'It is a good time to focus on risk and certainly diversification': Cogswell

Key Concepts

• Efficient Growth Strategy: An investment philosophy focused on profitability, quality, earnings growth, and risk management.
• High Volatility/Zombie Companies: Companies with high price fluctuations, often lacking profitability, which have paradoxically outperformed recently.
• Quality Factor: A metric identifying financially stable companies with reasonable debt levels and consistent earnings.
• Momentum Investing: A strategy of buying assets that have shown an upward price trend (e.g., SPMO).
• Portfolio Diversification: The practice of spreading investments across different asset classes to manage risk, particularly during uncertain geopolitical or economic times.

1. Market Anomalies and Performance Trends

Seth Cogwell, Managing Partner at Running Oak Capital, characterizes the last 52 weeks as one of the most irrational periods in stock market history. He notes a significant divergence from traditional investment logic:

• Performance Inversion: Factors historically proven to destroy value—specifically high volatility (often associated with "zombie companies") and meme stocks—have been the top performers.
• Underperformance of Quality: Conversely, "high quality" stocks (profitable companies with manageable debt) and low-volatility strategies have ranked at the bottom of performance metrics (e.g., low volatility ranked 220th out of 220 factors on Bloomberg).
• Historical Context: Cogwell compares the current market environment to 1999 and 2021, noting that the degree to which profitable companies are lagging behind unprofitable ones is historically unprecedented.

2. ETF Strategies and Portfolio Construction

Cogwell proposes a three-pronged approach to navigate current market uncertainty, using specific ETFs to balance risk and growth:

• RUN (Running Oak Efficient Growth ETF):
  • Focus: Profitability, quality, earnings growth, and risk mitigation.
  • Role: Acts as the "designated driver" of a portfolio. It serves as a counterbalance to speculative, high-growth, or high-volatility bets, providing stability when market "parties" end.
• SPMO (Invesco S&P 500 Momentum ETF):
  • Focus: Momentum stocks, heavily weighted toward Big Tech and AI-driven growth.
  • Role: A vehicle to participate in the current market rally. Cogwell describes it as a way to "play the party" if the current momentum continues.
• COWS (Amplify Cash Flow Dividend Leaders ETF):
  • Focus: High-quality dividend-paying companies.
  • Role: Provides a "margin of safety" and income. It offers low overlap with the growth-focused RUN and the momentum-focused SPMO.
  • Geopolitical Hedge: With approximately 10% allocation to the energy sector, COWS serves as a potential beneficiary of rising energy prices resulting from geopolitical conflicts, such as the war in Iran.

3. Key Arguments and Perspectives

• The "Irrational" Market: Cogwell argues that investors are currently ignoring traditional valuation metrics, piling into unprofitable companies despite high levels of economic uncertainty. He suggests this behavior is unsustainable.
• The Necessity of Diversification: Given the unpredictability of the current climate, Cogwell emphasizes that diversification is the most effective tool for risk management. By combining growth (SPMO), quality/profitability (RUN), and income/defensive energy exposure (COWS), investors can create a balanced portfolio that survives various market regimes.
• Performance Track Record: Cogwell highlights that the "Efficient Growth" strategy has a four-decade history and a 12.5-year audited track record, during which it ranked in the top 1 percentile of the midcap core space for 11 years.

4. Synthesis and Conclusion

The current investment landscape is defined by a disconnect between fundamental quality and market performance. While momentum and high-volatility stocks have dominated recent returns, Cogwell warns that this is an anomaly. He advocates for a disciplined, multi-layered strategy that prioritizes profitability and risk management (RUN), captures market momentum (SPMO), and provides defensive income and energy exposure (COWS). This combination is designed to provide resilience against the volatility of the current geopolitical and economic environment.