You can also listen to a narration of this article on iTunes & online.

Uber and Self-Driving Cars: The Utilization Problem Nobody Talks About

This article is an excerpt from the winter letter I wrote to IMA clients.

Uber Update

Fundamentally, Uber (UBER) is performing exceptionally well. Its bookings and revenues are growing around 20% a year. Its costs are growing at a much slower pace than revenues, and profits continue to grow at a much faster pace than revenues. Its service has become a utility in the digital economy.

The stock, however, does not trade on its fundamental performance today; it is trading on the news flow about autonomous vehicles (AV).

I visited San Francisco in the summer of 2025, and Waymos were crawling the streets like cockroaches. At some point it felt like there were more Waymos on the road than other cars. I took a Waymo with my colleague Cyrus. We were genuinely impressed. It was a seamless experience.

Uber is dead, long live Waymo?

Not So Fast

Waymo today is either losing money or barely breaking even for Alphabet, its owner. It is a super-secure car, not just because of software but also because of hardware. Waymo does not just operate on cameras like Tesla; it is packed with lidar and radar. I have read that a fully equipped Waymo car costs $150,000–$180,000. Knowing what we know about technology, it is fair to assume that in the future the extra hardware costs will collapse to nothing.

Tesla has taken a different approach. It has taken out lidar and radar and gone camera-only. Who am I to disagree with Elon? But in my experience (my family has three Teslas) full self-driving works fine almost all the time.

But I struggle with the “almost” part. It does not work in bad weather, when it rains or snows. The issue is sensors: cameras get clogged up. Also, lidar and radar can see far away; at a quarter of a mile, going at 60 miles an hour, that is 15 seconds away. Cameras lack that range.

But let’s assume Elon will figure this out.

Uber is dead? Long live Waymo and Tesla?

The Utilization Problem

To be successful at the rideshare self-driving thing, one figure becomes crucial: utilization. A car that spends two hours giving rides costs almost as much (less fuel and wear and tear) as one that is on the road ten hours a day.

People tend to do things in unison. We get up, drive kids to school, go to work, go to lunch, go back home. All of these activities happen for the most part at the same time of day.

Let’s say you are Waymo and you need to figure out how many cars to put on the road. Peak-time demand is 100 cars and off-peak demand is 20.

If you buy 100 cars, you are buying infinite love from riders; you will be able to fetch them a car during peak and off-peak times. This love will be expensive, and during off-peak times eighty cars will be collecting expensive dust and earning no money. This scenario brings a lot of love, poor financial performance, and eventual extinction.

Now, you can take the polar opposite approach. Buy only 20 cars. They will be busy during peak and off-peak times. During off-peak times consumers will love you. But during peak times the demand is for 100 cars and you only have 20 – the wait times (the ridesharing hell) will bring a lot of hate. Your utilization will be high at first, but then riders frustrated with long wait times during peak hours will move to someone else, and extinction awaits you.

Where Uber Fits In

This is where Uber comes in. If Waymo puts its cars on the Uber app, during peak times consumers can choose between Waymo or HVs (human vehicles; I figure it is only fair we have a name for human-operated vehicles). During off-peak times they will be choosing from a menu of HVs and AVs.

For this privilege of unlimited consumer love and much higher utilization, Waymo will pay Uber about 20%. (Uber’s usual take rate for HVs is 28%, but that also covers insurance. AVs are insured by their owners.) Uber has shown that when Waymo put its cars on the app, the increased utilization more than offset the cost of the platform.

One thing I learned from our painful experience investing in Intermex: If you own a company in an industry experiencing a transition, you want management that is not dismissing the transition but fully embracing it. As a small sidebar: We are entering a period where, with the help of AI, change will crawl into unexpected places; and so the ability to adapt and embrace change is something we look for in all management teams.

This is what we really like about Uber’s management; they are not dismissing AVs, they are embracing them. They are signing partnerships with Waymo but also bringing a dozen AV technologies and partners to their markets. It is unlikely that Tesla and Waymo are going to be the only AV providers. There are literally dozens of companies working on self-driving globally.

Uber announced that they will have self-driving in 15 markets by the end of the year. As a consumer, I care about four things in rideshare: safety, wait time, price, and ease of the experience. Uber can deliver all four with its hybrid network.

The Bigger Picture

But we may be looking at this thing completely wrong. AVs will likely bring lower prices and thus grow the rideshare market. Here is what I wrote from my most recent visit to London:

“The number of black cabs has declined from over 22,000 a decade ago to around 15,000 today. ‘The Knowledge’ academy only produced two graduates last month. What really shocked me is that there are now over 110,000 Ubers roaming the streets of London. Uber is, in my experience, 40% cheaper, and you can call one from the app. Yes, cab drivers lost thousands of cabs to Uber, but the market for hailed cars expanded by 100,000 thanks to added convenience and lower prices.”

What lower rideshare prices did to London’s black cab market will likely happen to the rideshare market as a whole: it will grow, and Uber will likely be right in the middle of it.

Mendelssohn Piano Concerto No. 1 – 2nd Movement

We are continuing our exploration of 2nd movements of romantic piano concertos with Mendelssohn’s Piano Concerto No. 1. #PianoAdagios

In 1831, Felix Mendelssohn, a 22-year-old prodigy brimming with Romantic fervor, composed his Piano Concerto No. 1 in G minor in just a few months. Mendelssohn premiered it himself in Munich on October 17, 1831, to rapturous applause, dedicating it to pianist Delphine von Schauroth. It’s Mendelssohn at his most vibrant — effervescent, poetic, and impossible to resist.

Click here to listen.

What AI, Tariffs, and Global Uncertainty Mean for Your Portfolio

Humility

Clients have been asking about AI, our portfolio, and the world. The honest answer to all three starts in an uncomfortable place.

Not with conviction. With humility.

We are living through a period where change is happening faster than our ability to understand it. The future feels less predictable, not because we know less, but because the range of possible outcomes has expanded.

When that happens, confidence becomes dangerous. Assumptions that once felt stable begin to crack. And the way we think about risk, opportunity, and even our own decision-making has to evolve.

What follows is an excerpt from a recent client letter, and my best attempt to think through that reality.

AI

AI requires an enormous dose of humility. It is changing much faster than our ability to understand the change. AI creating AI makes its growth exponential – something our minds have difficulty processing.

AI is a great benefit, but it is also a threat.

Until recently, the market focused on the benefit part, but there will be losers. Software stocks are a great recent example. Many are down 50–70% from their highs, erasing gains for some of them over the last five years or even a decade.

A lot of them traded at nosebleed valuations, priced for out-of-this-world perfection, and most of these declines are just normalization – bringing some clouds into a multidecade cloudless forecast of uninterrupted growth. But as we spent time researching them, we couldn’t say how this story will play out on an industry-wide basis. What we do know is that the range of outcomes – both positive and negative – has widened substantially.

AI definitely lowers barriers to entry and in some cases switching costs. It reduces boundaries of expansion of existing and new players – you’ll have companies encroaching on each other’s space, benefiting consumers of software but impacting profit margins of the industry. However, the productivity of software engineers will go up a lot. This is a deflationary force – and one that will displace a lot of jobs.

The software industry is the one likely to be impacted first, for several reasons: first, it is the most adept at change; and second, it has been the focus of AI companies, as they are using AI to program AI. Finally, software is at the tip of the spear of AI because it speaks the same language – computer languages. Software engineers get paid a lot of money in part because they have learned to think like a computer. Now they are competing with a brilliant one.

But it is also important to understand that though these companies are in the “software” business, creating software is not everything. They also need to provide support and continuity of updates, have industry knowledge, provide uptime, integrations, security, “throat to choke” – someone reputable to redirect blame to when there are problems – and more. The best products, at least judged on the single dimension of software excellence, don’t always win. Just look at Microsoft. It is a collection of a lot of average products that work well together.

From a broader perspective, a lot will depend not just on individual companies’ competitive positioning, which is paramount, but also on management and culture. Those who embrace change and execute well will create a lot of value. The ones who dismiss it may look fine for a while, until their businesses turn into Kodak camera film. The further we are from tasks that can be put into an algorithm and the closer we are to human connection, the further we are from the spear of AI.

As my friend Saurabh Madan put it, “Knowing what to do and having tools at hand doesn’t mean that companies will do it. It is like everyone knows that we should eat healthy and exercise. Not all of us do it.”

Embracing AI

IMA is embracing AI. It’s easier for us; we are a small company. We can turn on a dime.

We intentionally stayed away from complexity, choosing to do a few things but do them better. We can test and experiment with different models. We can hire consultants to help us adapt.

But at IMA change comes from the top, mainly yours truly. I encourage our folks to embrace it. This is not always easy.

We have great workflows that are running well now. Change requires interrupting those workflows, at first maybe making them worse. Diving into something new and unfamiliar is... there’s no better word for it: scary.

IMA is a small organization that is growing. I don’t want to hire more people. I don’t want an HR department and all the downsides that come with large size. I want us to stay small and agile. Folks at IMA, as long as they have soul in the game and continue to embrace change, have job security here and don’t have to worry about being disrupted by AI; rather, they are encouraged to embrace it.

Large organizations have it harder. They have more bureaucracy, and AI is not perfect; it brings its own risks, just like anything new does. A lot of people are going to fear for their job security.

This is why I think AI’s exponential improvement will at first run into the wall of human biases and insecurities. It will move at the speed of humans.

Eventually AI will overcome them, as more nimble organizations, the ones that embraced AI, will overrun the ones hanging on to the past. It is survival of those who adapt. But it will take time. Though probably less time than past transitions.

We approach AI with a lot of humility and know that if we don’t embrace it, we’ll be run over by those who do.

Diversification

Humility applies to portfolio construction as well. Humility means you don’t have all the answers, you keep an open mind, and you realize that the range of outcomes is wider than in the past. This is why we have been diversifying our portfolio.

I have to pause for a second. I rarely talk about the Bible in these letters, but the story of Noah’s Ark comes to mind: gather two of every kind to survive the flood. This is how Wall Street and academia approach diversification; but as Warren Buffett put it, that’s how you create a zoo.

We are not in the zoo business, just intent on picking the right animals. We look at diversification differently: each independent bet has to have its own risk-reward merit. I am not going to compromise on a company’s quality, management, or valuation just to “diversify.”

We will just have to make slightly more bets.

I hope, as you see from each of our decisions, that we have been uncompromising.

We have more small positions in the portfolio today. Our portfolio will likely grow from 20–25 stocks to 30–35, at least temporarily. I’ll repeat: These incremental positions have to breathe on their own, not at the expense of the rest of the portfolio. The goal is to reduce the idiosyncratic risk that comes from today’s transforming global political environment and fast technological change.

However, an increasing number of stocks brings its own challenges. It can breed indifference to outcomes. When you buy a 2% position, you may care a lot less than about a 5% one. But anything we buy, with very few exceptions, we are ready to increase to a large position as our confidence grows. This decrease in position size is likely transitional, not permanent.

My biggest concern is our ability to maintain high-quality research on a larger number of stocks. This is where AI becomes incredibly helpful. In many cases it has helped us do the same work faster, so the growth in the portfolio has not caused a degradation of research. It is not doing the work for us, but it is helping us go deeper and wider.

Also, an increase in the number of positions doesn’t always mean a linear increase in research. In many cases, 70% of the work is industry research. When we researched tobacco stocks, analyzing Philip Morris helped us understand Altria and British American Tobacco. Instead of buying one company in the space, we bought three, and then reduced to two. The same applies to oil companies, HMOs, and even software.

We are building a diversified portfolio, and thus by construction these companies will be exposed to different risk and reward forces. They will be in different phases of success (or turnaround), different geographies and industries, different corporate sizes.

The end goal of diversification is not really to reduce volatility, though that may be a byproduct, but to avoid permanent loss of capital. I expect that not all our investment decisions will work out. That is almost an axiom of investment math. As much as we work to eliminate this, we will have a few that result in permanent loss of capital. We keep working hard to reduce it.

We have been diversifying away from the US. I am sad about this. I love America; I want it to succeed. But lately we, the US, have been our own worst enemy. Though to a lesser degree than Europe, we get drunk on our past success and start thinking it is a gift from God, not the result of hard work.

We are destroying alliances that made us stronger and that gave us a gift (or curse, depending on how you want to look at it): the global reserve currency.

We are running 6% budget deficits while our debt is at the highest level since World War II – and this is in a benign economy. What is going to happen to budget deficits when we go into a recession? Will they go up to 9% of GDP?

In the past, developed markets traded at a premium to emerging markets; we had a stable political system, a stable and more diverse economy. That premium was earned, not given. And it is quietly eroding. Over the last decade, the delta between the developed and developing world has been narrowing. This is why we have been slowly but surely venturing outside of the US.

Europe offered more attractive valuations, but it has its own set of problems. I have a lot of conflicted feelings about Europe. I really want to be optimistic about its future. I was born in Europe.

I truly hoped that being forced to spend on defense would make Europe more pragmatic and would force it to address the socioeconomic issues of immigration, high energy prices, and insane overregulation. It has not really dealt with any of those problems. I can see it sleepwalking into irrelevancy, one luxury belief, one regulation at a time. It has to have a heart attack – a war on NATO country territory, or economic stress pushing government yields into double digits – for it to change behavior.

So we have been spending more time studying companies in Latin America and Asia.

We are not going to venture into China – I don’t want to wake up one day and find out that a company I thought I owned, I don’t own anymore. Americans cannot invest directly in India, but I don’t think we are missing much; India’s stock market trades at valuations that make the US look cheap. We had a small and successful excursion to Japan.

Our portfolio will look more global in the future than it has in the past. This makes our life more difficult, from research to trading, but I feel it is the right thing to do. This is going to be a slow, deliberate, and again, uncompromising process.

As you know, your portfolio is managed by a paranoid Russian Jew: my ancestors were at the end of the spear of change. I feel like it is in my DNA to worry about risks that may be lurking around the corner.

If you are worried about what is going on in the world today, I am worried even more: I am worried for you and for me, as my family’s net worth is invested in the same stocks as you are. So my advice: since I am going to worry anyway, maybe you need to worry a little bit less. Let me worry for both of us.

Pagliacci: “No! I’m not a clown!”

We are exploring timeless arias from Ruggero Leoncavallo’s opera Pagliacci.

Here’s “No! Pagliaccio non son!” (“No! I’m not a clown!”). During the play-within-a-play, Canio breaks character, declaring he is no longer the clown Pagliacci but a man consumed by love and jealousy, leading to the opera’s violent climax. The aria ends with famous words “La commedia è finita!” #TimelessArias

Click here to listen.

I’ve been attending the Berkshire Hathaway annual meeting for more than 15 years. When people ask what it’s like, I always struggle to describe these three days in Omaha — a small city invaded by 50,000 people from all over the world, all there to hear the words of the Oracle of Omaha, Warren Buffett. It never gets old.

For those heading to Omaha for the first time — or coming back for the nth time — I’ve put together a simple guide to this wonderful weekend, written entirely from my own experience.

A few things I’m involved in this year:

Our Q&A breakfast moves to Sunday morning this year. It’s completely free — but last year we hit capacity and had to turn people away, so don’t wait. We’ll also have a lineup of well-known authors signing books at the event. Grab your spot now before it fills up.

Register for Sunday Breakfast

On Saturday, I’ll be hosting a fireside chat with Adam Anderson, CEO of Innovex, the oilfield services company we own. A few months ago I told Adam how much I love BRK weekend — apparently I was so convincing that he decided to come. I’ll be interviewing him about Innovex, the oil services industry, capital allocation, and more. I’ve never done this before and I’m really looking forward to it!

On Friday, I’ll be a panelist at the Creighton Value Panel. And if you’re a YPO member, join us Saturday at the YPO event hosted by the local chapter.

I put all the details — restaurants, hotel tips, my schedule of events, and a few things most first-timers miss — into one guide. Whether it’s your first trip or your tenth, there’s something in here for you.

Check out my Omaha weekend guide

The Art and Psychology of Selling

This article is an excerpt from the winter letter I wrote to IMA clients.

I have to confess, this whole investing thing is a lot more art than science. I bring a scientist’s mindset – I approach problems with an open mind and I am willing to change my mind when data proves me wrong. But the world is constantly in flux, and I have imperfect, incomplete, constantly changing data, with new data pouring in daily. Though for every single company we have fair value and rate of return numbers on our spreadsheet, in our mind those numbers are vague, directional approximations. A company’s fair value is a range of values, which may change as facts and our view of the future change.

I devoted chapters to our sell discipline in my first two books. I’d probably rewrite those chapters, as my thinking about selling has evolved over the years. I’ve learned new things from my successes and my failures (I’ve had plenty of those).

I am more patient with selling when a lot of things are humming together and impatient when I lose confidence in management, and I have zero tolerance when I have an iota of doubt about management’s character.

Today, I also think a lot more about position sizes – they express our confidence about future returns, the range and skewness of outcomes. The higher the quality of the business and the better our understanding of it, the larger a position size we are willing to tolerate in the portfolio.

Valuation of course plays an important part, too, but it used to be front and center; now it is just a significant component in the mix. We let Babcock, for instance, grow much bigger than Vitaliy the book author would have before we started trimming it. There was a lollapalooza of positive factors: irreplaceable assets (the only place in the UK that can refuel and fix submarines), one of the best management teams in the world, and the tailwind of defense spending globally. As operating performance improved, the UK government trusted it with more contracts.

But psychology is just as important as the analysis.

We would have been better off if we had not sold a share of McKesson – the stock is up 7x from our first purchase. But that is almost impractical; it would be 40% of the portfolio and you and I would lose sleep over it. If one of us loses sleep over it, it means the cost of being wrong is too high and thus the gain is not worth it.

I was patient with trimming McKesson – the best player in the industry in a growing, very stable industry, with significant demographic tailwinds, A+ management. Vitaliy – the author of my first two books – would have sold it much sooner. We still own remnants of it.

The new me is more nuanced about selling, and it is harder to put that into a rigid framework, as each position is really a case-by-case analysis – this is why it is more art than science.

I am probably going to be more patient with Philip Morris (PM) than with British American Tobacco (BTI). PM has an exceptional management team with incredible ability to suffer, to sacrifice short-term returns for long-term competitive advantage. But BTI has been gradually improving; and thus over time, as I have greater confidence in its management, I may give it a longer leash.

I am writing all this to explain that there is a process to selling, but it is not rigid and is always in flux and full of… yes, humility.

If you take one thing from this letter, let it be this: don’t be afraid to evolve your process. The Vitaliy who wrote those chapters fifteen years ago was doing his best with what he knew. The Vitaliy writing this today has made enough mistakes to know that rigid rules are comforting but costly. The best selling discipline is one that adapts — to the company, to the market, and to what you’ve learned since the last time you were sure you were right.

Pagliacci: “Put on the Costume”

We are exploring timeless arias from Ruggero Leoncavallo’s opera Pagliacci.

Here’s “Vesti la Giubba” (“Put on the Costume”)

This aria is very dear to me. Canio, the circus owner, has just discovered that his wife, Nedda, is having an affair. He is about to go on stage and perform in a play with Nedda, where she plays a wife who is having an affair with Arlecchino. The cruel irony is overwhelming – his real-life tragedy will be enacted as comedy in front of a laughing audience.

This tension between inner turmoil and outward composure made this opera and this aria so dear to me. In 2015, I was having a very difficult time as an investor. I was in pain, dealing with professional setbacks and failures, but I had to show a different face to the external world. My investors and team needed to see confidence and leadership, not the doubt and anguish I was experiencing. Like Canio putting on his white-face paint and costume, I had to dress up in my professional persona every morning and perform.

I ended up writing a chapter about this in Soul in the Game. The aria captures something profound about professional life – how often we must transform our private pain into public performance. Canio’s famous line “Ridi, Pagliaccio” (“Laugh, clown”) became my internal soundtrack during those months. The show must go on, whether you’re a clown in a traveling theater or an investor managing other people’s money. Your personal catastrophe doesn’t stop the world from demanding your performance. #TimelessArias

Click here to listen.

