To Our Investors and Friends,
The S&P 500 Index (S&P 500) increased 8.9% in November, significantly recovering from the brutal August through October sell-off. Although there are many factors that led to this rapid decline and recovery, the biggest is the waning and waxing of inflation fears. After signs of a continuation in moderating inflation in November, the 10-year Treasury Bond collapsed 51 basis points in the month to end at just under 4.4%. The 2-year Treasury dropped 34 basis points, finishing at 36 basis points above the 10-year at 4.7%. Oil declined 6% in the month to close at just under $76 a barrel. Driven by waning inflation concerns, the stock market rebound was more uniform, unlike what we have experienced throughout the year. The Russell 1000 Growth Index increased 10.9%, the Russell 2000 Growth Index appreciated 9.1%, the Russell 2000 Value Index improved 9.0% and the Russell 1000 Value Index rose 7.5%.
For us, the greatest surprise and disappointment in this market has been the material difference in the performance of large companies vs smaller companies. As can be seen in the chart below, the Russell 1000 Growth index has appreciated by 36.6% this year compared to the other major indexes that have appreciated a more modest 2 to 6% over the same time frame. This significant differential is the widest we can remember in 25 years and is primarily driven by the outperformance of just a handful of mega cap stocks. Apple (AAPL) is the biggest beneficiary -- its shares rose 46% this year while revenue fell 3% and earnings were flat over the last fiscal year ending in September.
We believe both the material volatility in the stock market and the bigger-is-better view are in part shaped by the proliferation of algorithmically driven macro hedge funds that buy some baskets of stocks and bet against others, decisions determined primarily by changes in macro factors such as inflation and interest rates. Often, these algorithms are created by software engineers who have little or no experience with the public markets. The result is one of the greatest dislocations between individual company fundamentals and their stock performance that we can remember. The environment has created a rare opportunity for stock pickers, especially those who understand long-term drivers of value. Adam Grant, author of Hidden Potential, has interviewed thousands of people of all backgrounds seeking those factors that drive greatness in individuals. He concludes that people with a history “of studying proactivity and discipline allowed them to generate opportunities. They learned to anticipate market changes rather than react to them.” Like Grant’s Hidden Potential success stories, great investors study companies, anticipate change and take advantage of opportunities presented in stocks. Not surprisingly, the reactionary quantitative approach misses these opportunities on a consistent basis.
At Kingsland Investments, we focus on long-term fundamental trends with the goal of taking advantage of short-term moves in stocks that are disconnected from long-term trends. We believe that a slow and steady approach to investing has the potential to lead to greater consistency of buy and sell decisions as we tune out this short-term noise. This allows us to enjoy the benefits of compounding, which has the potential to generate significant gains over time.
All the best to you,
Arthur K. Weise, CFA