Orange on a Toothpick

Please find Running Oak's most recent performance and letter below. If you'd like a more thorough understanding of our approach and history, I was recently interviewed by Michael Gayed. Simply search for Michael Gayed, then Seth Cogswell, on LinkedIn, X, YouTube, and others. 

Why Invest in Efficient Growth:

• Top 3 percentile: Running Oak’s Efficient Growth separate account has performed in the top 3% of all Mid Cap Core funds in Morningstar's database over the last 10 years, net of fees.¹
• Opportune: A little known - yet very large - hole exists in the typical equity allocation, precisely where the most attractive risk/reward asymmetry currently lies. Efficient Growth addresses that hole - and opportunity - like few portfolios do.
• 5 Stars: Efficient Growth has a 5-Star Morningstar rating.
• Since inception, Efficient Growth has provided 26% more return than the S&P 500 Equal Weight Index and 5% more return than the S&P 500 Total Return Index, given the same level of downside risk, gross of fees. (Ulcer Performance Index)*

Differentiated Approach and Construction

• Mid Cap stocks are at their cheapest in 25 years relative to Large. Efficient Growth provides significant Mid Cap exposure.
• Efficient Growth is built upon 3 longstanding, common sense principles: maximize earnings growth, strictly avoid inflated valuations, protect to the downside.
• Running Oak utilizes a highly disciplined, rules-based process, resulting in a portfolio that is reliable, repeatable, and unemotional.

How to Invest

• Efficient Growth is currently available as an SMA and ETF. (ETF specifics and SMA historical performance can't be shared in the same note - sorry, it's annoying, I know. Please reach out to seth@runningoak.com for the ticker or more information.)
• In just 20 months, The ETF Which Shall Not Be Named has grown almost 15,000% since launch – from 2 to 299mm.

Performance update:

• Running Oak’s Efficient Growth portfolio was up 3.75%, gross of fees (3.70%, net), in January, versus 3.50% and 4.25% for the S&P 500 Equal Weight Index and Russell Mid Cap Index, respectively*

Look at the size of that boy's head. I’m not kidding. It's like an orange on a toothpick. - Mike Myers, "So I Married an Axe Murderer"

Stop me if you’ve heard this one… you have TOO much Big Tech exposure and not enough of the stuff that MAKES SENSE. I know, I know… Big Tech is pretty much all that has gone up over the last decade and a half. “Pretty much” is the key phrase there; our Efficient Growth strategy has largely kept up with the S&P 500 over the last decade, despite minimal Magnificent 7 exposure, so not ALL stocks other than Big Tech have stunk.

Efficient Growth has provided the diversification that clients need, especially right now, AND highly attractive performance. Plus, Efficient Growth makes sense, and its performance over decades validates the strategy’s pricipled investment philosophy and disciplined process.

Small, Mid, Value, High-Quality, International, Bonds, discipline, common sense, etc. have all stunk. That discrepancy in performance has led to a false sense of diversification for many and an unknown hole in the majority of portfolios. Advisors and clients investing in Large Cap strategies and diversifying with SMID, understandably, believe they’re getting this:

Instead, they’re getting an orange on a toothpick with a tiny serving of SMID.

Is the juice worth the squeeze?

Large Cap is 100% overvalued, per Ned Davis Research and its long-term average CAPE ratio. "Overvalued" implies two major features of an investment: lower return, higher risk. In other words, the juice AIN'T worth the squeeze.

Meanwhile, Mid Cap has outperformed Large by 60 bps, annualized, over the last 33 years (meaning per year, on average, for 33 years - that's a big cumulative difference).*

Mid Cap, per its long-term average CAPE ratio, is undervalued.*

The Mid Cap juice is very much worth the squeeze; it has provided the most juice over the last 33 years, AND it’s undervalued. If Mid gets squeezed to its long-term mean, it goes up! If Large gets squeezed to its long-term mean (which is inevitable, by the way – it’s only a matter of when), Large drops 50%. Of course, that’s assuming it drops 50% and then magically stops right at its historical mean. That isn’t how life, people, and emotions work. Behavior swings from one extreme to another. Thus, when Large reverts, it’ll revert past its mean and likely far past.

Yes, the Big Tech companies are cash machines. But what price are you paying for that cash? Paying $1.50 for $1 isn't kinda dumb; it’s real dumb. And I’m not even saying don’t invest in them; just don’t have a portfolio looking like an orange on a toothpick, particularly in Qualified accounts. This very moment, you could create portfolios built for the future, built to protect clients’ hard-earned money, built to optimize the juice-to-squeeze ratio.

Ooh, that was off-sides, wasn't it? He'll be crying himself to sleep tonight, on his huge pillow. - Mike Myers, "So I Married an Axe Murderer"

Our sell discipline is, arguably, the greatest value-add and differentiator of the rules-based investment process that we have employed for decades. Selling an investment that has treated you well and made you feel good is difficult. Selling an investment that results in gains can lead to an unpleasant client conversation. The Fear of Missing Out is especially powerful right now.

I get it.

However, portfolios that look like an orange on a toothpick - that are heavily concentrated in highly correlated, overcrowded, overvalued companies - have a high likelihood of leading to far more difficult conversations... and tears. All that is required to tip the toothpick over is a modicum of mean reversion.

In the words of Snoop Dogg, "don't cry, dry your eyes. And here comes [Running Oak] with those two little guys", upper Mid and lower Large cap. Make our discipline your discipline.

It seems like a good idea to:

• Invest in companies that have outperformed over the long run.
• Invest in companies that stand to APPRECIATE to fair value - not depreciate to fair value, like Large.
• Buy companies that are barely owned. A) If others follow, they’ll go up. B) If the memecoin craze results in a period like 2022, there’s no one to sell Mid Cap. Less selling pressure means less downside.
• Buy Mid Cap stocks. They have outperformed AND they’re cheaper AND they’re under-invested.
• Invest in MARGE – upper Mid/lower Large.

If you're in agreement and looking for a solution, Running Oak’s Efficient Growth portfolio fills that hole like few do, providing significant value like even fewer do. In 2022, Efficient Growth declined only 12.38%, net, versus 18.11% for the S&P 500 Total Return Index.

________________________________________

Running Oak's goal is to maximize the exponential growth of clients' portfolios, while subjecting them to far less risk of loss. In other words, we aim to help your clients realize their dreams and avoid their nightmares.

If you appreciate critical thinking, math, common sense, and occasional sarcasm, we would love to speak with you. Please feel free to set up a time here: Schedule a call.

Seth L. Cogswell

Founder and Managing Partner

Edina, MN 55424

P +1 919.656.3712

www.runningoak.com

All opinions expressed in this letter are those of Running Oak Capital’s and do not constitute investment advice.

¹For additional data and context regarding the claims made within this email, please refer to the Disclosures and Additional Data document located here.

²Statements on the standard equity allocation are based on informal feedback and experience from interactions with investors and other financial professionals.I

³Invesco: "Why Mid Caps Now"

⁴Ned Davis Research

Investment Advisory Services are offered through Running Oak Capital, a registered investment adviser.

*Past performance is no guarantee of future results. Performance expectations are no guarantee of future results; they reflect educated guesses that may or may not come to fruition. All indices are unmanaged and may not be invested into directly.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments and strategies may be appropriate for you, consult with us at Running Oak Capital or another trusted investment adviser.

Statements on the standard equity allocation are based on informal feedback and experience from interactions with investors and other financial professionals.

Stock prices and index returns provided by Standard & Poor’s.