The fall of the Silicon Valley Bank (SVB) has been the talk of the town over the last few days.
The collapse of SVB saw a ripple effect on the other US regional banks as well, with some
falling more than 40% in a single day. Now with the bank’s deposits and assets being transferred to Silicon Valley Bridge Bank, the depositors have taken a sigh of relief.
While the contagion risk of SVB’s fallout has been avoided for the time being, there are some lessons we can take away from this episode.
Just a few months before SVB’s collapse, global brokerage houses had given overweight and buy recommendations on the bank. While such research reports are a good starting point, it is important to do our own research rather than blindly follow the experts. As an investor, we should take everything with a pinch of salt. When investing, it is important to look at fundamentals, and likely risks of a company. Just relying on rankings and positive news flows from publishers and magazines may lead to wrong conclusions. Just a few days before the run on the bank, Forbes had ranked SVB among America’s Best Banks.
SVB’s CMO, CFO and even the CEO have reported the sale of their shares in the past few months. This is while they were giving positive commentary and alleviating investor worries. The CEO alone sold shares worth $3.6 million just 10 days before the collapse of the bank. He had sold nearly 10% of his holding in the bank in a single day. This is a red flag that needs to be tracked and questioned while investing in a company.
When such collapse happens in a stock, it has a ripple effect on the other stocks in the sector too. After the news of SVB broke out, there was a huge fall in the prices of regional banks due to worries about it being a systemic risk. Banks such as First Republic, PacWest Bancorp, Western Alliance Bancorp etc., saw more than a 40% decline in a single day. Investors in these banks also bore the brunt while they were not directly associated with SVB. The most important lesson to takeaway from this collapse was whatever the asset class may be, it is important to diversify our investments. For our savings, our deposits need to be spread across different banks and for equities, our investments need to be spread
across different stocks in various sectors across market capitalisation.
Diversification helps to reduce the unsystematic risk, thereby reducing the drawdown when some stocks in the portfolio don’t perform.
While the SVB’s collapse caught many investors off guard, in the markets, there are always going to be many known unknowns and unknown unknowns, but sticking to the research process and diversifying the investments will help avoid severe drawdowns and permanent loss of capital.
(The author is Chief Investment Officer, and Ameya Khandekar, Research Analyst at Research & Ranking)