The Hot Potato Market

To Our Investors and Friends,

The S&P 500 ended the month of May up 4.8%, a level that is close to an all-time-high. This bull market continues to be driven by a very narrow group of mega cap stocks, and is the most concentrated market in the index’s history. The 10-year Treasury Bond backed off on moderating inflation data to 4.51%, an 18-basis point drop from last month. The 2-year Treasury ended the quarter 15 basis points lower to end at 4.89%. Oil continued to moderate, ending the quarter down almost 5% to $78 a barrel. The major indexes all rallied. The Russell 1000 Growth index advanced 6.0%, the Russell 2000 Growth index increased 5.4%, the Russell 2000 Value index moved up 4.7%, and the Russell 1000 Value index gained 3.2%.

We have noticed some unusual activity at the beginning of this new bull market as some unexpected stocks make moves that are uncharacteristic of both their histories and their businesses. Abercrombie and Fitch (ANF) advanced 470% in the last year but declined by 30% the previous decade. Industrial equipment provider Powell Industries (POWL) advanced 211% in the last year and increased just 22% over the previous decade. Finally, insurance provider Jackson Financial (JXN) shot up 169% as its revenue and earnings declined since its 2021 IPO. These incredible moves have generally been made by incremental positive improvements in fundamentals that are supported by steeply increasing stock charts. It is important to note that these businesses have mid-single digit operating margins. Such low margins can lead to both significant positive and negative surprises and that is why the long-term stock performance of these businesses has historically been less than stellar.

We think the extremely short-term view of market participants including hedge funds, algorithms, and day traders is creating a game of hot potato with many stocks. They rocket up on price momentum, only to come crashing down when the momentum stops. The reason for this behavior is clear – these market participants are primarily interested in immediate price changes and are playing a game of the greater fool theory (a belief that a greater fool will buy the stock at a higher price from them in the future) as justification for their purchase. We fear that many of the AI hardware stocks, which also have low operating margins, will follow this same volatile path as soon as their growth slows down.

We believe this market behavior is far closer to gambling than it is to investing and expect that it likely will generate a significant number of losers as it plays out. It may be the only way to rationalize one of the biggest developments over the previous two decades, the incredible proliferation of hedge funds. As can be seen in the chart below, there are now almost 5 times as many hedge funds as there are stocks in the US indexes. It is not a surprise that when there are so many market participants seeking short term gains, a significant amount of randomness, for which there is little fundamental rationale, is the result.

At Kingsland Investments, we recognize that there is an unusual opportunity to buy the next generation leaders that we seek at uncharacteristically low prices when the momentum players sell. We believe that the most patient investors will be the most rewarded over time. At some point, great businesses experiencing transformational growth will be discovered and valued at much higher levels. By sticking to our process of buying and owning great young businesses, we think investors can benefit materially from the advances these companies will experience in their stocks over time.

All the best to you,

Arthur K. Weise, CFA

Taking Advantage of the Little Company

To Our Investors and Friends,

 The S&P 500 ended the month of April down 4.2%, a minor contraction after a very strong first quarter result. It should come as no surprise that the Magnificent Seven significantly outperformed the rest of the market as investors continue to crowd into this narrow group of stocks. The 10-year Treasury Bond advanced to 4.69%, the second meaningful increase in consecutive months (39-basis points this month) as fears of an inflation resurgence dominate Wall Street. The 2-year Treasury ended the quarter 45 basis points higher to end at 5.04%. Oil fell slightly, finishing the month at $83 a barrel. The major stock indexes fell in the month, led once again by small cap. The Russell 1000 Growth declined 4.2%, the Russell 1000 Value fell 4.3%, the Russell 2000 Value was down 6.4%, and the Russell 2000 Growth dropped 7.7%.

We have discussed the significant disparity between the performance of large cap companies versus small cap companies for some time now. In fact, the difference in performance between the Russell 1000 Growth (R1G) and the Russell 2000 Growth (R2G) indexes continued to widen this past month. Over the last 10 years ending in April, the R1G appreciated 322% cumulatively and outperformed the R2G by 214%. This is a standout performance compared to previous decades. Over the decade ending April 2014, the R2G advanced 134%, beating out the R1G by a mere 18% cumulatively. During the large cap technology dominating decade ending April 2004, the R1G advanced 150%, beating the smaller index by a less significant 73%.

We believe the last decade of large cap dominance is not merely a difference in the anticipated impact of a higher interest rate environment. It is also being influenced by such factors as a preference for passive ETFs that favor large cap stocks, macro hedge funds that avoid illiquid small caps, and institutional demand for alternatives that are selling their small cap exposure to make room for larger private equity and venture capital allocations. There is one group that is beginning to take advantage of this disparity – corporations that seek to buy new products or services in a shorter time frame than they could accomplish through organic efforts. As can be seen in the chart below, such acquisitions are generally at a significant premium to the price the market has assigned them. The average premium from the list below is 80%, a nice premium, but in most cases below the level the acquiree was trading at three or more years ago. (Note: we currently own CoStar Group and sold Shockwave Medical after the acquisition announcement).

