No, I wasn’t chasing an IPO allocation, nor am I considering buying the stock any time soon.

Does that make me a bear on the company?

Absolutely not!

I’m also not chasing the AI infrastructure plays. Not chip stocks, or memory players, or data center buildout guys.

Does that make me bearish on AI?

No way!

In fact, quite the opposite. It’s because I’m bullish on the technology that I feel like the companies are a bad deal at their current prices.

Let me explain.

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Disclaimer: I’m no technology expert. These are just the ramblings of a generalist, and might be way off base.

The story of progress

Let’s go back to the dawn of modern computing, and compare it to where we are today. I asked my trusty AI chatbot to help me model the amount of physical space and power consumption necessary to match the power of the current iPhone 17 Pro.

In 1970, it would have taken about 69,000 CDC Supercomputers, consuming 6.6 gigawatts of energy. The space required to hold this equipment? About 156 acres.

Fast forward to 1980, and we can now use 15,500 Cray-1 Supercomputers. Energy use and real estate have both fallen dramatically, down to 1.8 gigawatts and 25 acres, respectively.

Now we are in 1990, and Moore’s Law continues to work its magic. Your iPhone is now equivalent to 930 Cray Y-MP8s, consuming a modest 112 megawatts and requiring only 1 acre of computer cabinets. The kind of thing that can fit inside a large well-funded research facility.

Improvement in the 1990s was dramatic, and by 2000 the IBM ASCI White was the world’s fastest supercomputer, about 4x as powerful as your iPhone.

By 2010, a high end PC with 2 Nvidia graphics cards was now able to match the slim thing you now carry with you everywhere in your jeans pocket.

Where are we now?

What’s the point of this history lesson?

If we see even a fraction of this type of progress in AI compute, some of today’s infrastructure may prove far less valuable than investors currently assume. And if we won’t need these data centers here on Earth, we almost certainly won’t need them in freaking space.

The buildout is happening because technology is moving fast, and because the companies investing in it are afraid of being left behind over the next few years. They really have no choice but to participate in this high-stakes prisoners’ dilemma. But the end result of this gold rush is almost certainly a vast overinvestment in chips and infrastructure that will likely go unused, or need to be repurposed. Consequently, the dream of data centers in space may be much further away than the current enthusiasm implies… if we see it at all.

An investment in these companies at today’s prices requires us to believe that demand growth will outrun hardware improvement, software efficiency, and the fruits of competition. It is, in my opinion, a bearish view on technological progress and human ingenuity.

Progress isn’t anywhere close to being done. The next Elon Musk is waiting in the wings, and he or she will drive innovations that make a data center the size of “a significant part of the footprint of Manhattan” look like a huge waste of capital.

The current AI infrastructure buildout is rational, and will form the basis for lower cost compute and the increased demand we will certainly see in the future. But that doesn’t mean it will be a good investment for the companies making it. It’s the difficulty of making this call that leads me to avoid making any big bets on the future we all see coming.

The other side of this argument is that as prices decline, demand will surge. And indeed it will. We are still only in the very early stages of witnessing the impact of AI on our lives. But before you simply extrapolate recent growth into the future, consider what happened in the 1990’s telecom boom.

What does history tell us?

The 1990s analogue is the growth in bandwidth use.

Every bullish prediction back then was correct. In fact, the growth in bandwidth use was probably underestimated.

From 2000 to 2025, global internet traffic grew from roughly 0.9 exabytes/year to about 8,800 exabytes/year. That is roughly 9,000x to 10,000x growth, equivalent to an annual growth rate of 44% per year for 25 years.

Today, we stream almost everything we watch over the internet, often in 4K video. We hold videoconferences with hundreds of simultaneous video participants. We stream video games with almost zero latency. All while endlessly scrolling on our handheld devices.

We have seen insane bandwidth demand growth, and yet even with that growth, many of the telecom infrastructure providers who literally laid the groundwork for the internet of today disappeared, or took decades to recover the former highs. The vision was realized, but they were not good investments. And it is with that hindsight that I am happy to bow out of participating in the current mania. Those who choose to do so should be aware of the history.

If you weren’t paying attention back then, take a look at this Wired magazine article from 2004: Bandwidth Glut Lives On.

"The bandwidth supplied from the late 1990s to about 2001 or so grew exponentially," he said. "Only a small fraction of it was lit, but it was still far, far more than the market would absorb.

There’s no reason to believe that the story will be different this time around. AI may change the world. SpaceX may remain one of the most remarkable companies ever built. Data centers may become essential infrastructure for the next decade. All of that can be true, and today’s prices can still be wrong.

Jockeying for position in a rapidly changing market can create massive winners, and massive losers. Sometimes they can even be the same company.

Bottom line: A great investment requires a great price, not just a great story.

“If something cannot go on forever, it will stop.”

Herb Stein

Remember the guy who told you to never sell your Bitcoin? The guy who said you should lever up and sell everything you own to buy more Bitcoin? To mortgage your house and buy Bitcoin?

Remember that guy?

(The fact that the “Family Office Association,” of which I know nothing, created a platform for this nonsense is a topic for another post, although the deadpan expression of the dude on the left speaks volumes.)

Anyway, that guy has started to sell some Bitcoin, because the bills are coming due, and they are payable in USD.

The stock reaction is predictable.

And because there’s a good case to be made that his company has been the source of most of the marginal demand for Bitcoin, the price of the asset itself has also fallen below $60k for the first time since before the “crypto president” was elected.

How we got here

I have friends and clients who have made a lot of money in the crypto space over the past 10 years. And yet I remained steadfast about the fact that I had no interest in participating. In fact, I take pride in missing out. And while there are those moments when I have had the opportunity to say I told you so, this whole silly charade has gone on far longer than I ever expected it to.

Charlatans like Michael Saylor and Tom Lee jumped on to make a quick buck in their Bitcoin and Ethereum “treasury companies,” following the dictum of George Soros who famously said that “when I see a bubble, I rush in.” Lee, to his shame, leveraged his CNBC audience to copy Saylor’s dead-end Bitcoin treasury “strategy” in Ethereum, and erased the majority of the credibility he had built throughout the recent bull market.

As I write this, Saylor and Lee are sitting on combined losses exceeding $20 billion dollars.

This was always a likely outcome, based on the mismatch of assets to liabilities (crypto versus the “fiat currency” that these leveraged plays need to repay). Even if Bitcoin rockets “to the moon,” path dependency matters, and large leveraged players can be the cause of their own negative feedback loop. This is Finance 101, and shame on the huge number of financial analysts and reporters who legitimized this idiocy.

All that to say, that it was as clear as day that the business model for these companies (and others like them) had an expiry date. We are now seeing the very beginnings of this unraveling.

Because if something cannot go on forever, it will stop.

Time to buy?

You wouldn’t think it by what I’ve written here, but I actually have a lot in common with the Bitcoin crew. I agree with all of their views on the weaknesses of traditional fiat currencies. I appreciate the idea of a “hard” currency that can’t be debased by the perpetual political desire to buy votes with money that doesn’t exist. I really do get it!

The problem is that crypto has become nothing more than a giant casino, and the difficulty of assigning any kind of fundamental value to a Bitcoin makes it a no-go for me. Unlike so many Bitcoin skeptics, I do believe that it has a value… the problem is that it might be orders of magnitude lower than today’s price. One just has to wait for the speculative excess to get wrung out of the price, and this process could take a very long time.

A friend asked me several years ago, “what would it take you to buy Bitcoin?”

What I told him left him incredulous: “I’ll buy after Saylor’s forced liquidation.”

There’s a lot of Bitcoin to be sold between now and then.

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SpaceX S&P 500 update

Last week I wrote about the S&P index committee changing their inclusion rules to allow for “fast entry” of all the hot new massive IPOs coming this year. Well, on Thursday they decided against the move, and index investors will have to wait at least 12 months in order to get a piece of that hot SpaceX action.

I’m not commenting on whether or not this is the right decision, but rather using this as another data point on my claim that there is no such thing as passive investing.

An investment in the S&P 500 is essentially outsourcing your investment decisions to a nameless, faceless committee who does not know you, or your risk tolerance, or your investment objectives.

There are better options out there for most wealthy investors.

Would you like your socialism woke, or non-woke?

Okay, so the Republican president has suggested, once again, that the government wants to own pieces of successful companies so that “American people can benefit.”

Specifically, he’s talking about claiming stakes in Anthropic and OpenAI, coming on the heels of the government’s 9.9% stake in Intel.

Republicans are supposed to be fiscally conservative, right? Like free market, small government types? What on earth is going on?

The government already has a huge stake in every company under their thumb. It’s called income taxes, and it’s a pretty effective way to skim profits without having to lift a finger. There is no need to take additional equity in the companies from which it already extracts its share of profits.

