Paul Winkler: Welcome to “The Investor Coaching Show.” This is Paul Winkler and Ira Work talking about money and investing.
The Recent Banking Crisis
So let’s talk a little bit about the whole thing with the banking crisis when bank stocks dropped significantly in one day. I got calls from people saying, “Hey, bank stocks are down and people are saying that I ought to be investing in the bank stocks because they’ve dropped in value.”
There was a little clip on CNBC about how these stocks have gone down artificially too much. My first question was are these people rich?
Do they have lots of money and are they super, super rich because of their great stock investing prowess was the question that I had and I thought it was really good. Let’s just kind of listen to a clip about this very topic on CNBC because this guy brought up a really interesting point regarding bank stocks in general.
Speaker 1:The regional bank index has barely bounced, right? It’s been performing terribly. It matters if you think that there is still a very fragile situation in the banking system that this is only going to make matters worse.
I don’t want to bore you with too many numbers, but we’ve seen the number of banks out there over the last, I think, three to four decades dropped by 70%. We’ve gone from 14,500 to 4,200 banks in this country and I don’t think we’ve really missed a beat in losing all those banks. We are an overbanked country. We have, as I said, 4,200 plus banks. Canada has 34. Australia has 94. Japan has 195. I don’t think we miss a beat from seeing consolidation in the banking industry.
PW: I think that is really interesting, the point he’s making, about the number of banks, that we’re overbanked. There are too many of them.
We have too many banks in America.
Of course, you have a banking crisis when a run on some of the banks happens and banks went down in value. People say they went way down in value and that’s just ridiculous.
The Banking Industry
This news came out and all of a sudden, banks went way down in value so they must be underpriced, Ira, and we must be able to get these things at a bargain because they’re going to jump back up. My point jokingly, but not jokingly, is this wealthy person that’s giving you advice regarding what you ought to do with your money right now and going buying these.
But here’s the point that I had not even thought about, we are overbanked. Therefore, if we have too many banks and a crisis happens people take their money out of a lot of banks that may have been a little bit marginal and put it into banks that are more solvent or more financially able to handle whatever kind of runs might occur or more likely to be backed by the government if all of a sudden a real issue came up.
Banks dropping in price was logical based on that data that we didn’t necessarily have, and nobody was talking about when it actually happened.
Ira Work: Well, I do agree a little bit on what he said as far as we have too many banks. I mean, if you think about it, we have four major car companies.
And if you’re thinking about the other car companies that are actually building cars here in America, I mean Volkswagen is assembling cars. Nissan is just up the street. So we’re looking at maybe a dozen different car companies. So do we really need all those different banks?
PW: But then, in the banking industry, you’ve got the risk that if they’re paying more, it could be a bank that is unstable, because the banking industry’s more precarious than a car company.
You have those runs and all of a sudden, the government has to come in and back them. And that’s where you can run into some serious problems.
How Did People Know?
IW: Well, the interesting thing is, and I don’t know that it’s come out yet, is how did those people know to pull their money out of the bank? Unfortunately, most people that have their money in these banks don’t hear about it until after the collapse or at the tail end of the run.
So how did those people get triggered to know, “Hey, we’d better get our money out real quick?”
PW: Well, there were some people that were actually in the bank itself, as far as the higher ups in the bank, that had been pulling and there was all kinds of talk about that.
IW: So that was insider trading.
PW: In general, there were so many deposits in that particular bank that were uninsured and that’s another impetus to pull it out fast versus another bank where you may not have as much an uninsured deposit, so it’s not as big of a risk, right? So that may be part of it.
Regardless of whether we think that there are too many or too few banks, the interesting thing is that people on both sides of the equation think we ought to have more banks.
Competition isn’t a problem.
Then you have other people on the other side say that there are too many banks and thereby, what happens is the valuation when news comes out and stock prices move, you can’t say that necessarily the new stock price is absolutely the correct price for those banks based on the new information.
The idea of market efficiency is the market prices things properly. And you have a strong and you have what’s called a weak form. I don’t talk about this a whole lot, but there’s a strong form and there’s a weak form.
Strong form of market efficiency is not something we espouse. And that’s the idea that the market always properly prices stuff regardless. It is always correct.
The issue is that there’s always information you don’t know out there. If the market were always absolutely dead on correct, that means that every piece of knowledge that could be known is built into stock prices.
Market Efficiency
What we didn’t know at the end of 1999 was that technology was not going to grow fast enough to give us any reason to believe that the stock prices of technology companies were going to continue to go to the stratosphere. There’s information that we don’t know.
