One of the most important things to remember as an investor in individual stocks is that you don't need to have an opinion on everything. Not everything is a "buy" or a "sell," regardless of what Wall Street analysts say.
Most stocks should go in your "too hard" pile. That's a concept that Charlie Munger, Warren Buffett's longtime business partner, has talked about with respect to Berkshire Hathaway's investing strategy. The goal is to avoid big mistakes. If you don't understand an industry or a business, put it in your "too hard" pile. If a business is facing significant risks, even a rock-bottom valuation won't protect you from catastrophic losses. Into your "too hard" pile it goes.
Panic is contagious
The sudden collapse of SVB Financial Group's (SIVB.Q) Silicon Valley Bank has drummed up fears that other regional banks could be subject to bank runs. SVB appeared sound on paper, but the bank exposed itself to excessive interest-rate risk and planted the seeds of its own demise. Large unrealized losses in its portfolio of held-to-maturity securities became a big problem when the bank was forced to sell some of those securities at a loss as deposits dwindled. Panic ensued, and it was all over in a matter of days as the FDIC took over.
SVB was somewhat unusual in that it largely served tech companies that were dependent on venture capital funding, and that almost all of its deposits were in excess of the amount insured by the FDIC. SVB also pushed the envelope more than other banks in terms of interest-rate risks by embracing longer-duration securities. Unrealized losses on its held-to-maturity securities, if realized, would have effectively wiped out any equity. Depositors were rightly spooked when the bank sold some of those securities at a loss last week.
Other regional banks stocks were hit hard on Monday in the wake of SVB's failure. Shares of First Republic Bank (FRCB) was down more than 75% at one point, recovering to a mere 50% loss by 2:30 p.m. ET..
FRC and other regional banks did not take on the same level of interest-rate risk as SVB, and their deposits aren't as heavily tied to venture-capital funding. Unrealized losses on held-to-maturity securities, if realized, would wipe out a chunk of equity at these banks, but not nearly to the same extent as SVB. FRC and other regional banks appear perfectly sound.
However, that doesn't mean the collapse in regional bank stocks makes them an obvious, no-brainer buy. They very well may turn out to be fantastic investments from these prices in the long run, but you'd be taking a lot of risk to find out.
Not worth the risk
Bank runs are hard to stop once they get going, and they can destroy even the soundest bank. If depositors lose confidence in a bank, rightly or wrongly, that's usually the ballgame. One thing that could happen as a result of SVB's failure is a migration of deposits to the largest banks. That would force smaller banks to sell assets and realize losses. Who wants their money at a bank like that?
I looked at FRC's latest 10-K on Monday amid the rout, checking on unrealized losses and the average duration for its held-to-maturity securities. I decided it was all "too hard." While depositors at SVB are fully protected thanks to U.S. government action, and while the Federal Reserve is offering up loans to banks that run into liquidity issues, those initiatives didn't prevent investors from losing confidence. I have no idea whether depositors will lose confidence as well, so into my "too hard" pile FRC and other hard-hit regional banks go.
Am I missing out on potentially large gains? Sure. But I'm also not exposing myself to catastrophe. That's a trade-off I'm willing to accept.
