Inconceivable!

Please find Running Oak's most recent performance and letter below. Prior letters can be found at Nasdaq. For more color on the following, here is a recent interview touching on Certainty vs. Uncertainty.

Why Invest in Efficient Growth:

• Top 5 percentile: Running Oak’s Efficient Growth separate account has performed in the top 5% of all Mid Cap Core funds - despite being historically out of favor - 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 portfolio, precisely where the most attractive risk/reward asymmetry currently lies. Efficient Growth fills that hole - and opportunity - like few portfolios do.
• 5 Stars: Efficient Growth has a 5-Star Morningstar rating.
• Since inception, Efficient Growth has provided 19% more return than the S&P 500 Equal Weight 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 letter - sorry, it's annoying, I know. Please inquire for the ticker or more information.)
• In just 2 years, The ETF Which Shall Not Be Named has grown over 19,000% since launch - from 2 to 382mm.

Performance Update

• Running Oak’s Efficient Growth portfolio was up 0.50%, gross of fees (0.46%, net), in July.*

"Inconceivable!" – Vizzini, The Princess Bride

Inconceivable is the word of the moment.

Complacency - a feeling of quiet pleasure or security, often while unaware of some potential danger or defect.

Risk, particularly the risk of loss - due to complacency - is currently inconceivable to many.

There is a contradiction between how many feel about the world and how they invest in the world. Many, including myself, feel the world is as uncertain as ever. Meanwhile, the investments of many reflect absolute certainty and complacency.

Consistently Not Stupid - Running Oak in 3 Words

Running Oak’s Efficient Growth strategy is always risk-focused and NEVER complacent. It is common sense and obvious: maximize earnings growth within the constraints of attractive valuations – avoiding overvalued companies, in particular – and lower downside risk. Our strategy makes sense to me. It reflects my understanding of how the world works. Owning a share of a company that is making more and more money will result in a more valuable company. Owning assets that should go down is a really dumb idea over the long-term. Owning companies that have mortgaged their futures, taking on unsustainable debt for the benefit of their CEOs at the expense of shareholders, will result in trouble. I am CERTAIN that philosophy makes sense. Our rules-based process ensures we consistently deliver that philosophy to our clients.

That said, investing is inherently UNCERTAIN. The world feels incredibly uncertain. Companies operate in the uncertain real world and how they perform flows through into how investments perform, piling uncertainty on top of uncertainty. Meanwhile, the investments of many reflect absolute certainty and complacency.

According to some, over 50% of money invested in equities is now passive. Households have 20% more of their net worth invested in stocks than in the Tech Bubble. Index funds and passive investing are a bet on CERTAINTY (explanation to follow). So at a time when the world is incredibly uncertain, investing is doubly uncertain, and valuations of the 10 largest companies exceed the Tech Bubble by a good margin, people have more invested in certainty than ever before. That is bad. And keep in mind Large Cap Growth managers - by far the biggest holding of many - are playing "Keep up with the S&Pses." Both index funds and Large Cap Growth are a bet on CERTAINTY.

Consider the most basic construction of passive portfolios or the S&P 500. Begin with a company that is fairly valued. It comprises a proportional percentage of the S&P. Then, someone buys some of that stock, pushing the price and therefore the valuation up. Nothing changed fundamentally, but the S&P 500 now owns more of that stock BECAUSE it went up - BECAUSE it's overvalued. Do that again because “hey, this stock is performing well.” It is now more overvalued and, therefore, more is invested in it. Now, extrapolate that over 16 years, the hottest market in history, and one that has been driven by a tiny number of companies. By the day, Big Tech has become a higher and higher percentage of the S&P 500. Overvalued companies, crowded trades by definition because people have piled in, have run like arguably never before. That is Momentum; people piling in, buying more and more, simply because people piled in previously, pushing things further and further. In fact, Momentum hit the 99.8% in history last year. That is a 1 in 500 event. That was due to passive. Passive, by construction, does well in that scenario. It does not do well if that reverses. In fact, it does REALLY poorly. Passive is an investment in the absolute CERTAINTY that the last 16 years will continue. Maybe it will. But what if it doesn’t? Again, the world is uncertain. Investing, which depends upon the world, is doubly uncertain. Passive, at this point, is that pirate ship ride that swings back and forth until it’s upside down. The market is upside down; we just experienced a 1 in 500 extreme. Holding or buying more is a bet that pirate ship defies gravity indefinitely. And once again, Large Cap Growth managers are playing "Keep up with the S&Pses."

Uncertainty

Certainty

“Life is pain, Highness. Anyone who says differently is selling something.” — Westley

When I discuss our strategy, there are two primary topics: return and RISK. Risk is uncertainty. Index fund salesmen have somehow managed to craft a narrative that completely ignores risk. It’s wildly irresponsible; they're playing with people's financial well being. Again, there are only 2 primary topics; they leave out one, and it’s possibly the most important of the two. Index fund salesmen address risk by saying “the market is ALWAYS up in the long run.” They are selling certainty, but their product is anything but certain, especially right now.

Again... Large Cap Growth strategies are playing "Keep up with the S&Pses."

