• Bloomberg published an article citing academic research noting firms with high expected profit growth tend to underperform
  • Longtime readers of ours flagged us as we wrote extensively about this issue and how to exploit it in our 2012 paper The Siren Song of Growth
  • The chart below shows the returns to firms with the highest expectations have only been better at the peak of the internet bubble

The Internet Bubble & Today:

Those are the only two periods like this. We don’t think this is complicated: this will likely end very badly. The good news can be found in our research on investing in growth at a reasonable price – an asset class that seems entirely forgotten today.

Market Share Madness: The “Winner Take All” Problem

The chart above shows that the only comparable performance to today was the dot com bubble when internet companies and tech stocks went ballistic. Back then the theory was that, despite minimal total sales, these new companies would experience a massive increase in market share. The market decided then, as it is today, that the actual business model mattered much less than the perception these stocks would become market leaders.

Unfortunately, as we have documented ad infinitum, these types of promises were almost never fulfilled in the decades following the peak on March 10, 2000. Worse, even when these new tech companies actually did reinvent an industry, they still suffered badly as their valuation bubbles burst.

People often look at the products or services these companies are in, like cleantech shares, ignore the total lack of profit margins, size up the total market they are potentially disrupting, and then promptly price the stocks like they had already become winners. This type of thinking has been causing market bubbles since the times of ancient Venice.

You can read about that in our quick summary of what we learned from Galbraith’s legendary book on market manias. We are not here to suggest that it is NOT important to calculate market share and make estimates about the future. What we are saying, however, is that if the share price you pay already assumes the firm has won, how will you profit?

Many stocks, Snowflake being an incredible example, trade at market valuations that are equivalent to the entire addressable market they are in! So, if they are already valued like they own an entire market, what happens if there are bumps along the time period to this presumed success? History tells us these inevitable disappointments lead to disaster.

Please reach out if you would like to understand how low-interest rates, aggressive venture capitalists, and a speculative mania are creating easily avoided risks. We believe that for long-term investors there are tremendous opportunities in blue-chip companies today. KCR’s work is for serious investors. Speculators will find our word tedious as we offer no short-cuts or get-rich-quick narratives.

Thank you in advance for any and all interest!

  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 speculative trading definition

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.

May 7, 2021 |

May 7, 2021

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