Innovation as an Asset Class: The Implosion of the Nasdaq 100 & Ark Invest ETF

2020 was a brutal year for KCR. US bonds rose to offensive levels, offering investors a 0.50% yield, while equities soared to valuations above the dot.com peak. The pain for our team was intense.

Our evidence-based investment process is driven by historical data, algebra, and common sense. By the end of 2020, there was nothing less common than common sense. Basic maths were tossed out the window and replaced by empirically impossible narratives spouted by promotional fund managers and CEOs.

The two years that followed this peak in financial insanity made KCR look intelligent.

This success did not stem from any brilliant forecasts by the team. Rather, we credit our unwavering faith in behavioral finance, which shows that human beings repeat the same mistakes every market cycle. History has taught us that nobody learns from history in financial matters.

Coming off a string of winning years like 2021 and 2022, KCR is here to warn our readers of the obvious: nothing happens in a straight line. Today’s story is a cautious one. Results have been “too good for too long.” The market is a humbling machine, and we may be overdue for some uncomfortable months.

As always, we look to history for guidance. Today we will be focusing on price action first and then closing with fundamentals. Like our piece, Anatomy of a Bear Market, which documented how the fallout from speculative bubbles led to violent volatility, we will be looking at the dot.com analog using the NASDAQ 100 Index in the dot.com bubble and ARK Investment Management today.

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We’ll start off using the S&P 500 before jumping into those more speculative holdings. The chart below shows the decline in the S&P 500 from the peak of the dot.com bubble on 03/23/2000 to its trough on 10/07/2002.

The full extent of the -47% decline is shown on the left-hand axis. Along the way we highlighted in green the counter-trend rallies. Each annotation along the way shows the decline and subsequent rally from the relevant low. Example: the first leg down, the index fell -27%. From there it rallied 19%. Then fell -26% before ripping 22% higher. The path to the final bottom, -47% lower, was characterized by violent volatility.

SP500 The Path From Peak to Trough in the Dot com was Turbulent

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KCR believes the dot.com implosion is the only modern period analogous to the recent bubble.  We have spilled epic ink explaining

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

January 20, 2023 |

Categories: Quick Takes

January 20, 2023

Categories: Quick Takes

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