Where Alpha Still Lives

Most people are told the same thing about building wealth:

And eventually, financial freedom will come.

While this is overall great advice…

There’s one problem.

What nobody tells you is that what you pay (and when) ultimately determines what your future will look like.

In 1999, during a CNN interview, Warren Buffett walked the world through his reasoning for staying out of stocks as he expected a “lost decade” scenario.

Then, from 2000 to 2010, the S&P returned a negative 14% in total.

Meaning,

Those who were disciplined, saved a strict amount every month, and invested into index funds no matter the price…

Ended up losing ten years of their investment careers and personal financial freedom.

It’s no coincidence Buffett was once again calling for another lost decade the year before he chose to step down from Berkshire Hathaway.

I’m here to tell you one thing and one thing only:

Unless you can dedicate the next thirty years of your life to allow for your positions to provide you with decent returns…

Now is the time to act.

Today, 65% of the stock market is made up of expensive large caps in the AI space.

In 2000, these expensive large caps made up roughly 70% of the index.

And,

While I can walk you through the rest of the fundamental similarities to that era, there’s one thing you need to know…

Relative value investing returns tend to be negative when this concentration hits the market, and turns positive once breadth returns (gray area in the chart above.)

That creates both a problem and an opportunity for you.

Relying on investment advisors, money managers, or just buying the index will keep you outside of the areas that actually make money during decades like the one we are about to experience.

Long-only funds and advisors cannot put your money to work in these strategies, which is why 89% of them underperform the market.

Let’s briefly study those who outperform:

All of these legends have one thing in common.

They started their funds during 1985, 1977, 2007, 2007, respectively.

These were the time periods where the “gray area” of market compositions was the largest, where the chances of a “lost decade” were the lowest.

Coincidentally, they all closed their funds after posting 30-50% annualized returns after about a decade each.

This is what nobody tells you:

Wall Street and mainstream financial media want you to stay invested all the time and put money in all the time.

You become the guaranteed buyer and holder from which banks can collateralize and lend your shares or liquid cash out to other customers.

There’s a reason why Buffett is a household name, but Stanley Druckenmiller isn’t (even though Druckenmiller outperformed Buffett.)

It’s because the moment you become selective with your investments (stock pick) and time them…

You stop being the guaranteed liquidity the system needs.

Today,

We will go over what you can do as an individual investor, and what I’m personally planning to do, to not only survive in this coming “lost decade.”

But to thrive in it while everyone else is stuck with a flat equity curve.

And I’m not just picking and choosing themes here:

Let’s get into it,

Where alpha still lives.

Ask anyone who has been in the financial markets for over 20 years.

Almost every single person will tell you today’s market feels completely different, even “off” most of the time.

There’s an explanation for that:

The market is increasingly made up of expensive large cap companies, the ones over $100 billion in size and a constant P/E premium to what most of us have been told to pay.

Think about how long opportunities last when a company like Meta fell to a low P/E in 2022, or when Microsoft fell this year.

These “inefficiencies” are wiped out in days, not months.

At the same time, 90% of the U.S. population is investing less into the stock market, leaving the benefits of investing to the top 10% and 1% instead.

With larger amounts of capital to invest, these people delegate the selection and decisions to fund managers or advisors who directly invest in index funds or the same expensive large-caps.

In other words,

Unless you buy expensive large caps when they become inefficient, you have no chance at making a decent return on your money.

Where you often find the most inefficiencies is outside of the U.S. stock market.

Only 22% of the trading volume in the S&P 500 is represented by retail, which means 82% of the volume and action is determined by institutions and large funds.

They have hundreds of top-notch analysts, proprietary data, and the latest technology at their disposal.

You cannot compete with these people.

On the other end, you have markets like:

Where more than half of the trading volume is driven by retail traders.

Opportunities are endless in these areas, as the retail crowd drives excess volatility and inefficiencies for smarter operators to take advantage of.

I’m talking about long/short relative value strategies specifically.

This is where you can come in and say:

Imagine for a moment that you wanted to go short an expensive large company in the U.S. and how that would go for you.

Fundamentals, financials, and valuations go out the window entirely!

82% of market participants have nowhere else to go, so they just keep buying no matter what the price is.

This is exactly what creates lost decades.

It’s also why fundamental value investing has returned significantly less in the U.S. market compared to everywhere else.

We’re talking 0.16% returns for every 1% of risk you take versus 11% in retail-driven markets.

As long as you know how to value and analyze companies, you will almost surely outperform where retail is present to create inefficiencies.

In other words,

Unless you are willing to pay a significantly larger P/E for the biggest companies in the market, you are going to have a hard time making any money.

Before we continue…

Let me give you a lay of the land for the average investor:

This is the area where most of the alpha has been arbitraged away, the area that gives you 0.16% in returns for each 1% of risk.

