To Our Investors and Friends,
The S&P 500 Index (S&P 500) fell 1.8% in August, consolidating its strong move since the beginning of the year. The stock pullback occurred as the 10-year Treasury bond retested its previous high level achieved last October (the highest since 2007). It then fell back to finish at 4.1%, closing the month 14 basis points higher. The 2-year Treasury fell two basis points, finishing 75 basis points above the 10-year. Oil ended 2% up for the month at $84 a barrel. The market sold off quickly, large cap declining less than small cap. The Russell 1000 Growth Index fell 0.9% and the Russell 1000 Value Index declined by 2.7%. Small cap stocks experienced a more brutal selloff as the Russell 2000 Value Index declined 4.8% and the Russell 2000 Growth Index fell 5.2%.
August’s market volatility is becoming more common as short-term traders often overwhelm long-term investors. In fact, individual name volatility has increased considerably over the last few years. Trend-following algorithms, derivative instruments and the explosion of passive ETFs (exchange-traded funds), including double and triple-exposure ETFs, have all been factors in feeding the market’s obsession with the very short term.
One of the most impactful instruments is options, which were introduced to the market 50 years ago. As seen in the chart below, options contract volume has expanded meaningfully in the last few years. Ironically, these short-term derivatives are often used to hedge against volatility, but we believe they are helping create a lot more of it. We believe many users of these derivatives are focused on betting for or against a single data point – an earnings result, an economic report or the latest move in a commodity. This data point obsession lacks perspective, and the smaller the data being measured, the greater the chance of randomness when compared to the overall trend.
We equate this data point investing to the way satellite imagery sees the world – it is viewed as if looking through a straw. We believe its lack of perspective leads to unpredictable buy and sell decisions, which contributes to unpredictable returns in the short term instead of the predictable returns investors typically seek. At Kingsland Investments, we seek companies benefiting from long-term trends, even if not supported by every data point. This patient approach tends to produce more deliberate investment decisions, making portfolios less subject to the randomness of life. We will hold the stocks in these companies for many years if they continue to offer great appreciation potential. This allows us to enjoy the benefits of compounding, which has the potential to result in significant gains over time.
All the best to you,
Arthur K. Weise, CFA
The views expressed are those of Kingsland Investments as of September 1, 2023, 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.