The Buffett Puzzle

Warren Buffett has described the ideal business with perfect clarity. "The best business," he once said, "is one that is a royalty on the growth of others." He has also observed that "you'll never buy companies as cheap as stocks sometimes get." 

Together, these two statements imply a fantastic investment strategy: steadily deploy capital into businesses that are either royalties or have "royalty-like" economics, dollar-cost averaging into minority stakes using dividends and cash flows from existing investments. A five or ten percent stake in Marriott International might go on sale when investors are worried about a recession or a slowdown in travel, even when the entire company would not be obtainable at a cheap price. And when the cash flows in and no royalty business looks attractive, simply repurchase shares of one's own holding company.

Buffett identified this ideal strategy early, articulated it repeatedly, and has spent the past several decades largely ignoring it. That is what we consider the Buffett Puzzle.

The evidence of the missed opportunity is not subtle. Over the past couple of decades, businesses with exactly the characteristics Buffett described have compounded quietly and relentlessly. Companies like CME Group or Visa Inc. require little reinvestment, tend to generate cash in excess of reported earnings rather than consuming it, sit atop irreplaceable assets, and benefit from network effects or structural monopolies. They are either monopolies or oligopolies and they carry very high free cash flow margins on revenue. They are, in Buffett's own language, royalties on the growth of others. Yet he did not buy them, or bought them too little and too late.

A comparison of capital-light and capital-intensive businesses over the past thirty-five years shows an enormous performance gap, with the capital-light group pulling ahead so consistently that the divergence is not a matter of picking the right year to measure. It is a structural feature of modern capitalism. Businesses that can grow without consuming capital are simply worth more, in ways that compound over long periods. Buffett, who understands compounding better than almost anyone alive, appears to have understood this principle intellectually while failing to act on it in practice.

Consider two businesses that have the attributes that Buffett spent his career describing as ideal.

Google is a royalty-like interest on the broader economy. Its core business connects customers with merchants of every kind, both online and brick-and-mortar, and it earns a small toll on an enormous and steadily growing share of global commerce. The capital requirements relative to the earnings power are modest. The network effects are extraordinary. The business has gone on sale repeatedly, but Berkshire never owned it until 2025. Google traded for less than 20 times earnings in 2008, again in 2011 and 2012, in 2022, and for parts of 2025. In June 2012 specifically, the stock traded at 17 times earnings. Earnings per share have risen roughly fifteen-fold since then. Anyone who thought 17 times earnings was expensive in 2012 was not merely wrong but spectacularly wrong, and the magnitude of that error is a useful calibration point for thinking about what cheapness even means in a business with this kind of compounding power.

Marriott is a royalty specifically on travel lodging. It does not own most of the hotels that carry its brands; it manages and franchises them, collecting fees on the revenue and profits that flow through its system. The capital intensity sits with the property owners, while the brand, the loyalty program, the distribution system, and the global reservation network sit with Marriott. Travel demand grows roughly with global wealth, and Marriott captures a steady percentage of an expanding pie without having to fund the buildings. The business has gone on sale regularly. Marriott traded for less than 20 times earnings for most of 2008, in 2011, in 2013, for much of 2016, in 2020, and again at several points in 2023. Each of those windows offered a chance to build a position in a "royalty-like" business that is growing without using incremental capital.

Perhaps Buffett does not think 20 times earnings is sufficiently cheap. We will return to that question later in the essay. But the dollar-cost-averaging strategy I described at the outset would have generated meaningful positions in both companies many times over, at prices that look in retrospect like obvious bargains.

What he bought instead were extremely capital-intensive businesses that have certainly under-performed the "royalty-like" businesses and in many cases have been outright disappointments. Berkshire's railroad acquisition BNSF earns a large headline profit. But in his 2023 annual letter, Buffett finally acknowledged what the net income number had been obscuring for years. Since Berkshire's purchase of BNSF fourteen years earlier, capital expenditures had exceeded depreciation charges by more than $22 billion, amounting to over $1.5 billion annually. "Ouch," he wrote. The depreciation charge was actually insufficient to maintain the road, and so the dividends BNSF paid to Berkshire consistently fell short of stated earnings. "Berkshire is receiving an acceptable return on its purchase price," he admitted, "though less than it might appear, and also a pittance on the replacement value of the property."

This was an extraordinary statement. The most celebrated capital allocator in history had spent fourteen years and tens of billions of dollars on a business that was, by his own accounting, delivering a pittance on replacement value.

Newsletter writer Porter Stansberry, in a recent open letter to Berkshire's board of directors, calculated that on a capital-weighted basis, the gap between what Berkshire earned from its whole-company acquisitions and what it would have earned from simply holding the superior publicly traded businesses in the same industries amounts to nearly one trillion dollars of lost value. 

Embarrassingly, a comparison of each major Berkshire acquisition against the obvious public market alternative, available at the time of purchase, shows that Berkshire consistently chose the inferior business: See's Candies instead of Hershey, Nebraska Furniture Mart instead of Home Depot, Dairy Queen instead of McDonald's, BNSF instead of a basket of the publicly traded railroads. (See's Candies deserves a partial exemption from this list. Buffett has said it transformed his understanding of earning power divorced from capital requirements. The mistake was not buying See's; it was failing to apply the lesson at scale in the decades that followed.)

The Conventional Defense, and Why It Falls Short

The standard explanation for Buffett's capital allocation choices is size. Apologists say that Berkshire became so large that only a handful of investments could move the needle, and the universe of businesses large enough to matter grew small. But it does not fully explain the pattern. It might explain why Buffett could not buy small royalty businesses. It does not explain why he didn't accumulate large minority stakes in the best capital-light businesses available, since they were and are large enough to absorb serious capital. Google and Marriott are not small companies. The size constraint has become relevant over time, but it can only excuse so much.

Alex Rubalcava, a venture capitalist in Los Angeles, asked a question that goes to the heart of this tension at the 2003 Berkshire annual meeting. He noted that in his writings, Buffett expressed admiration for businesses that could employ large amounts of capital at high returns, while in other contexts Buffett and Charlie Munger both praised businesses that required very little capital. He asked whether these statements were contradictory.

Buffett's answer invoked Berkshire's scale: the sheer amount of capital it needed to deploy required businesses that could absorb it productively. At the time, this probably sounded reasonable to most of the audience. But the answer was actually an admission dressed up as an explanation. The real problem it revealed was that Buffett was unwilling to do what the situation logically required: return capital to shareholders.

A manager who genuinely could not find enough wonderful businesses at fair prices to buy could have simply paid dividends or repurchased stock. Buffett resisted this for decades, preferring to keep the capital inside Berkshire and working. And since he needed to deploy capital but was too cheap to pay fair prices for great businesses, he ended up buying a great many mediocre ones at prices that felt comfortable. BNSF. Berkshire Hathaway Energy. A collection of capital-intensive industrial businesses that satisfied the value investor's need for a familiar-looking multiple while quietly requiring capital investment in excess of what the depreciation charges showed. The scale argument was not an explanation for why Berkshire couldn't find better investments. It was a rationalization for why Buffett didn't have to confront the alternative.