Have you noticed our trades are usually long/short equity or option spreads?

It’s the only reasonable way to make a profit in that size range, otherwise we are fighting against thousands of funds that have wiped out all opportunities of buying great companies at reasonable prices.

For example:

Not because I like the company’s fundamentals or valuation, but because it was a macro signal the market was already overpaying for.

If I were to buy it because it was cheap or discounted, chances are there was a terrible reason unknown to us explaining why it was cheap in the first place.

If you are passionate about buying great companies at reasonable prices, without fearing the “it’s cheap for a reason” narrative.

Then international stocks are the way to go.

Data and performance don’t lie, and there’s a reason why more professional investors are choosing to invest in Asian or Latin American markets over U.S. markets now.

We’ll get to that later…

Meanwhile, you can click here for my country selection process leading me to China.

Unless you are willing to sit for years and wait for large-caps to come to a discount window of 1-2 weeks, which leaves you no time to research or build a valuation for them…

And,

You don’t have the time - or expertise - to build relative value long/short portfolios.

Then you need to begin operating in the areas where retail traders still drive the most participation, and where institutions can’t put money to work due to regulatory or size limitations.

Based on Sharpe ratios, there are a few areas that still deliver a decent return inside the U.S. financial markets.

The most obvious area, besides buying the expensive large caps, is shifting your universe to companies smaller than $1.2 billion in size.

With 0.37% to 0.41% returns for every 1% of risk, micro-cap stocks are the one place to consider when implementing a value investing approach.

That means:

The best part?

Institutions are not allowed to operate in this size range, since buying less than a $1 billion stake when you manage more than $50 billion simply doesn’t make any sense.

Therefore, Wall Street analysts tend to overlook their coverage in them, leaving retail traders and research services like this one to find and review these opportunities.

Before we keep going, I’m hosting a free live webinar next month on exactly this topic.

I’ll go much deeper into:

• Why traditional stock-picking edges stopped working in the most crowded parts of the U.S. market
• Why the ~$1.2 billion market-cap threshold matters
• How I use PMI and industry data to find opportunities before they become obvious
• Where international markets still offer measurable inefficiencies
• How I screen small and micro-cap companies
• And the specific framework I’m using to build the next generation of the Offside portfolio

The newsletter can only take us so far.

In the webinar, I’ll walk through the research, charts, case studies, and questions live.

It’s completely free.

But,

Size alone is not the edge:

The ideal situation is not just buying small companies.

Small and micro-cap ETFs have significantly underperformed for decades.

Where you want to find yourself is buying small companies that eventually turn into large businesses.

Fundamentally, here’s where your risk/reward comes from:

By picking high-quality value companies in the micro-cap space, you increase the odds of finding the next $100 billion company, allowing yourself to buy and hold in the old DCA approach.

Especially important during this lost decade scenario.

Valuation spreads tend to lead to inefficiency opportunities.

Let’s explain them at each size band:

I personally do not feel comfortable with buying and holding expensive companies just because they are the largest in the market.

My skillsets are better placed in the mid-caps space where macro signals tend to offer lots of short-term opportunities.

But,

For true wealth building…

I will personally go into the buy and hold micro-cap space where thousands of great businesses trade at inefficient prices, prices where you and me can find greatness.

Just look at Vital Farms:

The result?

A 15-18% return in just a week since buying it.

Information alone won’t get you to find companies like this one and the hundreds of others we’ll find over the next decade.

You have today’s information, but realistically, you don’t have the time to dig through thousands of available companies to research and invest into.

Your two choices now become:

Or

Because the market is increasingly becoming a game of us versus them.

At Goldman Sachs, I was a part of “them.”

Now that I have to eat what I kill, there is no room for making excuses.

If all you had was ten years and your starting capital to make a significant impact on your future, then doing what used to work is not going to cut it.

That’s what I’m here for today.

Most people will spend over $50,000 this decade on:

Only to underperform a lost decade.

If I were to give you all of this, plus where alpha can still be found…

$50,000 would be fair.

$25,000 would be a steal.

$5,000 would be ridiculous!

And I’m not even going to charge you that.

I’m giving it away for $540/year inside Offside Premium.

Click here to join.

What you decide to do today will determine the next ten years of your life.
You can join me, or wait to see what actually happened.

For those who are already in premium…

Stay tuned,

This week will be packed with follow up deep dives and more research on this topic.

G.

Meanwhile, here is the latest from Jordi Visser (the AI retail voice) covering the latest developments in the AI trade.

It’s not enough to cover the neutral side of things with actual data and fundamentals, you also have to check on what the bulls are saying and what they are leaning on.

Currently, most of his talking points have lost strength already, so it’s interesting to see what the next narrative shift will be:

Until next time,

OFFSIDE RESEARCH

Against the Tape, Ahead of the Curve.