10% YOY and definitely not recommended by analysts on CNBC on a daily basis, is likely to give you a far better return than the sexed up companies finding the favour of analysts on TV channels, who are themselves mostly doing the opposite of what they are recommending on the TV.
10. And lastly why should you pay 3-4% as management fees to your fund managers (who don’t even guarantee a prevailing bank rate for fixed deposits and who play the markets on your money) – only to lose your capital and then hear them blame the systemic issues of markets.

Human beings have short memory and people are afraid to acknowledge disastrous consequences of the bias of cognitive dissonance in the face of questionable advice on business channels.

Vakrangee, PC jewellers, Gitanjali Gems and Manpasand (these can be all googled and enough information can be found online about the dubious managements of these companies) have been recommended by some of the well known stalwarts of the market and just these 4 companies have eroded close to 35 billion UD Dollars of shareholders wealth in less than last 90 days.

Try doing exactly opposite to what the commentators recommend on the television. You are likely to make more money than by following their advice.

Someone needs to be eventually hanged for this. Whether it’s the fraudulent promoters or the overzealous self-serving analysts.

The decision entirely rests with the muppets.

Manu also writes for The Huffington Post and can be contacted on mrg45@hotmail.com

The Invaluable role of “Chief Business Obstructers” in the modern corporate world

Darwins theory of evolution in its simplistic form says ‘The fittest survive and they fight to compete, survive and procreate’

Societies have evolved over generations where economic progression, education and character have all moved in a synchronous manner. Some of the most developed economies like the US, UK and France have had their fair share of tribulations such as wars, diseases etc but have demonstrated that they maintained their financial, military and intellectual hegemony from a global perspective.

Societies in the first world countries prided themselves with superiority and there was a race among these nations to establish themselves as a leader in one thing or the other. Inventions (technological, financial and medical) of every form happened in the western world.

So why did India get left behind so miserably, when evolution of homo-sapiens happened almost at the same rate/manner across the globe.

The answer lies in one word “Corrupted Greedy Character”

But this didn’t happen by design – it was the natural evolution of a nation where its large population zealously procreated and grew roughly 4 times from 350 mill to 1.3 billion in just 65 years.

And Darwin’s to blame majorly for the present character of this nation. Or at least his theory explains this at best.

Lets reflect objectively on the causal factors.

India can primarily be divided into 2 kinds of demographics Rural-Agrarian and Urban-Corporate.

The rural-agrarian have relied on limited means, producing and consuming and storing for the proverbial winters/rainy days – Simple.

The urban-corporate are living in small over populated cities with limited resources and infinite greed among themselves to survive, grow, hoard and procreate. Another phenomenon happened in the Indian sub-continent in the last 50 years. Indians were primarily fighting floods, droughts and starvation and suppression in the last 300 years, but the last 50 were marked by rapid economic developments, lesser vagaries of nature, economic development led by rapid and almost alarming shift from agrarian to services based economy and a large part of urban population having marginally more than required.

Yet the starvation gene (let’s call it the gene X) still continued to exist and despite the rapid progression, in last 50 years, on all fronts namely economic, medical, food, transportation and habitation, the gene X that encourages to hoard, be greedy and survive at all costs and mostly at other’s expense, persisted and didn’t mutate at the same fast rate as the economic development of this sub-continent.

That’s why Indians over eat and eat till they are proverbially full (read bursting after a meal). They are generally a dissatisfied lot wanting more than what they deserve or can actually earn.  And that explains why inspite of being a rather superior nation on many fronts, this subcontinent still behaves primitive, back stabs, in-fights on trivialities and sadly the educated in the so called corporate world spend majority of the time pulling the other one and the surrounding ones down because of a misplaced sense of depravation and insecurity that purports corruption, greed and above all ‘obstruction’.

And that catalyses the breeding of ‘Chief Obstruction Officers” in the corporate world too. Fair warning pls – no COO should feel attacked – we could even call these assets - Chief Business Obstructers or Chief Financial Obstructers. They are all the same. For brevity lets just stick to CBO’s

C N Parkinson wrote a powerful essay in 1955 that pretty much defined the expansion of bureaucracies in an organisation and how work aligns and expands itself according to people available for its completion and organisations are perpetually insecure. Every insecure company necessarily wants to have infinite multiple layers of inefficient CBOs to keep an alleged check and balance.

But lets talk of the role that these CBOs play in the fate of organisations.

These people have never actually handled a business in its true sense. (the corner shop paanwalas are better businessmen because they invest their own money and have a skin in the game). CBOs pretend to be confident, very knowledgeable, stretched on the chair as if on a hammock (during an official meetings – but that’s a body language that hides inferiority in the garb of stretched posture), their condescendence and pretentiousness would put thought leaders such as Kotler and Prahlad to shame

Nothing amuses me more than seeing people from disparate backgrounds, accidentally landing themselves in position of authority, pretending to be Prahalad’s reincarnation, aspiring to make a mark without an iota of responsibility, assuming authority because no one questions, pretending to have a connection with GOD (when God least cares), and then start preaching on topics and industries – of which they have no knowledge.

