The SVB Crash Fallout: 5 Things You Must Do Now

Adani rout or SVB collapse? Which is the bigger opportunity for you?

Well, smart investors can actually profit from every such opportunity that causes unnecessary panic in the stock markets.

But it's important to first ensure that your downside risks are limited. You need to fortify the group of stocks you own.

Just a few weeks back, I spoke about the need to identify the potential Adani like stocks well in advance.

Finding poison stocks to throw out is a constant endeavour for my team. This is whether or not markets view them favourably.

As the SVB fiasco unfolds, we seem to be watching the replay of old crises that left retail investors scarred for life.

Silicon Valley Bank wasn't among the US' largest financial institutions, but then neither was Lehman Brothers in 2008. And nobody who paid attention in 2008 can help feeling the shivers while watching an old-fashioned bank run.But SVB isn't Lehman and 2023 isn't 2008. We probably aren't looking at a systemic financial crisis in the US or in India.

However, taking few proactive steps could be beneficial for investors who wish to turn the crisis into an opportunity...

• Bank with the clean banks: Warren Buffett has the knack of sending out warnings to business managers and investors when they need them the most.
  
  In the latest (2023) Berkshire Hathaway annual report he wrote...
  
  We will also avoid behaviour that could result in any uncomfortable cash needs at inconvenient times, including financial panics and unprecedented insurance losses.
  
  If only the tech companies with deposits at SVB had paid attention.
  
  Now depositors in Indian banks can be reasonably assured that most financial entities here are safe to bank with. Moreover, the supervision of a strong regulator like the RBI is an added advantage.
  
  But instead of getting lured by the greed of higher interest rates, check the asset quality of the bank before banking with it. For only such entities will be able to grow in an environment of steep cost of capital.
  
  My analysis says that even as the world grapples with high interest rates, both Indian corporates and their lenders are well equipped to take the risks in their stride. Major systemic risk due to the capex boom is almost ruled out.
• Discard stocks with questionable managements: The stock of Vakrangee crashed by 95% in 2018. Vakrangee may not have been the poster boy of 2018 market crash. But it left a mark, nevertheless.
  
  Why am I telling you about Vakrangee? Well, every market crash has its own story.
  
  You may have heard about the credit rating agencies in 2008. In the US, they were blamed for not warning about Lehman's possible bankruptcy. And for offering AAA ratings to Wall Street firms that were not financially sound.
  
  In India, in January 2009, Satyam's Ramalinga Raju confessed he had cooked the company's financial books for years.
  
  This time it was not the credit rating agency but the auditor, PwC, which was in limelight. It took the courts a decade to penalise PwC for this fraud.
  
  In 2018, it took the resignations of more than 30 auditors in six months, for the market to take note.
  
  You see, dear reader, you face a big problem when corporate governance issues or rating and accounting frauds come to light. It's typically too late to act. No one warns you when the fraud is happening. Only after it has happened.
  
  So, the only recourse, dear reader, is to look for data that points to unreasonable growth or margins that are too good to be true.
• Book profits where you must: I often have investors asking me if I regret recommending them to sell stocks that went on to deliver more returns after the sale. In other words, I deprived them of the notional gains.
  
  The thing is that holding on to stocks with deteriorating fundamentals, frothy valuations or slippery managements is as bad as eating greasy food that can cause ill health at some point.
  
  In his brilliant book Sapiens, Yuval Harari explained his 'gorging gene' theory that is the root of such investor mindset...
  
  ...we need to delve into the hunter-gatherer world that shaped us, the world that we subconsciously still inhabit.
  
  Why, for example, do people gorge on high-calorie food that is doing little good to their bodies?
  
  Today's affluent societies are in the throes of a plague of obesity, which is rapidly spreading to developing countries.
  
  It's a puzzle why we binge on the sweetest and greasiest food we can find, until we consider the eating habits of our forager forebears.
  
  You may not know when to expect the crash in stocks that continue to soar higher for no reason. But when such stocks crash you may lose out all the gains you patient accumulated for years.
• Keep a closer watch on your watchlist: There are two core drivers of earnings growth in the near term, the government's National Infrastructure Pipeline (NIP) and the capex plans of the private sector.
  
  In the NIP, roads, railways, and power are some of the main drivers of capex plans. The private sector capex plans are across the board with special focus on clean tech and PLI-driven capex in mobile, solar, EVs, battery technology, automobile, pharma, among others.
  
  I believe some of these stocks, which are frontrunners of India's capex boom, could even double Sensex returns in coming years.
  
  
  
  
  So, prepare a watchlist of stocks that could benefit from India's massive capex tailwinds. And keep a close watch on them even as markets penalise them with poor valuations for near term earnings volatility.
• Increase exposures when there is panic selling: Legendary investor Peter Lynch has dispelled the myth that high IQ is a necessity for the best gains in the stock market. He says...
  
  In the stock market, the most important organ is the stomach. It's not the brain.
  
  Lynch explained that investors need to know their pain tolerance and can often succeed if they simply hang on to their holdings in times of panic selling.
  
  I typically recommend subscribers to diligently increase their exposure to high conviction stocks in times of panic sale in the markets. They can thus avail of deeply discounted valuations and have a larger exposure to stocks with substantial upside.
  
  SVB and Adani stocks-led crash are not the last of the crises that Indian stock markets will witness in 2023. There are probably many more in the offing.
  
  The fallout of such crises may be negative for most investors out there.
  
  However a little patience, discipline and diligence could allow you make such opportunities the inflection point for investing goals.

Warm regards,


Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)