To Our Investors and Friends,
The market rose quicker in October than it fell in September as investors resumed their enthusiasm for stocks once their fears surrounding economic challenges began to dissipate. The S&P 500 Index rose 6.8% in the month. Oil increased more than 11% to almost $84 a barrel, as near-term demand/supply imbalances continue to impact the energy complex. The 10-year Treasury bond rose three basis points to 1.55%, while the spread between the 2- and 10-year narrowed to 107 basis points, a 17-basis point contraction. The major indexes reversed their September losses as company earnings reports supported views of a continued recovery, notwithstanding disruptions caused by supply chain bottlenecks. Large caps led the market recovery: the Bloomberg 1000 Growth Index increased 8.2% in the month and the Bloomberg 1000 Value Index rose 4.6%. Small cap gains were less robust as the Bloomberg 2000 Growth Index expanded 4.4% and the Bloomberg 2000 Value Index rose 3.5% in the month.
The quick fall and rise in the markets over the last two months highlights that once again, market participants overreact to perceived risks. We are all subject to a new reality that in a world of algorithms, fears can be multiplied exponentially. This is based on an old premise, and in fact according to Steven Pinker’s Rationality: What It Is, Why It Seams Scarce, and Why It Matters, “the appetite for florid fantasy lies deep in human nature – people, not algorithms, compose these stories, and it is people they appeal to.” In his book, Pinker explains that “conspiracy theories and viral falsehoods are as old as language” and have shaped our reactions since the dawn of time. The market often is possessed by motivated reasoning, or simply “my side bias” in which select information creates a narrative that supports an individuals’ existing bias. Many market participants are focused on the short-term act on these biases, unwilling to wait to see if the data supports their theories. If anything, quantitatively driven strategies combined with a price momentum driven market likely will increase the number of rapid moves up and down in individual stocks, sectors and the market itself.
Eventually, the market figures it out. “Rationality requires reflectiveness, open mindedness, and mastery of cognitive tools like formal logic and mathematical probability,” explains Pinker. Most people change their minds when faced with rational information – active open-mindedness is a rejection of motivated reasoning. Pinker concludes that better reasoners suffer fewer bad outcomes and have better socioeconomic outcomes. We couldn’t agree more, which is why critical thinking is central to our decision-making process.
The Kingsland Growth investment process originated on the premise that critical thinking must be applied to every decision we make to avoid the pitfalls of the market’s volatile nature. This has led us to focus on businesses, not just technologies. The success of every one of our investments is not dependent on how promising a technology may be far into the future, but on the evidence of whether consumers or businesses are embracing that technology. This is measured in both revenue growth and gross margins over time, which provide hard evidence of how a business is succeeding in the market. Quarterly earnings are the report card of how a business is performing and acts as a guide to how a company is progressing on its path to becoming the next generation blue chip investment that we are seeking. In the end, we believe a long series of strong earnings reports is the path to an incredibly successful stock investment and is the foundation of our investment philosophy.
All the best to you,
Arthur K. Weise, CFA
Investment Advisory services provided by Kingsland Growth Advisors. The views expressed are those of Kingsland Growth Advisors as of November 1, 2021 and are not intended as investment advice or recommendation. For informational purposes only. Investments are subject to market risk, including the loss of principal. Past performance does not guarantee future results. The stocks mentioned are for illustrative purposes only and are not a recommendation to buy or sell. There can be no assurances that any of the trends described herein will continue or will not reverse. Past events and trends do not imply, predict or guarantee, and are not necessarily indicative of future events or results. Investors cannot invest directly in an index.