Will the AI companies prove to be a special case, or will this set a dangerous precedent? It’s not a huge leap from here to more public “investment” in other important industries, like energy or defence. We’ve already got socialists in the US and Canada calling for government operated grocery stores. It’s a dangerous, slippery slope, as government influence reaches into more and more aspects of our daily lives. It’s not a surprise that opportunistic politicans are using this as a way to buy votes, but it is surprising how economically illiterate the vast majority of the population seems to be, on both sides of the political spectrum.

As Thomas Sowell wrote in Basic Economics,

While capitalism has a visible cost—profit—that does not exist under socialism, socialism has an invisible cost—inefficiency—that gets weeded out by losses and bankruptcy under capitalism. The fact that most goods are more widely affordable in a capitalist economy implies that profit is less costly than inefficiency. Put differently, profit is a price paid for efficiency.

I’m a bit afraid of where this is all headed. If this trend continues, equities may not continue to be the amazing investments they have been in the past. It’s definitely a trend to pay attention to.

Shuffle

There is an ever-present temptation to buy shares in the most exciting, fastest-growing companies. Today, that’s the artificial intelligence space. These companies attract all the attention, and suck all the air out of the room. There’s a case to be made that they are single-handedly responsible for keeping us in a bull market. But there’s a danger in crowding into these seemingly indestructible names.

Many novice investors assume that the only way to grow your portfolio is to buy shares in companies that are growing at high rates. The evidence, surprisingly, shows the opposite.

In the December 2019 Journal of Finance paper “Diagnostic Expectations and Stock Returns,” researchers confirmed a 1996 analysis showing that “returns on portfolios of stocks with the most optimistic analyst long term earnings growth forecasts are substantially lower than those for stocks with the most pessimistic forecasts.”

Huh?

You’re telling me that the companies expected to grow earnings the most performed worse than companies with the most pessimistic earnings forecasts?

That’s exactly what I’m telling you.

The paper is a dense one, with over fifty pages full of formulas and charts, but it is summarized neatly in the following chart, which is based on analyst estimates and market data collected by the researchers between 1981 and 2015. The universe of stocks is segregated into deciles, with the lowest projected earnings growth rates on the left, and the highest on the right. The subsequent return is reflected in the bar length. Reliably, over time, the stocks that analysts believe will exhibit the strongest growth actually perform far worse than the stocks that have the lowest growth projections.

To the non-professional investor, this makes no sense. You might be asking: “Isn’t the whole idea of investing to grow your capital by identifying the fastest-growing companies?” You might think that searching for the next Google is the ideal way to build your portfolio, but as the researchers demonstrated, it’s not.

Why is this? Well, a big reason is that higher-growth companies are more expensive than lower-growth companies. This is because investors are anticipating this growth, and therefore bidding up the prices of these companies. And so for an investor to earn a premium return on their money, the company needs to not only grow fast, but to grow at a faster rate than the market expects.

And here’s where things get difficult. The vast majority of high-growth companies do not maintain their growth rates. Portfolio manager Steven Romick highlights this by analyzing data between 1979 and 2020. He takes the top 1,000 US companies with over 10 percent earnings growth, and looks at how many of them were able to maintain this growth over subsequent years. Only 353 of those companies maintained a 10 percent growth rate in the subsequent year. After three years, only seventy-four of the original 1,000 were left. And after five years, only twenty-one remained. And because most basic stock analysis seems to be nothing more than extrapolating recent growth into the future, most growth companies will disappoint.

Chasing individual growth names is hard, but just as difficult is the temptation to chase fads. The idea is the same—identify an area of promising growth, and make some big bets on it.

The thing is, investors don’t call them fads. They are “theme investing strategies,” “new paradigm” companies, or “new economy” stocks. They are the companies of the future operating in the industries of the future, and anyone casting a skeptical eye on them is behind the times.

And unfortunately, as the exchange-traded fund (ETF) and indexing industry has thrived, more and more products are created that are intended to capitalize on these fads. Just because a fund company creates an ETF for a new hot investment area, it doesn’t serve as validation of that idea. It’s just a symptom of a business that will package and sell anything that people will buy.

In a 2021 research paper, Ben-David, Franzoni, Kim, and Moussawi track the performance of “specialized ETFs that track niche portfolios and charge high fees,” concluding that “these products perform poorly as the hype around them vanishes, delivering negative risk-adjusted returns.” Quantifying their analysis, they show that “specialized ETFs persistently generate negative alphas of about minus 3.1 percent per year.”

Recall that “alpha” means investment outperformance versus your benchmark. So, yup, that means that these strategies, on average, underperform the broader market by over 3 percent per year. That’s huge.

Before leaving this topic, I thought it would be fun to revisit some of the larger investor manias in recent history. You may have read about the tulip bubble of 1637, the South Sea bubble of 1720, and the 1840 frenzy around investing in railway stocks, but recent history suggests that a knowledge of history and a supercomputer in your pocket may not help you avoid the follies of the past—in fact, there’s an argument that social media has thrown accelerant on the fire of bubble creation.

Here is a partial list of some recent speculative frenzies and the approximate years of each. Be honest. How many of these did you take part in?

• Nifty Fifty stocks (1967–1972)

• Japanese real estate (1980s)

• Tech/telecom (1996–2000)

• Oil (2008)

• Housing (2008)

• Rare earth metals (2010)

• Fracking (2011)

• Biotech (2012–2015)

• 3D printing (2014)

• Marijuana (2018–2019)

• Crypto/NFTs (2021)

There will always be a hot new investment fad. A new paradigm. And those of us who cast a skeptical eye will be seen as hopelessly behind the times. But even when the predictions are correct, there’s no guarantee that investors will make money.

Chasing growth is hard, and you should try to resist the urge to do so.

Because there is a much better way.

Want to know more?

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The cynical view is that we are all salespeople.

It’s a spectrum, and I hope your own advisory team tilts more towards the former than the latter. But ultimately, the truth is that this business is all about selling. We don’t sell tangible things. We sell dreams of getting rich. Some might say, we monetize greed.

And the Grand Prix of firing up the animal instincts is a big, fat, monster IPO.

SpaceX is it, baby. It’s got everything: Elon, rockets, and AI. I’m not sure you could come up with a more buzzy new issue in a lab if you tried.

The company’s own filing describes its mission as “to build the systems and technologies necessary to make life multiplanetary, to understand the true nature of the universe, and to extend the light of consciousness to the stars.”

Those are what the consultants call “stretch goals.”

And here I am, investing in companies that make chocolate bars and potato chips.

Going along for the ride

You wouldn’t think it would need any help, but the index providers are scrambling to get some of that sweet, sweet SpaceX exposure.

The Nasdaq 100 is futzing around with it’s “fast entry” rules to be the first to include the company’s shares in the benchmark. This will cut the mandatory post-IPO waiting period from three months down to just 15 days. Not to be outdone, the S&P index committee has talked about cutting it’s traditional year-long waiting period in half. Can’t have the fast money investors chasing the other guy’s index!

Essentially, this means that index managers will be forced to buy shares in the company, valuation be damned.

For a stock being issued with a very low public float, this can greatly enhance the post-IPO pump, as pre-IPO investors will be loathe to take their profits too early, lest they miss the index-inclusion bump. The combination of hype, a very low float, a lack of sellers, and an imminent index inclusion mean that the valuation on SpaceX has the potential to quickly get very, very silly. (I mean, more silly than it already is.)

To be clear, the timing isn’t a coincidence, and it’s speculated that this was probably a move by Nasdaq to win the SpaceX listing over the NYSE.

And hey, that’s actually fine with me. I’m cool with letting them operate in the way they best see fit. But if you’re an index investor, you need to understand what this means. I wrote about this back in December of 2020, in a post titled The S&P 500 Index Committee Doesn’t Care About You (incidentally, about the index inclusion of Tesla, another Musk company).

As I wrote in that piece:

I think it’s important to point out to investors who believe they can hang their hat on a passive strategy… there is no such thing. Instead, what you are doing is delegating your stock selection to a committee.

They’re not making a judgment call on the quality of a company, the strength of a balance sheet, or the stability of a business.

They are making zero effort to determine if the company they’re adding to the benchmark is a quality business, or if the price being paid is reasonable.

Why would you hire them to decide where your money goes?

They don’t care about you. But you can’t blame them. It’s not their job.

But this isn’t just about passive investors.

Because active managers are often benchmarked against those same passive indices, they can have no choice but to play the same game.

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Back to SpaceX.

From The Information:

(Active) Fund managers fret that if they sit out the SpaceX offering and the shares soar, their performance will look dismal. If they buy in and the shares fall, they’ll have safety in numbers because they’ll look like everyone else. That’s particularly true for long-only institutional investors who manage money against benchmarks, said Karen Snow, former head of listings at Nasdaq, who now runs Rose & Co. Capital, a capital markets advisory firm.

