The Duration Crisis:

  • The light blue line shows the correlation between value stocks and the US Long Bond
  • The navy blue line shows the correlation between growth stocks and the US Long Bond
  • Until recently, both VALUE & GROWTH have historically carried very similar correlations to the performance of the long bond
  • As documented in our papers here, here , and here, many growth stocks today are highly speculative and the public is “all in”
  • These growth stocks now rise when bonds rise at a time when bonds are as expensive as any time in 40 years

Kailash believes investor crowding into growth stocks and yield-less bonds is creating a “duration crisis.” Our paper next week explains the problem and launches a sophisticated tool generating duration statistics for equities.

Important to note: Kailash believes this is one of the most significant papers and our equity duration tool is among the best we have launched in our decade+ of research. If you would like to review the work and preview the tool upon release, please click here. For a simple but powerful piece of research on the opportunities we believe exist in the now-forgotten asset class of growth at a reasonable prices, please see our piece on GARP investing.

Value and Growth Investing: Old Investment Strategies Revisited

KCR’s research has had a decidedly “value” bent over the last few years. This is not because we have anything against growth investors. Instead, it is due to our lower risk tolerance, preference for healthy cash flows with modest price-to-earnings ratios.

Please see our pieces Growth vs. Value, Innovation vs. Value, and Value Investing & Manias – A Brief Defense of History for some simple and compelling data that supports our “value” bias today. Unlike many newsletters and commentators, KCR’s views are not based on opinions or emotions. Everything we do is based on historical data.

As experts in behavioral finance, we believe what the history books tell us: for hundreds of years people have made the same mistakes. For those who are patient and fact-based, we are here to help you profit from the short-term thinking and errors of those around you. Unfortunately, this leaves us very much out of style in periods like today where many of our competitors promise “get rich quick” schemes. Yet times like these are essential to the long-term outperformance we believe processes like ours generate.

Today’s pavement-scraping interest rates have endorsed an investment style that favors large cap growth companies regardless of the valuations embedded in their stock prices. We believe this approach to investing, where people chase higher returns is a classic speculative euphoria.

We have documented the incredible fallacy that growth has lost to value over a decade+ time horizon. Our work shows that over the long term, despite the recent run in growth stocks’ share prices, value is still beating growth! We believe that even purportedly “core” indexes like the S&P 500 have a massive growth tilt.

Our investment “style” is to go where others are not. This is a gross simplification of the powerful behavioral research that underpins everything we do. But that is exactly KCR’s purpose: to make the complex simple and easy to use.

For investors with investment horizons over virtually any period of time, we believe many of the most popular mutual funds today are just extreme growth funds. We encourage people to be cautious as the market is currently infused with greed.

  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.
The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.

  1. Click the following to read more about Highest Growing Stocks, Speculator Trading, Mean Reversion Cycles

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.

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