• 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, How to Build a Growth Stock, and Are Clean Tech Stocks a Short, 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.

  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 for anyone seeking out more information related to the topics above.



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.

September 28, 2020 |

Categories: White Papers

September 28, 2020

Categories: White Papers

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