Thanksgiving musings: What's done extremely well over the last year???

It's not the QQQ

“Elle est jolie laide”

The French have a term “jolie laide” to capture beauty that is unconventional/peculiar, perhaps even ugly on the surface - jolie (pretty) and laide (ugly) coexisting in harmony.

Happy Thanksgiving everyone! As the year comes to a wrap … what a fast one it’s been, I know many of you are fumbling through Spotify, attempting to uncover your music consumption archetype for the year. Apart from general self reflection, it’s also a good time to reflect on what’s gone on in the market/portfolio, things to improve on and pitfalls to avoid (**important), for a wealthier and more prosperous 2025. Not forgetting of course, to enjoy every bite of the turkey and appreciate your loved ones.

The crisis of 2023

If anyone remembers, in the spring of last year, we had a banking crisis - multiple bank-runs that led to the some of the largest bank failures in US history. Sparked by the bankruptcy of FTX, Silvergate was first hit by a bank run before the subsequent panic-induced domino-closure of three highly reputable banks - Silicon Valley Bank (SVB), NY based Signature Bank and lastly, First Republic Bank. I still vividly remember the day, Peter Thiel “commanded his cronies” to pull their money out of SVB, ASAP; the stock gapped down bigly at opening and the rest is history.

In short, the main issue is as follows (Gator Capital summarizes perfectly) - asset-liability mismanagement. The aforementioned banks, especially SIVB, had grown its deposit base rapidly over the post-COVID tech boom. Rather than invest its excess deposits into short-term bonds, management ploughed them into long-term Mortgage Backed Securities (MBS), in a multi-generational low interest rate environment (cc 2020-2021). As interest rates rose in 2022, many of these long-term MBS declined in value rendering said banks technically insolvent. This was masked however by accounting rules enabling said banks to ignore mark-to-market losses for bonds that were “Held To Maturity” when calculating the firm’s equity and regulatory capital. Many banks therefore took advantage of this loophole and gambled unwisely on interest rates via long-term bonds. When depositors realized the banks that were holding their money were “technically insolvent”, guess what? You get a flurry of people wanting to pull their money, and with money locked in long-term bonds that were underwater (can only be sold at a realizable loss)… that can’t be good.

During that period, the market was in absolute panic - as per the article, “across the investing world, “people are asking who is the next one?”…”; the bank indices were collapsing and individual stocks were plummeting - there was blood on the streets.

The crisis of confidence was not confined within the American borders. Across the Atlantic, Credit Suisse (CS) suffered deposit withdrawals at a rapid pace and as investors panicked, UBS was offered a sweetheart deal to step in and purchase/rescue the bank, before a larger systemic crisis was triggered. It was genuinely, pretty damn crazy.

Would you have bought?

The big question though, “would it have been a great time to buy banks?”

The contrarian ones amongst us who’ve had Uncle Warren penetrate our brains repeatedly over the years with his letters and folksy humor would, almost in Pavlovian-manner, utter “be greedy when others are fearful….”

Yet, to pull the trigger is a different story.

After all, banks were legacy businesses and were not the hottest thing in town, since like forever. Nobody wants to hear you owning Citibank at the dining table; hell, if you mentioned Bank of America over a soju session, it might nullify the buzz, smack everyone sober and have them diss you for party-pooping … soju-drinkers could be quite aggressive about it too :p

Performance since

I won’t chart the price performance from the bottom. To be fair, those who went through 2008 would argue against trying to catch falling knives in financials. Anyone remember this scene from the Big Short? … That Eisman’s “BOOM” really gets me cracking.

But using a fair last one-year chart and comparing index to index (no idiosyncratic stock picking - so no exposure to the vagaries and obscurity of a financial black-box), owning the KRE - regional bank index - would have generated you >20% outperformance over the QQQ ETF (composing of tech giants - AAPL, NVIDIA, MSFT etc). If you had owned the BKX - large cap banks essentially (WFC, BAC, MS, GS, JPM), you would have more than doubled QQQ returns.

Unbelievable right? I asked a couple people today, which index do you think performed better over the last year? Nobody gave the correct answer.

It’s easy to look back in hindsight but in the eye of the storm, many were questioning the solvency of banks, some pounding their chest asserting that they’ve always been right - that banks were capital intensive, obscure and uninvestable … perhaps adding, with a cheeky smile, the conclusion that one should therefore only own big tech - not an invalid assumption but an inferior choice, so far, from a year ago.

Note that no stock picking was required, I’m merely exhibiting returns of the indexes and not the individual companies. All one needed was the cojones to ride his/her horse into the Red Sea with faith that the waters will part.

The jolie laide

One of my favorite bloggers at YetAnotherValueBlog, stated that he wished he swung harder at banks given that historically, buying banks below tangible book, presuming the book is good (IMO idiosyncratic risk diversified away by an index basket), would’ve been a great investment and we have hundreds of years of history testament to that fact.

So yeah, banks on the surface, may not be the sexiest business and yes, there was absolute panic on the streets; if you were tuning into CNBC or any financial column, there was so much doom and gloom that you would’ve held a cross up at the sight/mention of any bank stock.

So I guess ignoring all the noise and fundamentally recognizing the deep reality of things i.e. general stability and entrenchment of banks, and the ability to buy them cheap in the eye of the storm- all these pretty traits underneath the surface of the ugliness (panic etc) - that’s essentially what investing is about.

Anyway, these are my quick muses for Thanksgiving.

I’m pretty sure I round-pegged-in-a-square-hole the whole jolie laide thing but I’ve been reading some random French stuffs recently so somehow, these two managed to find each other deep within my messy head.

Once again, Happy Thanksgiving!