The Birth of a New Bull Market

To Our Investors and Friends,

The S&P 500 Index (S&P 500) increased 4.4% in December, enabling it to finish the year up 24.2%. The quarter represents something rare in stock markets, a retest of a low (first achieved in the summer of 2022) that was quickly followed by a new high – in this case within a mere two months. We think this capitulatory selling ended the bear market and began a new bull market. As is often the case, the bond market confirmed this bottoming followed by a new high for stocks. The 10-year Treasury Bond first rose to just shy of 5.0%, and then collapsed down to 3.9% where it ended the quarter. The 2-year Treasury dropped 80 basis points in the quarter, finishing at 35 basis points above the 10-year at 4.23%. Oil declined 6% in the month to close at just under $72 a barrel and ended the year almost 11% lower than where it began in January. The rebound that took off in November continued in December. The Russell 2000 Value Index jumped 12.5% in December, the Russell 2000 Growth Index appreciated 12.0%, the Russell 1000 Value Index rose 5.5%, and the Russell 1000 Growth Index increased 4.4%. For the year, large cap growth clearly dominated as the Russell 1000 Growth Index ended 43.7% higher, the Russell 2000 Growth Index finished up 18.7%, the Russell 2000 Value Index appreciated 14.7%, and the Russell 1000 Value Index expanded 11.5%.

We believe that 2023 will be remembered as the beginning of the new bull market driven by the emergence of Artificial Intelligence (AI). Unlike the emergence of the internet that played a greater role in certain parts of the economy over others (especially the consumer economy), AI can play an important role in improving decision making everywhere. The economy is poised to undergo the most radical transformation we have ever seen. This transformation will include the creation of new market leaders that use AI to transform business and the death of many brick and mortar economic behemoths that are too slow to react and cede their business to the next generation. We believe the short-term nature of stock market participants and record levels of investment in private equity are likely to accelerate this transition. These groups have convinced many CEOs to forego future investment for immediate cash returns, hollowing out the ability for older companies to effectively compete in a world that is both scarce in creativity and in willingness to take risks. Creative disruption at its best! We believe our portfolios hold these next generation leaders and are uniquely poised to take advantage of this transformation.

As seen in the chart below, the biggest boom periods occur during significant change, and are generally followed by busts as many speculative investments are discredited and new business models fail. Like the age of the internet, it will take years and perhaps even decades for the potential of AI to be fully appreciated, but the forward-looking stock market likely anticipates this change over the next decade, potentially overshooting and ending as all bull markets seemingly end, with a spectacular bear market in the next 7 to 10 years. This is the history of the stock market.

At Kingsland Investments, we believe our focus on long-term fundamental trends provides us with an advantage during these periods of economic transition. 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 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

The views expressed are those of Kingsland Investments as of January 2, 2024, 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. 

The Stock Market’s Hidden Gems

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

Less Amygdala, More Frontal Cortex Please!

To Our Investors and Friends,

The S&P 500 Index (S&P 500) declined 2.2% in October, bouncing off a 10% pullback from the July high. This significant pullback is directly tied to an increasing 10-year Treasury Bond that is now the highest seen since 2007. The 10-year Treasury Bond finished the month up 29 basis points to end October at almost 4.9%. The 2-year Treasury increased four basis points, finishing at 19 basis points above the 10-year to just over 5%. Oil fell 11% in the month to close at just over $81 a barrel. The stock market decline, completing its third month, impacted every major index. For October, the Russell 1000 Growth Index declined 1.4%, the Russell 1000 Value Index fell 3.5%, the Russell 2000 Value Index declined 6.0% and the Russell 2000 Growth Index dropped 7.7%.