We believe that large corporations will continue to swallow up their smaller competitors, especially if the financial benefits are obvious. Over time, investors may notice, and this large differential between small and large capitalization companies may begin to narrow. We suspect that if interest rates begin to fall, maybe this trickle into smaller companies will likely become something more meaningful.

At Kingsland Investments, we believe that the value of small companies is being heavily discounted relative to past history for reasons that are not economic in nature. We think that in time, great businesses experiencing transformational growth will be discovered. By sticking to our process of buying and owning great young businesses, we think investors can benefit materially from these dynamics as they get discovered by either the market or a lucky corporate buyer.

All the best to you,

Arthur K. Weise, CFA

The Risk Aversion Bubble

To Our Investors and Friends,

The S&P 500 ended the first quarter of 2024 up 10.2%, the biggest first quarter return since 2019 and a record high. A narrow group of companies including the Magnificent Seven and AI-associated hardware companies (including many semiconductor and server companies) drove the outsized move. The 10-year Treasury Bond advanced to 4.20%, a 32-basis points increase as the economy proves more robust than anticipated in the face of higher Fed funds rates. The 2-year Treasury ended the quarter 36 basis points higher to end at 4.59%. A stronger US economy also helped crude oil to rise 16.1% to $83 a barrel, adding to fears of an inflation resurgence. All major stock averages started the year on a positive note with large again outperforming small. The Russell 1000 Growth grew 11.4%, the Russell 1000 Value increased 9.0%, the Russell 2000 Growth advanced 7.6%, and the Russell 2000 Value moved up 2.9%.

This emerging bull market is unlike most previous bull markets in that the very largest companies are leading the way higher, and many of the smallest companies continue to struggle, some still unable to move up from low levels achieved more than a year ago. As can be seen in the following chart, Microsoft (MSFT), the largest company in the world, is leading the market recovery, up 27% from the previous market high achieved in October 2021. The Russell 1000 Growth Index, of which almost 50% is comprised of the Magnificent Seven, is up 16% over the same time frame. This contrasts with the small cap Russell 2000 Growth index, 10% lower than the previous market high, and Olo (OLO) – a software company growing quite robustly, but much smaller than Microsoft – trading 80% lower over this time frame.

We believe this noteworthy disparity of performance is a function of the underlying risk aversion bubble, which is causing misallocations of resources everywhere that most likely will be followed by significant reversions in the coming years as the risk aversion bubble deflates. The most obvious bubble is in mega cap companies, with the Magnificent Seven exceeding 30% of the S&P 500 this past quarter. Fueling this bubble is a depletion of many other asset classes including small cap and international stocks, both of which represent historically low levels of asset allocations over several decades. We think a major driver of this risk aversion bubble is the move into passive indexes, that began to gain favor after the financial crisis and now represent more than 50% of all dollars invested in equities.

The risk aversion bubble is also evident in the proliferation of alternative asset classes including private equity, venture capital, and hedge funds. Here, institutions’ attempts to escape market volatility have resulted in a flood of assets into these alternatives that mask volatility by delaying it or hedging against it. These asset classes generally reduce the volatility of current returns but ultimately will realize lower long term returns now that the higher interest rate environment has disrupted their exit strategies. These alternative asset classes have grown from hundreds of firms to thousands of firms since the end of the financial crisis and the beginning of an extended period of low interest rates. We suspect that a reallocation away from these asset classes likely propels unloved asset classes such as small caps in the years ahead.

At Kingsland Investments, we believe in patient, long-term investing in some of the most creative management teams building the best businesses we can find. We think that great businesses are built over decades, and that a long time horizon is necessary to benefit from the miracle of compounding. By sticking to our process of buying and owning these young businesses, we think investors can benefit materially from these dynamic companies over time.

All the best to you,

Arthur K. Weise, CFA

Faster Doesn’t Always Mean Better

To Our Investors and Friends,

The rally in the stock market continued in February as the S&P 500 index increased by 5.2% in the month. The 10-year Treasury Bond drifted up on strong economic data, ending the month at 4.25%, 26 basis points higher than at the end of January. The 2-year Treasury ended the month 37 basis points higher at 4.64%, a widening 39 basis points above the 10-year. A better US economy helped oil move up 3% to close the month at $78 a barrel. All major stock averages also moved up. The Russell 2000 Growth increased 7.6%, the Russell 1000 Growth gained 6.1%, the Russell 1000 Value moved up 3.3%, and the Russell 2000 Value increased 2.3%.

