Drawdowns: “If you buy things you don’t need, you will soon sell things you need.” -Buffett

  • Our first newsletter of 2021 suggested it might be a great time to rotate out of speculative stocks in IT and into Staples
  • Our second newsletter of 2021 showed that Staples were trading as cheap relative to the market as they were at the peak of the internet bubble
  • The chart below shows that over any 3 rolling year period, Consumer Staples stocks have almost NEVER lost money
  • At the Dot.Com trough, IT and the S&P 500 lost investors -75% and -41% of their money while Staples were UP 10% over the three-year period
  • At the GFC trough, IT and the S&P 500 lost investors -34% and -39% of their money while Staples were down only 5%

If you invested $1 in IT at the peak of the Dot.Com bubble, you lost 75% of your money, leaving you with only $0.25 cents – that requires a 400% increase to break even. Might be a great time to buy what you know & need!

Rolling Three Year Absolute Returns of Staples

Hat Tip to the folks at Ash Park for their wonderful work on Staples and the idea for this chart!!

Internet Bubble Blowing Again!

KCR’s research team has documented the painful similarities between today’s markets and the dot com bubble. Internet-based companies that sell cars, hail taxis, and other mundane things are valued as if they are changing the world. They might change how consumers behave but without a massive shift to profitability, it is only a matter of time before the bubble bursts. Investors need to look no further than ESG and cleantech stocks for further similarities.

The legions of day traders, enthusiastic venture capitalists, and the emphasis on mutual funds that are focused on “disruption” are all huge red flags for any student of history. Once again the Nasdaq composite index is on a tear, technical analysis has trumped fundamentals and speculatively valued companies no longer bother trying to explain their business models.

We fear that people do not recognize the cost of losing money. As people pursue “swing trades” and other trend trading strategies, the short-term gains are obscuring the time to recover from losses we feel are inevitable. Tech companies in 1999 were all the rage. But as we have documented, post the crash it took over a decade for investors to merely BREAK EVEN.

That is easy to read and disregard. But over the long term, you do not want to spend a decade getting back to “par.” That is no way to make money. This is all the more true if you are one of the 10,000 Americans turning 65 every year and are thinking about retirement.

KCR is fond of quoting legendary investor Jean Marie Eveillard’s comment that “life’s bills do not always come at market tops.” If record low-interest rates and trading on a bear market have driven you into the arms of “swing traders” we encourage caution. Buffett and other proven investors almost always put primacy on the preservation of capital.

We hope you will too!

  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.

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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