We call them “Chief Business Obstructers”

 

A friend was sharing his personal experience when he used to run a business that grew 5-6 times in 4-5 years. Customers were happy, colleagues were thrilled, profits were good. So much so – the growth rates encouraged his company to start thinking IPO. Nothing gives an executive more joy when peers in the industry start talking about small businesses that become a formidable force and everyone starts talking of these small businesses as the next big thing.

 

Enter – “The Chief Business Obstructor”

Corporate world is funny – everyone pretends to abide by Thomas Bertman’s adage “don’t fix it – if it ain’t broken” yet no one practices it indeed. On the contrary system gives authority to incompetent people who know nothing about a business and these wise men try and fix every single thing that’s not broken - till the business is on its  knees, is on ventilator support and eventually breaks down.

Corporate world is replete with examples of excellent businesses that tried to do a lot when nothing was required to be done and businesses and leaders who did nothing when a surgical intervention and action was required.

But there are clear and distinct signs that leave a trail of evidence, sometimes discovered much later (similar to the tail effect of a comet) when its too late, that sow the seeds of demise of well run, well managed, perfectly fine companies irrespective of their size.

I spoke to about 9 different C and D level executives and have endeavoured to summarise below the signs we must look out for – if we care for the longevity of the companies.

1. When setting up businesses do not allow the old loyalists from other divisions (who have no freaking clue of the new businesses) to opine.
2. Keep things simple – Product , Market, Marketing, Sale, Customer, Customer Service. This is all that matters. Anything beyond that is all farce.
3. Always almost make your projections keeping a buffer for difficult and unexpected times. Microsoft excel is a wh@#e – you can titillate it to whatever extent. It almost always fakes in real life.
4. Every executive who leverages the company, must be locked in (by hook or crook) into company’s employment for the length of the debt. Else the promoter will be left with the hot potato at the end while the executive would have taken his/her hefty bonuses and digested. Does this sound like Fuld?
5. Executives who fix up meetings 4 times a week on disparately different subjects – Weekly updates, strategy for the week, strategy for the month, long term strategy probably need to be fired immediately because they have nothing better to do and are only trying to establish their relevance at the cost of some other business and someone else’s time.
6. There is a trend to ask for weekly monthly and yearly cash flows week after week after week as if the flow of cash is the living account of the flow of bile of the Chief Business Obstructer.
7. To establish their own importance, some CBOs suffocate the businesses of cash to an extent that their artificial importance gets established as if they are The Fed and 90% of the time of the business is spent in making excel sheets or symbolically accounting for the CBO s bile.
8. When reviewers start commenting on everything that they don’t have info about and keep showing the business and its CEO in questionable light just to justify ones’s 8 figure salary and pretend to be custodians of the business – pls definitely get wary.
9. CBOs ensure that the business doesn’t have enough money to even pay its salaries while they are happily gloating in the warmth of their annual bonuses and planning trips across the globe.
10. CBOs unleash a volley of 20 something’s analysts, seeking data from companies with the sole purpose of making themselves and CBO’s look like saviors but in reality setting a rot of mission fatigue within the organisation.
11. Pretend to be owning the business at someone else’s expense, without investing a penny and feigning ignorance when shit hits the roof and finding someone else to blame.

The few reasons why a handful of businesses have survived over ages are – when..

1. Owners and CEOs have trusted a handful of performing executives over long periods of time.
2. Businesses aren’t judged week on week but are judged year on year and brand-on-brand and reputation-on-reputation and happiness-on-happiness (teams and customers)
3. Owners don’t allow fraudulent people with all authority and no responsibility to exist in the system without any measurable accountability.
4. Owners call-out the fakery by converting the hefty bonuses into equity and making these well-wishers participate in the success/failure of the company.
5. The fundamentals of running a business are kept simple where cash is king and debt is death.
6. Businesses aren’t enamored by the western style of cash flow discounting and valuing the future elusive cash into present ongoing party.
7. HBR in a series of popular blogs have lauded the Indian baniya style of doing business and has given an infinite importance to collaborative culture and care for all.
8. Businesses are managed with lean teams that are empowered and productive and not meeting 10 times a week to discuss strategy when none really exists. Take for instance Berkshire Hathway's office in Omaha that manages 510 Billion in marcap of businesses with a handful of 25 employees.
9. And lastly….
10. Rather than reinventing the wheel of management styles – unconditionally back the performers, remove the flab and rapidly weed out the fakers.

Manu also writes for HuffPost