The weakness over the last three months has been incredibly rapid and, in many cases, in opposition to what many long-term investors would have expected. In Robert Sapolsky’s Behave, The Biology of Humans, the author discusses how humans make decisions, which we believe may help explain some of the recent volatility in the market. According to Sapolsky, “Fear activates the amygdala in humans, with more activation predicting more behavior signs of fear.” The amygdala generates instinctive responses designed over tens of thousands of years to respond to a life-threatening danger that prevents us from reacting to every fear-inducing development in the brain’s frontal cortex. It keeps the amygdala in check by, among other things, focusing on such activities as “long-term planning, the regulation of emotions, and reining in impulsivity.” Sapolsky concludes, “The frontal cortex makes you do the harder thing when it is the right thing to do.”

We believe there has been a considerable absence of frontal cortex decision-making in recent months, in part because many investors are reacting to price movements higher or lower driven by fear, not fundamentals. We think the market’s response to weight loss/diabetes drugs is the perfect example of this. As can be seen in the chart below, the weight loss drug manufacturers Elli Lilly (LLY) and Novo Nordisk (NON.DK) have appreciated 51% and 44%, respectively, this year on the expectation that the GLP-1 inhibitor market (or appetite suppressant drug market) is more than 10 times larger than current year sales. This projection does not consider early evidence that these GLP-1 inhibitors are difficult to administer, have negative side effects and are financially unattainable for most people.  

Starting in July, and coinciding with a meaningful step up in purchases of the drug companies mentioned above, the market aggressively sold off both medical device companies of all shapes and sizes and most severely diabetes-related medical device companies. As seen in the chart below, the medical device ETF (IHI) is down almost 14% year-to-date, while leading Continuous Glucose Monitoring (CGM) company Dexcom (DXCM) has declined 22% year-to-date.  This has occurred despite growing evidence that the health benefits of weight loss drugs can be improved when used in conjunction with a CGM.

Source: William O’Neill’s Panaray.  Past performance does not guarantee future results.

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

The views expressed are those of Kingsland Investments as of November 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. 

An Increasingly Mechanical Market

To Our Investors and Friends,

The S&P 500 Index (S&P 500) dropped 4.9% in September, finishing the quarter down 3.7%. The pullback that began in August intensified in September as higher oil prices and higher interest rates drove investors to reduce their stock positions. The 10-year Treasury Bond finished the quarter up 77 basis points to end September at almost 4.6%, a level not seen since 2007. The 2-Year Treasury increased 18 basis points, finishing at 47 basis points above the 10-year to just over 5%.  Oil ascended 29% in the quarter to close at just under $91 a barrel. Most indexes fell by a similar amount. The Russell 1000 Value Index declined 3.8%, the Russell 2000 Value Index declined 5.2%, the Russell 1000 Growth Index fell 5.4%, and the Russell 2000 Growth Index dropped 6.6%.

We believe this quarter’s sell-off was largely driven by market participants who are increasingly influencing each other, resulting in outsized moves both higher and lower in short periods of time.  As shown in the chart below, the growth of hedge funds, algorithms and short-term derivative instruments feed on each other, leading to highly exaggerated moves in many stocks, but especially small cap growth stocks, which distinguished themselves to the downside this last quarter. Highly predictable businesses whose stocks would closely track revenue and earnings growth in a low turnover, long-only environment have now become increasingly volatile as hedge funds, algorithms and derivative instruments move in rapid succession in response to slight changes in fundamentals, interest rates, commodities and popular trader triggers such as moving averages and Fibonacci sequences.

The result has been a material exaggeration of stock moves in short periods of time. Fundamental changes that may have led to a stock appreciating five to 10% in the past are now leading to 25 to 50% moves that are then quickly reversed in the next quarter. In fact, this type of volatility has been commonplace across all stocks, but especially in stocks with a smaller market cap with less institutional ownership.

At Kingsland Investments, we focus on long-term fundamental trends and try to take advantage of the outsized moves in stocks driven by these mechanical influences. 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

The views expressed are those of Kingsland Investments as of October 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. 

A Lack of Perspective

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. 

