April 2023 Newsletter
In March’s Newsletter I complained about being locked out of my trading account but concluded that it was not the end of the world as most of the time we humans tend to trade with emotion, which in turn, statistically, lowers our annual returns. It just so happens that all the banking failures were going on around the time that I finally managed to wrestle control of my accounts back from TD. Once back online, I bought some First Republic Bank (FRC), which was under pressure by a run on its depositors. The price had been going up and down like a freshly caught fish in a small boat. My emotions certainly got a hold of me, mostly because I use to own FRC, I considered it a really good bank, and it was now on sale at a fraction of the normal price. I understood that this was speculative because when a bank loses the confidence of the system/depositors, money flows out of the bank. Without getting into Banking 101, any bank is at the mercy of confidence, right or wrong. If you read my article on crypto last month, I make the argument that the entire system only works if everyone agrees it does. There is no real asset behind any of it.
The monetary system works on the human belief that your paper money/crypto/gold/etc., will be exchanged for most anything you want. This fragility is backed by deposit insurance in some cases, as well as some government regulations but not much more. In the bigger picture, the US federal reserve, which has oversight of the monetary system, can step in should the entire system become unstable. They generally want the industry to self regulate and have no issue with letting bad banks go under. They get really nervous however when perfectly good banks get in trouble. FRC is a better bank compared to the other 3 dead banks. The question then becomes: “will FRC become bank number 4 and fail”? Other banks stepped in to provide liquidity, mostly because the confidence game has no limit. It’s in the banking industries’ best interest to shore the edges of the confidence castle walls to ensure they do not crumble further and affect confidence in all banks.
Does this mean FRC is out of the woods? Not really. All that liquidity comes at a cost and without the deposits of FRCs’ run away customers, their model is questionable. You can’t be a bank if no one deposits money with you. Will customers come back? That is the question. FRC could end up being sold to a bigger bank for next to nothing, or it could go back to normal. No one knows for sure and that makes it speculative.
I Should Have Stayed Locked Out
As it happened, my FRC purchase ended up being halted and I ultimately ended up paying way more than I expected. I should have put a limit order therefore controlling the price I was willing to pay. In the end I now own shares that are worth less than half of what I paid that day. Always something to learn from when you make mistakes like this. This situation can still play out in my favour but no one knows for sure. In any event my rules as they relate to speculation save me the embarrassment of losing lots of money as I am only allowed a few percentages of my portfolio in speculative positions. It’s a two way street, however. If the stock goes up and I end up tripling my investment, I am not going to get rich because the size of the bet is so small that it will not move the needle much. Nevertheless, Warren Buffet’s rule is do not lose money and by keeping specs small, I can ensure that no matter what happens, the rest of the portfolio will make up for mistakes. It’s all good. In any event, this is another example of what happens when you get emotional, or in other words greedy.
Opportunity?
For those interested in taking advantage of the banking situation, you can also pick up some TD or BMO, which have exposure to the US banking train wreck. They are both down allot for the year yet they are Canadian Banks, not US banks. So a couple of points… The US situation is not likely going to create much contagion, mostly because the failures were small vis a vis the us economy. The media has overplayed their magnitude, describing these as some of the biggest banks in history to fail. This is wrong and sensational, as they failed to consider inflation when comparing to the past. Also, after the great recession of 2007/8 there were more regulations added to the big banks in the US to shore up their ability to weather adversity. In addition, TD and BMO are very regulated Canadian Banks which are even more stable than American banks as a whole. A no brainer to me. If I did not already have a bunch of TD and other financials, I would certainly load up on these to overweight. I would consider both these as core holdings and not speculation. A big bonus to these Canadian Banks is their near 5% dividend yield.
Would I buy more FRC? As stated above, I think as long as FRC is under a deposit run, it has to be considered a speculative play and as a result I cannot invest anymore than I have already. A small position is all that is warranted at this time but the situation could change quickly. Certainly making money on TD and BMO is allot more certain and if you consider the risk reward ratio, then these are much better. FRC nevertheless is a great spec that one can learn much from, whether you win or lose.
Looking Forward
As I have stated time and time again, the investment environment is a little nutty. It’s all been made even more complicated with rapidly rising rates. Certainly one can argue that the unforeseen Banking situation is a result of the nuttiness. When central banks intervened to combat Covid, then reverse the position for inflation, there is certainly a high risk of unknown shocks to be expected. This is why I have been over diversified. At the same time, I am aware that from a probability perspective that we are likely going to see a good year for returns following the recent bear market (drop of more than 20%). So I continue to be bullish generally but remain aware that there could be much volatility as we continue to move forward.
Marc’s Monthly Moves
- Buy 30 Shares of FRC at 36$ Small speculative position
Marc’s Portfolio YTD Performance
My portfolio page is LIVE! I will continue to update it monthly. It contains a full list of my positions and the performance information that I’ve included below.
- Portfolio return: 6.5% (including currency losses)
- Portfolio return: 6.7% (without currency losses)
- S&P 500 return: 6.9%
- TSX: 4.2%
The portfolio under performed the S&P 500 by .2 percentage points.
Happy investing.
M
Money with Marc 