Tariffs in the Age of Economic Warfare

To Our Investors and Friends,

The S&P 500 finished the first quarter of the new year down 4.6% as fears of a tariff-induced slowdown led many investors to sell US stocks in favor of international stocks, creating the worst quarterly performance differential between the US and the rest of the world since the late 1980s. Investors also sought the safety of the 10-Year Treasury Note, which dropped 34 basis points, to end at 4.23%. The 2-Year Treasury Note fell 36 bps through the month to end at 3.89%. Oil declined 0.3% to $71 a barrel. Energy stocks performed admirably, up 9% in the quarter, helping Large Cap Value generate a positive return. The Russell 1000 Value Index ended the quarter up a modest 2.1%, while the other major indexes all declined. The Russell 2000 Value Index dropped 7.7%, the Russell 1000 Growth Index declined 10.0%, and the Russell 2000 Growth Index fell 11.1% in the quarter.

The US markets reversed their upward trajectory mid quarter after investors’ fears of an economic slowdown blossomed as we approach the full execution of the Trump administration’s tariff policy in the first week of April. Compounding this concern has been a lack of clarity in what tariff policy will ultimately look like, leading Corporate America to hit the brakes on investment decisions lest they make poor ones. Economist Nancy Lazar, from Wall Street firm Piper Sandler, estimates that the full impact of tariffs could grow from sub 2% of the value of all products in 2022 to 8% of the value of all products, a level not seen since the late 1940s.

According to Edward Fishman’s Chokepoints: American Power in the Age of Economic Warfare, the world entered the Age of Economic Warfare in the early 2000s, and over the last 20 years the impact of economic warfare has increased substantially while it has become much easier to execute such tactics. Fishman further explains, “The United States has reached into its economic arsenal… In the process, the world economy has become a battlefield. Its weapons take the form of sanctions, export controls, and investment restrictions…America’s strength in these battles stems not from its gargantuan defense budget, but from its primacy in international finance and technology.”

It is impossible to know the outcome of this economic warfare, but it is reasonable to assume that we will have slower economic growth and higher prices. It is a war that most likely will hurt the physical economy much more than the digital economy, which means after the selloff concludes, market participants will likely selectively return to those businesses that will benefit or be less impacted than the economy as a whole. At Kingsland Investments, we seek out companies utilizing the latest technology to build new markets despite the challenges the macro environment may present. We will make sure that portfolios continues to adapt to an ever-changing environment.

All the best to you,

Arthur K. Weise, CFA

A Highly Concentrated Economy

To Our Investors and Friends,

The S&P 500 retreated in February by 1.4% on concerns of a cautious consumer and a deteriorating economy. In a classic flight to safety, the 10-Year Treasury Note dropped 24 basis points, to end at 4.24%. The 2-Year Treasury Note fell 23 bps through the month to end at 3.99%. Oil fell 3.8% to $70. Cyclical areas in the market retreated, while interest rate sensitive sectors advanced. Interest rate sensitive areas helped the Russell 1000 Value Index squeak out a modest 0.4% gain, while cyclical declines led the Russell 1000 Growth Index to fall 3.6%, the Russell 2000 Value Index to drop 3.8%, and the Russell 2000 Growth Index to sink 6.8% in the month.

US consumers have been suffering for years now, as inflation has taken away their purchasing power and wage growth has not kept up. As a result, recent University of Michigan consumer sentiment surveys indicate a drop in consumer confidence over the last several months and a subsequent increase in inflation expectations over the same time frame. The average consumer is feeling poorer as the stock market makes new highs, a significant disconnect that is a challenge to future economic growth. This is not a new phenomenon, but we believe this sentiment has been brought to the surface with higher inflation.

As can be seen in the chart below, the top 10% of earners accounted for 36% of spending in 1994. By 2024, the top 10% made up 50% of spending. The concentrated level of income and spending that has been bolstered by a strong stock market adds fragility to our economy.

According to Nobel laurate economist Joseph Stiglitz, “The growing inequality in our society undermines the strength of the American economy." Ultimately, economic growth will slow if only a small portion of the population can afford to spend on anything beyond food and fuel. We believe the economy would be far better off if the middle class had greater spending power, which would increase demand for durable goods such as housing and cars, fostering a more resilient economy.

