3 Rights Make a Right

Please see Running Oak's most recent performance update and market commentary 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 2-3 percentile: Running Oak’s Efficient Growth separate account has performed in the top 2-3% 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 9% 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 email - sorry, it's annoying, I know. Please inquire for the ticker or more information.)
• In just 18 months, The ETF Which Shall Not Be Named has grown over 14,000% since launch – from 2 to 283mm.

Performance update:

• Running Oak’s Efficient Growth portfolio was up 18.22%, gross of fees (17.64%, net), in 2024, versus 13.01% and 15.34% for the S&P 500 Equal Weight Index and Russell Mid Cap Index, respectively*
• Running Oak’s Efficient Growth portfolio was down 7.12%, gross of fees (7.16%, net), in December, versus -6.26% and -7.04% for the S&P 500 Equal Weight Index and Russell Mid Cap Index, respectively*

It's MARGE O'Clock

3 wrongs don't make a right..., but 3 rights certainly do.

Mid Cap stocks have outperformed, are undervalued, and are barely invested. Better, cheaper, needed. Try as I might, I can’t imagine a better combination.

Efficient Growth doesn’t just provide significant Mid Cap exposure – you know, the asset class that has outperformed, is undervalued, and few own. Efficient Growth also provides significant lower Large Cap exposure, yet another area in which investors have little to none of. The line between Mid and Large is a made-up, random number, sort of like the Prime Meridian and the Dog Hair Expansion Rule (One dog = enough fur to knit 5 new dogs). Lower Large Cap, because they’re larger than Mid, are likely more liquid and more proven. Don't have little to none invested in a highly attractive area, due to a made up line.

There is a gaping hole in the average investor’s portfolio.*

The standard domestic equity portfolio consists of Large Cap (covering Core and Growth), SMID, and Small to Large Cap Value. Using SCHG, one of the most commonly held investments, as a representative Large Cap portfolio, it becomes clear that the average equity investor has negligible diversification within Large Cap. 60% of SCHG is invested in only 8 companies. Those 8 companies are all Big Tech, leaving only 40% spread out among the rest of the Large Cap Growth/Core universe. Investors don’t have diversified Large Cap exposure; they have a historic percentage of 8 companies and little else.

SMID, by definition, is typically concentrated around upper Small and lower Mid Cap, leaving upper Mid underinvested.

Value, including income/dividend, tends to be invested across the spectrum of Small to Large.

Here’s a representative map of the standard equity allocation:

MARGE – Upper Mid and lower Large are woefully under-invested.

A place and time to be overweight, not barely invested

“There are three kinds of people in the world – those who can count and those who can’t.” In case you’re the latter, I have pictures! It’s kind of like a comic book, minus the spandex-clad men .

Outperformance

Mid Cap has outperformed Large Cap by 0.54%, annualized, over the last roughly 33 years. Note: That includes the Large Cap’s historic outperformance over the last decade and a half, and Mid has still outperformed.

*Source: Morningstar 9/30/2024

Mid Cap has outperformed Small and Large for simple, persistent reasons:

Small – Small Cap companies, generally speaking, are less established and proven. They either lack a meaningful product, their products have yet to be adopted, or they have yet to monetize those products and achieve consistent profitability. As small companies gain legitimacy, increase revenues, and become more profitable, they graduate to Mid. Mid Cap companies have successful products and are, therefore, less risky than Small, leading to outperformance over the long run.

Large – The larger a company grows and matures the more difficult it often becomes to grow at the same or higher rate, particularly once a company is especially large and its market is saturated. Mid-sized companies, on the other hand, can more readily move the needle substantially.

Note: Smaller Large Cap companies also fit this description and are likely less risky.

Undervalued and much, MUCH cheaper

Mid Cap is undervalued relative to its long-term mean, based upon its long-term CAPE ratio. Per Ned Davis Research, Large Cap is more than 100% overvalued relative to its long-term mean, and even Small Cap, surprisingly, is moderately overvalued.

Mid Cap is not only undervalued; it is a steal relative to Large Cap.

*Source: Bloomberg

A December to Remember

The "December to Remember Sales Event" was more than just Lexuses with giant red bows on them. The average stock was also thrown in the clearance bin.

6 Days into December: The S&P 500 experienced negative breadth (more stocks declining than rising) the first 6 days of December, yet was up 0.34%. Per BTIG, "to show how bizarre it is, there have been 16 prior occurrences of six consecutive negative S&P 500 breadth days. The average SPX return of those stretches has been -6.62%, and the 'best' return was -1.3% in 2017." The S&P 500 was 7% higher than the average occurrence of 6 negative breadth days in a row and almost 2% higher than the best return ever.

9 Days into December: The string of more decliners than advancers hit 9 straight days, only the second time since 1996 for that to occur. That one other occasion was immediately following 9/11 – you know, one of the darkest days in the history of the United States.

11 Days into December: The string of more decliners than advancers hit 11 straight days, a new record. That was a singular moment in history.

A primary reason for the divergence between the S&P 500 and the majority of stocks was Tesla. From 11/4, the day before the Presidential election, to December 18, Tesla, one of the largest companies in the United States and world rose 105%. One of the largest companies in the world doubled in just 31 trading days. It did so based on the assumption that Elon Musk will use his newfound power within the US government to favor himself and Tesla.

As the average stock declined every day for 11 straight days and finished December down over 7%…, Fartcoin, a cryptocurrency created as a joke, eclipsed $1.25B in market cap ($1.6B on January 3rd). People invested $1.25B of their money in a make-believe currency named for flatulence.

“History Doesn't Repeat Itself, but It Often Rhymes” – Mark Twain.

The point of the above isn’t to argue the legitimacy or illegitimacy of crypto currencies, in general. It is to point out the magnitude of the froth in the most speculative of all asset classes (a term I use facetiously – nothing about these are asset-like). Many memecoins are little more than ponzi schemes, and they have sucked in 10’s of billions of dollars in the last few months. It is a sign of speculative fervor, much like the meme stock craze, which often ushers in a period of painful reality, as was the case in 2022.

Don't Do the Rhyme, If You Can't Do the Time

2022 was a return to reality, following the craziness of 2021 that culminated in the meme stock craze. Will there be a similar return to reality following the current memecoin frenzy? If so, what is that likely to look like? Again, the meme stocks were REAL companies. Just the 4 joke coins listed above have added over $50B in several weeks, more than the market cap of Occidental Petroleum, Phillips 66, Lululemon, Nasdaq, Baker Hughes, Kroger, etc. And there are over 300 memecoins.

A Place and Time to be Overweight, Not Barely Invested

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

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

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

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.

*Statements reflect the opinion of Running Oak Capital on the average investor’s equity portfolio allocation. This is based on informal feedback and experience from interactions with investors and other financial professionals.

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.

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

This email transmission and any documents, files or previous email messages attached to it may contain information that is confidential or legally privileged.  If you are not the intended recipient, you are hereby notified that you must not read this transmission and that any disclosure, copying, printing, distribution, or any action or omission of this transmission is strictly prohibited.  If you have received this transmission in error, please immediately notify the sender by telephone at (952) 582-6116 or return and delete the original transmission and its attachments without reading or saving in any manner.