You can also listen to a narration of this article on iTunes & online.

On AI Eating The World

There’s an unwritten rule in media: the more uncertain the future and the more confident the predictions, the more clicks and views they get. AI’s impact on the economy is the perfect example. I hear predictions that AI will accelerate GDP growth to 7–10%, or that our economy will fall into an abyss, as if either is a foregone conclusion.

Instead of joining the chorus of false certainty, let me offer you a crayon-level framework for thinking about it. I am going for vaguely right, not precisely wrong.

You can explain economic growth with a simple formula: growth in the employed population plus productivity growth. When women entered the workforce in the 1960s and ‘70s, the employed population surged and the economy expanded faster than population growth alone would predict. I saw estimates that today’s economy would be about 13% smaller if women had not entered the workforce.

On the productivity side, technology has historically added another 1–2% to GDP growth, as workers swapped hand tools for power tools, donkeys for combines, and adding machines for computers.

Now enter AI. Clearly a massive productivity tool. But productivity is only half the formula. Employment, and more importantly income from employment, is the other half — and that’s where things get complicated.

Take the software industry as an extremely crude example. It’s on the tip of the spear of AI disruption today. Say a company employs a team of developers. AI makes each one dramatically more productive. The company can now produce far more software than before.

In the best case, the higher output is absorbed by insatiable, newly created demand: The company can now write software for tiny niches it couldn’t reach before. This increases the productivity of the whole economy, demand rises, and all the developers keep their jobs while creating a lot of value.

There are also other, less rosy and no less likely scenarios. Demand doesn’t change, and the company lays off most of its developers because it only needs a fraction of them. Or maybe demand goes up but not enough to match the productivity gains, and the company still lays off developers because the remaining ones produce more than enough.

In both cases, developers are let go due to efficiency brought by AI.

Now zoom out.

The economy is a complex adaptive system, and what’s true for one company isn’t necessarily true at scale, for thousands of companies. A mix of the last two scenarios is the more likely outcome for the economy as a whole, and the consequences ripple outward. At the macro level, there is a tug of war between two opposing forces.

On the optimistic side, if AI helps companies create software they couldn’t have created before — whether more sophisticated or serving more niche markets — the pie gets bigger. Software that was previously too expensive to build becomes viable. New markets appear. Lower costs lead to lower prices, which improve the cost of living and spur demand. New demand creates new jobs.

On the darker side, fewer developers means companies spend less with software vendors: Oracle, Workday, Salesforce. Good for a software-producing company’s bottom line, bad for those vendors’ revenue and the employees who work for them. And if those vendors were buying this company’s software, that lost revenue flows back as lower demand. The laid-off developers themselves spend less and pay less in taxes. Apply this across an industry and an economy and suddenly you’ve got a shrinking pie.

So which side wins the tug of war? Nobody knows, and it will likely vary by industry.

The most common counterargument — the one I hope plays out and one I used to make myself — is that we’ve been through something like this before. A century ago, a third of the country worked in agriculture. Today, thanks to automation, a tiny percentage of the US population doesn’t just feed the country but much of the rest of the world. Farmers retrained; their children went on to build cars; and their great-grandchildren are doing jobs that didn’t even exist a decade or two ago: social media influencers, app developers, and the like. The economy adapted. It always has.

But here’s my hesitation with that analogy. Farmers didn’t retrain overnight. It took generations.

Today, the speed of change is unprecedented. It’s AI creating new AI. Each generation accelerates the next. Reportedly, 90% of Anthropic’s Claude Code was written by Claude Code itself. What used to take decades now takes years, often months.

The breadth is staggering. It started with software engineers, but it won’t end there. It will spread across all knowledge work — it is going to impact the previously untouchable professions, the Jewish mother’s dream jobs for her kid: lawyers and doctors — and then beyond. There are over four million Uber and truck drivers in the US, and self-driving is coming for them. Robots are already quietly taking over distribution centers and will eventually build houses, collect trash, and pick tomatoes — many of the jobs we Americans don’t want to do.

Put speed and breadth together and it’s very possible we’ll find a generation of workers whose skills simply don’t match the available jobs. That’s the real danger: not that the economy won’t adapt, but that it won’t adapt fast enough.

The software industry, the one grabbing headlines today, may be an aberration. Software engineers’ most important skill was thinking like a computer, and AI, being a computer, is faster and possibly better at it. Also, it doesn’t need to pick up kids from school, take vacations – it can work 24/7 in any weather. Other industries may not be as vulnerable as software, at least not as quickly.

Human inertia is a powerful force, especially in large companies. AI may end up moving at the speed of humans, as adoption has to overcome the default human behavior of resistance to change, fear for job security, and simply fear of the unknown. Self-preservation bias will slow things down considerably.

And there’s a physical constraint. Humans are energy: a mixture of food, water, Ozempic, and Viagra. AI is energy too: electricity. We are replacing one form of energy with another. AI may be displacing people in the workplace but not out of existence. Writing code to replace those programmers costs a lot of electricity, and building the new AI- and robot-powered economy requires data centers, factories, power plants, and grids. Those take years to construct. Energy is going to be a significant constraint to disruption.

The counteracting force here is competition. If more aggressive competitors start breaking progress at human speed — aggressively adopting AI, laying off employees, cutting costs, and lowering prices — competitors moving at human speed will have to adapt or die. The stock market will reward those who move at AI speed. Block (formerly known as Square), a fintech company, announced that AI had improved its efficiency and it will be (going full GPU), laying off 40% of its 10,000 workforce. Investors smelled much higher earnings — the stock instantly went up 20%. If you are a CEO worrying about your future, you were just shown a road map to a higher stock price.

New markets, new industries, new roles will emerge. They always do. But will they emerge fast enough? The adaptive system still works. The question is whether it can keep up.

At the end of the day, it’s really a tug of war between productivity and employment. As investors, we need to arm ourselves with a healthy dose of humility. The range of outcomes for how the future will look is getting wider, not narrower.

Pagliacci: “Such a game, believe me”

We are exploring timeless arias from Ruggero Leoncavallo’s opera Pagliacci.

“Un tal gioco, credetemi” (“Such a game, believe me”) is sung by Canio, a circus owner. Canio warns villagers not to joke about his honor or his wife’s fidelity, revealing his underlying jealousy and foreshadowing tragedy. #TimelessArias

Click here to listen.

You can also listen to a narration of this article on iTunes & online.

We own several investments in oil and natural gas. I have received inquiries from readers questioning the morality of these investments. In this essay, I address their concerns.

The Church of Climate and the Law of Unintended Consequences

Over the last decade, the global warming discussion has ceased to be a scientific debate and has morphed into something far more rigid: a religion.

You are no longer asked to theorize, debate, and understand; you are asked to believe. This, by definition, is faith, not science. The dogma is strict: you are either a believer or you are a heretic. If you don’t think this has become a religious movement, ask yourself: would people who are utterly convinced that this is a man-made crisis change their minds with the emergence of new, contradictory evidence?

If you are appalled by this phrasing and that I did not immediately signal my virtue in the opening sentence, you are probably already canceling me in your mind.

But please stick with me.

I am an analyst by trade. I look at data for a living. Becoming dogmatic and religious about the non-spiritual world is dangerous in my profession. And when it comes to man-made climate change, I have seen arguments for and against. I question the data quality, the modeling, and most importantly the incentives and groupthink of the people presenting both sides.

My view on this topic is simple and, I hope, intellectually honest: I simply don’t know. Climate is a complex system where the interrelationships among variables are very difficult to assess. Thus, the only rational stance I can take is Socratic ignorance. Even this stance is already getting me canceled by believers and non-believers.

I have a personal rule: I don’t debate religion or politics. I have never seen a person change their mind on these topics during a debate, and life is simply too short for futile arguments. Thus, here I’ll take a more pragmatic approach: It is rational to apply a “margin of safety” and err on the side of assuming global warming is man-caused and real. But, as investors and rational thinkers, we must also weigh the efficacy of our efforts against their costs.

As Milton Friedman famously said, policies should be judged not by their intentions—not by how warm and fuzzy they make you feel during a stump speech—but by their results.

The Road to Hell (Is Paved with Green Intentions)

If we carefully observe how the world has dealt with global warming, we would quickly realize we have failed miserably. The fight against global warming follows a familiar, depressing trajectory (especially when the government gets involved): it started as an idea, mutated into a movement, and ended up as a racket.

We have spent trillions of dollars, and what do we have to show for it?

Take Germany. In one of the most irrational policy moves I have ever witnessed, Germany shut down its nuclear power plants—the only reliable source of carbon-free baseload power.

Instead, this northern country decided to rely on solar and wind. But here is the problem with physics: the sun doesn’t always shine, and the wind doesn’t always blow. To bridge the gap, Germany has to run “peaker” (natural gas-powered) plants that are extremely inefficient and spew CO2.

But it gets worse. To fuel this transition, Germany got hooked on cheap Russian natural gas. In fairness, Germany originally embarked on its “green” journey after the Fukushima disaster, when it vilified nuclear energy. But the height of this insanity occurred in April 2023, when Germany shut down its very last nuclear plants—more than a year after Russia invaded Ukraine—while the country was in the midst of an energy crisis.

Germany used to be a manufacturing powerhouse, famous for chemicals and automobiles. Both industries require cheap, reliable energy. Germany doesn’t have that anymore.

The UK is following a similar script. In its quest to turn green, North Sea gas production has declined roughly two-thirds since its 1999 peak. Windfall taxes have crushed investment. The result? The UK pays roughly four times as much for commercial electricity as the US, and its manufacturing base is shrinking.

Europe’s CO2 emissions have flatlined, but not because the continent became more efficient. It is primarily because they exported their emissions. They shipped CO2-producing industries (and the jobs that came with them) to China. Consequently, China’s emissions tripled between 2000 and 2023. This is accounting sleight-of-hand, not planetary salvation—we still share the same planet.

The US has spent trillions on green energy: taxpayer-funded companies that went belly up, subsidized EVs, billions on charging infrastructure that still doesn’t exist. Yet much of what we call “green” is just as brown as the petrochemicals it replaces.

There is also the “inconvenient truth” of batteries. While renewables have low marginal costs, we currently lack the minerals to build the batteries required to store that power. And producing those batteries requires an incredible amount of energy—and CO2.

Pause for a second here and think about the real consequences of the policies. We have hollowed out our industrial base because we became uncompetitive; millions of people lost their jobs, and the quality of living, especially in Europe, has stagnated or declined, while China continued to produce what we produced with higher emissions. To China’s credit, it has been very pragmatic and is building hundreds of nuclear power plants.

The Villain Narrative

Every movement needs a nemesis. For the climate movement, it is the oil companies.

The transportation sector accounts for roughly one-third of global emissions. That is significant. Yet, we largely ignore the other two-thirds: heating, agriculture, and construction.

If we truly wanted to solve global warming, we would focus on all industries, not just “Big Evil Oil.” But nuance doesn’t sell. Instead, our policies have been exercises in virtue signaling. They enriched a select few, handed the tax bill to society, and made the West less competitive and less secure.

The Fiduciary Reality

As an investor, my role is simple—my clients hire me to protect and grow their wealth. In other words, they hire me to make them money. The ESG movement, the vilification of oil companies, and the political incorrectness of investing in them have created opportunities; energy stocks were left for dead a few years ago. We took advantage of it.

More importantly for this discussion, I am hired to make economic, not social decisions.

I do not apply my personal social filter when making investment decisions; I let my clients do that. We have a large, diverse client base with varying views on the world. The beauty of managing separate accounts is that we can customize portfolios to fit those views. Some clients tell us not to own tobacco, some have a beef with social media and tell us to never own Facebook (Meta), others have strong views on Elon Musk and ask us not to buy any Musk-related companies. Others ask us not to own oil companies. We even have clients who, due to their faith, don’t want us to own banks and liquor stocks.

We don’t judge; we just don’t buy.

We are not allergic to investing in green energy stocks; they just have to make economic and financial sense—in other words, they have to be good investments (excluding subsidies, which are subject to political football).

In the meantime, I focus on the reality of supply and demand, not the “religion” of the moment. The reality is that the world still runs on energy.

Chopin Piano Concerto No. 1 – 2nd Movement

We are continuing our exploration of 2nd movements of romantic piano concertos with Chopin’s Piano Concerto No. 1. #PianoAdagios

In 1830, a 20-year-old Frédéric Chopin, burning with youthful passion and Polish spirit, composed his Piano Concerto No. 1 in E minor, Op. 11, in Warsaw. Written as he was falling for singer Konstancja Gładkowska, it pours out lyrical melodies and is full of love. Chopin premiered it himself on October 11, 1830, in Warsaw, one of his last concerts before leaving Poland forever. Dedicated to pianist Friedrich Kalkbrenner, it’s a snapshot of Chopin’s soul — tender, fiery, and achingly nostalgic.

Click here to listen.

Today I’m sharing a letter that took me almost a month to write. Once I finished, I realized I was writing it as much for myself and my colleagues as for our IMA clients. This letter helped me examine what’s important—my why. I hope you find it useful.

You can also listen to a narration of this article on iTunes & online.

Our Sistine Chapel: Long-Term Investing in Quality and Kindness

Dear Client,

As my kids got older, I lost my father, wrote two books on life, and crossed to the other side of life’s dial—something in me changed. My focus shifted from me to you, from taking to giving. I realized that my professional center—IMA—needed to reflect this as well. This was a decade-long journey that I’ve finally put into words.

This is our promise to you.

Our Masterpiece

Warren Buffett has talked about how Berkshire Hathaway is his own Sistine Chapel. I love this analogy. I can visualize Michelangelo lying on his back on scaffolding forty feet above the chapel floor, arched backward, paint dripping onto his face, his neck cramped, the frustration of plaster drying and leaving little room for error. The sheer commitment of spending four years obsessing over details that visitors centuries later would need binoculars to fully appreciate. Michelangelo wasn’t just decorating a ceiling—he was creating something transcendent, one brushstroke at a time.

Buffett built Berkshire Hathaway from a much less physically strained position, sitting in an air-conditioned office in a comfortable chair with his feet up. Yet, I can see him “painting” his ceiling one annual letter at a time, one carefully chosen acquisition at a time, one shareholder meeting at a time. Living in Omaha, a thousand miles from Wall Street, he chose the harder path—he ignored the quarterly earnings dance it demands, focusing instead on the patient accumulation of great businesses, the careful cultivation of culture and managers who think like owners, and the decades-long compounding of capital.

Buffett’s Sistine Chapel analogy touched me because it showed that a business could be more than a soulless profit machine—it could be art, something permanent, deeply personal, an expression of one’s values, and a force for good in the lives of others. It also showed that the framing of what we create matters—it can elevate us and give us meaning, or, if posed poorly, shackle us. When Buffett reframed business-building as creating his Sistine Chapel, he didn’t just change how he thought about Berkshire, he changed what Berkshire became.

A Life Decision

This is how I look at IMA. It is not just a profit machine—this is my passion, obsession, and professional creation. I draw inspiration from Max Büsser, the founder of Swiss watch company MB&F. Max left a successful career running an old Swiss watchmaker to start his own company, where he broke two-hundred-year-old watchmaking traditions and turned watches into a true art form. When he made this incredible leap, he said, “It is a life decision, not a business decision.”

IMA is a life decision for me as well. It’s the ultimate singularity of purpose—the alignment between my passion (more like obsession) and what I get the privilege to do every day—something I hope to continue until my last breath. I get to do what I absolutely love—invest and write—and in doing that I’m building an institution that enriches the lives of those it serves. Not just for this quarter or this year, but for decades.

I’m not getting up in the morning energized by the growth of my bank account. Money is a byproduct, a natural result of value created, but not a purpose. A question I’ve puzzled over: If this is the case, why charge for something I’m willing to do for free? Why do I even charge for my books, given that writing them makes McDonald’s wages enviable? When people pay for my creation, there is meaning in that exchange. It is not a primary driver, but it is an acknowledgment that the work matters. It signifies that my effort, my dedication of time, are voluntarily honored by someone’s stored time—which is what money truly is.

Like Michelangelo, we’re building something meant to be admired not just by those who see it today, but by those who will encounter it decades from today.

Michelangelo operated in the tangible domain—a ceiling in a chapel. My canvas is IMA itself. My brushstrokes are how we research companies, our investment process, our culture, how we communicate with clients, how we treat each other. These daily brush strokes shape what we’re creating.

I spent a lot of time thinking about what my and IMA’s why is. I narrowed it down to two words—Quality and Kindness. Yes, they are generic and unexciting. They sound easy. Living them is not.

Let me unwrap it here.

You Can Feel Quality

Quality is an obsession for me. Ever since I visited Japan, I keep thinking about their culture of focused quality—doing something singular but extremely well. Walt Disney’s saying always stays in the back of my mind: “You can feel quality.” If quality is a feeling, I felt it everywhere in Japan: in a restaurant that just focused on yakitori and perfected every little detail of the tangible and intangible aspects of the dining experience; in the bento boxes sold at the train station that gave you a similar sensation to when you unbox your iPhone.

What I love about quality is its dual temporal nature—permanence and impermanence coexisting. Quality exists in what we’ve achieved today, yet we can always make it better. Through kaizen, those small incremental improvements, we’re constantly reaching toward tomorrow. And this is what gets me out of bed—constantly getting better.

I also think of quality as a spectrum of light: black and white and color. Black and white are the fundamentals—the essential craftsmanship. In research, it’s building financial models where we stress test every assumption. In operations, it’s flawless trade execution. The color is more elusive—where art lives. It’s flying to visit a company’s headquarters instead of just reading an annual report, or listening to every interview the CEO ever gave—hunting for a single insight. In client service, our team researches obscure tax implications for a client moving abroad, or stays late in the evening to talk to all family members about a complex financial situation.

You notice the black and white consciously—it is there or not. But the color is felt subconsciously—it’s the accumulation of interactions across countless surfaces. And quality is multiplicative, not additive. Like multiplying numbers, one zero brings the whole product to zero. One poor surface can undermine everything.

This obsession with quality shapes everything. Not just how we conduct research, but which businesses we seek out—companies run by people who value craftsmanship, who build on strong foundations, who create for permanence rather than the next quarter. It also has a tremendous impact on who we hire, how we train, and what we demand from our colleagues.

Quality Needs Direction

However, Quality without a sense of direction is dangerous. You may have built perfect systems, but the direction they point is paramount. The dark corridors of history are full of examples where efficiency was put to awful use. Quality is about the how; kindness is about the why.

Think of the Four Seasons. The rooms are immaculate, the linens feel like they cost more than your first car. But what you actually remember is how, during check-in, someone’s already bringing you coffee. How the bellboy remembers your name and your preference for sparkling water. How you feel like you’re the only guest who matters. That’s kindness embedded in quality. Kindness is how quality is transmitted between people.

Kindness shows up in the big and small decisions—how we meticulously analyze each investment and construct portfolios with tremendous care, how we communicate during volatile markets to lower blood pressure. In our seasonal letters, I try to invite clients to see their portfolio through my eyes as a decision maker, not speaking down but inviting them in. It takes me weeks of early morning sessions to write these letters, and I get tremendous meaning out of doing it.

But kindness also lives in the smallest interactions our clients have with our team: money transfers, tax documents, routine account questions. These mundane tasks could be purely transactional. Instead, our team treats each one as an opportunity to brighten someone’s day.

I cannot tell you the parental-like pride I feel when a client emails or pulls me aside at dinner, points to one of my colleagues and says, “You have a great person working at IMA—they helped me so much last year.”