At Kingsland Investments, we seek companies that both empower their employees and share in the wealth of their growing businesses. Shared prosperity leads to a virtuous cycle of growth. We are continually on the lookout for such companies and will seek to discover and own them as they emerge.

All the best to you,

Arthur K. Weise, CFA

Disrupting the Disrupter

To Our Investors and Friends,

The S&P 500 started the new year with a 2.7% increase for the month, driven by both large value and small growth stocks. The AI excitement that led the market last year is cooling off a bit, allowing other companies to get some attention from the market. The 10-Year Treasury Note rose one basis point for the month, to end at 4.58%. The 2-Year Treasury Note fell three bps through the month to end at 4.22%. Oil remained flat at $73. Higher yielding bank and pharma stocks were the biggest contributors to stock performance so far this year. These sectors enabled the Russell 1000 Value Index to increase by 4.6% this month. The Russell 2000 Growth Index is also having a solid start to the year, up 3.2%. The Russell 2000 Value Index is up 2.1%, and the Russell 1000 Growth Index is not far behind, up 2.0% in January.

For the first time in almost two years, the market is beginning to question the growth trajectory of Artificial Intelligence spending after Deep Seek, developed by a Chinese Hedge Fund, revealed a significantly less expensive way to train AI models. Not surprisingly, Deep Seek is borrowing from the learnings of leader OpenAI, essentially leveraging the tens of billions of dollars already spent on Artificial Intelligence. This is not surprising, because that is how innovation has progressed throughout history.  

Disruption occurs when a less expensive alternative to the accepted norm is introduced to the market, and the incumbents fail to respond to this new competitive threat – often because they cannot get out of their own way. In their book Machine, Platform, Crowd, authors Andrew McAffee and Erik Bryanjolfsson explain, “it is exactly because incumbents are knowledgeable and caught up in the status quo that they are unable to see what is coming and the unrealized potential and evolution of the new technology. This phenomenon has been described as The Curse of Knowledge and status quo bias.”

The authors further state “the combination of cheap raw materials, vast global markets, intense competition, and large manufacturing scale economies is essentially a guarantee of sustained, steep price declines and performance improvements.” Simply, this is how free markets operate – wringing costs out of the latest technologies until they are accessible to everyone – not just a handful of companies with billions of dollars to burn.

We think the market’s surprise with this development is another sign that there are few investors who understand disruption and therefore will get caught flat-footed when disruption changes the corporate spending trajectory on AI. We believe the greatest risk is in the private sector, especially OpenAI that is seeking a $340 billion valuation in their latest funding round. It may be the most overvalued business in the history of the markets, and we are grateful that the public markets are not exposed to it.

At Kingsland Investments, we seek the next generation blue chip leaders of the digital age that we believe can grow into much bigger stocks. We believe the greatest corporate beneficiaries of Artificial Intelligence may not even exist yet but are being contemplated by a few high school and college students fascinated by the possibilities of this exciting technology. We are continually on the lookout for such companies and will seek to discover and own them as they emerge.

All the best to you,

Arthur K. Weise, CFA

Fuzzy Math

To Our Investors and Friends,

The S&P 500 rose 23.3% in 2024, the second year in a row of more than 20% gains, a rare phenomenon not seen since the beginning of the internet boom in 1997 and 1998. Today’s enthusiasm is largely driven by Artificial Intelligence (AI) and the Mega Cap Technology companies known as the Magnificent Seven that are focused on transforming their businesses with exciting technology. The 10-Year Treasury Note rose 63 basis points for the year, to end at 4.58%. The 2-Year Treasury Note fell 8 bps through the year to end at 4.25%, ending the yield curve inversion mid-year. Oil remained flat at just under $72 for the whole year. For the year 2024, the story began and ended with mega cap stocks dominating performance. With approximately 56% of the Russell 1000 Growth comprised of the Magnificent Seven, the index soared 33.4% in 2024. This far exceeded the performance of the Russell 2000 Growth Index, that increased 15.2%, the Russell 1000 Value Index, that rose 14.4%, and the Russell 2000 Value Index, that gained a more modest 8.1%.