The Passive Index Myth

To Our Investors and Friends,

The S&P 500 Index (S&P 500) expanded by 3.1% in July as the chances of a soft landing of the economy improved, and the market advance was much broader than during the first half of the year.  Oil jumped 16% to $82 a barrel as concerns of a recession diminished. The 10-year Treasury bond increased 16 basis points in the month, ending at 3.97%, while the 2-Year Treasury was up 1 basis point, finishing 89 basis points above the 10-year. For the first time this year, the market widened and small companies performed better than large companies. The Russell 2000 Value Index increased 7.6% and the Russell 2000 Growth Index appreciated 4.7%. Larger companies lagged slightly as the Russell 1000 Value Index moved up 3.5% and the Russell 1000 Growth Index appreciated 3.4%.

The significant volatility in individual stocks and the entire market is partially the result of a major reallocation of equity exposure from actively managed funds to passive funds since the end of the financial crisis in 2009. By 2022, assets in passive investment vehicles exceeded assets in actively managed investment vehicles for the first time. Market pundits believed that investors lost faith in active management and moved to passive to get market exposure at low fees. Be careful what you wish for. To avoid one problem, investors have most likely created an even bigger one. It is a myth that the S&P 500 ETFs and all those ETFs like it are passively managed. They are in fact lower turnover, more diversified strategies that are regularly adjusted, i.e., actively managed.

As shown in the table above, there are some very surprising characteristics of these ETFs that most investors likely do not appreciate. In the large cap ETFs, a large percentage of total assets is highly concentrated in just a handful of stocks. If this concentration is not by design, it is a recipe for disaster. Turnover in large cap strategies is so low that poor-performing positions can hurt returns considerably, especially in a market that begins to favor smaller market cap companies (as we saw this month).

The smaller cap strategies don’t have a concentration issue but do have a turnover issue. A high turnover means that index changes are more likely tied to market sentiment than actual appreciation of individual names. We believe many active managers are so influenced by this turnover that they have been relegated to chasing the index instead of investing in businesses.

We don’t think that the index approach is the right approach in a rapidly changing economy. We believe investors will regret their moves into these low turnover, highly diversified strategies as the average company fails to keep up with the digital age. At Kingsland Investments, we are actively managing concentrated strategies focused on capital appreciation. We spend our time seeking out the best businesses the market has to offer, and then owning them as they grow into much bigger companies. 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 August 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. 

Algorithms and Instincts Drive the Market Recovery

To Our Investors and Friends,

The S&P 500 Index (S&P 500) expanded by 8.3% in the second quarter powered higher by the sectors that dropped the most last year – technology, consumer discretion and communication services.  Oil fell almost 7% to $71 a barrel as global demand remained muted. The 10-year Treasury bond increased 35 basis points in the quarter, ending at 3.9%, while the 2-Year Treasury moved up 81 basis points, finishing 88 basis points above the 10-year. As has been the case since the beginning of the year, a handful of mega-cap and larger technology companies are driving the market higher, while many smaller companies are modestly up this quarter.  As a result, the Russell 1000 Growth was up 12.8% and the Russell 2000 Growth was up 7.1%. Value again lagged as the Russell 1000 Value expanded 4.1% and the Russell 2000 Value indexes were up a modest 3.2%.

This quarter’s remarkable recovery should come as no surprise, given the brutal market sell-off that preceded it. Beginning in November 2021, the market aggressively sold off technology, consumer discretionary and communications services stocks as much as 70-90% in response to the largest interest rate increases we have experienced in 40 years. Starting in January 2023, select stocks made astonishing comebacks, some achieving all-time highs as their business fundamentals strengthened. The chart below highlights the “Magnificent Seven” stock changes over this timeframe. We believe this group will ultimately prove to be the first movers of the new bull market and should be followed by the rest of the market in the coming quarters.

We believe that higher interest rates should have led to 25-35% contractions during this period, not the much steeper declines that took place. We think there are two culprits: algorithms and primal instincts. Algorithms are programmed to buy and sell stocks in a systematic way and often with no regard to the impact such actions have on the stocks. Many of these algorithms are programmed by freshly minted computer science majors that have no experience with the markets making them simple in design. In aggregate, these quantitative investors are now responsible for well over $1 trillion in assets under management.

