• Introduction: Price Action Does Not Always Reflect Value
  • Financial Pornography: 1999 & Today
  • Conclusions & Exhibits

Introduction: Price Action Does Not Always Reflect Value

A recent Barron’s article cited research advocating the purchase of innovative tech-heavy indexes because:

• value investing is dead
• tech-heavy indexes were defensive based on Nasdaq’s performance during the COVID crash
• tech-heavy indexes would generate higher returns in the years ahead as they embraced change1

Our interest in the article stemmed from the fact that, as documented in This Time is Different and How to Build a Growth Stock, the last few years’ price action has provided optical appeal to these claims.

Kailash notes that the concept has worked in arguably the most innovative and tech-oriented index we know of: The Renaissance IPO Index.2 In IPOs, Index Inclusions and the Passive Patsies, Kailash provided evidence that the 2019 crop of IPOs added to major indexes were more overpriced than those at the peak of the internet bubble. We also disagreed with articles suggesting recent IPOs were safer than those of 2000. Specifically, some claimed recent IPOs had been for firms operating 12 years prior to listing, unlike in 2000 when the average firm going public was only 4 years old. Our assertion then was that losing money for 12 years instead of just 4 might be further proof of a failed business model. Despite being very wrong since publication, Kailash is sticking to history and believes this paper provides evidence to recertify our conviction.

As Fig.1 below shows, the tech-heavy IPO ETF outperformed the S&P500, Russell 1000 Value, and tied the tech-heavy Russell 1000 Growth.3 Having navigated the downturn admirably, the IPO ETF’s outperformance from the trough has been stunning – rising 107%, walloping every other index. To put the performance since the beginning of 2019 into context, IPO ETF has annualized returns of 95%. The R1G had annualized returns of 49%, followed by the S&P500 at 15% and the dreadful Value Index actually falling at a -14% annualized rate. The IPO ETF has indeed provided both modest downside protection and explosive upside capture.


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