The Magnificent Seven, comprised of the largest technology companies on the planet, Apple, Nvidia, Microsoft, Alphabet, Amazon, Meta, and Tesla, have made a spectacular two-year run, leaving the rest of the market behind and in many cases still off their highs achieved in 2021. There is no doubt that these are fantastic businesses, but we think the market’s intense focus on their opportunity has created an S&P 500 index of “haves” and “have nots.” In fact, as these companies trade near the highest valuations in history, many other stocks are at or close to the lowest valuation levels they have seen. It reminds us of the internet bubble that ended poorly for many internet darlings, while beginning a great bull run for many forgotten parts of the market.

As shown in the chart below, the Magnificent Seven experienced a cumulative 75% increase in revenue over the last two years compared to an 11% gain for the entire S&P 500. Excluding Nvidia, this growth was a more modest 24%, which although good, is not transformational (as it has been for Nvidia). The market responded to this growth with a 268% increase in the value of the stocks over the same time frame. Excluding Nvidia, it was a 175% gain. This compares to the index that experienced a 54% gain over the same period, and the equal weight index, a much more modest 24% increase. The S&P 500 Equal Weighted Index is an index that assumes that every stock in the index carries the same weight, while the S&P 500 Index ended the year with the Magnificent Seven representing 33.8% of the index.

It appears to us that the market is expecting the Magnificent Seven to grow a lot more than the group is capable of. Excluding Nvidia, the group’s stocks have appreciated seven times more than their businesses grew over the last two years compared to only about two times for the S&P equal weighted group (both from a cyclical low). What does this suggest? Given the rapid appreciation of the stocks, it appears the market is anticipating these companies to accelerate their growth from current levels. We believe that if AI does not accelerate their growth in 2025, the Magnificent Seven may quickly lose its luster and its catchy name. Is a Mediocre Seven in our future? If it is, we own portfolios consisting of the next technology leaders that the market may seek out as replacements.

At Kingsland Investments, we seek the next generation blue chip leaders of the digital age that we believe can grow into much bigger stocks. Once these stocks become widely owned and reach business maturity, we seek replacements by discovering new companies that offer compelling growth but have not been fully discovered by the market. This process is designed to produce compounding returns over time.

All the best to you,

Arthur K. Weise, CFA

The Challenges of the Working Man Before the Age of Artificial Intelligence

To Our Investors and Friends,

The S&P 500 rose 5.7% in November, a strong showing that coincided with an election result that brought with it hopes of both less regulation and lower taxes for the corporations that comprise the index. The 10-Year Treasury Note fell 10 basis points in the month, to end at 4.18%. The 2-Year Treasury Note dropped 3 bps to end the month at 4.13%. Oil fell about 1% in the month to close at $68 a barrel. Small cap stocks rallied strongly ahead of large cap stocks, potentially ending a decade of underperformance. The Russell 2000 Growth Index rose 12.3% and Russell 2000 Value Index increased 9.7% as investors embraced the prospects of greater acquisition activity and less of an impact from a potential global trade war for this group of companies. The Russell 1000 Growth Index gained 6.5%, and the Russell 1000 Value Index rose 6.4%.

Many describe the stock market rally as a relief rally that comes with the certainty of a smooth transition of power. We believe that the election shed light on the disenchantment of many working age men and the stock market rally reveals the hopes that they have for an improvement in their circumstances with a new administration. Time will tell whether these hopes are validated.

In his book Of Boys and Men, Richard Reeves describes the predicament of non-college educated working men as structural in nature and believes that a change in the administration will do little to improve their prospects. According to Reeves, the information age has materially changed our economy, and as a result, “labor force participation among men of prime working age has dropped 7% points over the last half century from 96% to 89%.” He further explains that this is an acute crisis for Generation Z and Millenial men as “the biggest fall in male employment has been among young men between the ages of 25 and 34.”