The Long Decline in Returns on Capital

If the size argument is really a rationalization for not returning capital, the question becomes why Buffett insisted on deploying capital into the businesses he chose. The answer begins with cheapness. Buffett's deepest instinct is that of a value investor, and value investors are cheap. Cheapness is usually a virtue. It is the bedrock of margin of safety, the discipline that keeps an investor from paying for optimism that never arrives. But cheapness has a corresponding weakness: it makes it very difficult to pay what a genuinely great business is actually worth. The royalty businesses Buffett should have been buying rarely looked cheap on conventional metrics. Companies like Google, Marriott, CME Group, or Texas Pacific Land have almost never traded at the kind of headline P/E multiples that would have satisfied a classically trained value investor. Buying them required accepting that the world had changed, and that returns on capital have been falling across the entire economy as the world has grown wealthier.

It is worth taking this point seriously, because it is the central macroeconomic fact of the past two centuries and the one Buffett's framework has had the hardest time absorbing.

There was a time when a person could live off the yield on government bonds. If you read a Jane Austen novel, the characters are getting a certain number of pounds per year, which was the interest on their consols, the perpetual government debt of the British empire. (See: 1, 2.) The yield was probably around four percent in sound money, which was a significantly higher real yield than the 2.7% that thirty-year TIPS offer today. (Not to mention the important difference in income tax rates.) A modest fortune invested in consols funded a country house, servants, horses, and a respectable place in society. Today, the real yield on government debt, particularly after income tax, varies between negligible and negative. The same nominal capital that supported a Regency-era family in idleness would have trouble supporting a retired couple in a nice place to live today.

The same thing has happened to real estate investments within living memory. During our lifetimes, there were times and places when you could buy residential real estate (like a single family house) and the rent would cover the mortgage. The cap rate on the property was perhaps a hundred basis points higher than the cost of the mortgage, so the property paid you to own it from day one. That has never recurred, even during the housing crash and the various housing corrections that followed. Cap rates on residential real estate and on similar streams of safe cash flow have compressed steadily toward the TIPS yield. The cap rate on a house in a nice part of the U.S. will generally sit a couple hundred basis points below the cost of a mortgage. The economics of being a small landlord have gone from positive carry to substantial negative carry, and the change is structural rather than cyclical.

It is possible, and I think likely, that equities are going through a similar transition. I am not saying this is certain. It is a hypothesis. But, as Kris Abdelmessih has written, the mass adoption of passive investing may be the invisible hand wringing the equity index risk premium out of the market. The mechanism is straightforward. As markets have built and popularized increasingly cost-effective ways to diversify away idiosyncratic risk, the price discounts that risky investments need to offer in order to attract capital have come down. A century ago, holding a diversified equity portfolio was expensive and difficult, and the equity risk premium that compensated investors reflected that friction. The friction is now nearly zero. There is no obvious reason for the premium to stop compressing.

Future investors may eventually look back at twentieth-century equity returns the way we now look at twentieth-century housing affordability or government bond yields. Can you believe people earned 8-10% real in stocks and thought that should last forever? 

There is a second change in the investment landscape that compounds the first. As we pointed out in our review of the American Express corporate history, large company management teams have become meaningfully better at capital allocation over the past three decades, and they have purified their business models to deliver higher returns on capital. The conglomerate era of the 1960s and 1970s produced sprawling businesses with undisciplined balance sheets, divisions that subsidized losers with the cash flow from winners, and managements that confused empire building with value creation. The shareholder revolution of the 1980s and 1990s, however uncomfortable and uneven, forced companies to think harder about what they actually did well. The businesses that survived and thrived tended to be those that identified their core advantage and stopped subsidizing everything else. They divested non-core operations, returned capital aggressively, focused on the highest-return uses of incremental dollars, and managed the balance sheet with discipline.

The result is that the best public companies today are structurally better businesses than their predecessors of a generation ago. They are not merely benefiting from accommodative monetary policy or temporary advantages. They are run by people who have absorbed forty years of accumulated lessons about how capital should be deployed and which businesses deserve to be inside a corporate structure at all. A company like CME Group is not expensive because the market has lost its mind; it is priced to reflect a business model that has been refined to near-perfection and sits atop a franchise that is genuinely difficult to displace. These businesses deserve to trade at higher multiples than what a value investor trained in the 1950s would consider normal, both because returns on alternative capital have collapsed and because the businesses themselves have improved.

The Insurance Mind

We can think of an additional explanation for why cheapness is so ingrained in Buffett's behavior, despite the two factors that we mention above (falling returns on capital and rising business quality) and it has to do with where Buffett's temperament was formed.

Berkshire's insurance operations are genuinely extraordinary. Buffett is one of the great insurance minds of the twentieth century, and the discipline he built at GEICO, General Re, and the reinsurance operations reflects a profound understanding of how that business works. In insurance underwriting, patience and stubbornness are not just desirable attributes, they are the whole kahuna. In a hard market, pricing is attractive, terms are disciplined, and underwriters earn good returns. In a soft market, competitors cut prices to buy volume, and the disciplined underwriter who refuses to write business at inadequate rates will appear to be leaving money on the table right up until the cycle turns and the undisciplined writers get crushed. The market cycles from hard to soft and back again with regularity. The curmudgeon who said no all through the soft market is vindicated. Stubbornness, in the insurance business, is the strategy.

Buffett's insurance success caused him to internalize this model deeply. He then applied it to equity markets, where it also worked for a long time. The logic transferred reasonably well: be patient, wait for the "hard" market in stocks (a crash), and then deploy capital aggressively when prices reach levels that others find unbearable. The approach was spectacularly rewarded in 1974, in 1987, in 2002, and again in 2008. Each of those dislocations produced the kind of prices that justified decades of waiting.

But the hard markets in equities are getting structurally shallower, for two related reasons. The first is that the world is wealthier, and more capital is now competing for distressed assets. When prices fall, the buyers appear faster and in greater numbers than they did in previous generations. The dislocations do not go as deep or last as long. The second reason is fiat currency and the modern toolkit of central bank intervention. The authorities now have both the instruments and the political will to short-circuit financial crises before they reach the depths that create Buffett-style generational buying opportunities. The Federal Reserve's response to the 2020 pandemic is a perfect example. What looked briefly like a 2008-style dislocation was resolved in a matter of weeks. Would-be buyers of distressed assets, including Buffett, barely had time to act before the floor was put back under markets. It happened again in 2023 where a Federal Reserve bailout (Bank Term Funding Program) preempted any distressed investment by Berkshire in the regional banks.

So the cash piles up at Berkshire. He is waiting, with the discipline and the temperament that made him one of the greatest investors in history, for a hard market that the modern financial system is increasingly engineered to prevent. The insurance mind, which was his greatest professional asset in the business that built Berkshire, has become a constraint in a world where the cycles that once justified it are being deliberately suppressed. He is not merely cheap in the abstract. He is cheap in a specific, structured way, expecting the world to present him with the prices it presented in 1974. That world might not be coming back, and Berkshire's cash pile is the visible evidence of a strategy waiting for conditions that may no longer reliably arrive.

