Silicon Valley Bank was at the right place, at the right time. We’re talking one-in-a-million here. SVB was founded in 1983 in Santa Clara, California, to provide financial services to technology and VC-backed companies. I can’t imagine a better location, market segment and timing than that.
SVB traded at a peak of $16 Billion prior to its sudden and shocking collapse. And while depositors were bailed out, equity investors were not. It’s easy to blame the equity investors themselves (or even the depositors for that matter) for not doing appropriate due diligence or assuming risk. It’s easy to point fingers, sure. But doing the actual due diligence that would have steered them away from SVB? Well, that’s a lot harder.
Not even harder, it was impossible.
SVB collapsed because they didn’t hedge their duration. Within the heavily regulated banking industry there wasn’t an auditor, regulator, or rating agency that caught it. And honestly, how could they have?
This post isn’t about SVB, don’t worry. It’s about the opaqueness of financialized assets. And it’s about what is real, and what isn’t.
And anyway, SVB isn’t the only such case. Remember “Bear Stearns is fine!”? Remember when Enron was exposed as a fraud by the brilliant and fearless Bethany McLean? Remember WorldCom and Lehman and Washington Mutual?
Could you have seen those coming with all of the information at the time available to you? Even if you had the skill set and the time and energy, could you have seen those coming? Maybe. I couldn’t have.
How many frauds or unforeseen terminal risks are lingering in S&P constituents today? How many of those companies will go to zero? I don’t know but I sure wouldn’t bet on zero.
If you are an investor you probably spend a lot of time thinking about risk. Unless you are an index investor, but we’ll cover that again soon.
So you think about risk, you worry about risk, you toss and turn and read and ask questions. But at the end of the day, you couldn’t have known that SVB didn’t hedge their duration risk. The deepest we can hope our due diligence will go is still just a scratch at the surface.
I’ve written about this once before, about how I found myself standing at a crossroads. I was being pulled in the same direction as most entrepreneurs in finance these days. I was being pulled further out on the risk curve, to newer markets, to leverage and volatility and… action.
And I was being pulled into another direction. To the boring old sector of REITs.
And at this crossroads I took a drive to go visit one of our REITs, to see it, to see that it was real.
We are invested in a REIT called Sun Communities. Sun manages a property called Northville Crossing, just an hour away from my house.
Northville Crossing isn’t fancy. It’s practical. It is safe, it is clean. But it ain’t fancy. It’s what we in the industry call manufactured housing.
There are lots of American flags. Lots of wheelchair access ramps. There are dog walkers, kids walking home from school, and friendly smiles.
I saw someone working on his yard and I pulled over for a chat. His name is Brock, he and his wife are both medical residents at University of Michigan. They wanted to live somewhere safe and affordable so they could pay off their student loans.
He says he likes it there. I ask about complaints and he says he doesn’t really have any. One time the garbage pick-up skipped his house. A neighbor’s amazon package went missing once last year. It’s a nice place. Good value. Nice neighbors.
Northville Crossing is real. Sun Communities is real. The roof over the head of a family is real. A community is real. A warehouse from which a business can operate is real. A downtown office building, even during the office building apocalypse, it is real. You can walk inside and see people working, you can see it among the skyline.
It won’t go poof in a single weekend because the CFO didn’t bother to hedge duration.
This is not to say there aren’t issues of leverage and debt and rate sensitivity and refinance risk and occupancy rates and valuation and on and on. It’s not to say that investing in real estate is easy or that real estate investors can’t go bust.
It is to say that the properties and the land are real. They are tangible. They can be seen and touched. And in an age where the biggest companies are valued based on inscrutable technology and opaque balance sheets, that means something.
It means that real estate is real.
It’s also a practical long term solution to the housing crisis. Better price point on the homes to start. More affordable, but there is less long term appreciation as an investment. It seems to me this is more of a cash flow situation.
Wonderfully said, Phil.