Best Time to Sell the Bank? Absolutely Steer Clear of these 6 Words

Looking for the best time to sell the bank?

The best advice I know of comes from Aswath Damodaran, professor of Finance at the Stern School of Business at New York University, and his story of the lemmings.

The lemmings became famous, or infamous, when they appeared in a 1958 Disney documentary called “White Wilderness.”

The lemmings appeared to have gathered on a cliff and ran off the cliff into the ocean to their deaths.

The question that arose was, “Why did they do it? Why did they commit collective suicide?”

You can see the first lemming in your mind, right?

He was going too fast; he couldn’t stop and went right off the cliff.

The second lemming was too close to the first lemming and the same thing happened.

Put yourself in the shoes of that very last lemming.

You’re going as fast as you can to the edge of the cliff.

You’ve seen the entire tribe disappear off that cliff.

I would assume you would have second thoughts about what you’re planning to do.

But then you hear a voice in the back of your head saying…

“They must know something I don’t.”

Remember those six words.

They are the deadliest words in investing.

Damodaran’s example goes on to divide the lemmings into three groups:

• Proud lemmings
• Yogi Bear lemmings
• Life Vest lemmings

Proud lemmings are momentum investors.

They look for the crowd.

They join in.

When you’re buying, I’m buying.

When you’re selling, I’m selling.

Why are you selling? I don’t care.

If you’ve ever seen the old Yogi Bear cartoons, you probably remember his most famous expression, “I’m smarter than the av-er-age bear!”

Yogi Bear lemmings think they’re smarter than the average lemming.

They run with the crowd until they get to the very edge of the cliff and at the last moment veer away.

Yogi Bear lemmings are market-timers.

They feel they are smarter than the other lemmings and they’ll be able to know when it’s the “right time” to get in or out.

If you can pull that off, that’s great.

You get all the upside and none of the downside.

That’s nearly impossible, if not impossible, to do without blind luck.

Valuation gives you a life vest.

It gives you something to hold onto when everybody goes in the same direction or when everybody changes their minds.

That’s a Life Vest lemming.

If you really want to buy something, you’re going to find a way to buy it.

If you really want to sell something, you’re going to find a way to sell.

Valuation slows the process down.

It gives your rational side time to mount an argument.

That’s why valuation is important.

The three big reasons the valuation process breaks down is when the person doing the valuation incorrectly concludes,

it’s not about the numbers,

it’s not about the models,

it’s not about the metrics,

“I know what the company is worth.”

The biggest problem is that when most people sit down to value a company or a business, and they already have a preconceived value they are expecting to see.

(Do you think multiples might play a role in this?)

The great irony is the more you know about a company, the stronger those preconceptions are, and when those preconceptions get set, your valuation follows.

In general, a composite of several valuation approaches will likely yield the most valid basis in which to form your conclusions.

There are five approaches to valuation we will be covering in next week’s newsletter.

If you want the information prior to having to wait until next week’s newsletter, you can find the valuation approaches in my book beginning on page 35. (Click here if you would like to order the book).

Here is this week’s action plan:

• Give serious consideration of what the right timing is for your circumstances.
• There are some things going on right now from a regulatory perspective that may, or may not, add to your consideration of timing.
  • The Department of Justice announced a revamping of Bank Merger Review Guidelines last June (2023) (Here is a link to a summary provided by a DC law firm who I have no affiliation with).
  • The OCC has issued a Notice of Public Rule Making (NPRM) at the end of January (2024) regarding business combinations under the Bank Merger Act which can be found by clicking here.
  • The FDIC has announced a Statement of Policy (SOP) in March (2024) on their position relative to Bank Merger Transactions and it can be found by clicking here. It is interesting to read the two objections to the SOP by two FDIC board members, Vice Chairman Travis Hill (Hill objection can be found by clicking here) and Director Jonathan McKernan (McKernan objection can be found by clicking here).
  • Finally, here is a link to a comparison of the OCC and FDIC policy positions prepared by the same DC law firm mentioned above, and again I have no affiliation with the firm.
• There is movement afoot regarding bank mergers you should be aware of, it may be played off by some as only applying to the largest of banks, but there is a belief that the alignment of the DOJ, OCC and FDIC, in conjunction with the President’s Executive Order on Competition in July of 2021 (it can be found by clicking here) will be more broadly applied creating, in effect, a moratorium on all bank mergers.

There are zero hacks or tricks in this newsletter. Just proven tactics that help you choose the right path for your bank.

Your path will:

• Inform your strategic plan.
• Guide your annual business plan and budget.
• Clarify priorities.
• Define your message so it can be communicated with confidence.

This is how savvy bankers navigate.

They build smart and valuable banks and choose the best time to sell – serving the needs of the shareholders and the board.

I hope you found this short lesson helpful.

What are your thoughts?

I’ll see you next week.