The Seduction of Scale

Cheapness, as reinforced by experience in insurance underwriting, may not fully explain the pattern. There may be another, less flattering force at work.

There is a meaningful parallel to James Ling, who built LTV Corporation into one of the great conglomerate empires of the 1960s through relentless acquisition. Ling was a genuine financial genius, a student of deal structure and capital markets who understood things about reorganizing corporate balance sheets that few of his contemporaries grasped. He was also, ultimately, a man for whom size had become a goal in its own right, a psychological reward that gradually overwhelmed his judgment about what actually created value. The behavioral fingerprint is this: a highly intelligent person who articulates sound principles about capital allocation and then consistently makes decisions that build scale rather than per-share value. LTV eventually collapsed under the weight of its ambitions, and Ling was left with almost nothing.

Buffett acolytes would reject the comparison, and the differences are real. He has not used leverage recklessly. He has not chased acquisitions for the sake of novelty or prestige in any obvious way. But the behavioral pattern is recognizable. Scale brings attention. It brings adulation. It brings Becky Quick flying to Omaha. It brings heads of state returning calls. It transforms a successful investor into an American institution, a monument, a figure whose annual letter is studied by millions as a kind of secular scripture.

A portfolio of quietly compounding royalty interests in land companies, pipeline partnerships, and hotel franchisors would not generate that kind of gravity. It is harder to narrate as a legacy. You cannot easily explain to a television audience why you own four percent of Marriott. You can explain, in terms that feel weighty and serious, why you own the entire BNSF railway.

There is also a subtler dynamic. Businesses that generate substantial free cash flow without obvious opportunities for reinvestment create pressure to return capital. If CME Group is throwing off cash that Berkshire cannot redeploy at scale, it must be dividended out or used to buy back shares. The empire, in that sense, stops growing, or at least grows differently, returning capital to owners rather than accumulating assets. That is the correct outcome for shareholders. It is a different story than the one Buffett has been telling for sixty years, and it is a story that does not lend itself to the particular kind of immortality he has spent his career constructing.

There is a sympathetic counterargument worth acknowledging. Buffett's model of permanent, patient ownership built something with genuine value beyond the returns: a reputation that attracted exceptional businesses on favorable terms, a culture of decentralized autonomy that good managers found appealing, a guarantee that the businesses Berkshire bought would not be flipped or dismembered. The argument is that this reputational capital created deal flow that a minority-stake approach could not have replicated. The counterargument is real, but it does not survive contact with the BNSF numbers. A model that generates deal flow into capital-intensive businesses delivering a pittance on replacement value is not a competitive advantage; it is a more polite way of destroying shareholder value.

The Theory of the Puzzle

The theory of the Buffett Puzzle, then, has three interlocking parts. The first is that Buffett's temperament was formed in insurance, where stubborn patience waiting for the hard market is the correct strategy. He transferred that model to equities, where it also worked for several decades. But fiat currency, central bank activism, and the general increase in global wealth have made the hard markets shallower and less frequent. The insurance mind is now waiting for conditions that the modern financial system is built to prevent.

The second is that cheapness, already a deep instinct, prevented him from recognizing that the world had changed. Returns on safe capital have been falling gradually for two centuries and falling more sharply for several decades, in a long-running compression that has touched bonds, real estate, and now arguably equities. At the same time, the best public companies have become structurally better businesses than their predecessors. Both forces argue that royalty businesses with durable franchises deserve to trade at multiples that look expensive by historical standards. Buffett could not bring himself to pay those multiples, and so he passed on the businesses he had described as ideal.

The third is that scale provided an emotional reward for the alternative. Deploying large capital into large, visible, controllable businesses built a monument. Accumulating quiet minority stakes in the best businesses available and returning excess cash to shareholders would have been better for owners but harder to narrate as a life's work.

These three forces reinforced each other. The insurance mind supplied the patience. The cheapness supplied the principled-sounding reason to pass on royalty businesses priced to reflect a permanently changed investment landscape. And the appetite for scale supplied the emotional reward for deploying that capital into something more visible instead. The result was BNSF, Berkshire Hathaway Energy, and a collection of capital-intensive industrial businesses that look impressive on an organizational chart and have consumed, by Buffett's own accounting, tens of billions of dollars more capital than their reported earnings suggest.

The Question for Greg Abel

Warren Buffett is now stepping back, and Greg Abel is taking over as CEO of Berkshire Hathaway. Abel inherits a company shaped by the forces this essay has described. As he acknowledged in his inaugural letter to shareholders, there is a collection of capital-intensive businesses acquired at prices that felt comfortable, generating less free cash flow than their reported earnings suggest, sitting alongside a cash pile so large it has become its own problem.

Abel also inherits an opportunity that is, by any measure, extraordinary. He could choose to become one of the great capital allocators in the history of American business! The path to doing so would require something that would strike most Berkshire observers as bizarre, even heretical. He should shrink the company.

William Thorndike's book The Outsiders (see review) profiles eight CEOs whose returns greatly surpassed the market over long periods. The common thread was not operational brilliance, though several were excellent operators. It was capital allocation discipline, and specifically the willingness to do whatever the situation actually required rather than what felt comfortable or looked impressive. Henry Singleton of Teledyne bought back nearly ninety percent of his company's shares when his stock was cheap. Bill Anders of General Dynamics sold divisions and returned the cash when he could not find acquisitions that made sense. Tom Murphy of Capital Cities avoided the temptation to build for its own sake and focused relentlessly on per-share value. All of them were willing to make the company smaller when making it smaller was the right answer. None of them were building monuments.

Ironically, Buffett himself appears in the book, and was once exactly this kind of CEO. The early Buffett, running the partnership and the early years of Berkshire, was as disciplined about per-share value and capital return as anyone Thorndike profiles. The later Buffett, presiding over an accumulation of capital-intensive businesses too large to sell and too mediocre to celebrate, is a different story.

Abel's most consequential early decisions may well be subtractions rather than additions. Prune or spinoff underperforming operating businesses. Begin buying minority stakes in the best capital-light businesses available rather than acquiring whole companies at negotiated prices. And if Berkshire's own stock is the best thing available, buy that. What would be genuinely bold, and genuinely correct, is to stop managing Berkshire for scale and start managing it for per-share value, even if that means the company gets smaller, quieter, and harder to narrate as a legacy.

Warren Buffett is one of the greatest investors who has ever lived. That is not in question. He described the ideal destination, saw it clearly, and then drove somewhere else. A combination of forces got him there: a temperament built for insurance cycles that the modern financial system keeps suppressing, a value investor's cheapness anchored to a world where returns on capital were higher and businesses were worse than they are today, and the seductive pull of scale and the attention it brings. None of these forces were obviously bad in isolation. Together, they compounded into a decades-long detour.

The question for Greg Abel is whether he has the nerve to turn the car around.

