Thought Starters

Today’s email is sponsored by J.P. Morgan

There’s always a reason to panic but that isn’t a reason to sell

Silicon Valley Bank and the potential collapse of other small or struggling banks has been the talk of the financial media over the past two weeks. Over the weekend, we saw this post pop up in our Facebook Discussion Group:

The Equity Mate that posted this certainly isn’t alone. We’re feeling it as well. This year has given us plenty of reasons to be nervous. From rising interest rates, to a cost of living crisis and now the collapse of Silicon Valley Bank. If you were looking for reasons to panic, you wouldn’t need to look hard.

No matter how nervous you get, this is your reminder not to panic sell. 

As investors, we can add Silicon Valley Bank (2023) to the long list of reasons to panic. Just in the past 15 years there has been the Global Financial Crisis (2008), the COVID crash (2020), China’s property collapse (2021) and Russia’s invasion of Ukraine (2022). In the same 15 years there has been economic crises in Greece (2009), Portugal (2010), Venezuela (2012), Brazil (2014), Russia (2014), China (2015), Turkey (2018), Argentina (2018), Lebanon (2019), Sri Lanka (2019), Pakistan (2022) and Russia again (2022). Most of these economic crises will be forgotten in time but in the moment they are scary for investors.

There are always reasons to panic. We are reminded time and time again that the stock market has grown despite these reasons. You’ll often see this represented with a ‘Wall of Worry’ chart.

As Warren Buffett wrote when the United States was in the depths of the Global Financial Crisis:

Sure, over the long term the stock market may recover and then some. But if I’m confident the stock market will fall further this year, why shouldn’t I sell today and then buy back in later when the market recovers?

Timing the market is near impossible. No investor, professional and amateur alike, is able to do it consistently. So while it may feel good to sell your stocks and reduce your risk, chances are you won’t be invested when the stock market recovers. And missing out on the early days of the recovery is a problem:

There are two conclusions from that quote: (1) you can’t miss out on the best days and (2) it is impossible to predict when the best days will come. So the only logical answer: stay invested.

That doesn’t make it any less scary. We’re with you on that journey. But proceed confidently knowing that history is on your side. There will always be another reason to panic but the stock market will keep climbing that wall of worry. Don’t miss out!

The wrong way to think about Moral Hazard

There has been plenty written on Silicon Valley Bank over the past week and we didn’t feel there was much to add by including another explainer in this email. So we’re going Silicon Valley Bank-adjacent and including this article discussing the idea of moral hazard in banking.

Put simply, a moral hazard arises when one party is incentivised to take more risk because it does not bear the cost of that risk. The classic example is America’s ‘too big to fail’ banks. If the banks know the government will bail them out, does that change how they invest their money?

In the aftermath of the US government guaranteeing the deposits at Silicon Valley Bank, the conversation on moral hazards has been front and centre. Critics have argued that other mid-sized banks will be incentivised to take on more risk in the belief that if those risks do not pay off, the government will also bail them out.

This article goes a step further and argues that government guarantees of deposits create a moral hazard and the banking system would be more stable if the government did not guarantee any deposits at all. It is not an argument we necessarily agree with, but it is an interesting look at the Silicon Valley Bank issue from a slightly different angle and it certainly made us think.

Gen Z’s dating revolution

Every generation has new ways of finding love. For millennials, it was all about the apps. Tinder, Bumble, Hinge - we were the first generations to embrace being introduced by an algorithm rather than friends or work colleagues. This article from Business Insider suggests that Gen Z are rejecting the dating apps and going back to meeting in person.

In particular, more and more Gen Z’s are dating a friend. A survey from the Centre on American Life found that around one-third of 30-49 year old women (millennials) were friends with their partner before dating. This rises to one-half when looking at 18-29 year old women (Gen Z).

A big reason for this is the growing dissatisfaction with dating apps. In 2019, a Pew survey reported 42% of Americans had an overall negative experience with dating apps. That is up to 46% in 2023. Another Pew survey found that four-in-ten women under 50 have been called an offensive name while using a dating site and more than half have been sent a sexually explicit image they did not request.

As a result, Gen Z’s are finding new ways to meet partners and fall in love. For the online dating giants - Match Group (owner of Tinder and Hinge) and Bumble - they have their work cut out to try and improve the online dating experience and attract the next generation of users.

Influencer parents and the kids who had their childhood made into content

This article felt particularly timely given France’s new ‘Sharenting Law’. Aimed to curb parents excessively sharing the lives of their children online, France’s law recognises that parents have a legal duty to protect their children’s privacy. In extreme cases, French courts are empowered to stop one or both parents sharing images of their children online.

At its core, this law recognises that having your lives shared online can have consequences and that children are often not given a choice, or where they are, are not able to fully understand and consent to this. This article from Teen Vogue takes a look at some of the children born to the first generation of ‘Influencer Parents’ and how their lives have been affected.

In the United States, the focus is less on stopping the practice altogether and more focused on ensuring child influencers are not exploited by the parents. In 1939, California passed the Coogan Law to ensure that child actors had 15% of their earnings set aside in a trust that couldn’t be accessed by their parents. Nothing like that currently exists for child influencers, although the state of Washington is currently considering a bill.

The first social media platforms launched in the late 1990’s. It really hit the mainstream with Facebook’s launch in 2004. The first generation of children that had their young lives shared online are just starting to reach adulthood. And as these young people are able to leave the spotlight of their parent’s social media accounts, we should expect to read a lot more stories like this.

Investment thesis: Floor & Decor (NYSE: FND)

At the start of this year, we’d never heard of Floor & Decor. Now, in the space of a couple of weeks, we’ve spoken about the American retailer on the podcast and featured it in Thought Starters. Last Thursday on Equity Mates Investing Podcast, Nathan Bell of InvestSMART unpacked Floor & Decor as a high conviction stock (Apple / Spotify). So when we came across this deep dive on the company, we felt we had to share it.

Floor & Decor is the third-largest hard surface floor retailer in the United States, with about 9% market share. The company’s two larger competitors - Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW) - are more general hardware stores, and that may be where the opportunity lies for Floor & Decor. By offering a greater range and stocking more inventory, the author believes Floor & Decor can increase its market share into double-digits.

This is an incredibly comprehensive look at one company and a reminder of how much work goes into building an investment thesis for an individual company. If that is a game you want to play, make sure you’re willing to do the work. It is also a reminder of how much information is available for free online. It truly has never been a better time to be an investor.

_{Disclaimer
All information contained at EquityMates.com and in any content produced by Equity Mates Media is for education and entertainment purposes only. Any advice is general advice only, and has not taken into account your personal financial circumstances, needs or objectives. It is not intended as a substitute for professional financial, legal or tax advice.}

_{Before making any financial decisions you should read the Product Disclosure Statement (PDS) and, if you are unsure, consult a licensed financial professional.}

<sub>Equity Mates Media operates under Australian Financial Services Licence 540697.

Equity Mates respects your privacy. All personal information collected is protected in line with Equity Mates' Privacy Policy.</sub>

_{Copyright © 2023 Equity Mates Investing Podcast, All rights reserved.}