“At the end of the day, institutional investors are rational. They get paid to be rational. Do they have to participate? Yes,” said Snow. “If you don’t participate, the risk is way higher.”

Musk and his bankers are well aware of the buying pressure they’re putting on fund managers. They’ve got something like $75 billion worth of stock to sell. And if Musk’s army of small investor followers know big buyers are waiting to pounce, they’re likely to bid up SpaceX’s share price in the first days of trading.

This will be a big story as the year progresses, and don’t forget that we are also expecting IPOs from Anthropic and OpenAI in the coming months. Both stand to “benefit” from the change in the Nasdaq and S&P index inclusion rules.

Everyone thinks they can play the bubble game and get out just before it pops. Some people will succeed. Most won’t. If you decide to play the game, make sure you know when to take profits and walk away. As the old saying goes, if you don’t know who the sucker is at the table, it’s you.

A consequence of this is that we see the world through red or blue tinted glasses, and have largely become completely incapable of adjusting to the brightness of unfiltered light (otherwise known as the truth).

The future reveals the truth

In investing, “truth” is only known in hindsight. Yes, the stock market was expensive in 1996 (the year Alan Greenspan famously accused equity investors of “irrational exuberance”). It remained expensive in 1997 while huge IPOs like Amazon and Netflix held investors enthralled by the promise of instant riches. The first big test for the bubble was the LTCM hedge fund blowup in ‘98, but that proved to be just a temporary blip. The year was 1999 when Warren Buffett wrote a Fortune magazine article arguing that investors were expecting far too much from stocks. And yet, the market marched on. The only “truth” is what the market is doing this very moment.

It was only in March of 2000 that things finally started to collapse under their own weight. There was no specific trigger, only an increasing awareness that prices were too high, that began to spread like wildfire. Barron’s took it mainstream with an article highlighting the number of high-flying stocks dangerously close to burning through their cash balances in the next 12 months.

Where are we now?

We don’t know when the current market rally will end. It doesn’t have to be any particular piece of news or events; rather, it can just happen as the weight of high expectations increases with every new high. The flood of huge upcoming IPOs could be just the trigger that sucks up enough capital to leave the rest of the market’s high flyers vulnerable to an air pocket.

In the meantime, when I’m looking for clarity, I try to simplify things as much as possible. I’m not a chartist, but I do like to see what the charts are saying from time to time as a reflection of the underlying market psychology. Helpfully, relying on the price movement allows you to tune out the day to day barrage of news headlines driven by the whims of the President’s Twitter-fingers.

One of my favourite indicators is to compare the percentage of stocks trading below their 200 day moving average to the broader market. I like this because if you were paying attention to it back in 2007, it very clearly telegraphed the underlying weakness in the market (and the economy) that would lead to the “great recession” of ‘08-09.

As illustrated in the following chart (the S&P 500 through ‘06-’07 is the top panel, and the percentage above the 200 day moving average in the bottom panel).

Crazy how you can see the pattern of a market trying to push through the highs 3x in late 2007, while the percentage of stocks below the 200 day moving average collapsed.

This, of course, was the precursor to a violent market crash.

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Now if you listen to the hysteria today about the narrow market leadership, you’d probably think we are headed down that same road.

Are we? It’s a good news/bad news story.

Clearly, it doesn’t look nearly as bad as the pre-’08 crash setup. But this is undoubtedly a market that is seeing declining participation. The number of stocks above the 200 DMA is clearly trending down while the market average continues to rise. It’s not a red light, but it’s certainly at risk of turning yellow, and it wouldn’t take much of a selloff to drive that lower line down to the same levels it was at in late 2007.

Shuffle

Another good way to seek clarity is to take some time to ponder with a pipe. I really do recommend it.

The more experience I accumulate, the more I think investment success is less about discovering secrets and more about obeying simple truths. Most of the big mistakes come when fear, envy, boredom, or ego convince you that this time is different.

Here’s the quick list, which I think covers a lot of the main philosophical points I’d communicate to the younger me (other than “buy Nvidia and Bitcoin and HODL”).

1. Don’t try to time the market. You can’t. Stay fully invested. Even through crashes.

I think it was Paul Samuelson who joked “economists have predicted nine of the last five recessions.” I think he is actually being charitable here. There is always an economist predicting a recession. There is always something to worry about. Economic collapse has been imminent at least since my childhood in the 1970s (this fear led to the speculative peak in gold in 1980). Sometimes you’ll even convince yourself it’s true. You might be right. But you’re probably wrong. Betting on the end of the world is a low probability strategy.

I have a history of outsmarting myself through needless worry. If I owned a quality asset, I almost always came to regret the sale. I don’t recall ever buying back at lower prices, as I had planned.

These days I’ll likely continue to hold onto all of my investments, even if I’m almost certain that a recession is on the way (kinda how I feel right now!) Because trying to time the market based on economic predictions is a losing game. 

2. Don’t be afraid to pay up for quality.

We value investors don’t like paying too much for a stock, and too often that means we shy away from the best businesses. There is, of course, a reasonable limit to how much one should pay, but some businesses are actually worth it. 

At what rate of return is management able to reinvest profits? How will this growth compound over time? 

A value investor doesn’t have to be a full-time dumpster diver. For the right business, paying a high price can be the intelligent thing to do. The trick is figuring out which ones are worth the price.

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3. Stay away from turnaround situations. They are low probability bets that aren’t worth the headache.

Some businesses are cheap for a reason. Management will always promise that a turnaround is coming. Don’t be so quick to believe them. 

4. Trust good management to get through difficult situations. They’ll figure it out better than you can.

Between Covid, tariffs, wars, and dramatic commodity price swings, the past 5 years have been a wild time in the world economy.

Many a time, you may have been tempted to sell a strong company because of one of these many perceived threats. And a surprising number of times, you would have been wrong to do so.

The best corporate management teams are able not only to survive, but to thrive during these difficult periods. If you’re investing in a good business led by a strong and proven management team, give them the benefit of the doubt. 

5. Keep away from angel investments and very early stage companies. A few people can do very well in this area. You’re probably not one of them.

You may as well buy lottery tickets. It’s just not worth the headache when there are always better alternatives with higher probabilities of success. 

6. Don’t lower your standards. Ever.

One is always tempted to throw caution to the wind when a bull market is roaring and people are making money owning crappy companies. “I’ll just ride this shitco for a little while, and then sell to a greater fool in a few months.” Don’t do it. The music stops at unexpected times. And the absolute most frustrating outcome is that your stock disappoints while the market keeps roaring. Ask me how I know this. Just don’t do it!

7. Reinvest dividends.

Compounding works wonders over time. Stay invested and keep investing. 

8. Live below your means. Invest the difference.

I’m not a believer in the idea that re-using your coffee grounds is the key to financial independence. This point is really just about making the most of your resources.

I’ve seen people with modest salaries get amazingly rich over time. I’ve also seen people with huge incomes end up with no savings to speak of. Live with relative modesty and save as much as you can. Nobody is as impressed by your Rolex, Porsche, or Chanel bag as you think they are. 

9. Don’t be afraid of using leverage if everything above is on point.

This is a controversial point, and definitely needs to be put in context. I’m not suggesting you should borrow to buy a high risk investment. But there are times when borrowing costs are low and prospective returns are high, and when the conditions are perfect you shouldn’t be afraid to act. In the fall of 2020 I was able to lock in a borrowing rate under 2% and build a conservative portfolio yielding well over 6%. I’m not sure if we’ll ever see that again, but leverage used sparingly and intelligently can multiply your results. I would only apply this principle in conjunction with a conservative investment strategy as outlined in Low Risk Rules. 

10. Keep learning and adapting. The ground is always shifting under your feet.

The basic principles of intelligent investing are timeless, but how you apply them will change as the market and business environment evolves. As soon as you think you’ve got it figured out, this business will humble you. Continually question yourself and your assumptions. Be paranoid. Remain defensive. Never take anything for granted. 

As a young investment geek, as soon as I turned 18, I made an appointment with my bank and opened up a trading account, funded with savings from part-time work. My first stock purchase was a quick bust, but I consider it tuition well spent. Like a child touching a hot stove, it taught me well.

I had some big winners in my first few years of investing… stocks that doubled or tripled in short order. That emboldened me, and set me up for a life-changing investment.

Catching the wave

It was a compulsory Information Technology course in my sophomore year. One of the topics being covered was the potentially world-changing hardware being laid down on ocean floors across the globe: fiber optic cables. For some reason, it’s burned in my memory - I can recall the pictures in the textbook, bottom of the left-facing page - the stock photo of fiber optic cables lit up in the spectrum of colours, along with a photo of workers in a clean room assembling the amplification equipment.