Thursday Night Links

• Over the long run in infosec, the defensive side tends to win. There's a lot of deadweight loss in a hack, and hackers have a higher discount rate than defenders, so in an equilibrium state attacking needs to be massively easier than defending to be worthwhile. But that long-run equilibrium is driven by the changes in behavior that arise when attackers have a temporary advantage. And in a world where more code than ever is being written and a smaller proportion of it than ever is being read, the rewards for supply chain attacks targeting key libraries are unusually high. This is one reason for Anthropic's rather public-spirited approach to using Mythos to fix software vulnerabilities; exploits are typically chained together, so it's a race to break the links before they're misused. [Byrne Hobart]
• Only a few economists’ works have inspired eponymous schools. Marxism and Keynesianism come to mind, but almost memory-holed is an American, Henry George, whose “Georgist” movement was a major political force in the heady days of late 19th- and early 20th-century progressivism. George was the author of Progress & Poverty, a bestseller shortly after its publication in 1880. In the 1880s and 1890s, P&P outsold every English-language book except the Bible. Yet today, no major publishing house handles his works, and the best edition is a scanned reprint of the 1905 edition from tiny Dover Publications. His work is so obscure and forgotten, despite his historical popularity, that no mainstream publisher can be bothered to pay for new typesetting. [The Tom File] 
• For whatever number we came up with here, one must remember that in many ways the poorest Britons today live better than did Mr. Darcy regardless of which method for calculating income or wealth I used. For all his wealth, he still froze in winter, constantly stank of horse or pig or mud, had to travel very very slowly to town, died at 50 and likely saw several of his sisters, nephews or cousins die in childbirth or before they turned one, drank awful drinking water even when avoiding the many outbreaks of Cholera or the constant smog from the coal-burning fires in urban households (the Channel Four series The 1900 House is a good indication for how, then remove another hundred year of development). [Joakim Book]
• Visa’s second quarter net revenue growth of 17% was the highest since 2022, driving GAAP EPS up 36% and non-GAAP EPS up 20%. Consumer spending remained resilient, and our strategy and innovations fueled strong performance in consumer payments, commercial and money movement solutions and value-added services. [Visa Inc.]
• Seems to me that whenever you move somewhere that is "cheap," there will be massive drawbacks and difficulties, period. This is apparently even true in a Mediterranean paradise like Italy. You "pay" for your life in a cheap place by dealing with some element of life there that is not easy to deal with, be it isolation, high median ages, bureaucracy, clannish locals, harsh climates, lack of economic / cultural / religious opportunities, social problems, crime, etc. Most often, you deal with a combination of some or all of these. So when you do the "moving somewhere super cheap" thing, there WILL be times where you want to give up and leave. That's where the real question comes in: "just how much do I NOT want to do the high-cost, crowded, 4HL, working-to-pay-the-bills thing?" The only ones who will really be so averse to normalcy in an "easy place" will be those who are very eccentric, poorly adjusted to the salaryman life, likely kind of poor, and who expect to remain kind of poor indefinitely. [Hickman]
• From 1936 to 1939 there were two life-and-death struggles in Spain, both of them civil wars. One pitted nationalist forces led by Francisco Franco, aided by Hitler, against the Spanish Republicans, aided by Communists. The other was a separate war among Communists themselves. Stalin in the Soviet Union and Trotsky in exile each hoped to be the savior and the sponsor of the Republicans and thereby become the vanguard for world Communist revolution. We sent our young inexperienced intelligence operatives as well as our experienced instructors. Spain proved to be a kindergarten for our future intelligence operations. Our subsequent intelligence initiatives all stemmed from contacts that we made and lessons that we learned in Spain. The Spanish Republicans lost, but Stalin's men and women won. When the Spanish Civil War ended, there was no room left in the world for Trotsky. [Pavel Sudoplatov]
• In a March 16, 2026, decision in Fortis Advisors LLC v. Krafton Inc., the Delaware Court of Chancery adjudicated claims arising from the sale of a video game studio, Unknown Worlds, where Fortis alleged Krafton acted in bad faith to avoid a $250 million earnout. In enforcing the merger agreement and granting specific performance, the court cited evidence that Krafton’s CEO had consulted ChatGPT extensively, relying on the CEO’s chat logs with ChatGPT as evidence of his intent and planning in orchestrating the takeover. [link]
•  We examine how “sleepy deposits” affect competition, bank value, and financial stability. Using novel data on account openings and closures at over 900 banks, we show that only 5–15% of depositors open new accounts per year. More closures are driven by moving or death than rate-shopping. We develop an empirical model in which banks face dynamic invest-versus-harvest incentives. We find that depositor sleepiness accounts for 57% of average deposit franchise value, softening competition particularly for banks in low-concentration markets and banks with low-quality services. Sleepiness also enhances financial stability and significantly reduced default probabilities during the 2023 banking turmoil. [NBER]
• We have been excited to see a proliferation of vintage LM projects, including Ranke-4B, Mr. Chatterbox, and Machina Mirabilis. Alongside these efforts, we introduce talkie-1930-13b-base, a 13B language model trained on 260B tokens of historical pre-1931 English text. Additionally, we present a post-trained checkpoint turning our base model into a conversation partner without relying on modern chat transcripts or instruction-tuning data. talkie is the largest vintage language model we are aware of, and we plan to continue scaling significantly. As a next step, we are training a GPT-3-level model, which we hope to release this summer. A preliminary estimate also suggests we can grow our corpus to well over a trillion tokens of historical text, which should be sufficient to create a GPT-3.5 level model—similar in capability to the original ChatGPT. [talkie] 

