Which Is Better: Fintech or Old-Fashioned Financials? Also, NFTs, Illiquid Stocks, Sleeping at Night....

This originally appeared on Empire Financial Research.

I can remember it so clearly…

It was 1997, and I was working at my desk at the?San Francisco Chronicle, where I wrote a daily business column. We were in the thick of the market melt-up when the only thing everybody wanted to talk about was the latest hot-tech initial public offering ("IPO"). (Sound familiar?)

And then... shortly after the market closed a headline crossed the tape (as they used to call it, kids): "Berkshire Hathaway to Buy Dairy Queen."

It was one of those moments... I just blurted the headline out loud and started laughing – the move was?so?out of sync with every other deal being done.

If nothing else, it was a dose of reality in a market that felt so overheated. As I?wrote?at the time...

Warren Buffett once again thumbed his nose at Wall Street's fads yesterday when Berkshire Hathaway agreed to acquire Minneapolis-based International Dairy Queen, of all companies, in a deal valued at $585 million.

With its ice milk outlets scattered in the smallest of small towns, the image of dowdy Dairy Queen was a throwback to the old days of investing, when investors paid attention to fundamentals.

Sometimes just because something has been around a long time doesn't mean it isn't as good as, or maybe even better, than whatever newer and flashier has come along.

An example of that might be a comparison of recent holdings in the ARK Fintech Innovation ETF (ARKF) versus the Financial Select Sector SPDR ETF (XLF). They're both finance-centric...Dig deeper, and that's where the similarities end... and the differences were laid out in?this blog post?by Kailash Concepts and a?related white paper?on choosing between growth and income. Kailash is a market data research firm. If the name sounds familiar, I've used their charts in several recent essays after having stumbled on one on Twitter. (Funny how that works!)

This idea resonated because it strikes one of my favorite themes... that sometimes it pays to stick with the basics.

In general, I think fintech is great, especially over the long-term. I also don't believe anything is an either/or. Unless you're in an index, it's often a stock-by-stock selection.

But that's the point, and if you're in an index… which index?

As Kailash wrote in their white paper…

Enamored with the novel investments promising exponential returns, investors are ignoring Financials despite their healthy balance sheets and record profits.

As the chart below shows, despite record profits and strong liquidity, investors have shunned financials.

Kailash suspects one reason is that "ETFs like ARKF have sucked capital away from safe profit centers."

And that's even as financials pay investors for their patience, with the XLF yielding a little less than 2%, or roughly 5%, including buybacks. A list of 10 financials cobbled together by Kailash yields even higher. That compares with negative 2% for the ARKF, which takes a 2% hit from equity dilution. Put it another way: Existing ARKF holders are?paying?2% to subsidize the fund's holdings.

As Kailash explains...

"The dilution of the underlying holdings is a significant issue for investors. The number we reported is the value-weighted total net of:

"Dividends + stock repurchases – stock issuance = Total Yield. That is a common measure of 'are the companies you own paying you or charging you to own them.'"

"In the case of XLF, owners get a nearly 2% cash dividend yield they can spend or reinvest. In addition, their proportional share of the companies' earnings is rising due to repurchases equal to 2.8% of shares outstanding over the prior year.

"By contrast, the stocks held by ARKF are net?issuers?of stock. Your stake in those businesses is in constant decline as they issue stock to fund operations. Specifically, your ownership in the underlying businesses declined by negative 2% over the trailing 12 months."

However, the real story is in the sheer performance of both ETFs, not just recently, but over the past year.

As this chart shows, the ARKF was a post-covid bull market baby... outperforming the XLF through last year's meme mania, when ARK's Cathie Wood gained celebrity stock-picker fame, and anything?not?fintech was this era's Dairy Queen.

When?that?ended, so did ARKF's run. Since then, the spread has widened... considerably.

But that's mostly because ARKF – steeped in companies with high (albeit falling) market capitalizations and negligible profits and outright losses – has collapsed.

Meanwhile, companies in the XLF have healthy dividend yields and what Kailash views as "the strongest balance sheet in decades."

They may not be exciting – Dairy Queen certainly wasn't – but Kailash also believes financials "still represent some of the best opportunities in the market."

In a market that had become downright irrational, it's hard to argue with that kind of rationale.

Moving On...?Random Thoughts and links

Repeating what I said on Twitter the other day…

Also...

• Easy to say in retrospect, but my?essay headlined, "When Valuations Start to Matter..."was surprisingly well-timed. Dumb luck at its finest. (Now, watch, stocks will soar!)
• Good?piece?by my friend Aaron Edelheit on the psychology of investing in illiquid stocks. Key point…

You have to know and understand that illiquid stocks can and often do move completely independently of fundamentals. Are you prepared for a 30-50% downdraft in your investment, and how would you realistically react??If you would panic or could not handle such a sell-off, you should not be buying these stocks to begin with.

So much easier to say in principle – when they're rising – than practice (when they fall.)

• Speaking of discipline, it's hard not to admire what value investor (and friend) Vitaly Katsenelson says in?this essay about avoiding the fads...

We spend very little time thinking about straws or what will cause the music to stop, or how overvalued the market is. We are focusing all our energy on patiently building a portfolio of high-quality, cash-generative, significantly undervalued businesses that have pricing power.

This has admittedly been less rewarding than taking risky bets on unimaginably expensive assets.?It may lack the excitement of sinking money into the darlings you see in the news every day, but we hope that our stocks will look like rare gems when the euphoria condenses into despair. As we keep repeating in every letter, the market is insanely overvalued. Our portfolio is anything but – we don't own "the market."

?????????Or, as I refer to it, the "I can sleep at night" approach to investing.

As always, feel free to reach out via e-mail at [email protected]. And if you're on Twitter, feel free to follow me there at?@herbgreenberg. My DMs are open. I look forward to hearing from you.