I read the local newspaper each day, a habit I had since I was around 10 (I was an odd child). The younger version of me focused on sports and entertainment, but by this point I was lingering on the business section. And so it was that I familiarized myself with a small local company that had recently issued shares to the public for the first time.

JDS Fitel manufactured equipment that multiplied the capacity of fiber optic cables. Once a communications company invested to lay wires across ocean floors around the world, JDS equipment promised to exponentially multiply the capacity of those cables.

I saw this young company, with no debt, doubling revenue every year, had just gone public, and I could own a piece of it for around 30x earnings. It was expensive, but in my mind, not unreasonable given the expected growth. At the time I was reading Robert Hagstrom’s “The Warren Buffett Way,” and faithfully reproduced the valuation model that Hagstrom used to explain Buffett’s thought process - a very rough net present value calculation. JDS looked like a winner.

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Betting big, winning big

I put an irresponsibly large chunk of my portfolio into JDS. That moment of youthful exuberance somehow turned into one of the best financial decisions I have ever made. As the company grew and merged with San Jose based powerhouse Uniphase, it found itself in the middle of a communications revolution and a stock market bubble. And I rode it up, occasionally selling shares.

Each time I sold, I would come to regret it. The stock was riding an exponential curve. Even though I knew it wasn’t sustainable, it felt like selling was a dumb move. Maybe prudent in the long run, but dumb in the short run. From my purchase price to the peak, the stock was up over 60x.

As for the valuation spreadsheet I used to make the original purchase decision… fuhgeddaboudit! I was making too much money to worry about stuff like that. The stock’s price had long since divorced itself from any rational relationship to the company’s future earnings potential.

I took the gains harvested from JDS and invested them into various other companies. I thought I was clever because I was selling the stock of a company trading at 50x revenue and buying a company selling at 40x revenue. In retrospect, it was lunacy. But that’s what drives market bubbles.

Betting big, losing big

I was addicted to the rush of investing in a big winner. Eventually, I identified my next big target. The next JDS. It was a company called Global Crossing. A company that was building out a communications network around the world, and would be able to use technology to multiply the bandwidth available on its network. It was going to disrupt the old telcos, with their legacy analog phone lines. They were toast.

I put my own money in Global Crossing. I told friends and family to put money into it. After seeing how well I did in JDS, they were quick to follow me. And soon after, it began a long and painful descent.

“People don’t get it,” I reasoned, parroting the analysis I saw online. “These guys aren’t making money now, but they are investing in a network that will be a money machine in the future. They are going to destroy the incumbent networks.”

And while I bought more, on “sale,” the stock continued its steady decline.

Global Crossing was eventually a zero. Bankruptcy was inevitable, and obvious to anyone objectively looking at the financial statements. I had rolled a good amount of my JDS profits into this company and vaporized them.

As a final, poetic move, I requested the worthless Global Crossing stock certificate from my discount brokerage. I wanted it to serve as a reminder of what can happen when you don’t know what you’re doing. When you lose your discipline. When you get greedy.

I was charged $49 to have it processed and mailed out to me. I had the intention of framing it and hanging it on a wall, but never got around to it. I wanted to snap a picture of it for this article, but as a final insult, I can’t even find the damn thing.

And that's how I lost more than 100% of my investment in Global Crossing.

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Wealth advisers at banks and independent brokerages generated billions of dollars in fees by steering individual investors into private market funds, which many retail investors are now trying to flee.

“The advisers themselves are stuck in this incentive structure where their behaviour is going to be aligned with pushing clients into these products,” said Shang Chou, the co-founder of the multi-family office Dishmi Capital. “It’s not a surprise that this stuff has been over-allocated to the retail investor base.”

As scrutiny of private credit has intensified, some on Wall Street have pointed the blame at incentive structures that herded rich investors towards these products as contributing to the asset class’s rapid growth. “Of course they’re incentivised by these fees,” said Bob Elliott, the co-founder of Unlimited Funds, referring to advisers at big brokerages, also known as wire-houses. “Any person who has a wire-house adviser knows that they’re constantly being pushed products that are financially [beneficial] for either the adviser or the wire-house, or both.”

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I’ve received a ton of feedback since releasing Low Risk Rules, including from commissioned advisors who claim that I was a bit too rough on them. It could have been even worse! At the last minute, I deleted an entire section that discussed the pervasive sales culture in our industry. It’s not in the book’s print version, but reproduced below.

“Eat what you kill.”

I first heard this expression in my early 20s when I interviewed at a prestigious bank brokerage firm. I’m not going to mention which one, but they had the nicest statements with a really upscale font, and I was excited to be considered for a role there.

“I don’t care if you’re the next Warren Buffett,” I was told. “If you can’t bring clients in the door, you’re not going to succeed.”

It was disillusioning to hear this because at this early stage in my career I still had this idealistic vision that if you did good work, you would naturally be rewarded for it. As I spoke with people at different brokerage firms, it painted a picture of a culture I just didn’t feel comfortable with. It was a numbers game. “Rookies” would be expected to make a minimum number of calls and at the end of each week the new assets each brought in would be posted up on the wall for all to see. The idea was to stoke competition among the recruits. The reality is that most wouldn’t make it out of year one.

“Come back for a second interview,” I was told, “and bring back a list of 50 friends and family you’re going to approach about becoming clients.”

For obvious reasons, the idea of using my friends and family as a launching pad for a sales position left a foul taste in my mouth. I never returned.

Another firm gave me an aptitude test, which I quickly realized was all about sales skills. I tried to fill it out with the answers I thought they would want, but still never heard back. The test was probably structured well enough to filter out the people only pretending to be status-seeking extroverts because they want a job as a broker.

Look, there are good people who work at these places. They have come up through the culture with their integrity intact and do the best for their clients. I know they exist, because I know many of them personally. But when you build a culture of incentives around selling, you make it hard for these quality people to survive and thrive. And you subtly change them over time. I’d love to tell you that if I worked in such an environment for a couple of decades I’d be the same person I am today, but the reality is that I probably wouldn’t.

In pursuit of profitability and efficiency, the brokerages are constantly thinning the herd, dismissing the least profitable advisors and reallocating their clients to the ones at the top. And so it becomes a literal fight for your business… each and every day.

As Upton Sinclair famously said, “it is difficult to get a man to understand something when his salary depends upon his not understanding it.” It’s easy to convince yourself that what you’re doing is best for your clients when your job depends on it.

As a prospective client, you should understand that the incentives this industry has put in place for advisors have nothing to do with helping you succeed.

Shuffle

Back in the ‘90’s, way before Spotify was a thing, the internet opened up a whole world of music. There was Napster, of course, but also the opportunity to stream some of the best radio stations on the planet. A friend introduced me to Triple J, which quickly became my favourite listen.

It just so happens that thanks to being featured in Morningstar FirstLinks a few times, I have a disproportionate number of readers in Australia, the home of Triple J. It’s pure coincidence, but as this week’s “shuffle” was chosen, I noticed that it’s not the first time I’ve featured an Australian artist. I’ve already written a bit about Nick Cave here, and this week I’ll keep the love flowing to our Commonwealth cousins.

This is a bit of an obvious one. As far as Australian music legends go, everyone knows INXS, but how well do you know Welcome to Wherever You Are, their 8th studio album?

It’s overshadowed by their 80s hits, and in my opinion it’s criminally underrated. Listen to the whole thing.

Well done, good and faithful servant; thou hast been faithful over a few things, I will make thee ruler over many things: enter thou into the joy of thy lord.

— Matthew 25:23 (The Parable of the Talents)

In the Biblical Parable of the Talents, a master entrusts his servants with a certain number of “talents” before he embarks on a journey, each according to his ability.

The first receives five talents, the second is given two, and the last, just one.

The word talent in the parable was intended to connote a certain weight of silver, with each representing approximately 20 years worth of labour.

This is tremendous wealth, so you can imagine the level of fear and responsibility felt by each of the servants.

Upon the master’s return, the first two servants return to him double what they were originally given, receiving from him the blessing that opens this piece.

The third, however, was afraid of his master, and rather than risk the loss of that single talent, he buries it, and returns only what he had been given. The master becomes angry, and demands that the single talent be taken from that man and given to the first servant. “For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken away even that which he hath.”

One of the things I always found most striking was the inequality of the distribution of talents to the servants. No explanation was given for this.

But an important clue is given at the beginning of the story. If the talents were distributed to each “according to their abilities,” it tells us that to the extent that we have been blessed with gifts, be they material or immaterial - we are expected to work to multiply them - not to bury them for our own benefit.

Basically, it doesn’t matter what you have, or what you are given. What matters is what you do with it.