Reeves states, “Male jobs have been hit by a one-two punch of automation and free trade. Machines pose a greater threat to working men than to women. The occupations most susceptible to automation are more likely to employ men.” Brookings Institute fellow Mark Muro explains, “Men make up more than 70% of production occupations, over 80% of transportation occupations, and over 90% of construction and installation occupations. These are all occupational groups with current task loads that have above average projected automation exposure. By contrast women make up most of the work force in relatively automation-safe occupations such as healthcare, personal services, and education.”

The one thing we can be certain of is that automation will only increase during the AI revolution. This means that the answer to solving the challenges of the uneducated male workforce is not a return to the past but rethinking what their roles can be in the future. It is important that we find ways to reverse the unemployment trends tied to automation and help these men again find purpose.

At Kingsland Investments, we will continue to search out those companies that are making life better for their customers, employees, and shareholders by coming up with solutions that are superior to those that they are replacing. We will use periods of short-term market enthusiasm to make sure that the portfolio is well positioned for the long run.

All the best to you,

Arthur K. Weise, CFA

Keeping the Political Noise in Check

To Our Investors and Friends,

As it often does, the S&P 500 finished October lower, down 1.0% for the month. The 10-Year Treasury Note increased 47 bps in the month, to end at 4.28%. The 2-Year Treasury Note rebounded 50 basis points to end the month at 4.16%. Oil remained fairly flat to close at $69, less than one percent higher than where it started the month. For this negative month, large capitalization stocks modestly outperformed small. The Russell 1000 Growth Index fell .3% and the Russell 1000 Value Index dropped 1.1%. Small cap stocks, which had benefitted from falling interest rates, faired poorer with the Russell 2000 Growth Index falling 1.3% and the Russell 2000 Value Index dropping 1.6%.

The stock market’s volatility has frequently been attributed to election jitters that are leading many to hold off on major decisions until there is clarity on what happens next week. Early voting has created a longer stretch of time that likely increases participation and most certainly has enhanced anxiety among the voting public. In fact, according to Arthur C. Brooks, Love Your Enemies, “political scientists are finding that our nation is more polarized than at any time since the Civil War. This is especially true among partisan elites.” As a result, surveys have suggested that a full 80% of Americans fear a decline in the stock market if the other side wins.

The American public is afraid that people who think differently from them will make decisions for them. Considering that Congress will determine how $6.8 trillion is spent, this is a justifiable fear. That is an insane amount of money. It is enough to bring out the very best and worst of us, and it has contributed to the political environment we have today.

We believe the real danger in the election is a sweep on either side, which could make the misappropriation of funds possible, and may put at risk our most important institution – a fair legal system that both Americans and the world depend on to realize their pursuit of happiness. Thomas Jefferson once said, “a difference in politics should never be permitted to enter into social intercourse or to disturb friendships, its charities, or justice.” Any material change to the legal system on which most Americans have built our lives will take away from the desirability of the country as a place to live and grow a business or a family. It is the one thing that could threaten the American dream.

At Kingsland Investments, we recognize that no matter which side wins, if there is no material change to our legal system, any stock market reaction should be fleeting. Companies with great businesses supported by supportive work cultures should continue to lead the market higher. We will look for opportunities that may present themselves as many may sell stocks in the days following the election.

All the best to you,

Arthur K. Weise, CFA

Ignoring the Cyclical Downturn

To Our Investors and Friends,

The S&P 500 continued to advance in the third quarter, ending up 5.5%. For the first time in a long time, returns were driven by large groups of value stocks, not just a handful of mega cap growth stocks. The 10-Year Treasury Note came down 55 basis points in the quarter, to end at 3.81%. The 2-Year Treasury Note fell even more – down 105 basis points and is now below the 10-year at 3.66%. Oil fell a sizable 16.4% in the quarter to $68 a barrel as weakening economies in both China and Europe depressed demand for the commodity. For the quarter, value took center stage while large growth lagged. The Russell 2000 Value Index was up 10.2%, the Russell 1000 Value Index increased 9.4%, and the Russell 2000 Growth Index appreciated 8.4%, largely driven by performance in more interest rate-sensitive sectors including utilities, real estate, industrials and financials. The Russell 1000 Growth Index grew a more modest 3.2% as the semiconductor sector, most notably Nvidia (NVDA), lost steam.

