How I invested in Yes Bank and Lost Lakhs of rupees.
- Much before i discovered ValuePickr and screener, I was kind of building a screener of my own, crawling data from websites and using SQL to do the screening part. One of the very first concepts I learned was that of “mean reversion”. If you buy companies with low P/E multiples, then the P/E multiples mean-revert. Sounds so good in theory, but difficult to implement in practice. One of companies I found this way was Yes Bank. it had fallen almost 50% from its all time highs of 400 and was trading at 200 rupees or so. I bought it. The P/E was low, it will mean revert, that is what I thought.
- As i started digging deeper into the story, i convinced myself that yes bank will turn around because “how can RBI allow the 4th largest bank in india to fail”. Oh yes they wouldn’t, but that does not say anything about the wealth of the equity holder, which could potentially be trapped for 10 years. I didn’t understand the concept of opportunity cost back then.
- Mr Gill got appointed. He was a veteran at Deutsche Bank. He would take care. Mr gill gave more interviews than even PM Modi did rallies during an election Campaign. He mentioned “The cost of credit will go up by 150 basis points” and that soothed me. I didn’t understand what he meant, but never mind that. “Mr gill has spoken, and hence it must come to pass” is what I thought. The stock price kept falling, I kept averaging. My dad kept telling me “Don’t catch a falling knife”. I told him “If we dont do something different from the crowd, how can we generate superior returns?”.
- One quarterly results came, then one more then one more. NPAs increasing. Always increasing, Me telling myself “Oh but it is only 4% of the book, how does it matter. 96% will still earn profits so it is ok”. Little did i understand the concept of NIM and the fact that a 4% NPA will completely wipe out all profits for a bank meaning that they won’t even have money left to run everyday operations unless they do some capital raise.
- Ravneet Gill promising that they will raise capital next month, next quarter, “In next 15 minutes, we will raise capital!”. Me feeling the joy of vindication. Oh, well I was right after all. The market was incorrect. I will end up with a multi-bagger even if the price mean-reverts. Potentially planted News stories that indicate “XYZ will invest 2 Billion dollars in Yes bank”. Stock price increasing 10%, 20%. My effective loss going from -60% to -50%. Me feeling a burden lift off of my chest. Nothing panning out in the end. Absolutely nothing at all.
- Me selling my yes bank stock and buying it back after a day in the name of “tax loss harvesting”. It was more like a way for me to ensure that i did not have to see the -70% -80% loss figures.
- The Reserve Bank of India imposed a moratorium on the capital-starved Yes Bank and capped withdrawals at ₹50,000 per account till further orders. Lower circuit after lower circuit. I had had enough. If the RBI itself was forced to clean up the bank, then IMO the equity capital I had invested had already been lost beyond redemption. I sell between 10-20 rupees making a 90-95% loss.
Some Saving Grace
- Although I lost X lakh rupees, thankfully I still understood the concept of position sizing. It was 30% of my portfolio, but my portfolio was small. I understood my own lack of knowledge and hence the direct stock portfolio never formed more than 20% of my net worth (rest of the money was in MF and bank FDs). Overall, i lost 6% of my net worth in yes bank. But i was saved myself by practicing position sizing since day 1.
- I think the most powerful adage I have learned about the stock market is “The stock market is a place where those with money meet those who have experience, and the one with money loses it and is left with experience, and the one with experience gains money”. Definitely true in my case. The amount of knowledge and wisdom I have gained in last 2 years has been wonderful and powerful and empowering.
- I learned that mean reversion is really a long-term concept. If you are at the peak of an expansion phase, then the downward trend is the mean reversion. Valuations and Prices won’t come back to the earlier highs until at least 4-5 years later (for smallcaps and midcaps).
- I learned that it is not enough to just look at some objective metrics or numbers. What matters is the story behind the numbers, as Prof Aswath Damodaran says. Why is a number/metric trending downward? Are we sure it will mean revert?
- One of my earlier learnings in life was that it takes 1000s of hours to become an expert at anything. I’d done this once in School (maths olympiads) and once in college (ML research) but I’d become lazy after starting my job. I wanted the upside (multi-baggers) but i didn’t want to invest the time required to do the research in order to create that upside. My passion for excellence and the sheer power of hard work (putting in the long hours) was revived. The yes bank loss was a very humbling experience for me. Made me realize the power and importance of becoming and staying an ever-evolving learning machine (as Charlie Munger and Mohnish pabrai would say).