When my son Jonah was eighteen, he asked me, “Dad, when I look at your job, you’re just looking at spreadsheets and pushing numbers around.” I told him that there may be more important jobs out there—in fact, I’m sure there are: firefighters, nurses, cancer researchers. But what we do makes a difference in people’s lives. I have a client, a radiologist who worked for 30 years—we’re managing his life savings. His quality of life during his retirement depends on our investment decisions. Another client sold his company for hundreds of millions of dollars and dedicated the proceeds to studying longevity. The work we do for him could help millions live longer.

This is an enormous responsibility that I take personally.

I remember in the early days of the pandemic when the world was closing down, I worked 14-hour days, seven days a week for months. I wrote to clients several times a week. The market was collapsing, but most of our clients were calm—I’d like to think that our portfolio decisions and thoughtful, clear, and honest communication regulated the volatility of their blood pressure. Their portfolios came out not just unscathed but actually ahead from the pandemic.

Quality and Kindness—this is the standard we hold ourselves to. Not just through returns—that is the obvious and non-negotiable part, our raison d’être—but through everything we do: every portfolio management decision, every interaction, every moment of care.

Quality woven with Kindness is our principle, our compass—guiding us when we face difficult decisions, when we navigate adversity. Together they shape who IMA is, our culture, how we treat people. The paradox is that in improving others’ lives, we find our own meaning.

We spend much of our lives stuck in the echo chamber of our consciousness, having a never-ending debate with our ego, worrying about status, our accomplishments, our image in the eyes of others. This self-focus, ironically, is a significant source of our anxiety and unhappiness. Helping others pushes us out from this prison of self-absorption and redirects our focus outward. We transcend from being the protagonist in our own drama into a supporting actor in someone else’s story. The meaning we find is not despite helping others but because of it—thus the unexpected paradox or maybe not a paradox at all.

Painting Together

Quality and Kindness are our Sistine Chapel. This alignment of my and IMA’s why is having soul in the game—when your identity and your work are inseparable, when what you do reflects who you are.

Michelangelo, though today he gets all the credit, did not work alone painting the Sistine Chapel, nor did Buffett build Berkshire alone—it was always a team effort. An effort of people whose whys were aligned with what their individual brushes were painting. The same applies to all team members who work at IMA—we are all painting our Sistine Chapel together. This is why I ask them, in everything they do, to ask themselves two questions: Is it quality? Is it kind?

You are part of the Sistine Chapel we are building, and I ask you to hold us to those standards. If you ever feel we can improve in delivering Quality and Kindness in your experience with IMA, especially in the smallest details, please let me know.

La Traviata: “The sea and soil of Provence”

We are exploring timeless arias from Giuseppe Verdi’s opera La Traviata.

Here’s “Di Provenza il mar, il suol” (“The sea and soil of Provence”)

While listening to this aria, I realized that opera – and art in general – invites us into a state of suspended disbelief. Opera exemplifies this perfectly: Entire stories spanning months or years unfold before us in just two hours.

Opera creates its own reality with its own rules. In both La Traviata and La Bohème, the dying heroines hold impossibly high notes just before taking their final breath. Our logical selves dissolve, disappear in this magical world, where the laws of physics and time bend to serve emotional truth.

This compression of time is particularly fascinating. Within those two hours, we experience a lifetime of emotions more intensely than in our actual lives. The very artificiality of opera becomes a magnifying glass for human experience – its conventions and constraints paradoxically allowing us to feel more deeply than naturalism ever could.

The unreality isn’t a bug; it’s a feature. By accepting that people sing their innermost thoughts and that death arrives on a high C, we enter a space where emotion can exist in its purest, most concentrated form.

Germont’s (Alfredo’s father) persuasive plea to Alfredo to return home is a warm and paternal baritone staple, evoking nostalgia and familial duty.

#TimelessArias

Click here to listen.

My brother Alex, my son Jonah, and I are going on what has become our annual trip to Switzerland to attend my friend Guy Spier’s investment conference, VALUEx Klosters. Before the conference, we’ll meet with the management of one of our companies in Geneva and then embark on a horological journey through Switzerland. We’re going to drive from Geneva to Zurich and visit half a dozen small watchmakers in the Vallée de Joux (most of them make fewer than a thousand watches a year).

In 2025, I finally got bit by the mechanical watch bug. Alex and Jonah are fanatics. I resisted for years—my view was that watches are useless trinkets. But the more I studied the retailer, Watches of Switzerland (one of our holdings), the more I appreciated the tension between art and craft in watchmaking. In a world of $15 quartz watches, mechanical timepieces don’t exist to tell time—they’re our last grasp at analog craftsmanship.

For me, it’s not about collecting—the possession of watches. I don’t have to own Monet’s paintings to admire them. But unlike with Monet, I can actually talk to these artisans, and there’s a lot I can learn from them.

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The 15th annual Intellectual Investor Conference (formerly known as VALUEx Vail) will be held June 24-26. If you’re a die-hard value investor, you can apply here.

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This is Part Two of my interview with CFA Society UK in London. In Part One, we discussed investing with intention, how to define risk properly, and how to build a disciplined investment process that endures over time.

In Part Two, the conversation shifts to artificial intelligence and its impact on investing. We explore what is structurally changing in the AI landscape, what may be cyclical or speculative, and how long-term investors can think clearly when market excitement is high and uncertainty is even higher. You can read the whole transcript here.

Artificial Intelligence, Nvidia, and the Risk of Overinvestment - Part 2

On Intangibles and AI in Investing

A large portion of business value today comes from intangibles rather than hard assets. What do you think about that, and how are you navigating AI?

I’m going to answer two questions—the one you asked and the one I want to answer.

First, on AI: If you embrace it, AI can make you smarter. If you look at AI as a tool, it becomes your friend. If you outsource your thinking to AI, it can make you dumber.

Thirty years ago, I had very good handwriting. Then personal computers came, I started typing, and today I can barely write by hand. That skill atrophied.

Today I see people outsourcing writing to AI. It worries me, especially for my kids—they’re going to forget how to write. That’s a huge negative.

But AI can also be your sparring partner. You can debate a stock with ChatGPT, and that makes you smarter. It helped me edit my book—usually you send a draft to an editor and get it back two days later. Now I can have an editing process in real time. I’m still doing the writing; AI is helping me edit.

We use AI in our research process, but carefully. We don’t want AI thinking for us—we want AI helping us think.

Here’s an example: I still read or listen to conference calls. But say I’m looking at a company for the first time and want to understand what happened over the last ten years. We download transcripts of earnings calls, throw them into ChatGPT, and say, “Tell me how management’s narrative has changed over the years.” I get a page-and-a-half summary. Before, that would have taken me a week reading 500 pages. Now I have new data that wasn’t accessible before.

Another example: A company claimed their prices were much cheaper than competitors’. I asked ChatGPT to compare their prices to every competitor, and it actually went to websites, navigated menus, and selected options. Twenty minutes later, I had a table listing all the prices.

On intangibles: Yes, the economy has changed. We’re becoming more of a knowledge economy. And the scary part is the speed of change. I look at Google and have no idea what its future looks like. I have friends who are very bullish on Google—they have good reasons. Google has TPU, their own processor, much cheaper than Nvidia. They came out with Gemini, which is supposedly phenomenal.

But three years ago, nobody questioned whether Google Search would remain a monopoly. Today it has competition that wasn’t there before.

A lot of times I look at these things and don’t have an answer. I wrote an article about this: Today everyone feels they have to have an opinion on every Magnificent Seven stock. I look at them and really don’t know—and by the way, a lot of them aren’t cheap.

But here’s what’s liberating: I have a portfolio of 25, maybe 30 stocks. There are 10,000 stocks out there. I don’t have to own Magnificent Seven stocks. I just need 25, and I have 10,000 to choose from.

So I can look at a company and ask: Is AI going to change this business? Benefit it? If I have no idea, I just move on to the next stock.

Is There an AI Bubble?

Now I’ll answer the question I’ve been waiting for. I expected it five questions ago. Is there an AI bubble?

I’ve thought a lot about this. I break it into a few parts.

From a stock perspective: look at Nvidia. Its income statement looks like a software company’s—maybe 75% gross margins (for context, Microsoft’s gross margins are 69%, Salesforce’s 78%).

Another data point: Intel at its peak dominance, when it was king of the world, when every computer and server ran on its chips, had max pretax margins of 32%—and only for a few years. Nvidia’s pretax margin today is 62%.

This is because Nvidia is essentially the only company making GPUs, outside of AMD and a few from Google. So they can charge incredibly high prices.

The problem is there are startups working on competing products. And then you have Google, Meta, Tesla—all the companies paying Nvidia billions—working on their own chips.

If capitalism works, Nvidia won’t be the only GPU provider forever.

Bulls will tell you that Nvidia trades at “only” 30 times earnings.

I remember, when the telecom bubble was bursting, reading bullish articles arguing that Cisco was trading at “only” 30 times earnings. If you bought Cisco then, at “only” 30 times forward earnings—and those earnings estimates were based on pie-in-the-sky projections—it took you literally a quarter of a century, a generation, to make your money back.

Nvidia’s stock is likely going to follow a similar path.

But I don’t want to talk about earnings.

The value of any asset is the present value of future cash flows over a long period. If you buy Nvidia today, you have to be certain those cash flows are sustainable. I’d question that.

Let me tell you what’s priced into Nvidia today. I ran a discounted cash flow model: revenues doubling to $400 billion by 2027 and then growing 7% a year for 17 years, margins remaining at current levels, and cash flows discounted back at 7% a year. If you’re comfortable with these assumptions, you’ll make 7% a year—the discount rate.

But that’s actually the least interesting part. Here’s what gets interesting: Half of US economic growth over the last couple of quarters came from data centers. The rest of the economy is probably shrinking—or at best not growing. Take data centers away, and what do you have?

We probably have an overinvestment bubble. That’s where the bubble is happening.

I read today that DeepSeek, the Chinese version of ChatGPT, can generate tokens at 95% lower cost—some insane number. In my new book, I talk about the power of constraints. When you don’t have financial resources, when you don’t have Nvidia GPUs coming freely, you have to become more creative. You have to create more efficient models. That’s what DeepSeek did.

What’s happening today in AI infrastructure looks very similar to the 1998–1999 fiber optics overbuilding. Remember Global Crossing, Level 3, Qwest, JDS Uniphase, WorldCom? Those companies were at the center of fiber optics, investing insane amounts of money because people said internet demand would be huge and insatiable.

They were right—demand was huge and insatiable. But guess what? Most of those companies either went bankrupt or nearly did. Equity holders got wiped out. Bond holders lost nearly everything.

Why? When everybody invests at once, you get overcapacity. Mark Zuckerberg said it doesn’t matter if Meta overspends a hundred billion dollars—the threat of not doing it is existential. But if Google, Tesla, and Meta all do the same, and everyone does the same, you get overcapacity. Most of these investments become malinvestments.

Also, technology changes. Part of why we have so much dark fiber 25 years later is that Cisco figured out how to compress data. You need less fiber. DeepSeek-type innovations will likely make AI training more efficient, so you won’t need as much compute.

And consider this: The internet was huge, but growth went exponential in 2008 with the iPhone, putting the internet in everyone’s hands. For AI, robotics might become that moment. But my point is: The road to AI won’t be linear. It will have a lot of bumps.

But that’s not what worries me most. Here’s what worries me:

I read about Meta’s data center in Louisiana—$26 billion cost. You won’t find that $26 billion as a liability on Facebook’s balance sheet. They created a special purpose entity, put in a few billion, and it became someone else’s problem.

There’s a debate about GPU useful life—some say two years, some say three, some say six. Can we agree it’s not 24 years? Well, that data center has been financed with 24-year debt. Of that $26 billion, I promise you $20 billion or more is not concrete—it’s GPUs going to Nvidia, financed with 24-year debt. A lot of it comes from private credit.

This looks very bubbly. There’s a debt issue coming.

The pushback I get: “Usually people don’t talk about bubbles during bubbles.” That’s true. Bubbles can last much longer than you think. People like me will get sick of talking about it, and that’s when it ends in tears.

Oracle changed the AI race from being financed by cash flows to being financed by debt.

Let me walk through Oracle’s numbers. Market cap: maybe $600 billion. Free cash flows: roughly $12–15 billion. Net debt: about $80–90 billion. And they just committed to spend hundreds of billions on the OpenAI deal.

Remember: $15 billion in free cash flows. A lot of debt already. And now hundreds of billions in commitments. Larry Ellison is making an all-or-nothing bet. He’s borrowing, Meta’s borrowing, everyone’s borrowing—that’s what’s happening.

I just finished reading Andrew Ross Sorkin’s book on 1929. Highly recommend it—great insight into people. One character reminded me of someone today: William C. Durant. He started General Motors, got kicked out, co-founded Chevrolet, merged it with GM, got kicked out again. A brilliant businessman who started two auto companies.

But he speculated in 1929, got wiped out, and died destitute, managing a bowling alley in the middle of nowhere.

You look at him—brilliant, very smart—and yet he still did these dumb things and got wiped out. I keep thinking about Larry Ellison. I don’t think he’ll end up managing a bowling alley on his private island in Hawaii. But—coming back to your earlier question—you want to say, “Well, if he’s smart here, he must be smart there.” I’ve found it often doesn’t work that way.

What concerns me is that this behavior can last a long time before it ends. And I’m concerned about the financial consequences for pension funds and others doing private credit with very little thinking or underwriting. I’m also concerned about the health of the overall economy once you take away AI spending.

The Future of Asset Management

How do you see the asset management industry evolving with AI and passive investing?

Believe it or not, I think passive investing is a gift to people like us who do active management. Not in the short term, but in the long term.

The more people do passive investing, the less analysis gets done. The less analysis, the more you compete against dumb money. When I say “dumb money,” I don’t mean people who buy index funds are dumb—in fact, they were smarter than many professionals. It’s just that it’s a one-directional decision: buy everything. Very little analysis goes into valuing each stock.

Long term, I’m very optimistic because I’ll have less competition. It used to be 500 people valuing a stock; now there’ll be 20.

One thing that worries me—and I have to be honest, I contribute to this problem—is that in ten years we’re probably going to kill all the young analysts.

In the past, you’d have kids graduate from school, become young analysts. You’d ask them to read transcripts, summarize them, compare prices. Now I don’t need them—AI does the job of 20 analysts. So I’m not hiring them.

But to become an analyst, you have to go through vocational training, rise up through experience. If we’re not hiring young analysts, who comes after us? I don’t have an answer. That worries me.

But investing itself—we’re going to have to embrace AI or get run over. We have almost a full-time person now just figuring out how to bring AI into our research process. Not thinking for me—helping me think better.

Everyone who works for me, in any job, I ask to embrace AI. For however old you are, you didn’t have AI to go to before. Now when you have a question, you have a very smart assistant that can help you answer it—not thinking for you, but helping you think. You have to reprogram decades of behavior. That’s very important.

La Traviata: “The youthful ardor of my ebullient spirits”

We are exploring timeless arias from Giuseppe Verdi’s opera La Traviata.

Here’s “De’ miei bollenti spiriti” (“The youthful ardor of my ebullient spirits”)

Alfredo’s joyful reflection on his new life with Violetta, a lyrical tenor aria full of optimism and tenderness.

#TimelessArias

Click here to listen.

My Q&A session with CFA Society UK in London was recorded. I’m going to share with you the recording and a polished transcript. As I was editing the transcript, the writer in me took over and I added some additional thoughts. Fair warning: This reads like a transcript, because it mostly is.

I’ll break the transcript into two parts. Part 1 will focus on investing and living with intention. Part 2 will answer questions related to the AI bubble. You can read the whole transcript here.

Living and Investing with Intention - Part 1

On Micro-Dosing Investments

About five years ago, at the beginning of the pandemic, you said: “I will micro-dose my investments to diversify away my ignorance.” How did that work for you, and what lessons do you take from it today?

Let me first explain what I do. I run an investment firm. Clients come to us and say, “Here are my life savings. Don’t screw it up.” What they mean is: I manage all their funds. When I make investment decisions, my number one goal is not to blow up—to make sure they get to retire.

In our investment process, we pay a lot of attention to risk. Since I’m talking to value investors here, for us, risk is not volatility. Risk is a stock going down in value and not coming back—permanent loss of capital.

To answer your question: When the pandemic started, I didn’t have a reference point. I had to go back 100 years to find something comparable, and I had no idea how it would work out. Would it last one year? Three years? Ten years? So I tried to create a portfolio that would survive no matter what.

I also realized there were unknown unknowns. If I made a decision that went bad, I wanted my exposure to be small. We usually run 20–25 stocks. At that time, we expanded to maybe 30 or 35, making each position smaller—micro-dosing decisions—because I didn’t want to blow up.

Let me give you an example. At the time, we bought stocks of investment firms (the likes of Janus & Invesco), but we did not buy one 5% position; we bought three totaling 5%. They were all cheap.

There’s another factor: When you manage other people’s money, you’re managing not just your emotions but theirs as well. You want your clients not to bail out at the very bottom. So you have two tiers of emotion management. That approach helped ensure our clients didn’t panic.

Why am I micro-dosing today? The political climate has changed tremendously. The last time I spoke to CFA UK was ten years ago, almost to the day—November 2015. Look at how the world has changed. This country has changed. Europe has changed. The US is becoming unrecognizable, little by little.

The political risk today—there’s much more uncertainty, many more underwater rocks that didn’t exist before. So we’ve reduced our position sizes again. Not as extremely as during the pandemic, but we have many 2–3% positions now.

Here’s one example. We own a British company, Watches of Switzerland. Half their sales come from the UK and half from the United States. One day I woke up and discovered tariffs on Switzerland had gone from 15% to 39%. Why? Trump had a conversation with the president of Switzerland. He didn’t like how she talked to him, so he raised it to 35% and added an extra 4% on top of that punishing tariff. Just like that. (After a Swiss delegation paid him a visit and gave him a golden Rolex, he took it back down to 15%.)

Those are the risks we have to live with today. This is why we’re micro-dosing—if something like this happens to one of our stocks, it does smaller damage to the portfolio.

On Living with Intention

I don’t understand the title of your talk. What does “living with intention” mean?

I just finished writing a new book. It’s not out yet, but it’s done. It’s called “What a Life!“ with the subtitle “The Operating System for a Life Well-Lived.“ It’s not an investment book, and there’s a whole section on intentionality.

I find—and when I say this, I’m usually speaking about myself, but it probably applies to everyone—that we often go through life physically present but mentally somewhere else.

Let me tell you a story. About ten years ago, I was in Vienna with my father. We walked through museums and then went to the opera—La Bohème. I love opera. I was in this incredible opera house, with my father, a person I love dearly, listening to one of my favorite operas in the world. And I found myself thinking about what I was going to have for breakfast tomorrow.

Think about it. I was physically there, but mentally I wasn’t. I wasn’t being present.

The punchline: My father said something that really shook me up. He said, “You always want to be somewhere else. You always want to be in the next place.”

I think we do this a lot. Intentionality is, first of all, being present where you are.

We often do things on autopilot, mindlessly, not intentionally, because we’ve done them for so long. Sometimes we act without thinking. When you’re intentional, you’re present in what you think and what you do.

On the Boiling Frog Problem

For value investors, the boiling frog problem is probably the most difficult thing we face. You do the work on a stock; you think you understand it well. Something goes a little wrong, but you think it’s fine. It goes down. More bad news. Drip, drip, drip—and before you know it, you’ve lost a lot of money. How good are you at coping with that and getting out quickly enough?

That is such a great question, and a very painful one.

It’s very difficult. Ideally, you think a company is worth X amount of dollars, you’re paying less than X, a discount. Problems happen. The value declines, the price declines. But there’s still a margin of safety... or is there?

I’ve made several adjustments over the years. First, I’m obsessed about the quality of companies we own. Let me clarify what I mean. I’m a very different investor today than I was three, five, or ten years ago. That’s a good thing—it means I’ve actually learned something.