We believe the stock market’s rally this quarter can partially be attributed to the Federal Reserve’s 50-basis point rate cut that took place on September 18th. Inflation is coming down, and the FED is now willing to more aggressively lower rates to avoid a recession. We will see in the coming months if they adjust quickly enough to enable a soft landing, or if employment trends weaken further, leading to both a bigger decline in inflation and a recession.

The post COVID world has been defined by the dramatic increase in inflation across sectors, which is often attributed to the massive amount of fiscal stimulus applied to economies across the globe just as supply chains broke down, leading to significant supply shortages. We believe that during this time frame, many management teams pushed through significant price increases on their products to levels that far exceeded the price hikes that they were experiencing themselves. The result is a level of profitability that in many cases has never been experienced by these companies before.

We examined the top 5 industrial companies by market capitalization in the Russell 2000 Growth Index, which we think is a good representation of the small cap industrial sector. They include Applied Industrial Tech (AIT), Fluor (FLR), Mueller Industries, Inc (MLI), SPX Technologies Inc (SPXC), and the youngest of the group, Casella Waste Systems (CWST). These five companies are all very mature businesses, CWST about 50 years old, and the rest are all over 100 years old. Mature companies tend to experience marginal unit demand increases, meaning revenue growth is far more tied to price increases than anything else.

As can be seen in the chart below, these five small cap industrial companies had high single-digit operating margins in 2014, a cyclical peak that ended with the busting of the fracking-related oil and gas bubble. As a result, in 2015 the stocks experienced a significant drop in both their P/E multiples and their operating margins. In 2024, price/earnings multiples are vastly greater than they were in 2014, and operating margins are in the low double digits. If these five companies’ businesses are anything like what they were during the last cyclical peak, the near-term future may be outright scary as stock prices collapse when margins return to historical levels, and multiples give up the gains they achieved in the last few years. Unfortunately, the algorithms that have been driving these stocks to current premium levels will react only once the cyclical downdraft has already begun.

At Kingsland Investments, we seek out young companies that can grow their profit margins as they get bigger, selling the same products or services to an increasingly larger group of customers. This secular growth does not carry the same risks that the mature, cyclical companies inherently have in their businesses. We believe secular growth may quickly regain the attention of investors should the businesses of mature cyclical companies start to struggle.

All the best to you,

Arthur K. Weise, CFA

Algorithms Everywhere and Not a Brain Cell Betwixt Them

To Our Investors and Friends,

For the first time in a very long time the Magnificent Seven began to weaken (down 70 bps) as the rest of the S&P 500 strengthened during the month of August, finishing up 2.3% for the month. Concerns of a potential recession grew, driving the 10-year Treasury Bond lower to 3.91%, an 18-basis point decline from July as inflation continued to moderate and unemployment to tick up. The 2-year Treasury ended the month 38 basis points lower to end flat vs the 10-year, which has not been seen since before the Federal Reserve started to move rates higher. Oil remains at year-to-date lows, finishing the month at $76 a barrel. Despite the weakening of the largest companies in the index, it remained a large cap dominated market. The Russell 1000 Value Index finished 2.7% higher, the Russell 1000 Growth Index grew by 2.1%. Fears of recession helped push the Russell 2000 Growth Index down 1.1% and the Russell 2000 Value Index to decline by 1.9%.

This past month, the market Volatility Index, or VIX, moved from what has been a steady range of between 11 and 20 all year to a high of 66 on August 5th. On this day, the Tokyo Nikkei 225, the major Japanese index, plummeted 12.4% in a day, the worst decline it experienced since October 1987. The trigger was The Bank of Japan’s move to increase interest rates to .25% on July 31st as the rest of the world looks to start cutting rates. This increased the costs of capital many hedge funds were borrowing to buy stocks and prompted them to liquidate their positions. What ensued was a major unwind of positions that occurred simultaneously around the world, and a resulting flash crash. The VIX had last been seen at this extreme level at the onset of COVID in March 2020, and before that at the onset of the financial crisis that began with the collapse of Lehman Brothers in October 2008.