Thursday Morning Links

• “The poor” in the United States today are not, generally speaking, hungry. Around a third of Americans are considered overweight; nearly half are obese. If we break this down along class lines, the heaviest Americans tend to be the ones with the lowest incomes. The wealthiest Americans, by contrast, are the likeliest to be thin; indeed, there is probably no correlation stronger in contemporary sociology than the one between a below-average B.M.I. and one’s class background. One is almost tempted to say that what Our Lady prophesied in the Magnificat has been fulfilled not in some future eschatological sense but here and now, as a mere description of socioeconomic markers—the hungry have indeed been filled to the point of bursting with ultra-processed foods, while the rich have voluntarily absented themselves from the table. [The Lamp] 
• Between 1870 and today, hours of work in the United States fell by about 40% — from nearly 3,000 hours per year to about 1,800. Hours fells but unemployment did not increase. Moreover, not only did work hours fall, but childhood, retirement, and life expectancy all increased. In fact in 1870, about 30% of a person’s entire life was spent working — people worked, slept, and died. Today it’s closer to 10%. Thus in the past 100+ years or so the amount of work in a person’s lifetime has fallen by about 2/3rds and the amount of leisure, including retirement has increased. We have already sustained a massive increase in leisure. There’s no reason we cannot do it again. [Marginal Revolution]
• Without physical optics there would have been no microscope, and until the perfection of the microscope, the biologist was in the main limited to what his unaided senses told him. It was by means of the compound microscope that the development of the cell theory was made possible in the nineteenth century. Similarly it is by means of the new tools and techniques developed in many instances by the physical sciences that the door to a biology of molecules has only recently been opened. [Rockefeller Foundation]
• “Concerning the advancement of learning,” Bacon writes in a letter to King James I in 1611, “I do subscribe to the opinion of one of the wisest and greatest men of your kingdom: That for grammar schools there are already too many, and therefore no providence to add where there is excess.” Quite right. Bacon was advising the king with regard to the charitable disposition of property; why, in our day, does Harvard need another two-hundred-million-dollar “charitable” gift to pile into its fifty-seven-billion-dollar endowment? [The Lamp] 
• Old money, ever prudent, armors itself against these barbs, toughening up via a series of rituals Aldrich calls the three ordeals. In the ordeal of education, one is constantly under pressure to establish personal bests in all fields—academic, athletic, social—and become the kind of seemingly effortless “all-rounder” Aldrich’s Harvard yearbook showed him to have been. The second is the ordeal of nature—the struggle of mountaineers or yachtsmen against elements indifferent to the size of their trust funds. Both practices seem to have endured into our own time. The third ordeal, military service, has faded in importance since the day Teddy Roosevelt marched into Brooks Brothers to order up the uniform he wore when he led the Rough Riders up San Juan Hill. Somewhere between the estimable naval service of a John F. Kennedy or a George H. W. Bush and the rather less glorious contribution of George W. Bush to the Texas Air National Guard, the military lost its hold on old money’s imagination, perhaps to the detriment of both institutions. [The New Criterion] 

Friday Night Links

• Citrini Research sent our incredibly capable field analyst – dubbed Analyst #3 in order to avoid emotional attachment – on assignment to the Strait of Hormuz. Armed with a fluency in four languages including Arabic, a Pelican case full of equipment, a pack of Cuban cigars, $15,000 in cash and a roll of Zyn, #3 set out to fulfill the itinerary we’d planned in our Manhattan offices the week prior. [Citrini Research]
• What he discovered on the ground: the AIS data everyone is trading on is missing roughly half of what's actually transiting the strait on any given day. Ships are going dark, spoofing destinations, broadcasting "CHINESE CREW OWNER" through transponder fields to avoid getting hit. Iran's ghost fleet is running 29+ laden tankers inside the Gulf with transponders off, moving an estimated $3B in crude to Malaysia since the war started. The entire market is pricing a "closed" strait off satellite imagery and transponder data that has a 50% blind spot. Every oil model, every supply forecast, every macro call built on AIS throughput numbers is working from a dataset that systematically overstates the disruption. When the signals deliberately go dark, the people staring at dashboards are the last to know what's happening. Citrini figured that out by putting a guy on a speedboat 18 miles from the Iranian coast while Shahed drones flew overhead. [link]
• Nature is not our mother: Nature is our sister. We can be proud of her beauty, since we have the same father; but she has no authority over us; we have to admire, but not to imitate. This gives to the typically Christian pleasure in this earth a strange touch of lightness that is almost frivolity. Nature was a solemn mother to the worshipers of Isis and Cybele. Nature was a solemn mother to Wordsworth or to Emerson. But Nature is not solemn to Francis of Assisi or to George Herbert. To St. Francis, Nature is a sister, and even a younger sister: a little, dancing sister, to be laughed at as well as loved. [G. K. Chesterton] 
• We all know that past a certain age, men just want to sit and read books about history. I remember when my dad went through The Change; I came home from school one day, and instead of being in the driveway shooting baskets and listening to Dire Straits, Dad was inside reading a book about the Korean War the size of a cinder block. At age 45, I’ve now undergone a similar shift: I now seek out information about the Italian invasion of Ethiopia the way 15 year-old me sought out topless photos of Cindy Margolis. [link]
• I am reading over the Trump pardons of well-connected fraudsters and people like that (not January 6 pardons or other political ones) and kind of synthesizing it with my mental image of the people described below, and as a result a sort of red-coded crook-pervert broad-elite is emerging in my mind, an alternate elite to the blue-coded broad-elite of professors and NGOs and whatnot, a more inchoate elite that isn't quite as legible as the blue one in the imagination of the general public but exists alongside it and is as every bit as loathsome, but for different reasons. It's a local gentry elite, the GOP's real base (not the blue-collar types voting Trump, but the "jet ski dealership" or "nursing home operator" McMansion dweller type), and the real reason the party exists. No one can actually name these people as individuals off the tops of their heads, at least not until the Trump pardon comes along. [@wmslamcan]
• Lucky people scored significantly higher on one trait: openness to experience. They talked to strangers more, varied their routines more, and said yes to invitations at nearly twice the rate. The "unlucky" group followed the same routes, ate at the same restaurants, and talked to the same 5 people. Their networks were closed loops. No new inputs, no new collisions. Luck isn't random. Luck is surface area. And surface area is a function of movement. [@aakashgupta]
• High-agency people seem to have this weird immunity to embarrassment. Getting rejected? Not embarrassing, that’s just data collection. Looking naive? Not embarrassing, that’s just information asymmetry you’re fixing. Breaking minor social rules? Not embarrassing, most rules are just Schelling points anyway. What would be embarrassing to them is not trying. That’s the thing they can’t live with. [@Kpaxs]
• Keweenaw Land Association, Limited today announced that it has entered into an exploration option, lease, work commitment, and royalty agreement with Pulsar Helium Inc. to evaluate helium resources across a large portion of the Company’s mineral rights portfolio in Upper Michigan. Helium is a critical industrial gas used in healthcare imaging, semiconductor manufacturing, fiber optics, aerospace systems, leak detection, and other advanced technologies. Demand has expanded alongside growth in space technologies and advanced semiconductor manufacturing. Approximately 40% of global helium supply is currently offline from traditional producing regions. This agreement positions Keweenaw and Michigan to help meet domestic demand, by leveraging the scale we have built over the past few years and laying the groundwork for a broader expansion with our partners. Under the agreement, Pulsar will initially receive an exploration option covering approximately 488,000 acres of Keweenaw’s mineral rights. The agreement includes a 36-month staged surrender schedule of acreage, and a minimum exploration expenditure at a level consistent with early-stage district-scale programs allowing Pulsar to evaluate the regional helium system before refining its exploration focus to a core 20,000-acre development leasehold. [Keweenaw Land Association, Ltd.]
• The other thing is that Bernie Sanders, who used to be a prominent critic of open borders, needs to lead his whole flock back to a politically sustainable posture on this. People are going to worry that the next Democratic administration will open up the floodgates to a chaotic flow of new asylum claims. They are going to understand that Democrats don’t like to be mean to sympathetic people, but that realistically the only way to prevent the situation from spiraling out of control is — yes — to frankly and unapologetically turn away people who are in fact not rapists or murderers or terrorists but just basically normal people who simply don’t have permission to move to the United States. This is going to be a tough issue for any Democrat, because the credibility problem after Biden is so severe, and because Democrats (myself included!) are really quite sincere in shying away from cruelty to people who really are just seeking a better life for themselves. But we do have immigration laws and we need to enforce them, and again I think moderating here is consistent with leftists’ core message. [Matt Yglesias]
• Starship will make it possible to use low Earth orbit as a parking lot for a giant space-based arsenal. This would allow the U.S. to pre-position conventional munitions with ablation shields and inertial guidance systems to strike anywhere on Earth within minutes. Putting tens of thousands of small munitions into orbit would become cost effective, by my estimate, at around $100 a kilogram. Munitions could include bunker busters, kinetic weapons, antipersonnel, incendiaries, fuel-air explosives, cluster munitions, and antitank, antiaircraft and antiship capabilities with sophisticated terminal guidance. Starship’s payload capacity promises to be so great that it will enable the deployment of much larger single munitions than today’s biggest airplanes, enabling conventional effects of a greater magnitude against even the most deeply buried targets. New kinds of strikes would become feasible. Imagine a strike package of thousands of 200-pound bombs, each landing precisely, at the same time, on electric grid sites, government buildings, railway crossings, border stations and road intersections—without putting planes or military personnel at risk. This wouldn’t be limited by the number of available missile launchers or by the need for multiple sorties by strike aircraft. Such a system would obviate the need to establish air superiority before bringing in bombers and the need for large numbers of expensive cruise missiles. From an appropriately chosen low Earth orbit, munitions could be deorbited with very little warning. [WSJ]

