Prosperity Has a Poor Memory
Prosperity has a poor memory if your prosperity is in the wrong assets. If your prosperity is in something that can disappear overnight, then your prosperity will disappear with that something overnight. If your prosperity is tied to a bank, stocks, or a job, your prosperity can vanish when one of those things fails. The recent turbulence in the banking industry illustrates my point.
March saw the collapse of two major banks – the second and third largest collapses in U.S. Banking history. A third was on the verge of collapse before being rescued by some larger banks. It all started with the collapse of Silicon Valley Bank (SVB) on March 10th, followed by the collapse of New York-based Signature Bank a few days later. The SVB collapse was the second biggest failure, and Signature Bank was the third biggest in U.S. banking history. These were the biggest bank failures since the Financial Crisis of 2008.
After the collapse of SVB and Signature Bank, a third bank, First Republic Bank, was on the brink of its own collapse before a group of the nation’s biggest banks stepped in to shore up its deposits including JPMorgan Chase, Bank of America, Citigroup and Wells Fargo.
Interestingly, it was the founder of JPMorgan Chase Bank, JP Morgan, who had staved off a couple of bank crises in his own time by shoring up the deposits of fellow banks on the verge of collapse in the early 1900s.
The collapse of SVB started with a run on deposits when its depositors lost trust in the bank. Its depositors sensed trouble when the bank offered the sale of $20bn of securities to mitigate a sharp drop in deposits. This raised red flags among customers and started a run on deposits. Customers withdrew their funds, investors dumped its stock, and the bank was bust by Friday morning, with many employees facing job loss.
Nobody like JP Morgan in 1907 was there to rescue SVB and Signature Bank. The government pledged to make all depositors whole beyond the FDIC-insured maximum of $250,000. Perhaps no private party came to the rescue because they didn’t believe in those banks’ viability due to the risky nature of their businesses. Whereas banks typically loan to individuals and businesses to buy a house or fund a business, most of these loans were secured by real assets. In the case of SVB, which catered to cash-strapped startups, and in the case of Signature Bank, which serviced many crypto firms, loans to these types of companies were high risk because there were no tangible assets backing them up.
The recent bank failures offer a lesson in prosperity and how certain types of prosperity can be fleeting, and how other types of prosperity can weather significant storms.
If your prosperity is kept in the form of cash in an institution like a bank or in the form of crypto at a crypto exchange and those institutions can collapse overnight, then you should reconsider where you park your wealth.
The recent bank collapses and the collapse of the crypto exchange FTX made many customers wonder if it was safe to park their money anywhere. If not for a government friendly to Silicon Valley and Silicon Valley donors, customers with more than $250,000 in deposits would have seen their prosperity go up in smoke.
What if there were a dozen bank collapses, and the government didn’t have the resources to restore every dollar of every deposit?
Are you willing to stake your prosperity on the biases of politicians and the government’s financial ability to rescue your particular bank?
From an investor point of view, if you had stock in SVB or Signature Bank, you saw your investments disappear literally overnight. And it’s not just bank stocks that wipe out portfolios and wealth overnight. It can happen to anything. Remember the Financial Crisis of 2008 where the stock market lost half its value almost overnight? That crash touched every industry. Many prospective retirees who stored their prosperity in their 401(k) ‘s, saw half their retirement funds vanish overnight – forcing many of them to continue working beyond their targeted retirement dates.
Finally, if your prosperity is tied to your job, you can also see your prosperity overnight, as many SVB and Signature Bank employees found out. Generally speaking, if your only source of income is your job, it doesn’t matter what you do for work, you can see your prosperity disappear overnight if you lose your job or are no longer able to work. This applies to the common laborer, the bank executive, athletes, and professionals.
What is your prosperity tied to?
Smart investors don’t hang their prosperity that can be fleeting. They seek out assets that are tangible, lasting, recession resistant, and that generate a passive income that can compensate for job loss or reduction. What do these assets look like? Not stocks that can drop in value overnight. It’s alternative assets not traded on a liquid public market that smart investors allocate to protect their prosperity.
Smart investors allocate to specific segments of alternative assets like private company investments (i.e., private equity), venture capital, and real assets to grow and protect their wealth. These assets aren’t traded on public markets and, as a result, aren’t vulnerable to market volatility that can wipe out portfolios in an instant.
Smart investors have long coveted income-producing private businesses and cash-flowing real estate to protect their prosperity. The benefits of these assets can be summed up as follows:
- Low Volatility.
- Inflation Hedge.
- Passive Income.
- Low Volatility.
- Tax Benefits.
- Opportunity to leverage seasoned experts’ time, experience, infrastructure, and knowledge through co-partnerships.
Prosperity has a poor memory and can be fleeting if placed in the wrong places, but when hung on alternative cash-flowing assets backed by tangible assets, it can last like an elephant’s memory.