The other culprit in the rapid decline and then rise in stocks is undisciplined stock participants that react to buying and selling pressures initiated by the algorithms. Dramatic moves tend to ignite our most primal instincts, compelling us to move as a group despite the negative consequences to individual participants. Investors show obvious disinterest in stocks that have sold off, yet enthusiastically chase after stocks that bounce. This is a basic instinct that we must fight, especially when the algorithms exacerbate the situation. Algorithms will only get more intelligent over time and could chase us out of and into stocks at an even greater cost to our portfolio returns.

At Kingsland Investments, we remain highly disciplined when seeking out and investing in what we believe are promising companies. Our long-term, fundamentally-based process allows us to take advantage of the short-term vacillations in the market, whether they are driven by algorithms or nervous investors that tend to buy high and sell low. Over time, we believe patience has the potential to produce performance that is reflective of the strong business growth we seek. With a little bit of luck, we strive to add to this strong performance by taking advantage of the emotional buying and selling that drive short-term market moves like that which we have experienced over the last two years.

All the best to you,
Arthur K. Weise, CFA

The views expressed are those of Kingsland Investments as of July 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.

Technology and the Era of Individualism

To Our Investors and Friends,

The S&P 500 Index (S&P 500) expanded by about 0.3% in May as the fabulous seven – the top seven stocks by market capitalization in the S&P 500 – continued to power higher while most of the market declined. Oil dropped a whopping 11% to $68 a barrel as anticipated China demand did not materialize. The 10-year Treasury bond increased 20 basis points, ending at 3.6%, while the 2-Year Treasury moved up 36 basis points, finishing 80 basis points above the 10-year. All but a select group of technology companies declined in the month. This led the Russell 1000 Growth Index to appreciate 4.6%. The Russell 2000 Growth Index increased 0.0%, while the value indexes contracted. The Russell 2000 Value index fell 2.0% and the Russell 1000 Value index retreated 3.9%.

After a horrific 2022, technology businesses are again powering the market ahead, this year driven by the excitement surrounding Artificial Intelligence (AI). AI could be the most customer-centric technology to ever come of age and follows a long list of technologies that have driven a rise in individualism across the globe, and specifically across generations.

Individualism is defined by author Jean Twenge as “an emphasis on individual rights that began to replace the old system of social rules surrounding race, gender, and sexual orientation.” It is enabled by technologies such as the internet, the cell phone, social media and now AI, and plays a critical role in shaping the future of our country and our economy.  In her book Generations: The Real Difference between Gen Z, Millennials, Gen X, Boomers, and Silents – and What they Mean for America’s Future, Twenge reviewed surveys involving over 40 million Americans across several decades to try to better understand what leads to the significant differences across generations. She theorizes that while previous generations were defined by influential events such as wars, pandemics and depressions, since the widespread adoption of television in the 1950s, subsequent generations are defined by the new technology of the age. Devices such as the personal computer and internet (Gen X), cell phones (Millennials) and social media (Gen Z) have led to a significant rise in individualism. This will only be magnified with the promise of AI, most likely the newest technology that will define the latest generation – the unnamed generation that began in 2015.

Individualism is creating considerable cultural change that likely will not revert to a way of life that older generations remember and value. The most significant impact could be a new slow-life mentality in which younger people take their time becoming independent adults, delay having children and even change their approach to work (the rise of work from home, mental health days and more generous parental leave) and how others are treated in society (so-called cancel culture). Central to this is protecting individualism above all else. Twenge states, "The emphasis on safety is rooted in the slow life strategy which favors safety as the ultimate virtue.” She further explains, "Protection is more important than open discussion. Millennials, on the slower side of the slow life strategy, favor protection while Gen X's earlier path to adolescence favors toughness, and thus more immunity to the idea that words are violence. Individualism, which favors the rights of those that have historically been discriminated against, intertwines with the slow life strategy of protection.”