Books - Q1 2026

• The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success (5/5) Bought two copies of this, one to read and one for the CEO of a company that is cheap and overcapitalized but inexplicably reluctant to buy back stock. (The book has been on sale for half off on Amazon.) The Outsiders is much better than I thought the first time around, when I got bogged down with how unscientific it is. It is true that there is no control group, but you can learn useful things about the world from small sample sizes. I also did not appreciate back then how persistent business quality is, so while it may be a bad idea for a retailer to buy back stock (Sears / Radio Shack), it will work much better for a company that owns royalties or has a durable business "franchise." The Outsiders has eight case studies of companies with very high total shareholder return (significantly better than S&P 500) over long periods of time that also repurchased large amounts of stock (share cannibals). The cases in the book are: Tom Murphy / Capital Cities, Henry Singleton / Teledyne, Bill Anders / General Dynamics, John Malone / TCI, Kay Graham / Washington Post, Bill Stiritz / Ralston Purina, Dick Smith / General Cinema, and Warren Buffett / Berkshire Hathaway. The youngest of these executives is John Malone, who was born in 1941. Bill Anders was an Apollo astronaut! We really need a more up-to-date and scientific study of share cannibalization. (Some incredible share repurchasers of the past decade: AutoNation, DaVita, eBay, Synchrony Financial, Dillard's, Murphy USA, Allison Transmission, Group 1 Automotive.) An honest assessment should also look at attempted cannibalizations that turned into shareholder wipeouts, such as Sears. Could those failures have been predicted in advance? (Share repurchases are much riskier if a company has leverage, low profit margins, or lacks profitability.) The book was written in 2012 and he picks Transdigm (TDG) as a contemporary analog of an Outsider company. An outstanding choice: subsequently it is up 20x vs 6x for the S&P 500, which is 26% compounded vs 15%. Other highlights: Singleton was the "Babe Ruth of repurchases." John Malone's research project at Bell Labs was "studying optimal strategies in monopoly markets." (Paper: Resource Allocation and the Regulated Firm.) "EBITDA in particular was a radically new concept, going further up the income statement than anyone had gone before." What we are most confident in would be that royalty-like businesses should return capital via share repurchases. But managements of large cap companies are much better at this now, as we noticed when we read the AmEx book last year. It is at the Oddball micro caps and small banks where the managers have trouble understanding the benefit of share repurchases.
• The Art of Spending Money: Simple Choices for a Richer Life (2/5) Always looking for a good personal finance book to give to people with questions about building wealth. The Millionaire Next Door is good in many ways but some of its ideas are out of date now. (In particular, it is much harder to be frugal in buying your primary residence because you don't want to live in an underclass neighborhood.) I should have remembered that the author's (Morgan Housel) previous book was just a blog post turned into a book. Here is the tl;dr summary for this one. Interesting chapter at the end about the lifecycle of greed and fear: "Greed happens when you double down on actions that at one time worked but aren't sustainable, or that cause you to overestimate how influential your actions were on outcomes."
• Landscapes of Extraction: The Art of Mining in the American West (2/5) Nothing more cornucopian than a gigantic open pit copper mine that has been in business since 1906. The Bingham Canyon Mine takes up 0.02% of the land area of the state of Utah. Can we spare the intrusion? To ask an art museum curator the answer would be "no." They think that mines and oil fields are "problematic" and need to be "interrogated" with art. Hey, that energy is keeping the lights on in the gallery. (Also remember: "There would be a lot fewer history professors without cheap energy.") The Works Progress Administration's Federal Art Project (FAP) paid for a lot of this industrial art during the Great Depression. Remember that  there was no demand for artists or writers during the Great Depression and it turned that generation of would-be artists into communists. Some of these paintings are great, though, like the Chasm of the Bingham or Merrill Mahaffey's painting of the Morenci copper mine (owned by FCX).
• In Short Measures: Three Novellas (2/5) They say never meet your heroes. We really like Michael Ruhlman's nonfiction writing. His book The Making of a Chef is a true 5/5 and so is Walk on Water, the book about a pediatric heart surgeon. (The theme in his early books was that the "people who pursue perfection, date-on-a-dime clarity, and impossible high standards are the most compelling human beings alive.") However, this book is a collection of three short novels that he wrote around the time he got divorced. Based on the theme of the first novella (I didn't read the other two), I think that he was working on his own justification for leaving his wife to be with another woman. (Oddly, for a much older and less attractive woman.) Catholic News has a great, based take on the New York Times' story on Ruhlman's second marriage: "I do know that when you are married, it is profoundly dangerous to develop a fast friendship with someone of the opposite sex. Above all, married couples must protect their hearts. One may not be footloose with your heart. In fact, it is no longer yours." "As a final silly coda, the Times reported that crime-novelist Laura Lippman became a Universal Life minister so she could officiate at their wedding in the park. It is all so heart-breaking and, I regret to say, so utterly unserious." Michael had a bad fall last year while drinking. Falls claim a lot of alcoholics. And foodies tend to drink too much.
• The Renaissance: A Short History (3/5) Paul Johnson says that the Renaissance was the first great cultural war in European history. "Medieval certitude - or credulity depending on your viewpoint - was now faced with Renaissance scrutiny, or skepticism." "In response to the Protestant cult of the vernacular - of simplicity, austerity, and puritanism - the Catholic Church, after its earlier defensive and guilt-ridden response, decided to embark on a much bolder policy of emphasizing the spectacular. With the Jesuits in the vanguard, churches and other religious buildings were to be ablaze with light, clouded with incense, draped in lace, smothered in gilt, with huge altars, splendid vestments, sonorous organs and vast choirs, and a liturgy purged of medieval nonsense but essentially triumphalist in its content and amplitude." His chapter "The Buildings of the Renaissance" would be useful if one were to visit Rome, Venice, or Florence.
• Beyond Banks: Technology, Regulation, and the Future of Money (2/5) There was a great tweet about banks three years ago that we often think back on: "what if everyone's paycheck gets automatically deposited into some dude's credit fund and the government guarantees the deposits if the fund manager makes a mistake?" Banks are a 19th Century technology that attempts to do two different, important tasks: safely store medium of exchange, and also finance long-term productive enterprise. We published the idea in Oddball about eight years ago that you could separate the two businesses, lending and payments. That is what the author proposes here. ("Removing banks as ubiquitous but essentially unnecessary middlemen would help reduce the high cost of payments.") However, we have gotten much better at understanding that things are the way they are for a reason. (Reading Calomiris's book about why we have banks.) Who do you think would win in a political struggle over this, the Trump boys and their crypto schemes, or JP Morgan and Visa?
• The Long Way (2/5) This was tedious - it looks like sailing around the world would be somewhat difficult and dangerous but also quite boring. At least with mountain climbing you have great views, exercise and company. Instead of finishing the 1968-1969 Golden Globe race and returning to England where his wife and stepchildren lived, he sailed on to Tahiti and fathered a child with a new partner. Makes sense that someone who could spend years of life alone at sea is not very tethered to relationships on land.
• A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market (3/5) This was reviewed in a two part review by our correspondent @pdxsag. Thorp was born in 1932 so he's now almost 94. He looks amazing for his age. (Here's a 2024 photo taken with Boaz Weinstein.) No one can figure out how he's aging so well. Tim Ferriss interviewed him and so did Bloomberg, but we really don't know the secret. Apparently he could still do a chin up at age 91. He mentions in the book that "when I wanted to know some organic chemistry to explore ideas for extending healthy human longevity, I learned it as I needed to." Maybe one thing is that, thanks to inventing an options pricing model and various arbitrage techniques, he was able to retire from working pretty young and lived a chill life in Newport Beach. Thorp says that he has maintained his high school weight, takes magnesium, Vitamin K, and Vitamin D, and exercises a lot. Good to know that if you are a blackjack player, removing the 5s from the deck changes the edge from 0.2% house advantage to 3.29% for the player. Talking about counting cards, he observes that playing with edge results in moderately heavy losses mixed with 'lucky' streaks of the most dazzling brilliance: "I learned later that this was a characteristic of a random series of favorable bets. And I would see it again and again in real life in both the gambling and investment worlds." He told an acquaintance to pull money out of Madoff's fund, but the guy didn't listen to Thorp's points, he "would simply poll everyone he knew for their opinion and go with the majority view." He doesn't believe in keeping deposits at mutual banks, either: "Our hundreds of accounts took capital away from other investments." The book is half autobiography and half "Thorp's bland personal financial advice."
• Crossing the Chasm (3/5) The 1990 book about marketing disruptive technology products, explaining the gap (the "chasm") between early adopters and the mainstream market. Technology adoption life cycle progresses through innovators, early adopters, early majority, late majority, and laggards. He says that model came from research on the adoption of new strains of seed potatoes among farmers. Realized that I am probably early majority (which is mainstream), across the chasm, and not an early adopter. ("Conservatives, in essence, are against discontinuous innovations. They believe far more in tradition than in progress. And when they find something that works for them, they like to stick with it.") Something about the visionaries: "likely to be planning on implementing the great new order and then using that as a springboard to their next great career step." That's a principal-agent problem where they may not have to live with downsides of technologies that they buy. That's also why the visionaries may alienate pragmatists, and pragmatists don't reference visionaries in their buying decisions. Interestingly, Everett Rogers who wrote the book Diffusion of Innovations (1962) doesn't believe in chasms: "innovativeness, if measured properly, is a continuous variable and there are no sharp breaks or discontinuities between adjacent adopter categories (although there are important differences between them)." One of the keys to crossing the chasm: "Can you explain your product in the time it takes to ride up in an elevator?"

