🙀 Emotions in the market

Is it okay to purchase a stock based on your preference/belief? Also, a case study on the recent SVB bank collapse.

💟 Love the Brand. Buy the stock?

One common strategy that everyone says while picking a stock is "Invest in what you use".

In the first place, why this even popped up? So we basically use a lot of products on a day-to-day basis such as Coke, Apple Inc, etc., which means the consumption rate is huge for these products. Hence, these companies have a greater advantage over the economies of scale and apparently, a small increase in the margin can turn highly profitable for these companies.

But does this strategy work?

Personal opinion - It doesn't make any sense to me. It's because it creates a biased opinion and I would rather say it's a very cliché strategy that seldom works. Just because you love a brand or a product, you can't be investing in it. For instance, I love tech products and I just love the business model of Cred. In fact, I have ranted about cred and their genius strategies of customer acquisition. You can check that out here. With just saying that I can't be simply investing in Cred just because I love their UI/UX and their business model. Because basically Cred is a loss-making company and they are burning cash as hell.

On the contrary, I know people who don't drink or smoke and are hesitant to invest in spirit companies or cigar companies like ITC, Philip Morris, United Spirits, etc, cause it actually hurts their sentiments and doesn't want to be investing in the company's growth. But these are actually profit-making companies and they have been innovating in their own industry. In fact, I have written about why to invest in ITC when it was trading at around 250 INR and it's now trading at ~50% higher. You can check about investing in ITC here (so proud of my recommendation though #flexing 😬).

So yeah, don't show your personal emotions in the market and don't be too ethical with the market. Instead, stand by your stocks as long as the fundamental story of the company hasn't changed.

The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them.

🏦 Closer look at SVB collapse

The recent buzz of the town - The fall of the Silicon Valley Bank (SVB) and while there are a number of reasons for its fall, I feel the below reasons are the actual stuff that made the bank collapse.

• Reason #1 - SVB invested lots of deposit amounts in LTB (long-term mortgage securities) as a mechanism of money rotation and as they are long-term bonds you need to pay fees when you want to liquidate the money before maturity. Eventually, Rate hikes by US Fed forced people to invest in govt bonds and the interest rate of LTB increased, lowering the bond prices. At this point in time, SVb just had notion loss.

• Reason #2 - All VCs asked their invested companies to pull out money from the bank due to the recession and SVB started facing liquidity crises. And hence SVB’s deposits were reduced by 20 billion in 3 quarters. They had to sell the bonds to meet the withdrawals of their customers and faced huge real losses. They also released a press release stating that they are looking for investments to raise 3 Billion. The timing could not be anything worse.

• Reason #3 - A bank run or run on the bank occurs when many clients withdraw their money from a bank because they believe the bank may fail in the near future. This created panic and commotion in the market and whenever there is economic anxiety, people start panic selling and it is really contagious.

So now guess what could be the best reason for the SVB bank’s failure? Is it reason #1… #2….?

I would rather say it was mainly due to the commotion in the market (reason #3 - emotions in the market) which was very contagious. Cause all the rest of the problems are common and in fact, a lot of other banks in the market faced the same issue. Then why didn’t they face the issue? One improper communication and message from the SVB management triggered the investors and depositors to pull put the money from their accounts which even made the liquidity of the bank worsen.

tl;dr - Research about the market. Try to understand the company's financials and its future potential and then strategise your investing.