Each of us is granted a set of gifts, and has a lifetime to put them to productive use. And ultimately, whatever we have worked for doesn’t belong to us - it’s returned to our master.

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This parable resonates with me because my career has given me the opportunity to help other people with the stewardship of their own gifts.

Done well, this work can have a powerful multiplier effect. Over years and decades, it can leave families more secure, charities on firmer footing, and the community and world I live in a little better off.

I feel like I’ve only just begun this work, and hope to pass the torch when the day comes that I’m no longer able. It’s part of the reason I wrote Low Risk Rules, and the reason I continue to write here.

My belief is that our job here on Earth is to make the most of our “talents,” in service to others. Whether unique skills, financial wealth, or both… on the last day, we will be called to account for what we’ve done with the gifts we’ve been given.

Blessed Pascha to all who celebrate the feast.

BlackRock Slashed Private Loan Value From 100 to Zero

BlackRock Inc. slashed the value of a private loan to zero at the end of 2025, just three months after assessing it at 100 cents on the dollar, marking the second sudden wipeout to recently hit its private-credit division.

“While a small loan in a troubled niche, its abrupt markdown highlights what critics describe as a key fault line in private credit: the lag between valuations on illiquid loans and the deteriorating performance of the companies behind them. Zips Car Wash was valued near par by its private credit backers in the months before it sought bankruptcy protection. And in November, BlackRock TCP slashed the full value of loans it extended to Renovo Home Partners, a struggling home improvement company.”

I wrote an entire chapter in Low Risk Rules about how private funds hide volatility. It’s an idea I keep coming back to here as well, particularly because it has become so timely. The book came out 4 years ago when private funds were all the rage, but this outcome seemed inevitable, only because we’ve seen it before.

This isn’t a blanket criticism of private funds. Rather, it’s about how they are marketed as “uncorrelated” and “low volatility.” If you’re not marking something to market every day, of course it will be uncorrelated and low vol. But then stuff like this happens, and it serves as a wake up call. Unfortunately for too many investors and advisors, it’s too late.

The Music Has Stopped in Private Markets

Semi-liquid private market funds suffer many flaws, but the most egregious is that they violate one of finance’s oldest principles: never fund illiquid assets with redeemable claims unless a lender of last resort stands behind the structure. Private market managers have not only defied this principle, but they have also amplified the risk by selling these structures to individual investors, who historically are far more prone to run when conditions deteriorate.

What is interesting and often under-reported is that the supply chain does not operate in isolation. It is reinforced by a network of amplifiers that includes trade media, trade associations, and academia. These amplifiers often repeat the prevailing narrative that private markets provide superior returns and diversification benefits. When these messages are repeated across multiple trusted intermediaries, the overall system gains momentum and skepticism becomes increasingly rare.

The run on private markets will likely accelerate and spread. Many investors will be affected, and the process has only begun.

The Fake Cartier and the Fake Rockefeller

“If you think about it, the family office rules the world,” said Rachel. “They are our most generous benefactors — they’re the ones who support funding for biotech or robotics.” Family offices control an estimated $5.5 trillion of capital, ranking them with Wall Street’s biggest banks. But in the financial world, they’re often the butt of jokes. There are notable exceptions, yet overall, family offices have a reputation for being somewhat unsophisticated — a sort of dumber money. Many of them make investments based on the whims of one very rich dude or, worse, the whims of his children who have no business experience or financial acumen of their own.

A joke among family offices goes, “You have a family, you have an office, you have a family office.” In other words, there are few specific qualifications or regulatory requirements for setting one up, making them both a potentially easy target for cons as well as ripe for fakers. When I spoke with people in the industry, many wanted to warn me about a roster of unscrupulous characters they believed to be scamming family offices.

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Bartzen’s professional life, however, was blossoming. She started landing speaking gigs in front of high-net-worth audiences. In May, she spoke on a panel at a Family Office Club summit in New York, where she was touted as an “angel investor.” “She said she was an angel investor and not raising capital, and we had no reason not to believe her,” said Richard Wilson, president and founder of the Family Office Club. She told many people on the party circuit that she’d been the “mastermind” behind the launch of several blockbuster drugs on the market, including Botox and the Merck cancer drug Keytruda.

Infinite midwit

I get a market update newsletter every morning, and over the years I have noticed that it has been afflicted by the insidious creep of “AI speak.” It’s a “free” newsletter for clients of this particular firm, but what you don’t pay in money, you pay in time. And I always get annoyed when I find myself reading something that was obviously put togehter by AI. If you as a writer can’t be bothered to write the words, why do you expect your readers to spend their precious time reading it?

It’s cool that AI can fold proteins, create websites, fact-check journal articles, etc. but it can’t write anything that I am interested in reading. The problem isn’t that it hallucinates or makes mistakes. It’s that everything it writes vaguely sucks. I drag my eyes across the words and I feel nothing. That’s not quite right, actually—I feel like, “I would like this to be over as soon as possible.” When I see the ideas that the machines think are insightful, I wince.

The computer doesn’t know any of this. It can’t know any of this. It can only read the cookbook; it can’t taste the meal. Objective knowledge can make your sentences true, but it can’t make them alive. Without access to subjective knowledge, you quickly hit a wall. And unlike all previous walls that AI has surmounted, you can’t overcome this one by scaling—either in the literal or metaphorical sense—because it’s a wall with a width you cannot describe and a height you cannot see.

As Montaigne put it back in 1580, “though we could become learned by other men’s learning, a man can never be wise but by his own wisdom”. What does it look like to have all the learning ever created, but no wisdom of your own?

Shuffle

And now for something completely different… (for real!)

My hopeful view on the tariffs was that the administration would see the folly of their ways and backtrack, and in many instances that is exactly what has happened. While never admitting they were wrong, the act of walking back imposed taxes and announcing “deals” to appease the market indicated that they knew that a country can’t tax its way to prosperity (despite the president’s proclamations to the contrary).

The tariff story is ongoing, but it has been eclipsed by the start of yet another war in the Middle East. Here, the stakes are higher, and the potential range of outcomes extraordinarily wide. This is what we call risk.

The dream of quick “regime change” has revealed itself to be illusory, but this only forces the US and Israel to double down. My own view is that this ill-advised adventure was prompted by surprising success in Venezuela, which emboldened another, significantly larger, gamble in Iran. So far, it’s not going as planned.

When you can’t just “cut your losses”

We warn against this in finance. Every trader knows that hot streaks always end, and loosening your risk management is a recipe for disaster. They also know that it’s a cardinal sin to turn a “trade” into an “investment.” The trader, unwilling to take a short-term loss, talks himself into believing that holding for a while longer is a good idea (“I’ll sell when I get back to even”). These adventures almost always last longer than expected, and often don’t work out at all.

The problem is, it’s not always as simple as hitting the “sell” button. In the case of Iran, it’s possible that an irreversible mistake has been made by people who were far too overconfident, and now committed to continuing along a path that has potentially catastrophic consequences for the entire world. A good dose of humility might have prevented this potentially misguided adventure. From this point, none of the options are good ones, and all leave us arguably worse off than we were a month ago.

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Move fast and break things

Now the president is an entrepreneur at heart, of that there is no question. And a recurring theme in Low Risk Rules is the idea that entrepreneurs think about risk far more differently than the rest of us (and especially us financial analysts).

Whereas the job of the analyst is to try to consider every possible thing that can go wrong with an investment, an entrepreneur simply can’t think that way. They would be unable to act, paralyzed by fear and anxiety. They have to get things done regardless of the risks. That’s how Donald Trump got here. Yes, he’s racked up a lot of failures, but he certainly doesn’t dwell on them, and this is a key to the success of the entrepreneur.

The problem is that I believe that this personality trait is fundamentally flawed when it comes to making irreversible decisions like potentially setting off another world war. If the Iran war was a stock trade, and Trump an astute trader, the right move by now would have been to sell out, take your loss, and move on.

But it’s not, and he can’t.

As I wrote in Low Risk Rules: “The famous Facebook corporate motto ‘Move Fast and Break Things’ is a great philosophy if your goal is to foster innovation. But it is the antithesis to intelligent investing.”

I guess the same thing might apply to global diplomacy at the highest level, and with the highest stakes.

The weight of your decisions

On a much smaller scale than the president, the investment decisions I make are actually reversible (often at the cost of incurring a capital loss). But they still weigh heavy, because enough bad decisions have the potential to impact the ability of people to retire comfortably, or to reduce the amount bequeathed to heirs or charities. I spend a hell of a lot of time wondering which of my assumptions are wrong, and trying to adapt my world view to the facts I observe as they unfold.

I feel like that kind of introspection might have saved the world from the current situation: another quagmire that has already cost too much money and too many lives.

