Why the “Mass Affluent” Need the Help of Honest FAs More than Ever

The researchers and portfolio managers who write KCR’s newsletter do their best to follow the data. We use sophisticated analytical tools to identify areas where we see significant market inefficiencies. Yet history does not repeat; it rhymes, which means we get things wrong. We write about that, too.

Most recently, it was our piece on KCR’s micro-cap model. We highlighted the unusually rough patch it was in. Fortunately, the longer one of our products suffers, the bigger and better the subsequent opportunity.

KCR’s decision to remain independent stems from our team’s desire to be honest. Fortunately, we have found a collection of institutional subscribers who, without exception, run some of the industry’s longest tenured and most successful actively managed equity funds.

Twelve years after our founding, we added a website and a product for Financial Advisors. We are glad we did.

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The headlines on Financial Services often make it feel like grifters and “GAAP compliant crookery” are the norm in our industry. KCR happily reports that, in our experience, the FAs we interact with have a profound dedication to their clients. These FAs remind us that “stocks” impact the lives of millions in a deeply personal manner.

KCR has written a ruthless collection of research on the potentially devastating investment impact of misleading financial data due to the abuse of stock-based compensation. Listening to FAs today, we believe one of the biggest risks to wealth preservation for millions of individuals and their families comes from the tsunami of stock-based compensation.

The chart below shows the cumulative issuance of stock-based compensation over the prior ten years since 2014. We’ll explain why ten years is such an important horizon in the pages that follow. First, we ask you to simply take in the magnitude of these payments. From 2004 to 2014 (first bar), employees were given a total sum of $700 billion in stock-based comp—a big number for sure.

But in the most recent decade (last bar), the number has exploded to a staggering 1.8 trillion dollars.

 

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Let’s now explain why we think this is an epic crisis on the make, why Financial Advisors are essential to averting disaster, and why active management – never less popular than today – is a critical part of the solution.

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  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 Research, LLC ’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.

[1] Excessive Extrapolation and the Allocation of 401(k) Accounts to Company Stock, Shlomo Benartzi, Journal of Finance; Dear Dr. Benartzi, this paper was penned by Matt, the practitioner on the KCR team and should not be conflated as Sanjeev endorsing my “method” of thinking here.  To the degree you feel I have misrepresented your work or taken the analog too far, please reach out so I can make amends – both personally and publicly – that you might feel necessary.

[2] July 14, 1989 – July 15, 1998

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 Research, LLC and its affiliates (collectively, “KCR”) 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 KCR. In preparing the information, data, analyses, and opinions presented herein, KCR has obtained data, statistics, and information from sources it believes to be reliable. KCR, however, does not perform an audit or seek independent verification of any of the data, statistics, and information it receives. KCR 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.

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

© 2023 Kailash Capital Research, LLC – All rights reserved.

June 20, 2024 |

Categories: Quick Takes

| Authors: , ,  and 

June 20, 2024

Categories: Quick Takes

Authors: , ,  and 

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