Twenge predicts that even more change is ahead. Gen Z is materially more pessimistic than earlier generations, especially after the COVID pandemic. She believes Gen Z has an “unapologetic desire to change a system they believe isn’t working anymore,” and is the most politically active generation since the Boomers in the late 60s and 70s. If AI is the technology shaping the next generation, the question for both society and investors becomes whether and how AI enhances or limits our freedoms in the decades ahead.

At Kingsland Investments, we seek businesses that use new technologies such as AI to create better solutions than are currently available in the marketplace. We believe that consumer centricity and entrepreneurship remain important themes that likely shape the economy of the future. We continue to diligently focus on finding businesses that we believe will enable the economy of the next generation.

All the best to you,
Arthur K. Weise, CFA

The views expressed are those of Kingsland Investments as of June 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. 

Artificial Intelligence Is Poised to Change the World

To Our Investors and Friends,

The S&P 500 Index expanded by about 1.5% in April as a handful of mega cap companies drove returns higher. Oil was up about 1.5% in April, ending at $77 a barrel. The 10-year Treasury bond remained steady, ending at 3.4%, as did the 2-Year Treasury, ending at 60 basis points above the 10-year. Continued concerns surrounding the economy favored large companies over small in April. This led the Russell 1000 Value Index to appreciate 1.5%, the Russell 1000 Growth Index to increase 1.0% and small cap indexes to finish lower; the Russell 2000 Growth Index declined 1.2% and the Russell 2000 Value Index was down about 2.5% for the month.

The resurgence of mega cap technology companies this year is largely driven by excitement surrounding Artificial intelligence (AI), which reentered investors’ radar earlier this year when Microsoft (MSFT) made a $10 billion investment in OpenAI, the creator of ChatGPT.  Almost immediately, shares of the companies that have considerable artificial intelligence businesses or capabilities soared, most notably AI chip maker Nvidia (NVDA).

Many technology companies have been building their artificial intelligence capability for decades, but it is only recent advancements in cloud-based data collection and enhanced computing capability through powerful semiconductors that have evolved these efforts.

So, why are corporations and governments eager to invest in artificial intelligence capabilities? “The development of AI is as fundamental as the creation of the microprocessor, the personal computer, the internet, and the mobile phone. Entire industries will reorient around it. Businesses will distinguish themselves by how they use it,” stated Microsoft founder Bill Gates last month.

According to preeminent expert Stuart Russell, an AI professor at the University of California, Berkeley, AI may have a net present value of $13.5 quadrillion ($13,500 trillion). Considering global GDP is currently just under $100 trillion, this is quite meaningful! Why is this? Super-intelligent AI will allow us to use the technology we have now but more efficiently and invent what we may need. As Russell explains, the invention of a superior intelligence “will be the last invention man need ever make, provided the machine is docile enough to tell us how to keep it under control.”  Super-intelligent AI will take over from here. 

This is both incredible and frightening all at once, for obvious reasons. In his book Human Compatible, Artificial Intelligence and the Problem of Control, Russell compares super-intelligent AI to an advanced alien race that is far more intelligent than humans and is set to arrive on Earth in 30 to 50 years. We would be preparing for the arrival of an advanced civilization that is vastly different and with much greater trepidation than we are for the arrival of super-intelligent AI. “Our response to super intelligent AI has been underwhelming,” explains Russell.

There is no need to lose sleep just yet, as we still have a lot to develop to create competent machines. Right now, the focus has been on faster speeds. Russell notes, “Faster machines just give you the wrong answer more quickly.”  What we need to do is give machines the ability to understand language and develop common sense, both of which are absent today. Russell explains that through language, “humanity has acquired layer upon layer of information that all work together.” In fact, “knowledge is a building material that can be accumulated and improve predictive calculations,” which eventually creates intelligence.