In the past, when I talked about quality, I would mention competitive advantage, return on equity, return on capital, balance sheets. Those things are still true. But today I’m also obsessed about the people running the company.

I also make sure—especially today—to avoid any possible structural changes where technological change makes a company obsolete.

Today I spend so much more time thinking about management: how they allocate capital, how they run the business. We spend huge amounts of time talking to competitors, reading transcripts from interviews and expert networks.

Despite all this, I’ve reduced the problem but not eliminated it. It’s still going to happen. And you know what? When I realize it’s happening, I sell.

Here’s one thing I’ve found: At that point, the position starts consuming enormous mental real estate. What used to be a 3% position is now 2%, but it’s consuming 15% of my mental bandwidth.

Another adjustment: waiting for fundamental momentum. One of our largest positions is Babcock, a British company. We increased the position substantially when we understood how great the management is and when the business started to turn.

The old me would keep buying on the way down. The new me is more patient, waiting for signs the business is turning. If it’s a turnaround, I wait for evidence before making my position larger. The combination of these approaches helps—but I’m still not going to avoid all the boiling frogs.

Is Value Investing Dead?

Is value investing dead? The most successful investors I’ve talked to recently have been thematic investors. They buy defense companies, tech companies. They don’t care about P/E ratios. It’s themes, trends, momentum—not value.

That’s easy because I have an answer. Here’s the thing: It depends on how you define value investing.

If you define it as buying statistically cheap stocks—yeah, maybe that’s dead. Price-to-book doesn’t work for analyzing Microsoft or any software company. When I started investing, I thought value investing was just buying cheap stocks. That’s what you learn if you read Ben Graham’s books and get one-tenth out of them. You get the cookbook stuff but not the philosophy.

Value investing is not about buying cheap stocks. Value investing is a philosophy. In fact—and this is not me, this is Buffett saying it—the term value investing is redundant.

Let me explain. Value investing is several things. Analyzing stocks as businesses. Asking for a margin of safety—if you’re buying a dollar, you don’t want to pay $1.20, you want to pay 50 cents. Having a long-term time horizon. Knowing the market will be volatile and will have an opinion on your stock every single day, and taking advantage of that.

What I just described isn’t really “value investing.” It’s just investing.

One of our largest positions is Uber. It did not look like a value stock when we were buying it. But Uber’s earnings were growing; and if you look at earnings five years out, it looked significantly undervalued. It wasn’t statistically cheap based on near-term earnings, but it was undervalued. There’s a huge difference.

Value investing is dead if you define it as buying statistically cheap stocks—algorithms will arbitrage that away. That’s first-level thinking. What I described, value investing, is not dead, because common sense is not dead.

So we shouldn’t read Ben Graham anymore?

No, you should. But when you read Ben Graham, get the philosophy out of it. The formulas—buying things at six times earnings—that stuff is obsolete. If Ben Graham were alive and wrote a new book, he’d probably spend a lot less time on formulas and more time on the philosophy.

On Macro Themes, Geopolitics, and Noise

How should investors think about big themes—macroeconomics, geopolitics, tariffs? Is it noise, or are these important factors to consider?

First, you need a long-term time horizon. A lot of things will be noise; a lot won’t be. The key is figuring out which is which. I know that’s a vague answer, but the key, really, is separating noise from signal and making adjustments.

An example: Looking at the geopolitical situation, we made a decision years ago to position our portfolio toward European defense. These companies were very cheap, so if I was wrong, I’d still be okay. But we saw how geopolitics were changing and incorporated that into our portfolios.

Seth Klarman had a great quote I try to live by: “We invest micro but worry macro.”

That doesn’t mean I try to figure out interest rates six months from now. But I look at the US having $36 trillion in debt, running 6% budget deficits during supposed economic expansion, and think: God forbid we have a recession—we could be running 10% deficits. So when I structure the portfolio, I think the chances of inflation are much higher, and I make adjustments.

Today you need acute awareness of what’s going on around the world and in geopolitics. And you need to figure out what’s noise and what isn’t. How does one do that? I don’t have a formula. It’s judgment.

Reconciling Intentionality with Long-Term Investing

Living in the present rather than the future sounds like a Zen idea. Is this difficult for an investor, since we’re focused on long-term thinking, deferred gratification, and patience? How do you reconcile those two ideas?

I’ve never tried to reconcile the two... let me try in real time.

Actually, I’m not sure there’s a conflict. But let me think about where the issue might arise.

The issue in investing becomes important when you start taking things that aren’t axioms as axioms. Here’s an example: In 2006-2007, I remember hearing the words, “Real estate in the United States has never declined nationwide.” That became an axiom. Everyone made decisions as if it were a law of physics—but it wasn’t.

As an investor, it’s critical to see through that. Being intentional means identifying these underlying assumptions and saying, “Well, this hasn’t happened in the last 50 years, the last 100 years—but that doesn’t mean it can’t happen.”

Being intentional about this—identifying assumptions—is extremely important. The opposite of intentional is mindless. When you’re mindless, you accept things as they are without realizing you’re walking on thin ice while everyone else thinks it’s solid ground.

On Investment Labels and ESG

Has your definition of value investing changed over the last two or three decades, given changes in market dynamics and politics?

Over the last 20, 30, 40 years, this industry has been invaded by consultants. If you’re a consultant, I’m sorry—I’m going to offend you in a second.

When you’re a consultant, you deal with a lot of data. You start labeling things, putting them in quadrants, dividing and slicing. This is how you justify your existence. You go to a boardroom, make a PowerPoint presentation with slides, boxes and charts. I’m empathetic—I get it. So you end up with GARP, small cap, mid cap, all these labels.

To me, all this stuff is mindless noise. Either a company is undervalued or it’s not. Either it’s a high-quality business or it’s not.

And since I’m in Europe, I’m going to upset another group: ESG. I’m sorry, but it’s nonsense, at least when it comes to investing.

I saw a chart showing CO2 emissions in Europe declining. Right next to it was China’s CO2, rising exponentially. Europe produces less CO2, but Chinese emissions have gone up enormously. The total amount of CO2 in the world hasn’t changed—actually, it went up—except now your electricity costs in the UK are four times higher and you have fewer jobs.

As an investor, I have the luxury of not voluntarily placing myself in a box, not having to worry about labels. When I was buying oil stocks and nobody wanted them because of ESG, that created an opportunity. If you owned those stocks at a mutual fund, you got fired or told not to buy them.

A lot of times, these labels create opportunities for investors. I try to take advantage of them.

The market has also become more short-term-oriented. People are less tolerant of volatility. If you have a longer time horizon and have a client base that can tolerate it, you can do better than others.

We own tobacco stocks. We own oil stocks. And whatever else isn’t ESG-friendly. My clients sleep well at night. Some of these companies have net cash balance sheets, great cash flows, and huge dividends. I just take advantage of those inefficiencies.

If you are outraged about what I just said, read this.

La Traviata: “Perhaps he is the one... Always free”

We are exploring timeless arias from Giuseppe Verdi’s opera La Traviata.

La Traviata is an opera about self-sacrifice for love. Watch the full opera here:

Click here to listen.

Here’s the aria “Ah fors’è lui... Sempre libera” (“Perhaps he is the one... Always free”)

Violetta’s introspective opening, followed by a dazzling faster section, showcases her inner conflict between love and independence. It’s a soprano tour de force.

#TimelessArias

Click here to listen.

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Each year, the IMA team and I gather everything I’ve written over the past twelve months and shape it into one comprehensive volume—Vitaliy’s Article Almanac—a year‑end tradition I truly cherish. We strip away the noise of timing and headlines, organize the essays by theme, add art, and turn them into a single, intentional reading experience.

Looking back, 2025 may be the most eclectic collection yet.

In these pages, we move from the shipyards of Scotland to the oil sands of Canada. From the hype and excess of the AI arms race to the timeless beauty of Puccini’s La Bohème. You will find deep dives into defense stocks and valuation sitting comfortably next to reflections on family, Stoicism, and what it means to live a meaningful life, including the story of “Operation Molly,” my son’s engagement.

Writing is not just how I communicate. It is how I think.

This Almanac is not a highlight reel. It is a map of my curiosity over the past year. The questions I wrestled with. The ideas that stayed with me. The places where investing, philosophy, music, and life quietly intersect.

My hope is that you read it slowly. Not all at once. Pick it up when you want to think, not scroll. And if something inside resonates, please feel free to share the Almanac with family or friends who might enjoy the journey as well.

Thank you, as always, for reading and thinking alongside me.

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P.S. If you'd like to take a look at my almanacs from previous years you can find them here.

I’m writing this quick note from NYC—I’m here for a conference. My brother Alex and I went to see a chamber musical, Reunions, at New York City Center (right next to Carnegie Hall). The book and lyrics were written by my friend Jeffrey Scharf (who, believe it or not, is also a value investor). I went to see it because of Jeffrey—I had no idea what to expect.

We absolutely loved it!

If you’re in NYC, you need to see it. It’s been a long time since I’ve watched something that touched me this much. Everything about this play was great—the venue is small and intimate, the dialogue, the story, the acting—all terrific.

- -

In Part 2, we shift from the streets of London and the economic lessons gleaned from black cabs and tax policies to a deeper dive into the essence of excellence in business and investing. I’ll break it up into two parts (you can read the full essay here).

You can also listen to a narration of this article on iTunes & online.

Surrounding Yourself with Greatness - Part 2

Fever-Tree

Before I explain why I love Fever-Tree as a product and an investment, here’s the story of how tonic water became a British obsession—it’ll make more sense after.

Picture this: it’s the 19th century, and malaria is wiping out British troops in hot, mosquito-infested colonies in India and West Africa. Scientists extract quinine from South American cinchona bark—voila, an anti-malaria miracle drug. The problem? Quinine dissolved in water tastes absolutely horrendous.

Enter the resourceful British officer class. They already have plenty of gin in their rations (because, well, they’re British). So they start mixing the daily quinine dose with water, sugar, lime, and a generous pour of gin. Suddenly the medicine doesn’t just go down; it goes down delightfully. The gin and tonic is born—not in a fancy London bar, but in a sweaty colonial outpost as a life-saving cocktail.

This is precisely why the G&T became a national institution in Britain and remains far more popular there than in the US. We Americans never had to choke down quinine to survive our nonexistent tropical empire.

Fast-forward to 2005. Two English guys, Charles Rolls and Tim Warrillow, frustrated that every tonic water tastes like chemical-laden sugar water, decide to go back to basics: real quinine from cinchona trees, natural botanicals, no artificial junk. They name their premium tonic Fever-Tree—a perfect nod to the tree that started it all.

I’ve been consuming so much G&T lately (more T than G to be honest) that I can travel to malaria-infested parts of Africa without a malaria vaccine.

Now, back to investing.

Fever-Tree keeps amazing me. I absolutely love the company’s obsession with quality. The company isn’t much different from Coke—it develops, sources, and markets the product but doesn’t manufacture it or own factories.

Schweppes, its biggest competitor in tonics and mixers, doesn’t have a single owner. The brand has different distributors with rights in different countries. Nobody is truly obsessed with it or cares about it the way Fever-Tree does. Like any other beverage company, Schweppes’s owners are just trying to figure out how to squeeze an extra penny out of production costs.

I heard a story about Schweppes ginger beer. One distributor wanted to reduce the cost of ginger, so they added chili sauce to give it a bite. But the lower ginger content reduced the murkiness of the water—a defining feature of ginger beer—so they added another chemical to restore it.

Fever-Tree, by contrast, has been importing three types of ginger from day one. It’s also been importing quinine—a core ingredient in tonic—from the same place in the Congo for over twenty years. In the deal Fever-Tree signed with Molson Coors, Molson Coors will distribute and manufacture the product, but it cannot touch the recipe. Fever-Tree maintains control. I respect that.

A friend told me he bought some good gin and stopped at Tesco to get Fever-Tree. The store was out of it, though they usually carry it. He couldn’t bring himself to buy Schweppes, so he went to a different store. That’s brand loyalty.

In Search of Excellence

I also had a chance to spend some time with Wise. I am a huge fan of the company. In the past I wrote that I admire management that has the ability to suffer. Wise management is the definition of this.

Wise has built a very innovative cross-border money transfer product. They provide great service, customers love the product and the prices, thus Wise spends almost no money on acquiring customers (they come through word of mouth, while competitors have to spend a good chunk of their revenue on customer acquisition, which puts competitors at a substantial cost disadvantage). In fact, the company’s product is so good that banks—who are supposed to be their competitors—are white-labeling Wise’s platform, using it for cross-border transfers while slapping their own name on it. Wise’s long-term goal is to become a platform for global money transfers.

But here is where it gets fascinating: Wise keeps lowering prices. As they grow—it’s a fixed-cost business—their margins expand. But instead of pocketing these expanding profits, Wise passes cost savings on to the customer by lowering transaction costs. This is why customers love Wise. This of course reduces the rate of the company’s earnings growth. And the management is fine with it. Two co-founders still own a big chunk of the company. Just to clarify, this is not altruism (though consumers definitely benefit from this), but cold logic and long-term thinking. By continually lowering prices they’re destroying their current and future competition, making it very difficult to get to scale —they are building an insurmountable moat. I really respect that.

We may or may not buy the stock—it’s on our watch list (we are looking for a better price). But, whether we buy it or not, I have benefited tremendously from studying this company. It showed me what excellent management looks like. Once you study companies like Wise, your tolerance for mediocre management declines.

I have a good friend who used to fish for stocks at the bottom of the barrel of quality and corporate management (he was seduced by statistical cheapness), and I think his latest returns have suffered for it. He recently bought Wise stock. I don’t know if he’ll make much money on the stock (I hope he does), as today’s stock price demands fairly high growth persisting for a long time. But I know the management quality of his future investments is going to be higher. I am very happy for him.

I’ve heard a saying that you are the average of your five closest friends. If you want to improve, you want to surround yourself with people who are better than you in certain parts of their lives, and spend less time with people who pull you down.

Avoiding bad influences is probably even more important because bad influence is more pervasive than good influence. If you spend a lot of time with heavy drinkers, you’ll likely drink more, etc.

Something similar happens in investing. If you spend a lot of time studying excellence, you’ll become a bit more allergic to mediocrity and the average caliber of your portfolio will go up.

However!!! This point is important: Investing, like life, is nuanced.

That means you can’t necessarily buy great companies run by terrific management at any price. The price (valuation) you pay is an important component of future returns. So buying quality at any price is foolish.

Today I am a different (hopefully better) investor than I was five, ten, twenty years ago. It would be sad if I were not. As I look at the biggest changes, it is my focus on quality. But not just business and balance sheet quality; no, the quality of the people who run the business. As I look at our portfolio today, the caliber of companies we own has risen.

The mantra I keep repeating to myself is: There are tens of thousands of stocks out there; I only need twenty-five. We can be extremely selective and uncompromising, especially when it comes to quality. Thus, when the market is going bananas over the latest obsession, we keep studying and building our watch list, filling it with exceptional companies that may not be undervalued today.

If you keep looking for new friends at dive bars, you’ll likely surround yourself with drunks. The same logic applies to portfolio construction—if you keep spending your time building a watch list of great businesses run by great people, eventually your portfolio will skew toward greatness.

Rachmaninoff’s Piano Concerto No. 1 – 2nd Movement

We are continuing our exploration of 2nd movements of romantic piano concertos with Rachmaninoff’s Piano Concerto No. 1. #PianoAdagios

Rachmaninoff composed this piano concerto at the age of 18. It’s less well-known than his 2nd and 3rd concertos. I tend to agree with the listening public, but I love this 2nd movement.

Let’s start with the version performed by Rachmaninoff himself:

Click here to listen.

I’m writing this on the plane from London to Denver, not knowing where my subconscious will take me, but looking forward to the journey. Alright, the flight from London to Denver is ten hours, and thus this essay is on the longer side. I’ll break it up into two parts (you can read the full essay here).

From Paris with Love, from London with Concern - Part 1

You can also listen to a narration of this article on iTunes & online.

Technology Changed Paris… Kind of

On this trip, my wife and I visited Paris and London, where I spoke to CFA Societies in both cities.

The last time we visited Paris together was in 2000, when Rachel was pregnant with Jonah. We enjoyed Paris so much more this time than 25 years ago—not because Paris changed, but because technology has.

Back then we were young and broke, staying in a hotel a few miles from the city center. This was before the iPhone, GPS, and Uber. Taxis were expensive, the subway was confusing, and Parisians either didn’t speak English or didn’t want to help us with directions. Our French didn’t go beyond bonjour. I distinctly remember how frustrating Paris was.

This time we stayed in the center of Paris, but more importantly, we were armed with GPS and Uber. We no longer had to ask anyone for directions. Google Translate helped us navigate restaurant menus. When it rained or we were tired—we usually walked at least 10 miles a day—we’d just call an Uber. Like magic, a minute later the car would appear with our destination already preprogrammed.

The only change I noticed in Paris itself? Getting to the Eiffel Tower now requires going through security. That’s about it.

My Lady at the Musée

In Paris we visited our favorite museum in the world again—the Musée d’Orsay. I’ve been there five times. It has one of the best collections of Impressionists, on the fifth floor. We visited “my lady”—the portrait of Madame Rimsky-Korsakov by Franz Xaver Winterhalter. If her family name sounds familiar, it’s because she was the aunt of the famous Russian composer Nikolai Rimsky-Korsakov.

The very first time we were in Musée d’Orsay, I fell in love with this painting. There is something magical about this woman, and I keep coming back to see her every time I’m in Paris.

Two Hours Under the Channel

We took the Eurostar from Paris to London—two hours and twenty minutes of pure joy and calmness. I love trains, and this was a ten out of ten experience. My wife is a scaredy-cat, so I only told her afterward that we’d spent a good chunk of time underwater. The train goes under La Manche—what the French call it; the British call it the English Channel.

London now feels a bit like home. This was my second visit in three months. It grows on you.

The Knowledge vs. The App

It was my wife’s first time in London, and she insisted we take black cabs. We got a chance to talk to a lot of drivers, who are very chatty. To become a black cab driver, you need to pass the test presumptuously called “The Knowledge.” No, this is not a test for a PhD in world science, but in UK streets and landmarks. Cab drivers have to memorize about 50,000 streets and landmarks.

As you can imagine, in a world where GPS comes equipped with “The Knowledge” and readily available cheaper alternatives—Uber—exist, the demand for black cabs isn’t exactly hitting new highs. The number of black cabs has declined from over 22,000 a decade ago to around 15,000 today. “The Knowledge” academy only produced two graduates last month.

What really shocked me is that there are now over 110,000 Ubers roaming the streets of London. Uber is, in my experience, 40% cheaper, and you can call one from the app. Yes, cab drivers lost thousands of cabs to Uber, but the market for hailed cars expanded by 100,000 thanks to added convenience and lower prices.

By the way, there are still advantages to taking a black cab. After you spend three years accumulating “The Knowledge,” you’ve made a huge investment, and thus you’re hanging on to your black cab credentials for dear life. My pushback to this argument is that Uber drivers are rated as well—drivers with lower ratings have lower priority in getting rides. There are embedded incentives for them to treat passengers well.

But more importantly, black cabs are allowed to use bus lanes—in a city mired by constant traffic, this becomes an important benefit. We took a black cab regularly to navigate through traffic but took Uber to the airport (it was literally $70 cheaper).

The Price of Fairness

This time I visited three companies—Watches of Switzerland, Fever-Tree, and Wise. We’re shareholders in the first two.

Watches of Switzerland made me think more deeply about the UK. To paraphrase Churchill’s words about the US: The UK eventually makes the right decision after it exhausts every wrong one.

Starting with Brexit, the country has been a political mess. Two decades ago, the UK’s GDP per capita was much closer to the US’s. US real GDP per capita grew from $58,000 in 2004 to $75,500 in 2024, while the UK’s grew from $47,000 to just $52,500. The gap has more than doubled—from $11,000 to $23,000.

