Introduction:

This paper adds to our recent research making the case that today is one of the most compelling times in history to adopt a simple dividend and income investing strategy in Consumer Staples. Specifically:

  • Mania: Kailash has documented the myriad analogs between today and past speculative markets that ended in disaster, embodied by this well-intentioned, if surreal, TikTok video about day-trading
  • Defense & Offense: As a speculative frenzy drives markets, Kailash further documents Staples’ long-prized defensive and offensive characteristics that seem to have been forgotten while reducing risks from high equity duration
  • Uncommon Opportunity: Based on history, today is one of the most opportune times to buy Staples

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In the back pages of legendary investor, thinker, and writer, James P. O’Shaughnessy’s “What Works on Wall Street,” the author noted that in July of 2000, Money Magazine wrote a critical article about him. Titled “What Doesn’t Work on Wall Street,” the magazine asserted his systematic approach to investing “…doesn’t seem to work anymore.”1 Reflecting on this and other public attacks levied at him in 2000, O’Shaughnessy wrote:

In feverishly speculative markets, believing in Occam’s razor – that the simplest theory is usually the best – is almost impossible. We love to make the simple complex, follow the crowd, get seduced by some hot ‘story’ stock, let our emotions dictate decisions, buy and sell on tips and hunches….

From December of 1997 through the date of Money Magazine’s July 2000 article, the Fund run by O’Shaughnessy today was up less than one percent vs. the S&P, which had risen 53%. From July 2000 – December 2003, the S&P would fall 18% while the Fund would soar 67%. Looking at the whole period, 1997 – 2003, the Fund compounded loyal investors’ money at 9.1% annually vs. only 3.8% for the Index. “What Works On Wall Street” was a formative part of this writer’s upbringing, and I would like to thank Jim for his fantastic work. Kailash would also suggest that recently minted day-traders might find buying (and reading!) a copy of his book the best investment they make in an environment like this.2

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  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.