This isn’t about politics. This is about allowing your pride to lead you over the edge into the abyss. As I wrote last year:

All that we can really do is hope that the president’s instincts are correct.

I fear that they may not be.

But of course, I could be wrong.

I hope I am.

What to do?

Love this excerpt from Tony Deden (thank you for the pointer):

It is easy and almost unavoidable to become caught up in the headlines of the day. We witness a raging war in the Middle East, having the potential to reshape energy flows, trade routes, and even more ominously, geopolitical alignments. It seems that it could even get much worse. The headlines command our attention, financial markets respond in real time, and narratives shift by the hour. It is natural to see each development demanding immediate interpretation. Yet, we are not served well by constant reaction. Instead, we need the kind of clarity that begins by stepping back from the noise and focusing on what actually matters over time.

Governments and politicians lie. The press lies. Treating official narratives as solid ground, especially in war, is a mistake. In wartime, truth is obscured by design. Information is delayed, manipulated, framed for effect, stripped of context, and turned into propaganda. Each side presents its own story. Reporters recycle claims they cannot verify and analysts mistake access for insight. The videos that circulate on social media are often AI-manufactured. As a consequence, we are left trying to build certainty out of fragments, contradictions, and deliberate distortions. There is no denying of this reality.

In such an environment, one can spend endless energy sorting claims, disputing events, parsing official statements, and chasing “breaking news,” only to discover days or weeks later that the underlying picture was very different. In my view, the more important discipline is not reaction but inference. If truth in the moment is obscured, consequences are not. They unfold with a logic of their own. Ergo, the essential task is to think forward.

Shuffle

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Shuffle!

Don’t you just love the serendipity that sometimes appears when you just put your music library on shuffle and let it take you where it may. Sometimes it launches you jarringly from Arvo Pärt into System of a Down and you swear you will never hit that damn button again.

But sometimes it knows exactly what to play.

It’s a flight home after vacation, and as we begin the descent, the cabin lights turn off and the first notes of Funkadelic’s Maggot Brain fill my ears. The song was timed perfectly to absorb the atmosphere of the dark cabin, the city lights below, and the somber mood of returning to the real world after a week on the beach, ending the exact moment we rolled into the gate. Perfection.

Maybe you’re attempting to dismantle Iran’s nuclear capability, with a side order of regime change, and then they go and close the Straits of Hormuz. Oops! Who could have seen that coming?

Or maybe you’re just headed on vacation with a draft of next week’s letter on your hard drive, when on day one you open up the computer to find the keyboard and trackpad unresponsive, leaving your computer disabled and your draft stranded. Oops!

Anyway, you won’t be reading what I was hoping to post this week. Instead, here’s a clip of me on Bruce Sellery’s Moolala podcast talking about Low Risk Rules. Bruce and I share a publisher (Page Two, who I can only say great things about) and he was gracious enough to host me on his show.

No promises when I can return to regularly scheduled programming. Fingers crossed!

The first time I did so, in December of 2022, a large Canadian mortgage lender with a sterling reputation decided that they would suspend redemptions on a fund that was marketed to investors as a safe, high-yielding fixed income alternative. As I write this in early 2026, the fund still has not resumed business as usual.

The investment returns, once reliably in the high single digits, since turned negative.

Oops!

But this was just the first of many. There are others. I have a client who owns one of these failing private funds from their prior advisor. We are trying to help them sell this thing, to no avail. Last quarter the fund manager was able to redeem 0.07% of the requested units for sale. That’s not a typo. That’s seven one-hundredths of one percent.

In other words, the client is effectively trapped.

And then this week news hit that yet another private Canadian real estate investment fund would be freezing redemptions, and is considering going public to grant their unitholders liquidity. This seems to be to be a fascinating opportunity to see what kind of value the public markets are willing to place on non-traded assets. I’m not sure exactly how this story ends, but it could accelerate the rush out of private funds.

(In case you’re wondering, I’m purposely leaving out the names of these firms to avoid dealing with the inevitable blowback from advisors who have client money in these funds. Let’s just say, if you know, you know. And you probably wish you didn’t.)

Look, there’s a clear pattern emerging here, and it’s not limited to the Canadian real estate market. South of the border, things are not going too great either. Blue Owl Capital (Redefining alternatives®) can’t seem to get its name out of the news.

But don’t forget about BlackRock, which limited redemptions in a flagship private credit fund for the first time ever.

Or Blackstone, which reportedly had to inject $400 million of its own capital into a fund to meet redemption requests.

Or this private German pension fund for dentists that blew up €1.1 billion speculating in private assets (oops!)

Meanwhile, this week the FT published a piece explaining how two private equity firms are offering UBS Wealth Management a cut of their performance fees in exchange for pushing their private capital products to their client base, made up of some of the world’s wealthiest private client investors. This isn’t unique, and it tells you a lot about whose interests your high end “wealth manager” is serving when he or she loads your portfolio up with these funds. While the current investors are clamoring to get out, your “trusted advisor” is using your wealth to provide exit liquidity.

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Tone deaf marketing (aka making stuff up and hoping they don’t notice)

And while these private funds increasingly show signs of cracking and buckling under a complete lack of liquidity, the salespeople do their best to keep the cash pouring in from new investors. Coincidentally, this week I happened to come across this slide from a Canadian institutional money manager’s marketing deck, outlining their expected returns under various economic scenarios.

I’m at a bit of a loss for words here, but here is one that comes to mind: bullshit.

The manager expects that in a stagflationary or recessionary economy, public market equities will get crushed. But private equity, and “non-traditional” income (private debt) will somehow, magically, do just fine.

Now, I just gave you examples of private debt funds around the world imploding, all while global stock markets are clinging near all-time highs. If the stock market falls 10-30%, as the manager believes will happen in these potential scenarios, there is no plausible scenario where these private assets go UP. None.

This goes beyond bad investing, or poor investor education. It’s misleading marketing. Less charitably, it’s a fucking lie.

Earlier this week, a young finance student reached out to me and asked if the story I told in my book about Ted was still how things were done. The idealistic student asked if advisors had become more transparent and honest with their clients. Sadly, I had to tell her that, if anything, things had gotten worse. And they will continue to get worse until yet another generation learns the lessons of the past.

It’s why I write this newsletter. It’s why I wrote this book. Help spread the word. Hit the like button below. Review the book on Amazon. Thanks for reading and thanks for your support!

People are worried about Blue Owl liquidity

Matt Levine has a way of cutting through the finance industry’s bullshit in a very lighthearted way.

As long as it’s not your money being lost or locked up in a private fund, it’s a fun read. As Homer Simpson was known to say, “it’s funny because it’s true.”

If you run an investing business, your main, existential job is to keep your clients’ money. One way to do this is by having consistently great returns, so your clients always want you to invest as much of their money as possible. That feels great, and if you can do it more power to you, but it doesn’t always work.

The other way to do it is structural: When times are good, you set up your investment vehicle in such a way that, if times get bad, you can keep the money. When times get bad, this approach doesn’t feel good. It is not fun when your clients complain about you on the front page of the Wall Street Journal. But your existential job, as an investment manager, is not to feel good. It’s to keep the money. And you can control your lockup terms more reliably than you can control your performance.

Private credit is in the middle of a giant push to manage trillions of dollars of retail money, and this is not exactly helpful for that effort. Logically or not, retail investors do want liquidity, and very public liquidity hiccups are bad for business. “The timing is especially awkward because Wall Street is rushing to bring private assets to the masses,” adds Markets Daily. “Trying to convince 401(k) retirement plans to add such funds gets tougher when investors are blocked from exiting.”

Once Wall Street’s High Flyer, Private Equity Loses Its Luster

For the past several years, private equity’s annual returns have been lower than the S&P 500’s.

Between 2022 and Sept. 30, 2025, U.S. private-equity firms have generated annualized returns of 5.8 percent, including investors’ fees. The S&P 500 generated 11.6 percent annualized returns over that same time period, according to the most recently available data from MSCI, a research firm.

And until the companies are actually sold or taken public, a private equity firm’s returns are only estimates of how their companies should be valued. Some investors are growing concerned that they are being left in the dark about the true value of their investments with these firms.

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Is it possible to invest ethically?

Great piece by that very much reflects my own beliefs around “ethical” investing.

Ethical investing does provide a benefit. It just isn’t a public one. It makes the investor feel good. It offers a sense of moral cleanliness and personal alignment. You get to look at your portfolio and feel like it reflects your values.

There’s nothing wrong with that, but we should be honest about what’s happening. The primary beneficiary of ethical investing, at least at this scale, is the person holding the portfolio. The personal satisfaction is real. The impact largely is not.