Recent legislative “victories” have been negatively impacting the country. In the quest for fairness, the UK started taxing its expats’ income earned outside the UK. The argument was simple: It’s only fair that they should pay taxes on all their income.

The result? Millionaires left the wet pond for the hot desert of Dubai, which offered a tax-free haven for foreign-earned income. The UK lost billions of pounds in tax revenue.

But this quest for fairness didn’t end there. The UK is now the only country in Europe that doesn’t return its value-added tax (VAT) to foreigners upon their exiting the country. It stopped doing so on January 1, 2021—the same day the UK exited Europe. VAT in the UK is 20%.

When this VAT law was passed in the name of fairness, the argument was that retirees pay VAT, so wealthy Arabs visiting the UK should, too.

When “wealthy Arabs” visit the UK and stumble upon a Watches of Switzerland store to buy a £10,000 Rolex, they quickly discover they can get it for £2,000 less across the Channel by taking a nice, comfortable Eurostar ride.

Yes, the rich—the Watches of Switzerlands of the world—took a small hit, but the mobile wealthy simply left for places that welcomed their capital. The have-nots absorbed the real damage: fewer sales, fewer jobs, lower incomes. The result? Retirees still pay VAT, wealthy Arabs shop in Paris, the UK loses billions in revenue, and the wealth gap this policy supposedly addressed only widened. The UK looks like a frog slowly boiling to death while turning up the heat on itself.

The UK keeps comparing itself to its wealthy cousin across the pond. They argue: Americans pay sales taxes (a consumption tax, similar to VAT), and they pay taxes on foreign income, too. But America isn’t a foggy island, and competition from the rest of Europe isn’t just a train ride away. We have our own problems, but at least our main attraction isn’t being a shopping destination for wealthy tourists and a tax haven for expats from other countries—and lately, unfortunately, not much else. A sad fact: In the pursuit of green energy, the UK has destroyed its fossil fuel energy infrastructure while spending billions subsidizing far more expensive “green” energy. Thus, its electricity costs four times more than in the US. As you can imagine, this isn’t conducive to manufacturing.

I could keep going with this, but my blood pressure is rising. I’ll keep my fingers crossed that our British friends have finally exhausted every wrong decision and are ready to make the right ones. Though I suspect my fingers will fall off first—plus it would be difficult to type this way.

Back to Watches of Switzerland. Its fundamental performance in the UK reflects the miserable economic climate and tax policy of the country—flat to slightly growing sales. If VAT tax reimbursement is reinstituted, this will be a positive catalyst for sales growth in the UK. Stoics would call it a “positive preference”—nice if it happens, but not the core of our investment case, which rests on the US.

The US represents about half of their revenues and has been growing nicely. Historically, luxury watches were sold by jewelers, and their presentation treated watches like commoditized diamonds. The company has been changing that. Their Rolex and Patek Philippe stores in Hudson Yards shopping mall in Manhattan are a great example of that—they are elevating these brands to art-level luxury (I’ll be visiting them on my trip in early December).

If Americans spent as much money on Swiss watches as our British friends, the demand would go up about 80%. It gets more interesting if you look at millionaires. Britain has around three million millionaires, America almost twenty-two million. Yet Swiss watch exports work out to roughly 500 Swiss francs a year per British millionaire and only about 200 francs per American one. In other words, even among the wealthy, the British buy Swiss watches at more than twice the intensity of Americans. Adjusting for the concentration of wealth, US consumption could increase 2.6 times. Again, at Watches of Switzerland’s current valuation, this upside remains a positive preference.

The amount of digital ink I’ve been spilling on Watches of Switzerland would make you believe that it is a huge position for IMA—it is not. But knowledge (not “The Knowledge”) is cumulative. I learn a lot from researching, really enjoy it, and position sizing is not set in stone. I’ve written a longer piece about it, which you can read here.

In part 2, I’ll discuss Fever-Tree, Wise, and surrounding yourself with greatness.

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The fact that you’re here, reading, thinking, reflecting with me, honestly means a lot. Every reader isn’t just a number; it’s a real person choosing to spend time with me, and that’s both humbling and energizing. If you’d like to keep exploring ideas about investing, life, and philosophy, or if you have questions or thoughts to share, come find me on X or Twitter or whatever we’re calling it now, at @vitaliyk. It’s where I’m most active and responsive.

Tosca: “We praise Thee, O God”

We are exploring timeless arias from Giacomo Puccini’s Tosca.

Here’s “Te Deum” (“We praise Thee, O God”)

Here is my favorite evil character in all of opera. I don’t think I’ve ever hated a character more. Maybe this is exactly what makes Tosca such an incredible opera: It’s built on stark contrast – between Tosca’s pure, self-sacrificing love and Scarpia’s cruel, lust-driven power.

Tosca is willing to die for love. Scarpia is willing to kill for lust.

In this aria, Scarpia sings of his twisted desire for Tosca. Before diving into the fully orchestrated version, start with this gem: Antonio Pappano, music director of the Royal Opera, accompanying the phenomenal baritone Bryn Terfel. It’s raw, intimate, and chilling.

#TimelessArias

Click here to listen.

The Intellectual Investor Breakfast - Berkshire Hathaway

Sunday, May 3rd, 2026

Omaha Marriott Downtown at the Capitol District

222 N 10th St, Omaha, NE 68102

Register Here!

Omaha 2026 Breakfast + Get Together

If you’re making the pilgrimage to Omaha for the Berkshire Hathaway Annual Meeting, I’d love to see you there. Every year, thousands of value investors gather to celebrate the wisdom of Buffett and Munger, but my favorite part has always been connecting with readers and friends over coffee.

I hosted my first reader get-together in Omaha back in 2008, during my very first Berkshire Hathaway Annual Meeting. Fewer than a dozen of us gathered in a hotel lobby to talk about investing and life. Last year, more than 400 people showed up. (Never underestimate investors’ enthusiasm for free food!)

This year, we’ve reserved a large room at the Omaha Marriott Downtown at the Capitol District for a morning of conversation.

Schedule

• 7:45 am – Breakfast

• 8:30–10:00 am – Q&A with yours truly

• 10:00–11:00 am – Meet and greet

This is not a disguised marketing event. I simply look forward to meeting you, answering your questions, and sharing a meaningful morning together.

Space is limited to registered guests only. Feel free to invite friends, though they’ll also need to register.

Register your interest by filling out this form, feel free to share the link with others! Register Here!

Next week I’m heading back to Europe. On November 13, I’ll be a keynote speaker at the CFA Society of France annual dinner (you can register here). Then on November 19, I’ll be speaking to the CFA Society of UK (you can register here). While in London, I’ll also be visiting some of our holdings. My wife is joining me on this trip. The last time she was in Paris was in December 2000, when she was pregnant with Jonah.

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Today I am going to share with you Part 2 of the Fall letter I wrote to IMA clients. Part 1 was hijacked by my writing muse, which took me on quite the detour through luxury watches and premium tonic water. But now that I’ve gotten that obsession out of my system, let me return to what I originally sat down to write about: Babcock, and in Part 3 I’ll discuss London and Scotland. You can read the full letter here.

The Ability to Suffer - Part 2

You can listen to a narration of this article on iTunes & online.

What brought us to Scotland was Babcock. This is what I wrote to IMA clients in my last letter before the trip:

Babcock keeps reporting great numbers: In 2025, its revenues grew 11% and earnings 17%. The company announced something that (unfortunately) you rarely see with European companies: a £250 million share buyback (about 5% of its shares). It is a much better company today than it was 15 or even 5 years ago. It’s another testament that people make a huge difference. The credit goes to two Davids: David Lockwood and David Mellors.

Babcock was undermanaged by previous management. The Davids simplified the business, flattened the corporate structure (removing layers of managers – a recurring theme in our companies), paid down debt, and improved the company’s performance. Babcock started to deliver products on time and on budget, the relationship with the government (they lovingly call it “the customer”) improved, and now they’re getting more deals awarded. They’re getting these deals not just because UK defense spending is growing but because they’re a better partner for the government.

We’ve been asked by clients about our BAB position size. After I visited the company in January 2023, we increased our position. I have to confess, it’s psychologically difficult to buy stocks that have gone up – at the time, it had already increased by about 50–70%. But at this higher price, the company was actually a better value – the range of possible outcomes was much narrower, its business was improving, and we could see a clear path to success.

Also, there was a significant tailwind behind us. Babcock is the second-largest defense contractor in the UK. The world was getting less safe. At the time, Houthis (Yemeni terrorists) were attacking ships in the Red Sea. The UK is an island nation – its navy is paramount to its security.

The size of the UK navy has decreased by 70% since its peak in the 1990s. Seeing the size of Babcock’s shipyard in Plymouth (the southwest-most point of England) made me realize that this company has an irreplaceable asset that’s not going anywhere. It’s the only shipyard in the UK that can service nuclear submarines.

As we look at Babcock today, the stock is around £10, and our conservative 2029 earnings estimate is about £1 (we are projecting 8% revenue growth) with the stock worth £17-20. BAB, a virtual unknown in the US, was until recently a hated stock in the UK – a so-called “widow maker.” Anyone who bought it over a ten-year period until recently lost money on it. Most institutional and retail investors stayed away from it, and few analyzed it. This is how opportunity was created for us.

However, a rising stock price (in this case driven by much-improved fundamentals) altered the perception of the state of the company and brought investors back into the stock. In addition, now that BAB pays a dividend and has a market capitalization in excess of £5 billion, it has become investable for larger funds that avoided it in the past. In the eyes of investors today, BAB looks like one of the best-in-class defense companies that they can still buy cheap.

We’re going to be very patient with Babcock – it’s like a tanker that has turned and will be difficult to stop. Despite our gains and its size in the portfolio, we think this is an extremely high-quality business with recurring revenues and that there’s a lot more return to come.

When I visited Babcock’s facilities in Davenport (southwest England) in January 2024 during its investor day, it seemed like the company was finally headed in the right direction. Morale was high, the turnaround trajectory was clear, and all that was required was time to execute.

On this visit, the company felt like it was firing on all cylinders. The management team had created a lot of value and future optionality. There was speculation in the FT that one or more Scandinavian countries were considering placing large orders for new frigates, and Babcock had a good chance of being part of the development of new UK nuclear missiles.

At the Davenport event, I sat with Babcock’s chairwoman, Ruth Cairnie. We discussed stock buybacks, and she told me it was too soon – the company had to rebuild its reputation and balance sheet before returning cash to shareholders. When I saw her again, a year and a half later, in Rosyth, I thanked her for eventually authorizing the buyback.

There used to be a saying in the US: “You don’t get fired for buying IBM” – meaning IBM was a safe choice. Under the old management, as the Babcock CFO told me, you could get fired for hiring Babcock – it did not deliver on time, on budget, or on spec. That clearly wasn’t the case anymore. The government was actually seeking Babcock out for contracts.

Babcock’s shipyard in Rosyth was impressive. In addition to building frigates, it makes missile tubes for US and UK submarines, which require incredible craftsmanship and precision – the missile travels hundreds of feet underwater before breaking the surface and eventually heading into space. Even a millimeter of imprecision is magnified a thousandfold.

Babcock’s facility was not quite at Coca-Cola bottling levels of automation, but just a few dozen people operated many robots that semi-autonomously made these monstrous tubes. Sometimes little things (though missile tubes are not so little) tell you a lot about big things. If Babcock can do this well, no project is too complex for them.

A few dozen people attended the event. What I found interesting was that American and UK visitors were allowed to see the missile tube facilities, but for security reasons the French and other EU nationals were not. The UK is the US’s closest ally and their submarine programs are incredibly integrated, which may provide future opportunities for Babcock.

In my previous letter I discussed Huntington Ingalls’ capacity constraints in submarine and shipbuilding. Babcock seems decades ahead of HII’s shipyards (not difficult, as HII’s felt like it was stuck in the disco age – the only thing missing was a disco ball).

Although I suspect Babcock is decades behind Korean or Chinese shipbuilders, I see that as an opportunity. The company’s new management is obsessed with automation, but the transformation is just beginning. They showed us what they lovingly called a “spider monkey” robot that paints ships 10x faster than people.

I keep coming back to the importance of people.

Babcock’s previous management almost ruined the company by overpaying for an acquisition in an adjacent business they knew little about and had no right to succeed in. It became a master of none—the new business was written down to almost zero a few years later, it was a distraction, and mediocrity was allowed to infest its core defense business.

There’s plenty of debate in the US about management compensation. I honestly don’t care how much management makes as long as it’s based on performance. You can overpay a mediocre CEO by $1 million and underpay an excellent one by $10 million.

Compare JP Morgan to Citibank – if Citigroup hired JP Morgan’s CEO, today it wouldn’t be another irrelevant bank. Whether Jamie Dimon makes $10 or $100 million a year shouldn’t matter to JP Morgan shareholders – he created a truly remarkable and resilient company. Did he do it alone? Of course not – good CEOs attract and hire good people.

My problem isn’t how much Jamie makes, but how much Charlie Prince (CEO of Citi from 2003 to 2007) made. A few months before the Great Recession nearly took Citi down, Prince famously said (about subprime mortgages), “As long as the music is playing, you’ve got to get up and dance.” He almost danced Citi into the grave. While Prince was dancing, Jamie Dimon was tightening JP Morgan’s lending standards. Citi (yellow line) outperformed JP Morgan (green line) for a while – until it didn’t. The irony is that Jamie was fired from Citi a year before he took over BankOne, which later was acquired by JP Morgan.

The same applies to Babcock management – the two Davids (CEO and CFO) have done an incredible job. Now you don’t get fired for hiring Babcock – you get praised. Think of the jobs they’ve created (and will create), and how much stronger they’re making the UK.

One important quality good management needs to have is the ability to suffer. Yes, suffer! Doing the right thing—not dancing when the world is high on FOMO and engulfed in a giant mindless dancing orgy—is incredibly difficult and painful. It means giving up short-term profits to protect the business from future implosion, whether from bad loans or brand destruction. This requires both high IQ - to see that the party will end in tears, and supersized EQ with giant stamina for the pain of being a lone voice of reason.

I hope you can see why we have an obsession with people who run businesses, not just the businesses themselves.

Management’s ability to suffer is worthless if a company doesn’t have the right board of directors and shareholders, and if an investment firm doesn’t have the right clients. This is why effective and honest communication is essential.

Shareholders and the board trusted Jamie Dimon’s decision not to join Chuck Prince on the dancing floor. This is what gives Rolex an incredible, embedded in its structure, competitive advantage—the foundation has infinite life and is perfectly aligned with building a multigenerational brand.

There are many nuances buried in the above statements, but the message is the same: we want to own companies that are run by management that will not sacrifice tomorrow for today – have the ability to suffer, and where there is alignment between all constituents. Today, Babcock checks all the boxes.

The ability to suffer applies to investing as well—being rational and a lonely voice is incredibly difficult and painful (I can attest to it personally). As one value investor who chose not to “dance” and fill his portfolio with future dot-bombs during the dotcom bubble said, “I’d rather lose half of my clients than half of my clients’ money.”

Amen to that!

I am infatuated with this alignment. This is why I write exhaustingly long client letters – I want you to understand what you own and why, I want my stocks to become your stocks. This is why IMA does not employ a single salesperson—we want clients who choose us with conviction, not ones we’ve convinced to join us.

Most importantly, we want clear alignment between what we do and our clients’ expectations.

Our goal is to get rich slowly. It’s not that we’re opposed to getting rich fast, but that route is loaded with land mines. We are managing clients’ irreplaceable capital—quite frankly, all of my family’s net worth as well as the majority of IMA employees’—and we don’t want to blow up.

This means that at times, when the party is in full swing and everyone is dancing and everyone’s neighbor is minting money, we will be standing on the sidelines until the music stops. In those times, all the ones who are dancing will look brilliant, and we will look less than smart. We are okay with it, and we choose clients who are going to be fine with it, too.

This is where the investor letter ends, and my travel log continues in Part 3.

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I’d love to hear your thoughts, so please leave your comment and feedback here. Also, if you missed my previous article “The Art of Rational Irrationality – Part 1“, you can read it and leave a comment here.

Tosca: “Recondita armonia”

We are exploring timeless arias from Giacomo Puccini’s Tosca

The contrast between the heroines of two famous operas, Bizet’s Carmen and Puccini’s Tosca, is fascinating. Carmen is self-centered and cunning, jumping from lover to lover and breaking their hearts in the process.

In contrast, Tosca is the ideal of innocence. She easily gets jealous, but it is out of complete devotion and love. She is willing to sacrifice herself for her love and ends up killing for love. Tosca is the opposite of Carmen, who uses her freedom and sexuality as power, discarding lovers when they bore her, while Tosca’s entire world revolves around her love for Cavaradossi.

There is of course another way to look at Carmen, and maybe this is why millions of people are in love with the opera. Carmen embodies sexual liberation and independence, moving between lovers according to her own desires and refusing to be possessed by any man. She views love as temporary pleasure rather than binding commitment.

Here’s the aria “Recondita armonia” (“Hidden harmony”)

Cavaradossi is musing on the mysterious harmony between his dark-eyed Tosca and the blonde Madonna he’s painting – Puccini’s clever blend of artistic expression and jealousy sets the stage.

#TimelessArias

Click here to listen.

Today I am going to share with you the Fall letter I wrote to IMA clients. Due to its length, I’ll break it into three parts. In part one, I’ll discuss the rational irrationality of luxury goods and premium tonics. In part two, I’ll focus on what excellent management looks like at Babcock. And finally, in part three, I’ll conclude by taking you with me to London and Scotland. You can read the full letter here.

The Art of Rational Irrationality - Part 1

You can listen to a narration of this article on iTunes & online.

I am in awe of writing—I feel like I’m a guest on this journey. When I sat down to write this letter about my trip to London and Scotland with my son Jonah, I had a plan. I was going to talk about the musicals we saw, compare Scotland to New Zealand – both are green, full of sheep, have rolling hills, people speak with funny accents, drive on the wrong side of the road, and after all of that eventually get around to discussing Babcock’s investor day and how it’s a changed company. But after a few pages I was a bit surprised to discover that this is not where my writing muse took me. We’ll revert to my original plan, but in parts 2 and 3 of this essay.

Babcock – our largest holding and the second largest defense company in the UK – announced that in early September they were going to hold a marine investor day in Rosyth, Scotland (a suburb of Edinburgh). This wasn’t going to be just a presentation in an air-conditioned conference room but a tour of its shipbuilding yards. The moment I heard that, I said “road trip!”

I’m always looking for an excuse to visit Europe, especially when accompanied by my 24-year-old son Jonah. Though he’s well-traveled for his age, he’d never been to London, and I’ve never been to Scotland. IMA also owns two other British companies I wanted to visit – Watches of Switzerland (WOSG) and Fever Tree. Unfortunately, both companies were in their “quiet period” (the time when management is legally not allowed to meet with investors), so instead Jonah and I visited half a dozen WOSG stores in London, including their four-story flagship Rolex store, and did a fair amount of research on mixed drinks in UK restaurants and bars.

But despite not being able to meet with management, this trip turned out to be something even more valuable to me as an investor: a masterclass in businesses that have discovered the art of being rationally irrational.

The World of Luxury

Let’s start with the Watches of Switzerland Group WOSG – it is the largest “retailer” (more on that later) of Swiss watches in the UK and the US.

When I start doing primary research, I sometimes get a bit too deep, especially if I really like the product. Before we owned WOSG, I was indifferent to mechanical watches, but when I was researching WOSG, I spent considerable time studying the watch industry and began to equally appreciate both the design (the art and craft) of mechanical watches and their marketing. Mechanical watches represent the last frontier of the analog world; everything else has been captured by digital.

