Lessons From Buffett And Lynch On Investing Amid Crises: Opportunities For The Patient Investor

We've seen this picture before.

From the collapse of the railroads in the 1800s to the Great Depression in the 1930s to the Savings & Loans crisis in the late ‘80s and early ‘90s to the Great Financial crisis in 2008/2009–speculation over investment, leverage and too much of a what appears to be a good thing oftentimes ends badly for investors and those financial institutions that are playing a part of that game. Silicon Valley Bank is now the latest casualty of a long, but sometimess forgotten pattern, of the dangers of risk of being overly exposed to an area of the economy that is high in speculation and overvaluation.

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As Warren Buffett once said, "You only find out who is swimming naked when the tide goes out."

Buffett also once said, "Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble."

The Silicon Valley Bank Backdrop Story

For Silicon Valley Bank and some of the tech start-ups that did business with them, the ebb current started with rising inflation in late 2021, which lead to significantly higher interest rates. This led to a bear market in stocks, particularly growth stocks in 2022, which spilled over into the private market valuations. Venture-backed companies found it harder and more challenging to raise funds, so many started drawing off their cash balances to cover costs.

To make matters worse, Silicon Valley Bank invested in longer-duration government bonds and as interest rates rose, those bonds fell in value. In need of capital, the company had plans to try and raise capital, but the FDIC wasn't going to wait around.

On March 8 Silicon Valley Bank was solvent, on March 9 customers tried to withdraw $42 billion and on March 10 the FDIC had taken control of the bank. It was a classic run on a bank.

Risk And Opportunities

Investors could look at this event with Silicon Valley Bank in two ways. The first concerns the contagion effects that may impact the markets, other banks and companies. Roku, the streaming service, had close to $500 million in deposits at the bank. The company had a total of $1.9 billion in cash so 25% of the firm's cash may not be recoverable. Companies like Roku will get receivership certificates for its uninsured balances and will have to wait to see if they will get some or all its money back. There will undoubtedly be more stories like this, and the ultimate fallout is still unknown.

But with these historical events often comes an opportunity for the long-term, patient investor, which is the second way to look at the situation.

Opportunistic investors looking at the banking sector may want to start getting their buy lists ready as values emerge. Since the end of 2021, the Financial Select Sector SPDR ETF XLF is down close to 16%, while the SPDR S&P Regional Banking ETF KRE is down more than 25%. But, underneath the hood, many financials are down much more.

The great mutual fund manager Peter Lynch once said, "Investing without research is like playing stud poker and never looking at the cards." My research relies on the stock-picking methods of great investors like Peter Lynch and Warren Buffett and many others. I've extracted the investment criteria outlined by Buffett, Lynch and others into computerized investing models and rank stocks through this system that is made up of 22 distinct stock selection models ranging from value, quality, growth-at-a-reasonable price, pure growth and momentum. Because of the comprehensive and diverse set of models, I can analyze stocks through various investment approaches and see how a wide range of how companies rate fundamentally. For example, I've screened the top 10 money center banks in the U.S. that get the highest rating at the current time.

While the recent collapse of Silicon Valley Bank may have contagion effects that impact other markets, banks and companies, there is also potential for the disciplined, long-term investor to find opportunities in the banking sector. As Lynch once said, "Know what you own, and know why you own it." By conducting thorough research, avoiding excessive risk-taking, and maintaining discipline and focus during periods of market turmoil, investors can take advantage of the opportunities created by crises.

By John P. Reese, Contributor