If you fundamentally cannot stomach investing in a large corporation because of ethical concerns, you should at least be honest about how deeply entangled these companies are in everyday life. Take a company like Procter & Gamble or Chevron. If you buy almost anything from a drugstore, you’re almost certainly giving money to P&G. If you drive a car and buy motor oil, you’re very likely supporting Chevron. Avoiding them entirely is close to impossible unless you opt out of modern life altogether.

At that point, refusing to invest in them doesn’t meaningfully change your ethical footprint—it just limits your own ability to build long-term wealth. You’re still participating as a consumer, just without the upside of ownership.

You only have to get rich once

In Low Risk Rules, I wrote:

Let’s use the example of Masayoshi Son, head of Japanese firm SoftBank, who has tech investments around the globe. A New Yorker article quoted a former SoftBank executive as saying, “Venture capital has become a lottery. Masa is not a particularly deep thinker, but he has one strength: he’s devoted to buying more lottery tickets than anyone else.”

The idea was that venture capital and angel investing, generally, are nothing more than fancy lotteries for tech visionaries.

In this piece, kicks off his essay by examining Son’s investment record as follows:

The ironic part about Son’s journey is that, despite the hundreds of billions of dollars that his company has gained and lost over the last 24 years, his net worth is still only $30 billion, or less than halfway back to his peak net worth. He would have been much, much richer had he exited the game in 1999 than he is now after spending 24 more years investing.

Lots of good stuff here, and it’s not really about Masa at all.

Why is it so hard to hold on to the money we made? Because hitting a home run on an investment is euphoric. And beyond the dopamine rush, it strokes your ego, making you feel smart. Those good feelings cloud your judgement.

Financial returns are a seductive feedback mechanism. When something you invest in goes up by a lot, you feel like a genius, and you want to experience that rush again. And because your last bet was correct, you grow more confident, so you decide to double down on another trade. Maybe that investment works out as well, so you repeat the process again. Positive reinforcement in the form of financial compensation is one hell of a drug.

Now, this essay was written in late 2024 (and I’m just getting to it now….) so some of the investment references are a bit dated (particularly his comment that “if you owned stocks (like, literally, any stocks) or crypto (like, literally any crypto) over the last couple of months, you’ve made money.” But let that be a lesson that when you read comments like that, the end is often near! I feel like this essay actually reads better with the benefit of hindsight, knowing that many of the massive crypto and tech winners he wrote about have been taken out back and shot.

Why Do Investors Play Low Probability Games?

We seem inexplicably drawn towards activities – such as timing the short-term fluctuations of markets or taking aggressive, concentrated bets – where the chances of positive outcomes are poor, yet we carry on regardless. Why can’t we resist playing what seem like the wrong games?

It’s short. Read the whole thing!

Read more books

This focused attention actively shifts your autonomic nervous system from the sympathetic “fight-or-flight” state toward the parasympathetic “rest-and-digest” state. As this happens, you experience measurable physiological changes: your heart rate slows, your breathing deepens and becomes more regular, and your muscle tension decreases.

Reading represents one of our most sophisticated yet accessible tools for nervous system regulation. In an age of constant stimulation and fragmented attention, books offer something incredibly valuable: an activity that simultaneously stimulates your brain and calms your body.

In order to “reduce risk” I will hire several of these faceless groups of suits. The mountain charts will look slightly different, but the overall pattern will be the same. I have a separate folder for each set of statements, and they live next to each other in my study desk drawer. I pull them out at tax time and send them to my accountant. And I move on with my life.

Occasionally the numbers will drop and won’t bounce back. One quarter, two quarters, now three… and the numbers don’t seem to be coming up. The notch in the mountainside is getting larger and larger. All of a sudden I’m feeling less confident in this particular faceless group of suits, and I start seeking an alternative. If an ad catches my eye, or a friend recommends a “great guy” he works with, I might consider switching to a new guy with a new suit. And the process starts anew. We pass this bump in the road, and I move on with my life.

This is one way to do it.

It becomes automatic and soulless. Like the morning coffee you chug every day on the way to work, sitting in traffic, preoccupied with the problems of the day ahead, the pick-up of the kids after school, and don’t forget to swing by the dry cleaner on the way home.  You drink the coffee by reflex, barely registering it as it passes your lips.

Do you remember the last time you really appreciated that morning cup of coffee? Because when you stop to truly enjoy it, that morning cup is magic in a mug.

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I’ll admit that I am a finance nerd, but hear me out on this one.  Have you ever stopped to consider the magic of investing in a company’s common shares?

You can own an actual piece of a company that you admire. A company that may have been founded generations ago halfway around the world. But now you can own a small piece of it. You are effectively hiring that company’s management to take care of the cash you invest with them.

Businesses aren’t static entities. They are living things, imbued with the spirit of their employees and leaders. They struggle. They adapt. They grow. They have cultures and personalities, which change over time. They stumble, and sometimes they fall. The proudest of them can decline and perish, and sometimes the ones left for dead miraculously rise from the ashes.

Most important in the current context, these companies will survive through all manner of presidents, to the left and right of the dial. They’ll survive through trade disputes, embargoes, and wars. They’ll survive through the periodic stock market manias and crashes, and the current investment flavour of the month.

Being able to invest in a business is an amazing thing, and there is a soul and a spirit to doing it well, and caring about it.

When you think about it this way, it changes everything. I’m not passively buying stocks as commodities. I’m buying pieces of businesses. I’m building my empire.

Perhaps the most important element to investment success is sticking with your plan through the inevitable downturns. Owning shares in companies with leadership teams you believe in is a phenomenal way to do that. You’ll ride through highs and lows with them. If you made the right choices, you’ll need to demonstrate patience and faith in their ability to weather the storms. The same management team you admire will use their ingenuity to solve problems and adapt as their environment changes. If you’re an entrepreneur, think of your own business and how many times you faced an uncertain outlook. How many times you had to pivot your strategy in response to changing conditions. But you made it through.

If you think about it like this, you’re not likely to be easily swayed in your opinion by financial news’ sensationalized clickbait headlines, linking to an article written by a reporter who has never run a business in their life.

The stock market is just a reflection of the business world you know so well. The faceless suits have it all wrong.

Did anyone expect Jeff Bezos to transform Amazon from an internet bookseller to a mammoth global retailer, a ubiquitous cloud software platform, a video and music service, and a grocery store?

Or Steve Jobs, resurrecting Apple from near death with the iPod, and eventually revolutionizing modern computing with the iPhone?

Remember Hurricane Katrina, when Walmart’s leadership and logistics proved more adept at getting supplies and provisions to New Orleans than the Federal freaking government, with all of its unlimited resources?

These management teams can be your partners. They find a way to survive and prosper.

They are the heroes. Invest in them.1 Forget the suits!

When you buy a share of a corporation, you’re recruiting their management team to manage your money for you. To find a way to prosper by maximizing long-term shareholder value. If they’ve proven the ability to do it in the past, you can have trust in them to continue to execute. Doesn’t that sound better than hiring a faceless suit to shuffle your money around while optimizing equations littered with Greek letters?

It’s not as complicated as the suits will have you believe.

The best investors are slowly building empires by investing in the heroes.

Is something supposed to change when you come into liquid wealth?

Those new to this world often don’t feel like they fit in anywhere… not with the wealthy, and not with the crowds they formerly felt part of. Some of them go to great lengths to keep their wealth a secret in order to preserve their prior life.

It shouldn’t need to be said, but there’s nothing special about rich people. Not even the ultra-rich. The problems can be somewhat different, but they are just the same as the rest of us.

Interestingly, there’s a perception that their wealth affords them a higher level of attention from professionals. That’s not always the case. Many of them have very average advisors, giving very average advice. Often this is because they don’t easily trust people, and so show loyalty to advisors they should have outgrown long ago.

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There’s also a common belief that there’s something special about the ultra-wealthy as individuals. People look up to them. Even other wealthy people!

I recall being forwarded an email composed by a successful serial entrepreneur. He was on a cross-country flight and apparently a few drinks in when he decided to pen what he thought was a profound collection of thoughts - his keys to living a successful life of achievement and happiness. He flipped the email along to a few of his friends, many of whom were also very successful people. And one of them forwarded along to me, noting that these were “very interesting thoughts from a successful person.”

I dove headfirst into the email, but was ultimately left surprised by the banality of it all. This wasn’t anything profound. It wasn’t even rehashed Munger-esque “worldly wisdom.” It was pablum. Stuff like “a person with Great Dreams can accomplish Great Things!” This shit made Tony Robbins sound like Tolstoy.

Over the years, getting to know some extraordinarily financially successful people, I came to realize that there is generally nothing terribly special about them. Sure, there’s a drive to work hard and succeed, but lots of people have that. There are just as many admirable and accomplished people of average means.