We believe that the shock was not triggered by an economic event that market participants were reacting to as they have in the past but is an indication of how the stock market participants have changed. Market participants themselves are now highly concentrated, which can lead to significant volatility for the most minor of events. More than 50% of equity investments in the US markets are now in passive indexes -- the largest amount in the S&P 500 Index -- up from about 10% at the time of the financial crisis. Of the actively managed funds, a large percentage of these investment strategies are directed by algorithms that are programmed to do some variation of the same trend following strategy – buy what is going up and sell what is going down. Add these two groups together, and the concentration of actions leads to the extreme volatility that we see today among individual stocks, sectors, and the major indexes themselves. This is precisely what Economics Professor Nassim Taleb warned us about in his book Antifragile.

As can be seen in the chart below, such robust, one-way trading is leading to a growing number of notable bearish to bullish stock reversals – situations where a stock moves from being severely punished by the market to rewarded in a relatively short period of time – during times in which there is no change to the fundamental trend. We can see that software producer Intapp (INTA) declined 33% earlier this year to only fully recover this decline in the last three weeks. Next generation credit provider Affirm (AFRM) dropped almost 60% this year before almost fully recovering from the decline in the last three weeks. This is coinciding with similarity extreme bullish to bearish reversals – Super Micro (SMCI), the most recent example of this, advanced over 300% through March of this year and since then has given up all but 53% of the gain.

We believe that the one-sided trading focus of algorithms is creating some very scary upward moves in stocks leading to valuations that may take years for the businesses to grow into. Conversely, there are also some incredibly attractive opportunities as some stocks drop to valuations far below what their fundamentals would suggest they are worth. It just takes a little thinking to appreciate these overshoots, which is far too much to expect from the algorithms. Once the trend changes direction, however, we can be sure that the algorithms will fall right in line, supporting the new direction of the trend.

At Kingsland Investments, we spend our time seeking and discovering the emerging leaders of the digital economy. Unlike the algorithm-based strategies, we focus only on these companies that we think will become much larger in the next several years, and therefore will have the fundamental strength to support a meaningfully appreciating stock price. We leave the fads and fashions of the moment to the algorithms that will drive such stocks higher and then lower in the blink of an eye.

All the best to you,

Arthur K. Weise, CFA

Taking Age into Consideration

To Our Investors and Friends,

The S&P 500 ended the month of July up 1.1% as investors began to take profits in the Magnificent Seven (Apple, Microsoft, Nvidia, Meta Platforms, Amazon, Google, and Tesla) to invest in other neglected parts of the market. The 10-year Treasury Bond fell in the month to 4.09%, a 27-basis point decline from June as inflation continued to moderate. The 2-year Treasury ended the month 22 basis points lower to end at 4.29%. Oil drifted lower, ending the month down more than 5% to $78 a barrel. The Russell 2000 Value Index advanced 12.2%, the Russell 2000 Growth Index increased 8.2%, and the Russell 1000 Value Index expanded 5.1% in the month. The profit taking on the Magnificent Seven led to a 1.7% decline in the Russell 1000 Growth Index.

The stock market is not the only place where there has been a significant change in leadership. After a poor debate performance, and with the encouragement of his fellow party leaders, President Joe Biden announced he would no longer seek re-election to the most powerful position on the planet. Although he didn’t explicitly say it was because of his advanced years, we can be confident that it was a primary factor. It is clear Biden’s age has generated much conversation and debate about older Americans and forces us to consider how aging is changing the world in new ways.

Andrew Scott, author of The Longevity Imperative, states that “Aging doesn’t start at 65. Aging occurs at different speeds for different people, leaving the task of defining old age impossible.” As can be seen in the chart below, humanity has done a terrific job materially reducing infant mortality and finding cures for those diseases that shortened life, allowing people in developed countries to live well into their 70s and 80s. In fact, Scott claims that a child born in the United States today has a 50% chance of reaching 95 years old.

