The lesson of Sifter’s founder, Hannes Kulvik, after the 2008 financial crisis became very topical last week when Silicon Valley Bank (SVB) in the US fell into a crisis and waves hit the stock exchanges in Europe and Asia.
“Sifter no longer invests in the financial sector. The risks of banks and insurance companies are not Sifter’s risks.”
Hannes Kulvik
The Sifter fund has not invested in banks since 2007
The situation in the United States does not immediately affect Sifter Fund’s investments because we have not invested in the banking sector. The indirect effects are visible, of course, in that stock markets have fallen around the world, but the price of the Sifter fund has only fallen -1.0% during March (28.2-13.3.2023).
Why do banks not meet Sifter’s quality company criteria?
Although bank stocks have traditionally been popular investment targets, for example, due to high dividends, in Sifter’s investment strategy, banks do not meet the criteria for quality companies.
- Firstly, the balance sheets of banks and the transparency of their operations can be complex and difficult to understand. Banking is highly dependent on macroeconomic factors such as interest rates and the general state of the economy. This can lead to significant risks that are not always easy to assess.
- Secondly, the financial sector is subject to regulation and scrutiny, which can be costly for banks and reduce their profitability.
- Lastly, the reputational risks associated with the financial sector, such as those seen in the 2008 crisis, can also pose a significant risk for investors.
Throwback 2008-2009
(Excerpt from the Investor book, page 135)
“In March 2009, the New York Stock Exchange had already fallen by 50%. The steepness and duration of the decline were reminiscent of the development in 1929. How long should this misery last? If history repeated itself, prices would fall for a long time. Many talked about the last days of capitalism. They got more attention than those who were reminded that at some point the price decline would end in both housing markets and stock exchanges.
Not even the reassurances of the new President Barack Obama eased the misery of the stock markets. On March 3, 2009, Obama said that “buying stocks can be a good deal” if the investor has set his sights on the long term. However, the turning point was near.
The third important lesson for the Sifter team was related to financial stocks. The earnings reports of Lehman Brothers, Royal Bank of Scotland, and Credit Suisse looked good and their market values were high, even though the banks’ balance sheets had already rotted. Understanding the real situation had been extremely difficult for experts assessing the condition of banks, despite the transparency and regulation of the largest companies in the industry.
Bank executives and owners vowed after the financial crisis that such a disaster would not happen again. Hannes Kulvik, who had witnessed and experienced the Finnish banking crisis and the global financial crisis, did not trust such assurances. He decided that Sifter would no longer invest in financial sector stocks. There would be dozens of other industries left with tens of thousands of companies operating in them. But the risks of banks and insurance companies would no longer be Sifter’s risks.”
Banks can still be good investment opportunities
It is important to note that Sifter’s decision not to invest in bank stocks does not mean that bank stocks are not good investment opportunities for other investors. Investors should always do their own research and analyze the risks and opportunities of different investment options before making investment decisions.
In equity investing, it is important to stay within one’s own area of expertise and to know the investment opportunities in which one is investing. This helps make better investment decisions and reduces the risk of losing invested capital. The banking sector is still one of the world’s largest industries, and many investors consider it a stable and predictable business.
Sifter’s customer promise to investors
Sifter Fund is a global fund specializing in investing in quality companies that are believed to have qualitative and numerical superiority. Our investment strategy is based on research and investing only in companies that have real money-making power, and the potential to grow and succeed in the long term.
We also aim to avoid taking excessive risks. We see that preserving wealth is more important than maximizing returns with high risk.
We have written about stock market declines many times before, for example in these articles:
- The stock market correction – What really changes when stocks fall?
- What does a long-term investor do when the market goes down?
- 4 ways to deal with stock market uncertainty
Santeri Korpinen
CEO, Sifter Capital