There’s something beautiful and weirdly nostalgic about mechanical watches – they are one of the only remaining echoes of the analog past. Spend time with watch aficionados and you begin to appreciate the complexity and nuances of watchmaking – all those exotic functions (mostly unnecessary if we’re being completely honest) that they lovingly call “complications.”

What impresses me most is watchmakers’ attention to detail – their ability to pack so much functionality into a little round case. It’s craftsmanship in its purest form, where precision meets artistry in a space no bigger than a silver dollar.

If you think that the iPhone and Apple Watch have decimated the watch market, you’d be right – but only about the “low-end” of the watch market (those under a few thousand dollars). The high end remains alive and well (though it is coming off a serious pandemic bubble).

That’s because when you buy a Rolex (or any luxury mechanical watch), you’re not buying a device that tells time. You have a smartphone in your pocket, and you can get a quartz or electronic watch on Amazon for $10 (and a beautiful one for $25) that will keep time more accurately than a mechanical watch. What then is its purpose? Put simply, mechanical watches are men’s jewelry.

It turns out that there are several types of buyers of Swiss watches. There are those projecting status. Social scientists call this peacocking, signaling to the world they have extra money for frivolous trinkets (from an evolutionary perspective, they are showing potential mates that they can support them).

Then there are watch enthusiasts who are truly obsessed with them – who know tiny nuances, brand history, how they are made, and which movements they use. If you need a parallel from a familiar universe, think of your favorite American Civil War buff, minus the dressing up and reenactment (my brother Alex and Jonah fit into this category).

And then there are collectors. Some people collect stamps, others cars, and still others watches. (I suppose there is a tiny minority of buyers who actually wear watches to tell time.) I should note that these groups aren’t mutually exclusive and often overlap.

When it comes to marketing, Rolex is the center of my fascination. It is somewhat of a paradox —it is the largest maker of Swiss mechanical watches with about one-third market share, yet you still have to beg your authorized dealer to sell you a watch. It is like a dominatrix for rich people—they have to go through abuse from their Rolex dealers. That’s in part because demand for Rolex watches far outstrips supply (you can see this play out in the secondary market, where prices are often higher than in the store).

It probably costs Rolex less than a thousand dollars to manufacture a watch that sells for fifteen thousand. The gap between those numbers is explained by the story Rolex has so carefully crafted. They’ve mastered not just watchmaking but human psychology, turning a simple transaction into aspiration.

This is where retail comes in. Stores selling Rolex (and most luxury Swiss watches) are not traditional retailers but authorized dealers. Their model resembles auto dealerships: brands give out only a limited number of dealerships and are very selective about who gets them. This changes the business model’s economics and competitive dynamics tremendously, which is why I call WOSG a “retailer” in quotes.

We don’t typically own retail stocks – my EQ is very low when it comes to them, most don’t have moats, and I tend to lose money in them. But I don’t look at WOSG as a retailer; it’s a natural extension of luxury Swiss brands. If Walmart, Macy’s, or Target wanted to get into this business, they wouldn’t be able to. Unlike traditional retailing, where a store chooses which goods to sell from a distributor (and how many), Rolex and other Swiss brands tightly control who sells their watches and how many each dealer receives. Over the past decade, Rolex has been culling the herd—the number of Rolex authorized dealers in the US has declined by about a quarter to about 300, while sales increased.

The beauty of this authorized dealer model is that WOSG doesn’t need to worry about competition from a store opening next door. But they do need to be paranoid about their relationship with Rolex, which wants just one thing from retailers: a perfect customer experience that aligns with its story about its craftsmanship and obsession with quality.

This is why every authorized dealer is micromanaged by Rolex – down to where the Rolex counter sits within the store, how it looks, even what materials are used. If a retailer wants to remodel, blueprints and final design need Rolex approval. I heard a story about a McDonald’s opening on the same street as a Rolex authorized dealer who had operated from that location for decades. Rolex asked the retailer to move. On the surface it sounds absurd, but in my dive into the brand I realized the genius of this approach.

Let me give you a counterexample that illustrates just how crucial this controlled environment is. I was recently walking through a Macy’s store in Denver and saw a counter that sold Gucci watches. It was located right next to the loud, bustling shoe section. The display itself looked slightly scratched up and dusty with dim lighting, as if it had come from a pawn shop selling nose rings. This is precisely why Gucci is not known for its watches.

Our perception of a product is profoundly shaped not just by the product itself but by the environment around it. This insight doesn’t apply only to Rolex and other luxury goods. It’s why Apple is obsessed about the box the iPhone comes in, the look and location of its stores, the customer service experience, etc.

The perception of value imparted by the environment became crystal clear to me when I visited the Rolex store on Bond Street (London’s equivalent to NYC’s 5th Avenue). It was instantly clear that while WOSG may be running this store, it’s a guest at Rolex’s party. Rolex doesn’t want to retail its watches directly but needs partners that will care as much about client experience and storytelling as they do, and in WOSG they found the perfect match. As Jonah put it with a smile, “Watches of Switzerland has soul in the game.”

As long as WOSG continues to tell Rolex’s story to their standards, they’ll maintain that coveted relationship. For us as investors, WOSG is our way to indirectly own part of Rolex, as the brand accounts for a large chunk of WOSG’s revenues and profitability.

There’s another fascinating aspect to Rolex that makes it unique as an investment and explains its willingness to produce fewer watches than the market demands. Its founder had no descendants, so the company was left to a foundation that has an infinite time horizon, not just the next quarter. As a result, the company’s decision-making focuses on maximizing cash flows and preserving its brand; short-term growth is secondary. I wish all my companies could operate with such clarity.

This is harder than it sounds, especially for public companies where management tenure lasts only a few years and shareholders demand quarterly profit growth. Consider what happened to Coach, the maker of luxury handbags. It went on a growth spree and decided to open outlet stores. Its profitability skyrocketed … but then moms discovered their teenage daughters could buy the same Coach bag.

The issue wasn’t just logical (monetary) but also psychological: we hate to admit it, but we constantly compare ourselves to others. When your well-to-do friends carry Coach purses, your purse telegraphs that you share their social status. But when their kids start buying the same purses with their allowance money, the social hierarchy suddenly gets distorted. Demand collapsed, and the brand was nearly destroyed.

Sounds silly? Welcome to human psychology and luxury products, which require an infinite time horizon – a degree of patience that few companies can pull it off.

I am obsessed with quality and even romanticize it. That’s because a focus on quality puts you on the path to constant improvement. I admire companies that put quality front and center. We live in a world that prioritizes efficiency and the never-ending pursuit of lowering costs. That has been the story of industrialization and modern progress. But the artisan pursuit of quality – something you still see in luxury brands like Rolex watches, Louis Vuitton purses, and Ferrari cars – is an attempt to slow down time and elevate craftsmanship over efficiency.

This is why the luxury watch market is rationally irrational. On one hand, it makes sense to strive to do less and get more. Arguably this is why the quality of life has improved so much over the years. Instead of a donkey plowing a field, a mechanized, soon-to-be self-driving combine does the work. But in this pursuit of efficiency, we lose a bit of humanity, and these partially handmade, inefficient products fill that void. When someone buys a Rolex, they’re not just buying a watch – they’re buying into the idea that some things should take time, that mastery matters, and that there’s value in doing something the hard way.

Fever Tree

The same obsession with quality led me to another British company. In 2025 IMA bought a small (“venture”) position in Fever Tree. They make alcohol mixers, and their slogan explains their business model: “If ¾ of your drink is the mixer, mix with the best.”

The more I studied Fever Tree, the more fascinated I became. The company singlehandedly created the premium mixer category. They’ve captured the UK market for premium tonic water – the Brits are fond of their gin and tonic – and are synonymous with high-quality tonic. Just like Rolex, Fever Tree (which is run by a co-founder) is obsessed with quality. Industry interviews are filled with stories of their relentless pursuit of perfection.

And just like Rolex, Fever Tree obsesses over the perception of its product. They cannot control distribution like Rolex does, but they can control the bottle. You won’t find Fever Tree in plastic bottles. Most comes in glass bottles – occasionally cans, but never plastic. It’s priced several times higher than the low-end leader Schweppes, and customers happily pay the premium. After all, they just paid $50 for a bottle of vodka or gin, and want to mix it with another quality product. Charlie Munger could have licensed his saying to Fever Tree: “When you mix a turd with raisins, you get a turd.”

During the pandemic, glass prices have skyrocketed due to supply chain issues. Glass is Fever Tree’s largest cost item, and this has significantly dented the company’s profitability. Management could have relented and switched to plastic bottles, but it decided to endure short-term pain to preserve the brand. I admire that.

Let me make a not-so-obvious confession: I am a disgrace to Mother Russia. I don’t really drink. I haven’t had a straight shot of hard liquor since I was in college, and don’t even like the taste of wine. Part of me wishes I did; wine tasting looks like fun. My wife and I toured Coppola’s winery in Napa a decade ago, and after I sampled half a dozen wines, I politely asked for a beer. I am persona non grata at Coppola’s winery.

But now that I’ve discovered Fever Tree and mixed drinks, my alcohol consumption has gone up from a few drinks a year to a few a month. Since Jonah and I couldn’t visit management during their quiet period, we did field research the traditional way – we ordered gin and tonic everywhere we went (the lengths I go to!). On our trip we tried many competitive products, and though I may be biased, Fever Tree was our favorite by far.

After we returned to Denver, I asked my assistant to buy every Fever Tree product she could find. I wanted to try all the flavors. I posted this picture on x.com (you can follow me on x.com/vitaliyk) with the caption “Another day at the office... We take our research seriously.”

My friend Chris responded, “Now do PM [Philip Morris].” Chris and I are both shareholders of PM, the maker of Zyn, cigarettes, and other nicotine products. But I have to draw the line there: quitting smoking three decades ago was one of the most difficult things I ever did.

Just like Rolex, Fever Tree knows its strengths and weaknesses. They are brilliant at creating outstanding products and brand building, but are not as good at manufacturing and distribution. So they do what smart companies do – they outsource what they’re not good at. Fever Tree just signed a joint venture deal with Molson Coors to manufacture and distribute their products in the US. Get ready to see Fever Tree in more stores and bars over the next few years.

My wife, kids and I rarely drink traditional soda, but after our “research,” we started drinking Fever Tree ginger beer as a treat. It comes in many flavors, has very little sugar, and uses only natural ingredients. This represents a moonshot upside for the Fever Tree investment case – they become “adult soda,” a very nascent category in the UK.

My biggest concern is that management will have to walk a very fine line to stay premium and high-priced. I’m sure if they lowered prices, sales would surge initially, but this would mark the beginning of their demise as a brand. They’d lose their identity, could no longer afford the highest quality ingredients, and most importantly, consumers’ perception that they represent high quality would evaporate.

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I’d love to hear your thoughts, so please leave your comment and feedback here. Also, if you missed my previous article “My Article in The Wall Street Journal“, you can read it and leave a comment here.

Tchaikovsky’s Piano Concerto No. 2 – 2nd Movement

We are continuing our exploration of 2nd movements of romantic piano concertos with Tchaikovsky’s Piano Concerto No. 2. #PianoAdagios

In 1880, Pyotr Tchaikovsky poured his heart into Piano Concerto No. 2 in G major, Op. 44. He dedicated it to Nikolai Rubinstein, patching up old wounds from the First Concerto’s rejection, but fate played a cruel trick – Rubinstein died before he could perform it. The concerto premiered in New York in 1881.

Click here to listen.

Today I want to share with you an article I wrote for The Wall Street Journal. The version they published — which you can read here — was edited for print space, so I’m sharing the full piece with you.

The Robots That Handle Your Amazon Orders

A visit to a fulfillment center, where machines move merchandise and tell humans what to do with it.

When I had the chance to tour an Amazon fulfillment center in Denver with a few colleagues, I jumped at the opportunity. Like most people, I order regularly from Amazon but had never seen the machinery behind those quick deliveries. I was curious about the logistical marvel that could get a package from click to doorstep, sometimes in just a few hours.

What I expected was impressive efficiency and scale. What I found was both more remarkable and more unsettling than I had imagined.

The fulfillment center’s job is straightforward: receive goods from suppliers, sort and store them, then fulfill customer orders by packaging items and loading them onto trucks. This particular center wasn’t responsible for final delivery – it sends already-labeled packages to smaller distribution centers closer to customers, which hands them off to carriers like UPS, USPS, or Amazon’s own delivery fleet.

The first thing that hits you is the noise. The conveyor belts running through the facility are so loud that we needed headsets to protect our hearing. The building itself is enormous — three stories high, with about 2.4 million square feet of working space, roughly the size of sixty football fields. It’s divided into three distinct areas. The perimeter is a lit walkway that allows goods to flow in and out of the building. About one-third of the center looks like a normal warehouse where humans work.

But the largest portion of the facility is completely dark. This is where inventory is stored on thousands of yellow shelves, each five feet square at the base and eight feet tall. The robots swarming this land of darkness look like electric orange self-driving lawn mowers in a coordinated dance, giving each other the right-of-way. They slide under shelves, lift them a few inches, and ferry them around the dark area. A fence separates the dark zone from the rest of the facility, protecting the humans from the robots and the inventory from humans. Only specially trained employees can enter when equipment malfunctions or an item falls off a shelf.

Chaos Theory in Practice

Unlike at Home Depot (or most retailers), where knives are with knives and bolts are with bolts, almost all the inventory here is stored on shelves scattered throughout the dark zones in a completely random order. Amazon’s computers keep track of millions of items across thousands of shelves – they know not just which shelf contains each item, but exactly where it’s placed on that shelf.

All human interaction with the shelves happens at the “DMZ” – the boundary between the light and dark zones, where the loading and picking stations are located. At loading stations, merchandise is taken from yellow bins and placed onto shelves for storage. At picking stations, merchandise is retrieved from shelves and put into yellow bins.

Both stations look similar, and there are hundreds of them. Each is staffed by one employee who follows pictorial instructions on several overhead screens. For loading, they might see a visual instructing them to take an item from bin #2 and place it on the right side of shelf level five. If they are picking, similar visual instructions might tell them to take the item pictured from the middle of shelf level four and put it into bin #5. A light shines on the correct one of the five numbered bins in front of them.

Multiple cameras monitor each employee’s movements, recording where each item is placed. Computers track the time it takes to load or unload each item, and a single screen displays the employee’s statistics. Amazon has gamified the process so that pickers and loaders can compete against each other using their times as inputs. Every hour, the computer interrupts the workflow to provide short, guided stretching exercises.

As I talked about this distribution center with my colleagues, I remarked that the dark side of the fence where the robots roam looked dystopian, like something out of Black Mirror. But my colleague Robert offered a more chilling assessment: “It’s the humans that look dystopian.”

He was right. Workers exercise zero judgment; they simply follow detailed computer instructions. As I observed them, my heart overflowed with empathy. They are shells of muscle, mindlessly moving items from one place to another. This job requires someone to turn off their brain for 10 hours a day and enter a comatose state for the duration of their shift (they work four 10-hour shifts a week).

This job starts at $22 per hour – a relatively high wage, considering Colorado’s minimum wage is about $15. A job at 7-Eleven starts at minimum wage, and entry-level positions at Walmart pay about $18. But this job requires wearing protective headphones for 10 hours a day in a windowless building in near-total isolation. It’s just you and the yellow bins and shelves, without interacting with another human for almost the entire day.

As we discussed automation with our guide, we learned this facility was a “Version 9” – a relatively old 2015 vintage (though I imagine the software running the automations is days old). The newest fulfillment centers are up to Version 13, with even more robots. It’s easy to predict how this story will end – these distribution centers will literally “go dark,” as robots don’t need light. It’s just a question of whether it will happen in five years or ten.

Then I realized what I had initially missed: this facility is run by sophisticated algorithms housed in an AWS facility a thousand miles away. Every single decision, from the moment an order is placed, is made by these algorithms—not AI, but millions of lines of pre-programmed code. A software system decides which facility to send the order to. Once the order arrives, the lawnmower-like robots start moving shelves. The system then provides pictorial instructions to the humans on what to pick, where to place it, and which truck to load.

Thousands of micro-decisions were made by algorithms, and none by humans. The people here (outside of those who designed the system) were just cogs – biological components executing software instructions with remarkable precision, but without thought, creativity, or autonomy.

The future hasn’t arrived yet, but its foreshadowing is alive and well, humming quietly in windowless buildings across the country, where the boundary between what humans can do and what machines can do grows thinner every day.

For well over a century labor and capital have been at war. Automation and sophisticated algorithms have been steadily winning for capital. But AI—which learns from data and improves itself rather than simply following pre-programmed rules— is an accelerant that will bring decisive victory to capital. Robots will perform almost all tasks; humans will be there only to troubleshoot edge cases. Today, this facility employs 3,100 people. Fully automated, combining robotics with AI-driven coordination, it may need only 100.

I honestly don’t know how I feel about it. On one hand, 3,000 people will no longer have to turn themselves into drones for 40 hours a week. On the other hand, what will they do? What will happen to millions of people like them across the country?

This question haunted me as I left. A common argument, which I have often made myself, is that AI and automation will create new, high-paying jobs, just as previous technological revolutions did. This perspective has historical precedent: a century ago, one-third of the U.S. population worked on farms before mechanization shifted that labor into factories. Similarly, many high-paying occupations today (cloud engineer, social media manager, SEO expert) didn’t even exist thirty years ago.

Unlike those past shifts, however, the AI revolution may be so pervasive – broadly impacting both blue-collar jobs, from robots manning warehouses to self-driving technology replacing drivers, and high-paying white-collar jobs like radiologists, accountants, and customer service reps – that it eliminates jobs without creating enough new ones. Past revolutions also took decades to unfold. The question isn’t if new jobs will emerge – they will. The question is whether they will emerge fast enough, and in sufficient numbers, to offset those displaced by AI.

We’re likely entering an era of structurally higher unemployment. Walmart has already announced that it will stop increasing its workforce, despite growing and opening new stores. Companies today are walking a thin line – they don’t want to appear to disturb the perception of the status quo, but automation and AI will lead to a decreasing need for human workers. Hiring freezes will come first, followed by layoffs.

The consequences for society are truly difficult to imagine. The natural reaction will probably be to embrace populism. Corporations will become social villains. Will we have political unrest? Mass unemployment combined with wealth concentration in the hands of those who own the algorithms? Nobody knows. But the world that lies ahead will be fundamentally different from what we’re used to.

Watching these workers reduced to biological automatons made me think about my own children. What skills will they need to thrive—not just survive—in this new world? They’ll need creativity – not just the artistic kind, but the ability to connect disparate ideas in new ways. Higher emotional intelligence and human skills will become paramount as more work moves into algorithmic domains. They’ll need adaptability – the ability to constantly acquire new skills, as they’ll have multiple careers over their lifetime in a world changing at a blistering pace. They’ll need to maintain agency over their lives rather than develop a victim mentality when faced with technological disruption. They’ll need to stay curious, embracing AI as a tool to leverage their human capacity, and remain open to change. They will, in short, need to cultivate the very things that make them irreducibly human.

Machines will stuff boxes and follow instructions. My hope is that my children will write their own script rather than read from one.

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I’d love to hear your thoughts, so please leave your comment and feedback here. Also, if you missed my previous article “Why Smart Investors Should Sit Out the AI Arms Race“, you can read it and leave a comment here.

Tchaikovsky’s Piano Concerto No. 1 – 2nd Movement

When my son Jonah was four years old, his Montessori daycare teacher asked me if I could create a classical music CD for the class to listen to during playtime. This music had to be accessible for the young ones. Here is what I did. I took adagios (slow movements) from my favorite piano concertos, and that was it. We’ll do the same for the next part of our exploration of #PianoAdagios and we’ll see how long it takes.

The speed of playing is called a tempo – here is a continuum of slow tempos. As I understand it, there is plenty of subjectivity to this as well.