At the end of the day, a lot of the success comes down to a combination of luck and hard work. A singular focus on making money can take you a long way.

In non-self-made cases, it’s usually one extraordinarily talented family member who is able to plant the seed which becomes the tree which provides fruit and shade for several future generations.

There’s nothing extraordinary about the rich. They’re just like the rest of us.

I’ve written before about the loneliness and isolation caused by wealth, and the mental health struggles that often come with it.

More than that, as a certain batch of peculiarly redacted files released this past month hint, a lot of the people we may have admired might actually be terrible human beings, or at the very least, willing to turn a blind eye to the horrific actions of their “friends.” Sometimes, those associations were a key contributor to their financial success. This is nothing to admire.

I grew up on the day that I realized that the people I looked up to were still trying to figure it out, just like I was (and still am.) Don’t be intimidated by other people with money. Don’t feel like they have access to any special secrets or knowledge (most relevant to the themes I talk about here, that includes copying their investment portfolios.)

How to be rich? Don’t worry about auditioning for the role. Stay true to the values that got you here. Oh, and if a mysterious billionaire invites you to his private island for a wild party, say thanks, but no thanks.

You stumble upon this company because you were searching for dessert recipes. But you can’t believe what you see. The balance sheet is rock solid. The business is generating prodigious cash flows, which are being used to pay a fat dividend and buy back shares. As far as you can reasonably tell, the company faces little to no threat of disruption, and possesses advantages over competitors that should endure for at least next decade.

To top it all off, it’s trading at a very low multiple. Nobody, it seems, has heard of it. No analyst coverage. A Google news search turns up nothing. It’s just sitting there, making shareholders rich.

So you sell your other stocks, and buy shares. You borrow against your home, and buy more shares. You reinvest your dividends into even more shares. Every spare dollar goes into buying more of this absolutely amazing investment. Quarter after quarter, management delivers stellar results that consistently exceed expectations.

You can’t believe your luck.

Now here’s the question - do you tell anyone else about Parfait Corp? Or do you keep it to yourself?

For every buyer, there’s a seller

If this is such a great company, who is selling you all these shares?

It could be someone who doesn’t agree with your opinion on this company’s future (not everyone is as smart as you are).

Maybe they are just financially illiterate and can’t read the financial statements.

Perhaps they need to raise money to buy a boat or fund a divorce settlement.

Maybe it’s an estate being liquidated for distribution.

Whatever the reason, it doesn’t really matter. All that matters is that someone is willing to sell you these shares for far less than they are worth.

You want to keep it that way, right?

Can you keep a secret?

There will come a day when you’re ready to sell your shares of Parfait Corp. But that’s not today. Why would you? Why would anyone? It’s hard to think of a better use of your investment capital right now.

You’re not buying it to sell it, you’re buying it to accumulate it. If you end up owning the whole company, so be it.

So why would you screw up a good thing?

Someone is selling you the shares, cheap.

And there is very little competition in the marketplace - nobody else is interested in buying the shares that go up for sale.

This is a perfect setup for long-term wealth creation. And the way to keep it going is to keep your big mouth zipped and not tell anyone else about Parfait Corp.

Why would you do anything different?

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Ponzi economics

Before we continue with the story of Parfait Corp, a brief pivot to discuss the important issue of sardines (trust me, this is going somewhere).

In Margin of Safety, Seth Klarman made famous a story told in the 1986 Sequoia Fund Annual Report:

There is the old story about the market craze in sardine trading when the sardines disappeared from their traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared. One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller said, "You don't understand. These are not eating sardines, they are trading sardines."

Trading sardines are not for eating! It doesn’t matter what’s in the tin. As long as enough other people want to buy cans of sardines, you’re going to make money buying and flipping those cans.

It’s in your interest, as a sardine trader, to ensure that interest in sardines remains high. Tell your friends! Tell your neighbours! Tell your in-laws!

One can imagine a high profile CEO pivoting his whole company around buying up sardines. Perhaps that same CEO will spend all day on Twitter and CNBC telling people "The only use of time is to buy more sardines. Take all the money and buy more sardines... take all your time to figure out what you can sell to buy more sardines… and go mortgage your house and buy sardines with it, and if you’ve got a business, finance it and convert the proceeds into sardines.”

Interest in sardines cannot be allowed to wane, because then your cans of rotten sardines will be worthless. It is imperative for you to spread the gospel of sardines. “This is real wealth,” you will tell people. “Sardine cans are outside the purview of governments and central banks. Sardine cans are real money.”

Parfait or sardines?

You don’t want anyone to know about how good an investment Parfait Corp is. Parfait is going to do amazingly well for you, no matter what other people think of the investment. In fact, the longer it remains undiscovered, the more money you will make on it.

On the other hand, you need everyone to be convinced that sardines are the future. And the only way you escape with a profit is to sell your sardines to people at the same time you’re telling them how great sardines are and how they have to hold onto those fish for the long term.

Which asset would you rather own?

This isn’t about sardines

As you’ve probably guessed by now, this has nothing to do with sardines.

In other news, last week the price of Bitcoin fell below the average cost of Strategy, Inc.’s holdings in the cryptocurrency.

To a large extent, this pushback has disappeared, because investors in a few private funds that were assumed to be “safe” have seen their investments locked up, while promised returns turn into losses.

My basic point has always been that unlisted alternative investments can be a lot more risky than their marks to market let on, and that makes it very difficult for clients to distinguish between those that carry more or less risk. Even in something as low risk as residential rentals, I’m seeing private funds maintaining or increasing their NAVs, while equivalent public REITs have declined markedly. The truth, as far as valuations go, probably lies somewhere between the two extremes.

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If you’re an investment professional or a student of the craft, you understand this. But most clients are in the dark, and place far too much reliance on marketing materials. I’m talking to the investor who may not be aware of how these funds are hiding volatility (and potentially, the risk of permanent loss of capital). So I hope you don’t mind if I beat this dead horse just a bit more. Because if you allow them to, private investment funds can hide a multitude of sins. 

Warren and Charlie tell it like it is

At the 2019 Berkshire Hathaway Annual Meeting, Warren and Charlie received a question from a pension manager specializing in alternative investments. This cue was a prompt for a great discussion highlighting so much that’s wrong with the asset class (much of which I’ve already covered here and in Low Risk Rules). 

Dubious marks to market? Check.

High fees? Check.

Locking up investor funds? Check. 

The challenges of managing liquidity in order to meet capital calls? Check. 

Since they are both much smarter and more articulate than me (and frankly I’ve always admired Charlie Munger’s ability to summarize a situation in the most blunt terms possible), I thought I’d paste some of the discussion here (I’ve edited out the parts that are not relevant to private client or family office investing). 

I aspire to reach a point in my life and career where I can tell it like it is the way Charlie does - dropping truth bombs and not caring who gets offended. Stick around. You’re going to love this newsletter when I’m 99 years old. 

WARREN BUFFETT: “…we have seen a number of proposals from private equity funds, where the returns are really not calculated in a manner than — well, they’re not calculated in a manner that I would regard as honest.

And so I — it’s not something… I would be very careful about what was being offered to me.

If you can raise $10 billion in a fund, and you get a 1 1/2 percent fee, and you lock people up for ten years, you know, you and your children and your grandchildren will never have to do a thing, if you are the dumbest investor in the world. But —

Charlie?

CHARLIE MUNGER: Well, I think what we’re doing will work more safely than what he’s doing… but I wish him well.

WARREN: if you run a fund, and you get even 1 percent of a billion, you’re getting $10 million a year coming in. And if you’ve got the money locked up for a long time, it’s a very one-sided deal.

And you know, I’ve told the story of asking the guy one time, in the past, “How in the world can you — why in the world can you ask for 2-and-20 when you really haven’t got any kind of evidence that you are going to do better with the money than you do in an index fund?” And he said, “Well, that’s because I can’t get 3-and-30,” you know. (Laughter)

CHARLIE: What I don’t like about a lot of the pension fund investments is I think they like it because they don’t have to mark it down as much as it should be in the middle of the panics. I think that’s a silly reason to buy something. Because you’re given leniency in marking it down.

WARREN: Yeah. And when you commit the money — in the case of private equity often — you — they don’t take the money, but you pay a fee on the money that you’ve committed. And of course, you really have to have that money to come up with at any time. And of course, it makes their return look better, if you sit there for a long time in Treasury bills, which you have to hold, because they can call you up and demand the money, and they don’t count that. They count it in terms of getting a fee on it. But they don’t count it in terms of what the so-called internal rate of return is. It’s not as good as it looks. And I really do think that when you have a group sitting as a state pension fund

CHARLIE: Warren, all they’re doing is lying a little bit to make the money come in.

WARREN BUFFETT: Yeah. Yeah, well, that sums it up.