Thursday Night Links

• The prospect of a sustained reversion in investment yields likely extends beyond the horizon of bargain-hunters’ binoculars. We may look back at historical returns and wonder why investors ever got to have it so good. We will look back and think how inefficient it once was. Can you believe people earned 8-10% in stocks and thought it should last? We may look at equity returns for the past century the way people now look at home prices. Remember when a house only cost 3x annual income? [Moontower]
• Israel & the GCC are absorbing the kinetic cost of a conflict whose primary beneficiary, counter to the mainstream narrative, is actually America (First). Qatar offline for 5 years reprices the entire global gas market in favor of US exporters for the remainder of the decade. The Gulf states face years of rebuilding. Europe faces its 2nd energy crisis in four years. Sure, the average American might face temporary moderate inflation & higher gas prices. But if you are the architect of the US empire & you view the rise of China & Chinese ASI as an existential winner takes all scenario, the collateral damage is acceptable cost. Whoever controls the energy corridors controls the monetary system. Whoever controls the monetary system & the energy supply simultaneously controls the compute infrastructure that determines which civilization builds ASI first. [_10delta_]
• Positioning Marines on islands off Iran’s coast, rather than inside Iran itself, could be a loophole that would allow Trump to claim he has kept his promise not to put American boots on the ground in Iran. “I don’t see them in Iran proper,” Miller said. “I think if you’re going to put them anywhere, the place where it would be on some of the islands that are around Iran, in the Gulf, that might give you some advantage from a tactical sense for a period of time.” [WSJ]
• EPD’s Q4 ’25 financial results were excellent (one of its best quarters in the last five years), with a positive read on both growth trajectory and return of capital potential. Given the company’s strong balance sheet, it can direct incremental free cash flow to equity holders as capital spending tapers in 2026 and 2027. At the same time, its business is expected to generate mid-single digit cash flow growth over the next two years. EPD is one of KYN’s largest holdings and is a good example of the attributes we seek for the Company’s exposure to liquids-focused midstream companies. [Kayne Anderson Energy Infrastructure Fund, Inc.]
• Contrary to popular perception, recessions are not the inevitable bust that follows an unsustainable boom, and they do not operate like wildfires that clear out economic deadwood. Recessions are caused by adverse shocks like war and energy price spikes; and far from unleashing gales of creative destruction, post-recession economic growth typically resumes the same trend as before—all pain, no gain. [Tyler Beck Goodspeed]
• For all leftists’ talk about the unaccountable power of the Tech Oligarchs, they’re being routed without a fight from their home: a city whose wealth and power they can credibly claim to have built (at least as a class), and which is among the most beautiful places on earth. This is, of course, a death-spiral move for the state of California — but the real puzzle is this: For what they’ll spend on relocation costs alone, the tech exiles could have bought the entire California political system in perpetuity. [EXIT Newsletter]
• Son of a diddly! When we last spoke a smidge over 60 days ago it was looking like REITs might have their day in the sun. Sure enough, by late February the REIT market was up nicely. However, if the REIT rally was Punxsutawney Phil, then it saw the shadow of inflation and the clouds of war and hurried back into its burrow for a continued REIT market winter – giving back all the gains garnered the last two months. [Modiv Industrial, Inc.] 
• The card economic model powers shared investment, backed by active governance, standards and fault-tolerant operations (blog). To compete against Visa, you have to build a better payment system with better economics that overcomes the shared investment of all stakeholders. Open standards are a great technology model but a terrible business one, as commercial exchange requires risk management and a clear definition of terms. Blanket law and mandated payment schemes may create compliance requirements, but they do not provide the incentives to assume risk and invest. [Tom Noyes]

Will Attending an Investment Conference Make You Sad?