We are going to start our exploration of piano adagios with Pyotr Ilyich Tchaikovsky’s Piano Concerto No. 1 in B-flat minor, composed in 1874. Tchaikovsky initially dedicated it to Nikolai Rubinstein, who harshly criticized it as “unplayable” and “worthless.” Undeterred, Tchaikovsky revised it slightly and entrusted it to conductor Hans von Bülow, who premiered it triumphantly in Boston on October 25, 1875.

Let’s explore the 2nd movement from this concerto:

Click here to listen.

Why Smart Investors Should Sit Out the AI Arms Race

You can listen to a narration of this article on iTunes & online.

Bubbles don’t form out of thin air. They arise from stories that feel real and transformative—narratives that capture our imagination and hint at a world-changing future. The more real and compelling the narrative, the bigger the bubble.

There’s always some truth beneath the hype. That doesn’t mean what’s happening in AI isn’t real—it absolutely is. The question is: What impact will it have? How much value will be created? In the end, it’s a math problem: How much will these companies earn in the future versus what investors are paying for them today?

We have no idea. Nobody does.

To understand where we’re headed, let’s look back at the late 1990s—the height of the dot-com bubble. The internet was going to change the world, and it did. That’s a fact. During the bubble, internet stocks soared. Then they crashed.

Some, like Amazon, truly did change the world. If you’d bought Amazon in 1999 and endured a 95% decline, holding on through years of losses, you’d still have done incredibly well. But human psychology makes that nearly impossible; very few who bought at the peak held through that drawdown and waited 10–15 years to see meaningful gains.

For every Amazon, there were hundreds of companies that soared and then disappeared into the dot-com graveyard—names like CMGI and JDS Uniphase, celebrities of their day that are barely remembered now.

The parallels to today are striking. In 1999, it was hard to imagine another company displacing Yahoo! as the internet’s dominant search engine. Yahoo! was the “Google” before Google, until a small startup came out of nowhere and dethroned it.

OpenAI could become the winner—or it could become another Yahoo!.

That’s the challenge: It’s almost impossible to identify the winners ahead of a revolution. As investors, we must maintain humility. No matter how confident people sound, nobody truly knows. That’s the first point.

The second is that we tend to overestimate what a new technology will do in the short term and underestimate what it will do in the long term. Most likely, AI on its own won’t be as powerful as it will be when combined with other technologies.

Consider how the internet’s first wave of transformation didn’t become a tsunami until the smartphone arrived. The smartphone was the accelerant, propelling internet adoption and creating entirely new industries. Uber, for instance, exists only because the smartphone and the internet came together. In a similar way, robotics may become the catalyst for AI; its true potential will unfold as it fuses with other technologies.

Beyond these conceptual concerns, the actual deals happening today have dot-com overtones. Oracle committed to spending $300 billion on data centers for OpenAI, which in turn promised to pay Oracle $60 billion a year. Oracle’s stock skyrocketed. Larry Ellison became the second richest person in the world.

But this is just the beginning.

Pause to process the magnitude of these numbers—commitments of hundreds of billions of dollars. They’re unfathomable.

Then the plot thickens. Nvidia invested in OpenAI, which will use that money to buy Nvidia chips. OpenAI also invested in AMD and will be buying AMD chips, too. I know money is fungible, but you could argue that Nvidia is helping finance OpenAI’s purchase of competing AMD chips.

OpenAI is the connecting link in a chain of neatly stacked dominoes. There’s so much dependency here, and it all comes down to one thing: profitability.

OpenAI is losing billions of dollars today. It needs to generate hundreds of billions in annual revenue within a few years for these dominoes not to come crashing down.

Let’s come back to Oracle. It’s a financially strong company, but it doesn’t have $300 billion sitting under a cushion. It will be borrowing much of this money to build these data centers; and unlike its core software business, this new adventure promises to generate very low margins.

This reminds me of the late ‘90s, when Lucent and Nortel financed money-losing dot-coms. When the market crashed and the dot-coms ran out of cheap capital, these two Wall Street darlings were obliterated.

But things may get a lot hotter before they cool.

OpenAI is in the lead today, but Meta, Google, xAI, Microsoft, and others see this new arms race as existential. For them, economics goes out the window—it’s a race for survival. Each company is behaving rationally in isolation, trying to mitigate the threat of a competitor owning a smarter AI that could turn them into a pumpkin at midnight.

But collectively, this will likely lead to tremendous overcapacity—too many data centers and too much compute built in the short term.

Here’s what’s changed: Until this point, the data center arms race was financed by the cash flows on the Magnificent 7’s balance sheets. Oracle has taken us into a new, levered arms race. Once you introduce significant debt into the ecosystem, it becomes more fragile, more path-dependent, and more sensitive to external events like recessions, interest rates, and geopolitics.

Timing becomes critical—the difference between OpenAI achieving profitability in five years versus three could be catastrophic.

History is full of examples, from railroads in 19th-century Europe to the fiber optic buildout I lived through. In that case, US infrastructure was built on the backs of debt and equity investors who lost hundreds of billions of dollars.

This is what makes this country great—people are allowed to take risks and are allowed to fail. Sometimes both investors and consumers win. Sometimes, only consumers win.

Not all of this infrastructure investment will be useful decades from now. Most of the money today is going to three things: data centers, AI chips, and power generation.

The investment in power is arguably a net positive, as the US desperately needs an upgrade to its electric grid. This AI boom will help, creating pressure to develop new electricity generation and improve our grid, hopefully pushing for modular nuclear reactors, battery technology, and fossil fuels.

In contrast, while data centers themselves can last for decades, those built with unconstrained capital in a race to be first are vulnerable to inflated costs. Future data centers will likely be built for a fraction of today’s price, making these early facilities less competitive.

The biggest malinvestment, however, will likely be in AI chips. They have a useful life of only a few years, as Nvidia’s business model depends on making today’s hardware obsolete with faster, more efficient models. This rapid obsolescence is compounded by Nvidia’s pricing—it enjoys software-like margins because it’s the only game in town, allowing it to price its chips at exorbitant levels.

The bulk of today’s capital is pouring into this rapidly depreciating hardware.

I’ve seen projections that AI infrastructure investment will hit a few trillion dollars by the end of the decade. For a 15–20% return on that capital, these companies would need to generate several trillion dollars in new annual revenue—roughly the size of the entire US and European car industry combined.

And here’s the kicker: When Level 3 and Qwest were laying fiber, projections claimed the appetite for it was insatiable. But then the technology improved, and today we still have an overabundance of fiber. As China’s DeepSeek showed us, there is a risk that future models will require less of everything, including compute and power.

Something interesting happens during bull markets—certain stocks become untouchable. They can do no wrong; every move is interpreted as if their CEO is some Machiavellian Magnus Carlsen, seeing ten steps ahead. These stocks only go up.

Nortel, Lucent, JDS Uniphase—they were stocks you had to own. I don’t remember their CEOs signing women’s breasts with a Sharpie, as Jensen Huang does today, but this was before social media. They had that same aura of invincibility.

This brings me to my advice for investors.

Let me tell you a secret about investing. You get to choose the game you play. You can observe and be entertained by the AI game transpiring before your eyes, but you don’t have to play it. You can simply be honest with yourself and say, “This is too difficult. I just don’t know.”

And here’s the truth—nobody knows. Not even Sam Altman, who might be brilliant but doesn’t have a crystal ball, no matter how confident he sounds. Big breakthroughs are built by delirious optimists like him. It’s his job to sound confident. His company is burning through cash, and he’s in two businesses: building models and raising money. He has been excellent at both.

But this doesn’t mean investors in OpenAI or other AI stocks will make money.

Instead, you can focus on the thousands of other companies out there and find value. They don’t have to be connected to AI—though they may be beneficiaries of it—but you also need to be paranoid enough to ensure they won’t be destroyed by it.

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I’d love to hear your thoughts, so please leave your comment and feedback here. Also, if you missed my previous article “Cost-Plus Capitalism: Lessons from HII and the Future of Naval Shipbuilding (Part 5)“, you can read it and leave a comment here.

La Boheme: “Farewell, sweet awakening in the morning!”

We are exploring timeless arias from Giacomo Puccini’s La Boheme.

“Addio dolce svegliare alla mattina!” (“Farewell, sweet awakening in the morning!”)

This is another great example of ensemble duet. I absolutely love this duet, though I fell in love with it later in my life. It contrasts the lovers’ quarrels – Rodolfo and Mimì’s tender farewell against Musetta and Marcello’s fiery spat – and highlights Puccini’s genius in weaving conflicting emotions into harmony. #TimelessArias

Click here to listen.

In a few weeks, I’m going to a small investor conference in Richmond for a few days. Then in mid November my wife and I are heading to Paris and London – I’ll be speaking to the CFA societies of the UK and France. I hope to visit some of our UK and French holdings and, quite frankly, enjoy those cities with my wife. You can attend these events if you are a member of those societies.

Then we’re off to Playa del Carmen, Mexico for a family vacation for Thanksgiving. And there’s a good possibility I’ll attend another conference in NYC in December. Time permitting, I may be able to do reader get-togethers in those aforementioned places - you can register here and we’ll let you know.

Cost-Plus Capitalism: Lessons from HII and the Future of Naval Shipbuilding (Part 5)

You can listen to a narration of this article on iTunes & online.

This is Part 5 of my client letter, sharing insights from my visit to Huntington Ingalls Industries’ Newport News shipyard, an overview of the current state of US shipbuilding, and the reasons behind our investment in HII. You can read the previous parts here.

My investment friends, IMA colleagues Cyrus and Robert, and I visited HII’s shipyard in Newport News in April. This trip gave me an unexpected insight into the industry. As a reminder, HII is one of only two companies in the US that builds nuclear submarines (the other is Electric Boat, owned by General Dynamics). It is also the sole supplier of nuclear aircraft carriers to the US Navy.

Today, it takes both companies a little over a year working together to produce one submarine. It takes HII about 10 years to build an aircraft carrier (you read that correctly). Korean shipyards can build a cruise ship with 2–3 times the displacement in just 18–24 months.

The visit to HII’s shipyard crystallized why. It felt like we were transported back to the 1970s. The process by which HII builds submarines has changed little since then. I expected to see a high degree of automation; we saw almost none.

While Korean shipbuilders rely heavily on automation, HII is heavily dependent on labor that, in the post-pandemic world, would rather work at 7-Eleven selling Slurpees than do physical outdoor work for $23 an hour. This is HII’s biggest problem today – finding people to staff its shipyards.

I can’t really blame HII or GD – they’ve responded to the customer’s demand. It would have been irresponsible from a shareholder perspective to make large investments in automation and equipment with little to no return. There was no need. HII could produce an aircraft carrier every few years, but why? These floating cities last 50 years. The US has 11 of them (more than the rest of the world combined).

Let’s say HII made a huge investment in equipment and automation so it could build an aircraft carrier in three years. This equipment would then collect dust for years till the next one was ordered.

Another explanation for why there’s been no change is the consolidation of our defense industry. On July 21st, 1993, then-Defense Secretary Les Aspin held an infamous dinner with defense industry executives, during which he informed them that the Cold War was over, government defense spending would decline, and the industry needed to consolidate. This dinner went into the history books as the “Last Supper.” Since then, the US Navy has shrunk by a third.

The US has had a peacetime navy – a navy that doesn’t lose ships in war. The US hasn’t lost a ship in combat since WWII. There was no need to produce ships fast and in high quantities.

This industry also has an inherently flawed incentive system, called “cost plus” – they get paid for incurring higher costs. The more money they spend (the cost), the more money they’ll make (the plus). This makes them good businesses to own – cash flows are highly recurring, stable, and predictable. But as a taxpayer, I realize that my tax dollars could be getting a much higher return (I’m oversimplifying a bit but directionally I’m right). Since the industry has consolidated, there’s little competition. We went from having 51 “prime” (top-tier) defense contractors to just five.

I’ve learned that when a shipbuilder builds a brand-new ship, they really don’t know how much it will cost – they’re still fiddling with process improvements. It takes about three or four ships to iron out all the construction kinks. I’m sure this isn’t much different from General Motors making cars – the cost of the first few hundred new (differently designed) cars rolling off the assembly line is higher than the next 300,000. Manufacturing is a process that improves with the quantity produced.

In fact, there are good reasons why commercial shipbuilders can stamp out ships much faster and cheaper – they produce at consumer scale, while HII and GD produce at government scale. It’s a numbers game.

We don’t have a civilian shipbuilding industry. During WWII, we had a large manufacturing base that switched from civilian to military products – but not today. This is where China has a significant advantage over the US. China can increase its production of destroyers almost overnight by converting its civilian shipbuilding industry. Its shipbuilding capacity is hundreds of times greater than ours.

China already has a larger navy than the US by size. Their average ship is still smaller than ours – they can’t travel as far and carry fewer missiles. But they’re increasing production of larger ships that match ours. In the not-so-distant future, their navy could become larger than ours in both quantity and quality. In all honesty, we don’t know how good their ships are, but we’re not going to wait to find out.

Under both the Biden and Trump administrations, the US has started to increase investment in our navy. The bill just passed by the Trump administration will directly invest in equipment to help HII automate its production (this equipment will be owned by the US government but used by HII).

The government is also making “an investment” in HII’s labor force – it’s essentially giving HII money to raise wages for its employees. This will enable HII to attract more workers and build ships and submarines faster. The US plans to increase submarine production from 1.1 to 2 per year by 2028. This may seem optimistic, but submarine construction is on the rise. The number of vessels the US government plans to buy in 2026 is increasing to 19 from the current 10–12 per year.

HII’s backlog is $48 billion and growing. Its revenue and earnings will continue to increase with the size of the US Navy. The pandemic’s effects still impact its profitability. The infusion of capital and increase in wages will allow HII to produce more ships and submarines annually. Our fairly conservative earnings estimates for 2030 are $30 a share. At 15–17 times earnings, we arrive at a $450–510 stock price. It currently stands at around $250.

You just read my write-up on a stock. I may have sounded very convincing, and you are thinking “I should buy this stock.” Before you do, read this.

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I’d love to hear your thoughts, so please leave your comment and feedback here. Also, if you missed my previous article “Why We Bought Aker BP: A Technology-First Oil Company (Part 4)“, you can read it and leave a comment here.

La Boheme: “Yes, they call me Mimì”

We are exploring timeless arias from Giacomo Puccini’s La Boheme. #TimelessArias

Here’s “Sì, mi chiamano Mimì” (“Yes, they call me Mimì”)

Mimì’s gentle self-portrait here is utterly endearing. She shares her simple life as a seamstress, embroidering flowers while dreaming bigger. This short aria makes us fall in love with Mimi (and the opera).

#TimelessArias

Click here to listen.

This is Part 4 of my client letter on our purchase of Aker BP (AKRBP in Oslo). I explain how I discovered the company and why its “alliance model”, single-basin focus, and technology-first approach make it exceptionally efficient. You can read Part 1,2, and 3 here.

Why We Bought Aker BP: A Technology-First Oil Company (Part 4)

You can also listen to a narration of this article on iTunes & online.

I stumbled on Aker BP completely by accident. I was having dinner with a good friend Rob Vinall in Omaha during Berkshire Hathaway’s annual meeting weekend. We were sharing our notes on International Petroleum (IPCO) – Rob is a shareholder as well. He asked me if I’d ever looked at Aker BP. I knew the Lundins had sold Lundin Energy to Aker BP (a Norwegian oil company) and were large shareholders, but I’d never looked at the stock. He said, “Take a look – you’ll like what you see.”

The very next day, I was having a conversation with another value investor who sits on the board of a Norwegian oil services company. I asked him if he knew much about Aker BP. His eyes lit up and he started telling me about their unique “alliance” model (I’ll discuss it soon). Right after I came home from Omaha, I dropped everything, and Max (our analyst) and I started studying Aker BP.

It’s truly an amazing company. Its single focus is on the Norwegian Continental Shelf (NCS), a vast submarine expanse that stretches across the North Sea, Norwegian Sea, and Barents Sea, spanning a little over two million square kilometers – roughly three times the size of Texas. This immense underwater territory, over which Norway holds sovereign rights over natural resources, has been a cornerstone of the country’s economy. Most of the NCS’s oil and natural gas reserves are 100-400 meters underwater, which is considered relatively shallow.

As we started studying Aker BP, we became fascinated by its “alliance model,” which it borrowed from Toyota and goes beyond traditional “kaizen” – continuous improvement. At its core, it aims to align incentives between the company and all of its suppliers.

Oil drilling in the sea is a team sport. In fact, an oil company is really a general contractor that manages a lot of suppliers: some provide and man rigs, another helps build the pipeline that gets oil from platform to shore, another owns and operates boats and helicopters that bring crew to and from platforms, another operates submarines and divers who install equipment on the sea bed. The list is endless. All these suppliers have their own agenda and have multiple balls in the air, many of which have little to do with Aker BP’s agenda.

There’s a great line from Brad Jacobs’ book How to Make a Few Billion Dollars that stuck with me: “I am on the board of several companies which employ 10,000 people. I can promise you one thing – not a single one of these 10,000 people wakes up in the morning trying to figure out how to make Brad Jacobs wealthier.”

Brad Jacobs started several multibillion-dollar companies, including United Rentals, XPO, and what would become Waste Management. A properly aligned incentive system is a big part of his success. One of the most important things I’ve learned about business is that incentives are everything.

Aker BP’s alliance model is an open-book system – the company shares the project’s financials with suppliers and incentivizes them based on the project’s performance. Suppliers work together and collaborate to achieve a common goal. The success of the project leads to their success, and thus the success of Aker BP. Incentives are the alignment of interests – suppliers share both upside and downside.

The results speak for themselves: inspection times have been cut in half, maintenance work reduced by up to 80%, and production costs have dropped from $12 per barrel in 2019 to just $6.20 in 2024. In the history of Aker BP’s development, every project – an oil or gas field – was completed either on time or ahead of schedule (we checked).

Karl Johnny Hersvik, Aker BP’s CEO (and also a mathematician by training), has been running the company since 2014. Under his leadership, the stock has delivered 22% annual returns. He had this to say about Aker BP: “We are a technology company that just happens to produce oil.”

Aker BP became the first oil producer to declare itself “AI-first” in January 2025. The company has developed a unified digital system that integrates everything from underground modeling to equipment maintenance, enabling partners to collaborate on shared 3D models in real-time. They’re also pioneering safety improvements by using remote-controlled drones for inspections and setting up automated systems that enable them to run offshore wells from land, reducing the need for workers in dangerous environments.

Their wells now run 97% of the time, up from the low 90s five years ago. Perhaps most impressively, each Aker BP employee generates $4.2 million in revenue – well above the $2.6 million average for similar European oil companies – showing how technology has transformed not just their operations but their entire business model.

Aker BP’s exclusive focus on Norway’s continental shelf brings the same kind of efficiency that Southwest Airlines achieved by flying only Boeing 737s. By concentrating all operations in one region, the company can tie new oil discoveries into existing pipelines and platforms at relatively low cost, rather than building them from scratch. Their teams have developed deep expertise in Norwegian geology over the course of decades, allowing them to repeatedly apply successful approaches across multiple fields while continually improving efficiency.

This single-basin strategy also dramatically simplifies the business. The NCS is one of the world’s best-mapped offshore oil regions, with extensive data that makes finding oil less risky. By avoiding the complexity of operating across multiple countries, Aker BP keeps overhead low, streamlines logistics, and runs a leaner organization – all of which translate directly to lower costs and higher returns for investors.

We like that the Lundins own 14% of the company’s shares, and another 37% is owned by Aker – a Norwegian conglomerate – and BP. This patient shareholder base allows the management (which we hold in high regard) to focus on the long term.

Aker BP has a terrific balance sheet with low leverage. Its focus has been on growing the dividend by 5% annually and opportunistically buying back stock.

Just to clarify, we purchased shares in Norway in Norwegian kroner; however, for the sake of consistency, I will quote numbers in US dollars for the AKRBF ticker.

