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How Silicon Valley Bank Failure Can Make You A Much Better Investor
The Silicon Valley Bank (SVB) autopsy will last a long time.
Hindsight will uncover many warning signs.
There will be blame thrown everywhere.
Management, regulators, etc. All will take a hit.
But the main part of it all will be SVB made a big bet on bonds, lost, and is now no more.
None of it had to be that way though.
In fact, it all could have been prevented if SVB followed one rule all investors must have – have an exit strategy.
To understand what went wrong here you have to look at SVB’s collapse at the elemental level.
SVB is a bank.
It takes in deposits – an estimated $176 billion at the end of last year.
Then it lends those out.
Instead of making loans though, SVB focused on buying bonds, which are, in a lot of ways, the equivalent of loans.
There’s nothing technically wrong with that, but it turned out to be the start of the bank’s unravelling.
SVB was sitting on a massive amount of U.S. treasury bonds.
The bank would pay depositors 0.5% or whatever, collect 3% on their bonds, and the difference would cover the costs and go to profits.
It’s banking. It’s really simple looking at it from the top.
It all would have worked out too IF inflation was truly “transitory” like no one who buys groceries ever believed.
Inflation, however, killed it all.
When the Federal Reserve started hiking interest rates, the value of the bonds held by SVB (and many other banks) started dropping.
In the end SVB was sitting on $16 billion of losses in bonds that it was just going to hold onto and ride out until the bonds matured.
Depositors, however, started asking for their money back and SVB had it tied up in losing bond bets.
The bank had to sell off the bonds and couldn’t hold until they matured.
Again, there were many mistakes made here.
Bad management…Squandering of company capital…Hiring staff that has historically proven it wasn’t up to the job of managing risks.
But there’s one that’s particularly outstanding that would have avoided all of this.
If SVB had a stop-loss to cut losses early on its bleeding bond portfolio, it would have been just fine.
Sure, there may have been a big hit of a few billion dollars. Maybe more.
But it wouldn’t have been an existential hit.
That’s something all investors can take away and use during these times.
Always have an exit strategy to protect your capital and live to fight another day.