It will be up to us to make sure that the Super Intelligence we create doesn’t quickly become our master, a fate we handed down to the apes millions of years ago. “I fear that AI may replace humans altogether. If people design computer viruses, someone will design AI that improves and replicates itself. This will be a new form of life that outperforms humans,” stated renowned astrophysicist Stephen Hawking in 2016.

I believe that our greatest concern should be “a failure of value alignment…imbue machines with objectives that are imperfectly aligned with our own.” Russell explains that super-intelligent machines must be programmed knowing “that the human will switch it off only if it is doing something wrong, that is, doing something contrary to human preferences.” The good news is that leading developers of AI are all aware of both the potential and the systemic risks of losing control of our creation and are developing AI with that in mind.

At Kingsland Investments, we seek businesses that use new technologies such as AI to create better solutions than are currently available in the marketplace. These new solutions are often faster, less expensive and simplify operations for customers, leading to significant demand. Although not immune from economic slowdowns, we believe adoption of such technologies should remain solid throughout the economic cycle, accelerating faster than the economy coming out of weaker economic times such as what we are experiencing this year.

All the best to you,

Arthur K. Weise, CFA

The views expressed are those of Kingsland Investments as of May 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. 

Fear At the Speed of Light

To Our Investors and Friends,

The S&P 500 Index increased about 3.5% in March, finishing the quarter up a respectable 7.0%. Oil was down 6% in the quarter, ending at $76 a barrel as economic optimism diminished in March. A handful of important bank failures were the catalyst for interest rates dramatically changing direction. After first rising earlier in the quarter, the 10-year Treasury bond reversed course, ending 40 basis points lower in the quarter to finish at 3.5%, while short-term rates fell 80 basis points, ending at 50 basis points above the 10-year. Many claimed the Federal Reserve (Fed) would increase interest rates until something broke, and that appears to be exactly what is happening. Renewed economic uncertainty and a now highly anticipated recession turned large growth into safety and small caps into a high-risk asset class. For the entire quarter, the Russell 1000 Growth Index finished up 14.4%, the Russell 2000 Growth Index up 6.1% and the financially sensitive value indexes performed worse; the Russell 1000 Value Index was up about 1.0% and the Russell 2000 Value Index ended down .7%.

The rapid collapse of Silicon Valley Bank and Signature Bank in the middle of March is the direct result of something enabled by the digital economy – the fastest bank runs in human history. Silicon Valley Bank experienced a $140 billion deposit withdrawal in two days as a very nervous deposit base, startups that have no easy sources of additional capital BUT are incredibly digitally savvy, pulled their money out as fast as their iPhones could process their instructions.  The shuttered banks are just a subset of the bank run crisis, as many other tier-two and community banks saw significant deposit flights that will be fully revealed when these banks report first quarter results in the coming weeks. We will most certainly see continued wind-down of the asset/liability mismatch facing many banks in the months ahead, reducing available credit in the economy.

We believe the Fed/FDIC/Treasury reacted effectively and appropriately with impressive speed, restoring credibility to the banking sector. They also importantly cut the cryptocurrency economy from the dollar-based financial system through the closure of Signature Bank and Silvergate Capital before that. Cryptocurrency holders will now have a more difficult time exchanging dollars for crypto and vice versa for the foreseeable future, preventing what could be an even bigger problem down the road. We have not yet found an investable business built on crypto, and with 17,195 different cryptocurrencies in existence, according to the Coinbase database, the “asset class” may create far more losses for speculators than even the SPAC industry will in the years ahead.

What is becoming clearer is that the new digital age can create losses for the unaware and uninformed faster than ever before. The fight or flight response of people is only getting more intense in the digital world and will likely create and destroy fortunes faster than the speed of light.

At Kingsland Investments, we seek great businesses that we believe have the potential to create fortunes over years. The new digital era has brought us better ways to connect, but an equal number of ways for the technology savvy to take advantage of the naive. With far more perils ahead, it is more important than ever to take the time to understand each investment opportunity than to jump into the abyss without a parachute.

All the best to you,

Arthur K. Weise, CFA

The views expressed are those of Kingsland Investments as of April 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.