As the world gets older, society is changing in unanticipated ways. What used to be a population structure resembling a pyramid with many young at the bottom and fewer old at the top is becoming much more inverted across the ages. This means that older Americans wield greater political and economic power, while younger Americans are no longer able to support the long retirements and healthcare expenses of their elders. Society will have to adapt to this new reality by changing both the current healthcare system, and by developing what Scott calls an “economic longevity dividend” - an economic benefit derived from an older working population.

Scott explains, “A healthcare system that brilliantly supported the first healthcare revolution is not set up to achieve the second and is unsustainable. The second longevity revolution will need more than just a new health system, it will also require scientific progress and medical breakthroughs that help us age better.” To achieve this, the 1% of total healthcare costs currently spent on preventative care will need to increase considerably.

An economic longevity dividend can be accomplished by rethinking retirement and rejecting agism. We are on our way to doing just that. Scott explains that “over the last ten years, workers over 50 accounted for the majority of employment growth in the world’s richest nations.” In fact, according to social entrepreneur Mark Friedman “old people are the only natural resource that is increasing in the world.”

At Kingsland Investments, we spend a considerable amount of time studying how the economy will change in the future and then determine the likely beneficiaries in the stock market. Those companies that embrace significant trends, such as the impact of an aging population, set themselves up for a brighter future. Investors can do the same, preparing for a significantly longer retirement by appropriately investing in the great growth companies of the future.

All the best to you,

Arthur K. Weise, CFA

The Dark Side of Social Media

To Our Investors and Friends,

The S&P 500 ended the second quarter up 3.9%, again driven by a concentrated group of mega cap technology stocks. The 10-year Treasury Bond increased slightly in the quarter to 4.36%, a 16-basis point increase from last quarter as inflation moderated. The 2-year Treasury ended the quarter 12 basis points higher to end at 4.71%. Oil remains in a fairly tight range, ending the quarter down almost 2% to $82 a barrel. The Russell 1000 Growth Index advanced 8.3% (driven by a handful of powerful movers), while the rest of the market declined. The Russell 1000 Value Index decreased 2.2%, the Russell 2000 Growth Index fell 2.9%, and the Russell 2000 Value Index declined 3.6% for the full quarter.

One of this year’s best stock winners has been Meta Platforms (META), formerly known as Facebook. It is up 42% year to date, which has far exceeded the performance of the S&P 500, that is up 14% YTD. We have not owned this stock at Kingsland Investments because we believe their products have become detrimental to society and are especially harmful to teenage girls. Burn Book author Kara Swisher explains, “social media has a scary ability to generate anxiety and rage and it is addictive…in the new paradigm, engagement equals enragement. This is made worse by the people who run these companies for whom anticipation of consequences is lacking and whose first instinct is to let it all through the gate regardless of potential damage or danger. It is all private with no accountability.”

As can be seen in the chart below, ever since the widespread adoption of smartphones by teenagers beginning in 2010, depression and anxiety have significantly increased. According to author Jonathan Haidt’s The Anxious Generation, “we know that Facebook intentionally hooked teens using behaviorist techniques thanks to the Facebook files, a trove of internal documents and screenshots and presentations brought out by the whistle blower Frances Hogan in 2021.” He further explains that “social media platforms can ping you continually throughout the day urging you to check out what everyone is saying and doing. This kind of connectivity offers few of the benefits of talking directly with friends. In fact, for many young people, it is poisonous.” The result, Haidt explains, is that when attending college “the previous exuberant culture of Millennial students in discover mode gave way to a more anxious culture of Gen Z students in defend mode. Books, words, speakers, and ideas that caused little or no controversy in 2010 were by 2015 said to be harmful, dangerous, or traumatizing.”

At Kingsland Investments, we spend our time examining every investment for the impact it is having on its customers, community, and employees. Those that significantly benefit all three are most likely to grow to a much larger size in time, while those that are inherently detrimental to society will experience a decline in their businesses as society moves away from the negative effects their products or services are creating. We would not be surprised if the recent school smart phone ban becomes national policy, and as the addiction breaks, Meta Platform’s advertising business materially suffers.

All the best to you,

Arthur K. Weise, CFA