We have been here before.
The failure of Silicon Valley Bank on March 10 reminds me of what I experienced firsthand as a bank analyst during the global financial crisis in 2007 and 2008.
As a professional investor for 30 years, I rely on my own experiences to help guide my investment approach. When I was a bank analyst then, I captured the 10 lessons below to serve as a guide for myself and colleagues to help get us to the other side of the valley.
Every crisis is different, but they often have things in common. Today’s turmoil shares some striking similarities, though, in my view, this current episode is much smaller in scale and far less damaging.
Last summer, with rates rising, inflation high and the prospect of recession looming, I unearthed these lessons from 15 years ago and shared them again. And when Silicon Valley Bank failed a few weeks ago, I circulated them once more to offer perspective and help colleagues manage the uncertainty. Here are those lessons, which I believe bear repeating.
It is difficult to predict when the current crisis will end, but experience has taught me that it will and that we will get through this. Time and time again, markets have demonstrated a remarkable ability to endure and recover from crisis and thrive.
Today, as a portfolio manager and principal investment officer for American Mutual Fund®, I spend much of my time focused on preservation of capital and draw from my personal experiences in past crises in that effort.
I also rely on the wisdom of colleagues. At Capital Group we have many veteran investors with deep experience. Some 37% of our portfolio managers have more than 30 years of investment experience while 89% have 20 or more.
The importance of experience
Moving beyond financial crises takes time and can be messy. Regulators have taken swift action to try to contain the damage and restore confidence, and they have been coming up with some very creative solutions. But those remedies will need time to be tested by the market. So, patience is crucial.
Going forward, I expect to see a dramatic tightening in lending standards. Small- to mid-sized banks are likely to be subject to stricter regulations — along the lines of the requirements for the largest financial institutions. Those likely include higher capital and liquidity requirements, periodic stress testing and restrictions on the types of investments banks can employ in their bond portfolios.
As in any cycle there will be winners. My view is that the strong will get stronger. That includes banks as well as companies in other industries that generate strong cash flow and can fund their own growth. For example, select technology giants are cash-flow positive today. Some of them made massive investments in their businesses when rates were near zero. It would be much more expensive for competitors to challenge those incumbents today.
Across industries, I believe opportunities will surface. The key for investors is to remain calm, look past the turbulence and be ready to act when opportunity does arise.
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