Protecting & Growing Wealth in the Age of Uncertainty

From 2017 – 2020, speculative trading on predatory apps like Robinhood became a true stock market mania. The catastrophic misallocation of capital was, briefly, a very profitable endeavor.  We did not flinch.

Amidst this backdrop, KCR began to see unfortunate parallels between 2020 and 1969, the period immediately preceding the Great Inflation of the 1970s. In January 2021 we initiated a long-running series advocating investors buy stocks that make things we need. Energy and Staples topped our list.

We saw record cheapness in some of the most proven and profitable firms in the market with solid balance sheets that paid healthy dividends.  We showed that the stocks were not just cheap but might be some of the best hedges against inflation. Advocating for food and beverage stocks like Costco Wholesale, Coca Cola, Procter & Gamble, and other boring stocks amidst a speculative din brought little attention.

Nonetheless, our preference for energy and consumer staples stocks has proven profitable on an absolute and relative basis.  A recent article Defensive Stocks Take Their Turn as Highfliers, made it sound like our penchant for grocers and other makers of consumable household goods might have run its course.

The chart below attempts to put this in context.  We have updated the ratio of Consumer Staples vs Consumer Discretionary Stocks since our January 2021 piece. Since our initiation, the outperformance of Staples stocks vs. Discretionary stocks has barely moved the needle.  There is a great deal of room to run.

Consumer Staples vs Consumer Discretionary Stocks More Mean Reversion Ahead

If you are familiar with our work or need no further convincing, please click on this link for our top consumer staples stocks.  As we discussed in last week’s missive on how to protect capital amidst war and drought, there is growing evidence that the year over year change in food prices may have much farther to run.  We continue to believe staples stocks’ consistent revenue growth, robust dividend yields, and consistent earnings per share make them a critical part of any portfolio.

Consumer Staples vs Consumer Discretionary: From the History Books

Look.  Our company operates a business that values “getting on base” and preserving capital.  We are not a shop that makes grand promises.  Which is unfortunate.  We’ve learned that’s what sells.

We continue to pan overpriced loss-makers in posts like lottery ticket stocks.  And we have expended a good deal of digital “ink” warning readers about the need for understanding the precarious math around bear trading. Despite avid and growing readership, we are not exactly surprised by the lack of invitations to cocktail parties :)

YOU ARE NOW READING BASIC MEMBER LEVEL CONTENT

The next two slides are critical and simple historical evidence of how inflation is the “wrecking ball” of discretionary goods stocks.   We have never seen work like this done and believe it to be eye-opening. 

The chart below shows:

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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 a simple, concentrated, low turnover, and hard-hitting GARP investing strategy, we would like to talk with you.  Similarly, if you are looking for a model portfolio of the most proven and durable dividend payers that is simple to implement, please let us know.  KCR also offers a wide range of easy-to-use but sophisticated tools like our Equity Duration product, which allows you to estimate a given portfolio’s interest rate and inflation risk. 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.

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.