The market’s rapid ascent this year bodes well for the continuation of the bull market. Unlike most new bull markets, however, it is unusually narrow and often led by just a handful of dynamic stocks. Some of these stock moves appear to be driven by momentum traders (or algorithms) gone wild. The Russell 2000 Growth’s positive performance this year is being driven by a handful of names in red hot areas including weight-reducing GLP-1 hopeful Viking Therapeutics (VKTX), up 314% (with a potential drug approval several years away at earliest), Nvidia chip beneficiary Super Micro Computer (SMCI), up 204%, and bitcoin owner Microstrategy (MSTR), increasing 62%. These three stocks are all small cap proxies for areas of interest by market participants and accounted for about 75% of the Russell 2000 Growth’s total return YTD. None of these stocks are in our portfolio.

In his latest book, Same as Ever, A Guide to What Never Changes, author Morgan Housel discusses how patterns in human behavior show up again and again in the stock market and cautions us not to act too hastily. He explains, “the more your time horizon compresses, the more you rely on luck and tempt ruin.” We believe that rapid access to information has led to FOMO (fear of missing out) unlike anything we have experienced before and is the most likely driver of these rapid stock gains. Housel further explains, “every investment price, every market valuation, is just a number from today multiplied by a story about tomorrow.”

It generally takes years for businesses to develop and create profits great enough to support large stock moves. This really cannot be shortchanged. Housel further explains, “most things have a natural size and speed and backfire quickly when you push them beyond that.” At Kingsland Investments, we believe in patient, long-term investing in some of the most creative management teams building the best businesses we can find. We think it is very important to not get caught up in the moment, and make sure that market momentum is justified by solid fundamentals building a foundation that supports ever increasing stock prices.

All the best to you,

Arthur K. Weise, CFA

Human Connection in an AI-Dominated World

To Our Investors and Friends,

The S&P 500 Index (S&P 500) began the year on a positive note, finishing up 1.6% in the month of January. The year’s start is a continuation of the patterns we saw all last year with large cap growth handily beating every other part of the market. The 10-year Treasury Bond gradually increased throughout the month, ending at 4.0%, 11 basis points higher than a month ago. The 2-year Treasury increased 4 basis points in the month, finishing at 28 basis points above the 10-year at 4.3%. Oil rebounded almost 6% in the month to close at just under $76 a barrel as terrorist attacks in the Red Sea and elsewhere in the Middle East spiked fears of energy disruption. The Russell 1000 Growth Index jumped 2.5% in January while the Russell 1000 Value Index increased a modest .1%. Small cap started the year off poorly with the Russell 2000 Growth Index finishing down 3.2% and the Russell 2000 Value Index falling 4.5%.

As can already be seen in market returns in January, Wall Street’s infatuation with everything Artificial Intelligence (AI) should likely keep AI as the dominant factor driving the emerging bull market. AI holds the promise of generating material efficiency gains for business and is already being attributed to layoffs among technology and white-collar workers. Although it is not yet clear whether the recent layoffs are due to efficiency gains occurring today, it is clear that at some point in the future we will need far fewer people using AI to do the same work that many more are doing today. Human interaction and human connection will begin to warrant a much steeper premium in this increasingly AI dominated world. In the end, we expect AI will not replace humans, but enhance people’s productivity in the new digital economy.

In his book How to Know a Person, author David Brooks discusses the significance of human connection that will only grow in importance in an AI-dominated world. This human connection has materially decayed in a world dominated by social media as short content has replaced real understanding. Brooks explains “social media gives the illusion of social contact without having to perform the gestures that actually build trust, care, and affection. On social media, stimulation replaces intimacy. There is judgement everywhere and understanding nowhere.”

We will come to realize that AI will never replace humans, because humans are impossible to replace. Brooks explains, “you have a three-pound hunk of neural tissue in your skull, and from this, somehow conscious thoughts emerge. You emerge. No one understands how this happens. No one understands how the brain and body create the mind, so at the center of the study of every person there is just a gigantic mystery before which we all stand in awe.” Brooks believes that every individual uniquely views the world from his or her own lens, and that the only way to understand that unique view is through great conversations in which that world view is fully revealed. “Our differences of perception are rooted deep in the hidden kingdom of the unconscious mind, and we are generally not aware of how profound those differences are until we ask.”

At Kingsland Investments, we believe understanding the insights of creative management teams will always involve great conversations. We anticipate many new businesses will emerge that use AI to create better alternative solutions than currently exist. As always, we will seek to discover these opportunities enabled by AI through great conversations with these new leaders.

All the best to you,

Arthur K. Weise, CFA

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.