So you’ll have market drops that are quick because new information comes out because markets’ strong efficiency isn’t really what we see. We see weak efficiency and what weak efficiency means is this, is that market mispricings are there and they can be there, but we don’t know who’s going to figure out where the mispricings are and can take advantage of them.
Now, what is the evidence behind that? The evidence behind that is the professionals trying to figure out which stocks to buy and which stocks to sell. The evidence is that they’re not getting higher returns than the market itself.
IW: Right, and that’s the thing about market efficiency.
The price is right based upon the knowable information that is currently known.
But what we don’t know is the new information, what we call news, which then changes the look of what that company is going to be.
The company could be having earnings quarter after quarter. Now, most people are going to believe that the next quarter is going to be positive earnings, but those earnings can drop and we don’t know until the earnings are actually announced, which will then affect the price of the stock.
So there’s where the slight inefficiency is, but that is what actually makes it efficient because the price will adjust to that new news.
PW: Yep. And it adjusts so fast you can’t get in front of it. Investment firms do this all the time. They all have a little bit of a different approach as to where they think mispricings in the stock market are.
That’s really what’s going on. It’s different management styles and types of methodologies going on. And it’s not unlike mutual fund companies.
You’ll go to a huge mutual fund company like Fidelity or Vanguard, and what you’ll find is that they will have multiple funds in one area of the market. Now, why do they have multiple funds in one area of the market?
Hoping for the Best
Because one of those funds is going to do well versus the other ones and then we can market that to people because even though it says past performance is no guarantee of future performance, people somehow believe it does.
IW: It’s really wishful thinking, though. That’s really what it boils down to is are we going to just throw a portfolio together and then hope it works out, which is, by the way, how most people are doing it.
They’re hoping those funds that the advisor has picked and the advisor is, for the most part, selling the funds that have recently done well. Well, with proper diversification, you really want to add money to those funds that recently have not done well because there are cycles of the way asset classes move.
You don’t know when those areas are going to come back.
IW: In1995, I asked a bank owner how much it cost to start a bank. He said, “You would need about a million dollars worth of seed money.” And that was almost 30 years ago.
Paul Winkler: You’re looking at 10 million in today’s dollars.
IW: This is what is great about the free market is you and I, Paul, can go and open up a bank, not that we want to, but we can.
We have that freedom. We have that ability. We can take the risk. We can offer a little bit more interest to gather money.
The way he told me to do it is to go and open up right next to a big national bank. You want to get their fee structure and you want to price your fees just a little bit lower and watch the money move from next door into your bank and then you build up your bank and then with any luck, 7, 8, or 10 years down the road, the big bank next to you is going to buy you again.
Okay? So do we need 200 banks? Probably not.
How Is Money Managed?
PW: What we get into here, and this is the point that I really wanted to drive home, is that this person was trying to say that I’m going to buy the stock of these banks because the banks are going to recover. But there are people that believe that there are too many banks out there and maybe some of those flaws were unveiled with what happened recently with Silicon Valley Bank.
So the thing is you don’t know what that new information is and when markets digest that new information there is a response right away. So we have to look at how money is managed for an investment portfolio.
Are we seeing buying and selling and trading? You can look at turnover ratios inside of mutual funds. Turnover ratio, if you got 100% turnover, means that the stocks are totally different from one year to the next.
Another thing you can look at is do you have multiple asset managers that the company actually recommends? You can put a little bit of money with this or do you have a choice? Typically, what you’re looking at is a choice of different market timers and stock pickers and it’s a problem.
Some people just stick all their money in an S&P 500 fund.
So many people investing in the S&P 500 think they’re diversified, but they’re not.
PW: Two companies make up 10% of an S&P 500 index. Are you kidding me? It’s like an accident waiting to happen.
IW: Because you got 500 companies. I mean, with our $3,000, you can invest in an S&P 500 fund and you have 500 companies where to go buy those funds on an individual basis, it’ll probably cost you $4 million.
Most people don’t just have that sitting around. Well, if that’s what you have, you’re not diversified because a good portfolio will have 20 different asset categories specific to that area of the market.
PW: Precisely and that’s the idea behind diversification.
Want to talk with us directly?
Schedule a call here.
*Advisory services offered through Paul Winkler, Inc. (‘PWI’), an investment advisor registered with the State of Tennessee. PWI does not provide tax or legal advice: please consult your tax or legal advisor regarding your particular situation. This information is provided for informational purposes only and should not be construed to be a solicitation for the purchase of sale of any securities. Information we provide on our website, and in our publications and social media, does not constitute a solicitation or offer to sell securities or investment advisory services, or a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction.