Emerging markets investor Harvey Sawikin of Firebird Management has a funny post on his Substack, The Falling Knife, asking whether attending an investment conference makes you sad. His conclusion, after some pseudo-rigorous math farmed out to a fictional AI assistant named "Chet Gepetti," is that it probably does, at least slightly. 

The mechanism is well-known to anyone who has attended an investing idea conference: the asymmetry between the pain of a bad idea that you bought and the regret of a good call that you passed on. Losses feel worse than missed gains feel good, but both sting. Add in the 40% of ideas that are duds, some conference food, and the nagging memory of a General Growth Properties pitch you heard from Bill Ackman in 2009 and then did nothing about, and the math turns against you.

His post resonated with me because in 2014 I attended a value investing conference where twenty-four ideas were presented and I have been tracking them, off and on, ever since. (It's been with some schadenfreude, since the conference organizer wouldn't let me present my idea, a small bank for 63% of tangible book value.) The results are instructive, though not in the way that value investors usually hope.

The 2014 conference's dogs were spectacular in their failure. Civeo Corporation, a workforce housing company, immediately plummeted after the conference and is still around, down roughly 90%. Iconix Brand Group, a royalty-driven brand licensor eventually went to near zero, down 99.7%, a near-total wipeout. Forest Oil merged with Sabine Oil & Gas in December of that year and Sabine filed for bankruptcy the next spring. QR Energy merged with BreitBurn Energy Partners, which also went bankrupt. Resolute Forest Products held on long enough to be acquired for a modest premium, though the Canadian dollar's 20% decline over the period ate much of that.

What is striking about this list is not just the magnitude of the losses but the speed. Several of these companies effectively ceased to exist within twelve to eighteen months of being presented as cheap. 

It was a value investing conference. The central premise of value investing, going back to Graham and Dodd, is the margin of safety: the idea that buying at a sufficient discount to intrinsic value protects you from catastrophic loss. If you are right about the asset value and wrong about everything else, you should at least get your money back. The failures indicate that either the margin of safety calculations were wrong, or that the concept does not travel well to certain kinds of businesses. Perhaps both. Commodity-producing companies, leveraged companies, and companies with deteriorating secular trends have a way of going from "cheap" to "zero" while being "undervalued" the entire way.

The base rate of public companies going bankrupt in any given year is well under 1%. The proportion of ideas from this conference that ended in bankruptcy or near-bankruptcy within a few years was dramatically higher than that. This is not a random sample, of course. Value conferences tend to attract the contrarian, the beaten-down, the deeply discounted. Which is precisely the problem. There is a selection effect toward the kinds of companies that appear cheap based on flawed metrics.

There were some good ideas too, and one extraordinary one.

General Motors was roughly flat over the decade, which is perhaps the most value-investor outcome imaginable: you do the work, you are right about the valuation, you hold for years, and you end up where you started. U.S. Steel roughly doubled. Visa returned something like seven times your money on a total return basis, which is an excellent result, though it required you to own a wide-moat payments network at a time when you were surrounded by people pitching over-leveraged forest product companies and housing for oilfield workers.

But then there was Nvidia Corporation (NVDA).

Remember that at the time of this conference in 2014, it was primarily a gaming GPU company. (We, of course, had zero interest in anything linked to "gaming," for dorks.) Nvidia has since returned something in the neighborhood of 500 times your money. If you put 4.2% of your portfolio into each of the twenty-four ideas at equal weight, the naive strategy, the math is remarkable. Visa alone would have covered most of the dogs. But then Nvidia would have returned roughly 20 times your entire starting portfolio over twelve years.

The problem is what that looks like in practice. After a few years, a genuinely equal-weighted portfolio becomes anything but equal. Nvidia would have grown to dominate the portfolio so completely that you would have experienced 50%-plus drawdowns in 2018 and again in 2022, watching what was functionally your entire portfolio cut in half, twice, before the final ascent. Almost no professional manager could have survive that. Harvey addresses exactly this in some other Substack posts on art collections and Firebird's early portfolio: even if you have the right positions, the institutional constraints of managing other people's money make it nearly impossible to ride a 75% concentration in two stocks through a bear market without your limited partners concluding that you are a reckless gambler.

The only way to have actually captured the Nvidia return in its entirety was probably to put these stocks in a brokerage account you never checked ("coffee can"). The position sizing problem is not just psychological, it is structural. A manager who communicated to investors in 2022 that they were 70% in a semiconductor stock that had just halved would not have had LPs for long. The money would have left, locking in the loss, before the recovery came.

Sawikin writes about this dynamic in the context of art collections, noting that Keynes' collection at King's College has compounded well precisely because no one was tempted to "trim the Cézanne position." Stocks do not have that feature. You get a price every day, your investors are watching, and the pressure to do something is constant.

I only went to that one conference in the series and have occasionally wondered what I missed in subsequent years. It would be interesting to look at the other vintages. Did the hit rate improve? Did anyone present NVDA again in 2016, after it had already doubled, and catch the remaining 250x? At what point did the energy and commodity ideas, which dominated the 2014 vintage in a way that reflected the zeitgeist of that moment, give way to technology ideas in later years?

I do attend a different annual value investor dinner and have returned for several years now. One pattern I have noticed is that the best ideas (so far as I can judge) are also the ones that are best presented. This is not a coincidence. Clear communication is demonstration of clear thinking. An idea that can be explained simply and directly has fewer moving parts, which means fewer things that can go wrong. The people who can stand up and say quickly and clearly exactly what they own, exactly why it is cheap, and exactly what has to happen for it to work out, are people who have better mental models of the world.

The corollary is that a complicated pitch is often a warning sign. If the presenter cannot explain why a company is cheap without also explaining four offsetting factors that are currently obscuring the value, there is a decent chance that one of those factors eventually wins. The companies that went to zero from the 2014 conference generally had stories: the oil price will recover, the licenses will be renewed, the merger will unlock the discount. The thesis required multiple things to go right. They did not.

The simple ideas, like buy the world's dominant payments network, buy the AI-adjacent chip company when no one cares about AI, turned out to be the ones worth owning. The elaborate restructuring plays and commodity-cycle bets, the ones that required the most slides and the most assumptions, are the ones in the bankruptcy column.

This is not a new observation. But watching it play out over a decade, with a specific set of names and a specific date stamp, makes it more concrete than it usually appears in the abstract.