And speaking of selling something, per Sean Williams of the Motley Fool, from 2020 to today insiders of the largest AI players have sold:

• $4.73B of Nvidia
• $7.44B of Palantir
• $758mm of AMD
• $9.53B of Meta
• $894mm of Microsoft

and bought... wait for it... $5.51mm of stock over the last 5 years. They've sold $23.5B and bought $0.00551B. These are the people who know most. Jeff Bezos recently sold $5.7B of Amazon. Again, no one knows the businesses of these companies better than those running them, and they are selling.

There is a great story about Brad Jacobs, the founder of XPO. A short seller put out a hit piece on XPO in 2018, driving the stock price down significantly. Jacobs went around to multiple banks, borrowed heavily, and BOUGHT $2.5B of stock. XPO bought its stock back, because Jacobs felt it was underpriced. The stock then appreciated meaningfully, and XPO's shareholders made a large profit. Many companies are currently buying back stock at valuations that eclipse the Tech Bubble. They are using shareholder money to do so, while... the people who know most are selling. Always keep an eye out for poorly aligned incentives.

“We are men of action. Lies do not become us.” — Westley

Why would index fund salesmen convey certainty when investing, particularly passive portfolios, is uncertain? Because they make money doing so. (Why would companies use shareholder money to buy back stock, while those orchestrating buy backs are selling personally? Because they make money doing so.) The lower cost associated with providing no effort and no expertise – passive investing – has created an impression that these companies are altruistic and working for free. Vanguard, BlackRock and the others are making A LOT of money. Sure, the fees are lower, but the assets are bigger, and they’re providing nothing. There’s no work going into it, just selling. It’s basically free money.

By the way, Running Oak's fee, the fee for a top 5% strategy requiring work and expertise, is arguably 1/4 what it would have been 2 decades ago. There's a difference between cheap and good value.

“Rodents of Unusual Size? I don’t think they exist.” — Westley

Risk is real. Apple’s long-term PE is roughly 14. It’s trading at a PE of 35. Apple, the 3rd largest holding of many, could drop 50% overnight and STILL be expensive.

Tesla, a car company and the 8th largest holding of many, has a PE of 200, and fewer and fewer people are buying its cars. Tesla could drop 90% overnight and still, relative to historic norms, be expensive.

Microsoft, the 2nd largest holding of many, has a Price to Sales of over 13. In order for an investor to break even at the current price, Microsoft would need to distribute ever penny of revenue for over 13 years, which assumes Microsoft has no employees, no R&D, no AI data centers, and that taxes don’t exist. That’s to break even.

Both index funds and Large Cap Growth managers are all-in on these three, as well as Nvidia (Roughly 20% of Nvidia's 2024 revenue was from Microsoft. CoreWeave also represents a big percentage, and CoreWeave is doing... not so hot.), Amazon, Meta, and Alphabet (which we own but are underweight relative to the S&P 500).

And speaking of Rodents of Unusual Size, a primary driver of recent returns has been financial leverage. Leverage can make a good thing better, but it can also make a bad thing  far, far worse.

“The pit of despair.” — The Albino (I don't know if that term is politically correct. If not, blame the internet.)

Running Oak’s goal is to help our clients grow all that they have worked to save AND avoid the Pit of Despair. As mentioned above, the Pit of Despair (a large drawdown, lost decade, etc.) is real. The odds of the Pit of Despair are historically high at the moment. It may not happen soon. It may never happen again (said facetiously). But what if it does? The world is uncertain. Investing is doubly so.

If you’re a planner, nothing derails a financial plan like a large drawdown. Index funds, by construction, provide high returns in times of hot Momentum and large drawdowns when the most overvalued companies stop becoming more overvalued. If wealth preservation and the ability to retire are a priority, index funds are inappropriate. Drawdowns are unavoidable when investing, but the Pit of Despair is not. From 2000 to 2002, Running Oak's Efficient Growth portfolio, High Quality, Small Cap, Value, and plenty of other managers actually fared well while the Nasdaq declined 80%. The key was to not be invested in index funds and the most overcrowded, euphoric trades.

Invest Where Others Aren't (MARGE - Upper Mid/Lower Large Cap)

• Investing where everyone else is investing means higher prices, higher valuations, lower implied returns, higher implied downside.
• Investing where others aren't means lower prices, lower valuations, higher implied returns, lower implied downside and a margin of error.
• Investing where others aren't also provides valuable diversification.
• If the market goes up, others are likely to follow, propelling prices.
• If the market goes down, others can't sell what they don't own, meaning less selling and downside pressure.

It's win/win.

“Fezzik, are there rocks ahead?”

“If there are, we all be dead.”

“No more rhymes now, I mean it!”

“Anybody want a peanut?” - An exchange between three

"Don't invest as though life is certain.

If you do, your clients'll be hurtin'."

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

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.

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

The opinions voiced in this material are those of Running Oak Capital’s, do not constitute investment advice, and are not intended as 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.

*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 regarding the large gap in the middle of the typical equity allocation reflect the opinion of Running Oak Capital This is based on informal feedback and experience from interactions with investors and other financial professionals. Further, statements on where the most attractive risk/reward asymmetry lie, although based on observable data, reflect the opinion of Running Oak Capital.

*Statement regarding Mid Cap stocks outperforming Large is reflective of historical performance of the Russel Midcap Index vs Russell 1000 Index.

*Source of Mid Cap undervaluation & Large Cap overvaluation: Bloomberg