At our purchase price of $22-23, the dividend yield was around 11%. The company is bringing several large oil fields online, which should take its earnings up to $3.50 (at $75 oil). We believe the company should be trading at approximately 10 times 2029 earnings, or around $35. With $11 of dividends we’ll collect by then, we get a very nice return – a double.

You just read my write-up on a stock. I may have sounded very convincing, and you are thinking "I should buy this stock." Before you do, read this.

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I'd love to hear your thoughts, so please leave your comment and feedback here. Also, if you missed my previous article "Charlie Kirk and the Cost of Courage", you can read it and leave a comment here.

Timeless Arias – La Boheme: “What a cold little hand”

I am very excited. You and I are about to embark on a wonderful journey of arias from my favorite operas. An aria is a vocal piece; it is that moment when the action in the opera pauses (I'd argue time stops) and characters get to showcase their voices and tell you about their world.

In all honesty, I, and I suspect most people, usually listen to operas because of the arias – they are the pillars that hold the opera together. Opera without arias is like borscht without beets. (I figured I'd go Eastern European on you.)

Arias come in different forms: solos (one singer), duets (two singers, usually a love song), and ensembles (multiple singers singing at once). I love them all. But I especially love to watch for interactions between singers in duets and ensembles. There, I pay attention not just to the individual voices but also to the body language between singers. Are they just singing their solo tracks, or do they feed off each other’s energy?

If you are not into opera or are new to it, look at these music notes as a gentle introduction to this wonderful world of opera. If you are an opera pro, you'll get to re-listen to your favorite operas and compare different performances.

I'll tag this series of notes as #TimelessArias – this way you can go back and explore my past notes.

We are going to start our exploration with a solo from La Boheme, by Giacomo Puccini.

La Boheme: “What a cold little hand”

“What a cold little hand” (“Che gelida manina”)

Let me provide you context: Rodolfo's bohemian friends have just left for Café Momus, when Mimì (Rodolfo's future love interest) knocks on his door, looking for a light for her candle. This is where the spark between Rodolfo and Mimì is lit. Both their candles blow out in a draft, and as she searches for her dropped key in the darkness, Rodolfo finds her hand and takes it in his.

Click here to listen.

This is Part 3 from my client letter where I talk about my trip to International Petroleum in Calgary, the economics of Canadian oil sands, and the importance of corporate culture. You can read Part 1 & 2 here.

The Client Who Changed How I Invest

Warren Buffett said that when he writes his annual report, he thinks of his sister Susan and writes as if he's talking to her. This is a wonderful trick – it's difficult, probably impossible, to visualize hundreds or thousands of people, but easy to talk to one.

I write for Dr. M.

Dr. M became a client early on; he’s a radiologist who'd been reading my articles for a few years. The tipping point came when my favorite accounting professor at CU Denver invited me to speak to her graduate class about value investing. Dr. M's son happened to be in the audience that day. When he went home and told his father about my talk, that endorsement was all Dr. M needed to pick up the phone and turn over his retirement account – the bulk of his life savings – to IMA. Remarkably, even though he lived right here in Colorado, we didn't meet face-to-face until a few years later.

The gravity of what we do hit me during our initial conversation. I'm not curing cancer or saving babies from burning buildings. But our decisions impact how Dr. M will spend his retirement, the final chapter of his life. The pot of money he placed under our care is irreplaceable capital; he won't have an opportunity to earn more. I couldn't care less about what my industry obsesses over: the latest performance against the indices. When I make investment decisions, I think of Dr. M. I don't want to screw it up for him. I’m focused on long-term survival.

Dr. M and I have what I consider a perfect relationship where (hopefully) I think of him far more than he thinks of me. He's a very smart guy who chose to dedicate his life to healing people, not to being a stock junkie like me (our society needs more people like him, not me). He's also intellectually curious and reads everything I write. Today both of his now-adult sons are also IMA clients.

As I've gotten older, something odd has happened: Money has become less of a motivator (the younger, especially the Soviet Union version, of me would be confused about this). Doing what I love and being a net positive force to the people I contact, like Dr. M, is what recharges my battery.

This brings me to you, my dear reader. I'll be sharing an excerpt from a letter I wrote to Dr. M (and all IMA clients who own these stocks). But I want to make sure I'm a net positive force in your life. If you blindly buy companies I mention in these letters, our relationship may tilt toward being net negative to you.

I may change my mind tomorrow about these companies – facts may change, new information will come out, I may have missed something and end up simply being wrong. I may sell these stocks. Dr. M will find out because he'll see the sale confirmation in his Schwab or Fidelity account. A few months later, he'll get a letter from me explaining my latest thinking. None of these things will happen for you.

If you blindly buy stocks I've mentioned here, you'll be getting on the train without knowing where to get off – and that may end up hurting you, as these stocks may decline and you will not know what to do. We have a portfolio of stocks; you don't know how big these positions are in our portfolio. Thus, please (!) read these articles as case studies or as an initial nudge toward rolling up your sleeves and doing your own research.

Skin in the Game, Steam in the Ground (Part 3)

The Intellectual Investor Conference in Vail (formerly known as VALUEx Vail) concluded on Friday, June 13th. Two days later, my son Jonah and I flew to Calgary to tour International Petroleum’s Blackrod project, one of the largest projects in Alberta’s oil sands. IPCO’s management organized our visit. During this trip, we also met with the management of two of our other holdings: Canadian Natural (CNQ) and Pason (PSI).

IMA is one of the largest shareholders of IPCO, which is a very special company. It is special not because of its assets but because of the people who run it. It was founded by the Lundin family. Swedish engineer Adolf Lundin, who passed away in 2006, founded half a dozen mining and oil companies that have been incredibly successful, with his sons later continuing the family’s business ventures.

Adolf’s crown business achievement is Lundin Energy, which he started in 2000 with a $50 million equity raise (the only equity raise it has ever made). Lundin Energy discovered one of the largest oil fields on the Norwegian Continental Shelf. Twenty years later, it was sold to Aker BP for $14 billion (we are a shareholder of Aker BP as well). Before it was sold to Aker, Lundin Energy spun off all non-Norwegian assets, and this is how IPCO was born.

The Lundin family is extremely respected in the oil and mining industry for the simple reason that they have been repeatedly successful in many businesses for decades (although luck undoubtedly played a role in their achievements).

I have been thinking a lot about the sources of their success. It is uncommon today to see family empires built in the resource industry. Resource businesses are extremely challenging and highly cyclical. This cyclicality is a bug for most other companies, but the Lundins turned it into a feature. Unlike most publicly traded oil companies that are run by “professional” career CEOs who may or may not have much skin in the game and whose tenure typically has a runway of five years, the Lundins do have skin in the game. They are large shareholders in anything they run (they own 60% of IPCO), and they think long term.

They may have engineering degrees, but they are businessmen first and engineers second, at least when it comes to capital allocation decisions. There is absolutely nothing wrong with being an engineer. I’d love for my kids to be engineers – if it made them happy. However, in my experience with resource companies, be it gold, copper, or energy, is that CEOs with an engineering mindset become like men with hammers: Every problem looks like a nail; every hole in the ground needs to be drilled; and every mine needs to be developed, no matter what the economics are or the best use of capital.

When commodity prices are high, these guys get drunk on their own Kool-Aid, believing this time is different and expecting high prices to remain elevated forever. They end up making uneconomic decisions, and shareholder value gets destroyed. They forget the truism in commodity and capital-cycle industries that high prices cure high prices and low prices cure low prices. When prices are high, more capital flows into the industry and supply matches and then exceeds demand, leading to falling prices.

Conversely, when prices are low, companies tend to stop investing in production, demand exceeds supply, and prices rise. These dynamics are particularly pronounced and extreme in resource and material industries.

The Lundins are different, and I believe this is largely the source of their success. In addition to being good engineers, they are excellent capital allocators. They are countercyclical in their capital allocation – they zig when others zag. When oil prices are high, you want to be building a fortress balance sheet and borrowing money (as they did with IPCO in 2022).

When commodity prices decline and all your competitors are hiding under their desks, you want to be spending this money – you’ll be buying assets from overlevered competitors for pennies on the dollar. I found that the more people are irrational around you, the more it pays to be rational. But this is only a partial reason for their success; I’ll discuss others a bit later.

Blackrod Project

The Blackrod project we went to see in Alberta is very important for IPCO’s future, as it will account for almost half of IPCO’s revenues.

But before I zoom in on it, I need to take you into the world of oil sands. Canada is rich in oil sands (specifically bitumen – a heavy, gooey mass from which crude oil is extracted). There are two methods for extracting oil from oil sands: open-pit mining and in-situ extraction. When bitumen is closer to the surface (less than 75 meters), open-pit mining is used (approximately 80% of oil sands in Canada); otherwise, the in-situ method is used.

Let’s start with open-pit mining. Rock is excavated from the ground and transported on giant trucks (where the wheels are taller than a human). Then the rock is crushed into sand, and oil is steamed out of the sand in giant factories near the mine. Canadian Natural has one of the largest open-pit projects, Horizon, in Alberta. It costs $20 billion and produces 264,000 barrels of oil per day (approximately 96 million barrels per year).

IPCO’s Blackrod oil reserves are buried deep in the ground, and thus the SAGD in-situ method is used. In-situ means “in place” – unlike in open-pit mining, the sand is not moved, and the natural environment is mostly untouched – most oil extraction activity happens deep below ground. SAGD means “steam-assisted gravity drainage.” It is one of several methods used to extract oil below ground. Two horizontal wells are drilled parallel to each other, about 5 meters apart vertically. In the case of Blackrod, they go 100 meters deep and then 1,400 meters horizontal. Steam is injected into the upper well, which liquefies the bitumen, and the oil flows into the bottom well, where it is then pumped out.

Water is separated from the oil, and both go through significant processing. Most of the oil produced in Canada is “heavy.” It is called Western Canadian Select (WCS) – a more viscous oil that needs to be diluted with lighter oil or diluents in order to be transported by pipelines, and thus requires more complex (i.e., expensive) refineries. WCS trades at a discount compared to the “lighter” Western Texas Intermediate (WTI) oil typically produced in Texas or Louisiana. Today, this discount is about $11 per barrel. Transportation costs, pipeline and rail, are another reason for the WCS discount compared to WTI.

Water is the lifeblood of the SAGD process. It is pumped from a nearby reservoir that has mostly “brown” (dirty) water; therefore, the water undergoes a filtration process, including reverse osmosis (similar to the filter you have in your kitchen), and only then is it converted into steam.

Once the steam is pumped into the ground and water is collected with oil, it undergoes a multistage filtration process again. This time around, it also undergoes distillation to remove silica (which can burn pipes), and then it is turned back into steam to extract more oil from the ground. 95% of the water pumped into the ground is recycled back into the process.

As Jonah and I toured Blackrod, it occurred to me that this is more of a giant water processing facility than anything else. In fact, the most significant constraint on production at this enterprise is steam.

The Blackrod project will have multiple phases. This current phase 1 will produce 30,000 barrels of oil a day. It essentially requires three barrels of steam to extract one barrel of oil from the sand; thus, this facility will produce 90,000 barrels of steam per day. If IPCO can increase its production of steam above that figure or increase efficiency (i.e., use less than three barrels of steam to produce a barrel of oil), it will be able to pump more oil – it’s that simple.

Despite the complexity of the operation, there are significant advantages to oil sands production compared to conventional and shale oil fields. Think of oil sands as giant lakes, whereas other types of oil reservoirs are ponds formed by rivers. Oil sands formations are mostly uniform, and thus the oil content is consistent throughout the crust – to some degree it is closer to aggregate (rock that is crushed and used to build roads and buildings) mining than to oil drilling, where oil distribution may vary significantly in more conventional reservoirs and shale (you can hit dry wells, and reserves can have different sizes and come with varying oil pressure).

Other methods of oil extraction often come with steep declines in production over time. The majority of new oil discoveries in the US have been in shale – oil and natural gas are trapped in shale rock. This is the fast-declining type. Your highest level of production is on day one, and then it drops steeply, by as much as 70% within 12 months. Conventional oil wells see annual declines of 4% to 7%, depending on the type of well.

Oil sands projects have relatively low rates of production decline. CNQ’s Horizon project has had a 0% decline. Before investing $850 million in Blackrod, IPCO ran a pilot project for a few years – its decline rate was 3%. The lower the decline, the less maintenance and growth capital you need to invest to keep production constant. The biggest advantage of oil sands assets is that they have a long asset life: 20-50 years for oil sands versus 3-4 years for shale oil.

Blackrod is essentially a factory built literally in the middle of nowhere. It is located near Lac la Biche, a remote town in northern Alberta. It took us a one-hour charter plane ride from Calgary and a two-hour bus ride to get there. IPCO had to build its own roads through the wilderness to develop this project. According to the management, phase 1 is 70% complete, and the project is on budget and on schedule. This is where engineering is paramount. It will be online in late 2026 and running at full capacity by the end of 2027.

IPCO’s Valuation

In our models, when we value oil companies (and in the numbers I am about to discuss), we are using a $75 oil (WTI) price. At $65 oil, earnings decline by about half, and at $85, they increase by about half. Keep that in mind when reading this – these companies are very sensitive to the price of oil. Our estimate of IPCO’s earnings in 2028 (once the Blackrod phase 1 comes online) is approximately 30 Swedish Krona (SEK). The stock is currently at about 150 SEK, as of this writing, so we are paying approximately five times earnings for IPCO’s 2028 earnings.

But wait, there is more.

The Blackrod area has about 1.25 billion barrels of total reserves. Phase 1, which has a lifespan of 23 years, is only going after 250 million barrels, leaving about a billion barrels untouched. We have discussed this with management, and after IPCO completes phase 1, if the time is right (i.e., oil prices are high and there are no better opportunities), IPCO will start developing phase 2, which will have the same production capacity as phase 1 – 30,000 barrels a day, will cost $850 million, and bring about an additional 15-20 SEK per share.

Let's say IPCO starts working on phase 2 in 2029 and it takes four years to bring it online. Then, by 2033, it will have 45-50 SEK of earnings per share. At 8-10 times earnings, it is a 360-450 SEK stock. These earnings estimates don't account for the significant value management can create in the interim by buying back stock at a single-digit multiple—you can cancel a lot of shares this way (you'll own a larger portion of the company). This also doesn't account for 750 million barrels of reserves (post phase 1 and 2).

Assigning multiples to future earnings is a shortcut – they are second nature to me, but let me explain how cheap IPCO shares are in even simpler terms. Today, the company’s market capitalization (value of all shares outstanding) is $1.7 billion. If oil prices are at $75, over the next six years, IPCO’s free cash flows will be $2 billion – we receive the cash flows it generates beyond year six for free.

If oil prices are at $85, the figure is $3 billion; more importantly, at $65, the figure is still $1.2 billion. We have to reach $50 oil prices before IPCO only breaks even. If oil prices fall to $50 and stay there for a long time, IPCO stock will decline (probably by a lot), but this drop will be temporary (because as we know, low oil prices lead to high oil prices).

Management and Culture

The day after we visited IPCO’s Blackrod, Jonah and I met with Canadian Natural and Pason. After those meetings, once we were in an Uber on the way to the airport (another company we are a shareholder of), I asked him for his thoughts on the companies we visited.

He said, “Dad, I would love working for any one of these companies.”

Jonah’s response really made me think.

These were not random companies we visited. Throughout our research, we had an inkling that they were special. There are a lot of cheap energy stocks out there, but we bought these because we liked the people who ran them. Good management usually fosters good culture.

One common denominator among these companies is that all of them have a flat corporate culture. I have learned to appreciate flat corporate structure for several reasons.

First, it is paramount for information flow. Most interaction with the real world takes place down in the trenches, with employees working in the oil field or interacting with customers. This is where problems are noticed before they bubble up to the top and show up in weak sales numbers, safety issues, or cost overruns. In typical large companies, most authority is concentrated at the top. The more layers you have between decision-makers and the bottom layers of an organization, the less informed and thus lower quality the decisions are.

Second, not all wisdom is trapped at the top. The shorter the distance these ideas have to travel to where the power and capital allocation lies, the better.

I am a big fan of Israel for many reasons, but one of them is its ingenuity – it is often referred to as the Silicon Valley of the Middle East, partly due to its very flat organizational structure. Israelis are very informal and have a healthy indifference to authority – a trait that has a lot to do with the fact that everyone serves in the military and that Israel maintains a large reserve force. Thus, one day a CEO may find himself commanded by his own subordinate.

In Israel, if you have a great idea you can take it directly to upper management. I recently learned that the idea to distribute pagers filled with explosives to Hezbollah terrorists in Lebanon – and then detonate them at the right moment – came from a very low-level female Israeli Defense Forces (IDF) soldier. She had what seemed like a crazy idea and took it straight to the top. Though high-risk and difficult to execute, the operation decapitated Hezbollah’s leadership and proved instrumental in Israel’s victory in Lebanon.

I have heard many stories like this. Here’s another. Several decades ago a concerned citizen knocked on the door of the IDF and said he had a very important idea to share with the head of R&D. That was how Israel’s first military drone came into existence.

Back to our companies.

CNQ does not even have a CEO (yes, you read the sentence right). A committee of C-suite executives meets every Monday and makes decisions together. Though CNQ is located in two skyscrapers in downtown Calgary (they employ thousands of people there), executives don’t have private elevators or big offices (I’m thinking of GM in the 1980s as I write this). They work in cubicles together with everyone else. Any employee can walk up to an executive and ask a question or make a suggestion.

IPCO has a flat corporate structure as well. It doesn’t have traditional “managers.” Every employee who manages people also has main responsibilities. Most people we met at IPCO were “lifers.” As we walked Blackrod with Will Ludin, the CEO of IPCO (Adolf’s grandson), I noticed how he knew every detail about each piece of equipment on the site. I am very impressed by Will.

Pason is located about 15 minutes outside of downtown Calgary (which by the way looks just like Denver) in what from the outside looks like a strip mall. I thought I’d be walking into a Dollar Tree or Dollar General store. But inside it was very inviting – a place where employees would want to commute to.

When I discussed culture with John Faber, the CEO of Pason, he mentioned that he has the smallest office in the company. To which Jonah, putting on the intonation of a well-meaning psychologist, asked, “How does that make you feel?” We had a good laugh.

John mentioned that a good way to measure a work environment is how long people stay at a company. He said that Pason is not the highest-paying place in the industry, but despite that, people never leave the company. He went through a lot of stats showing that people usually retire from Pason due to old age or are carried out.

CNQ and IPCO employees operate like owners – they are heavily incentivized to behave this way. At CNQ, the concept of return on investment is part of the culture; all employees are treated like owners. But while skin in the game and financial incentives are important, they are not everything – a realization I only came to when I started running IMA. People seek meaning; they want to feel good about themselves. Money can be an indicator of success, and having skin in the game creates financial alignment. However, life feels hollow if what you do doesn’t recharge your battery of meaning. We want to feel needed, not just at home by our spouse and kids, but also at work.

Flat corporate culture can empower people, giving them agency and thus meaning.

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I'd love to hear your thoughts, so please leave your comment and feedback here. Also, if you missed my previous article "Inside Baseball: How We Build Portfolios (Part 2)", you can read it and leave a comment here.

How Music Should Be

I have a confession to make: I am not big into going to classical music concerts. I still keep attending a few performances a year, harboring hope that I'll enjoy them, but my hit rate is one out of fifteen or so.

It is mostly my problem, not the performers' – I may choose the wrong seats, where the acoustics are bad, or start daydreaming, or get distracted by people in the audience. I cannot tell you how many times I have enjoyed listening to the same piece of music in my car on the way to the concert more than at the concert itself. (Opera is an exception; the hit rate there is maybe eight out of ten.)

This is why I wanted to share with you this little "spontaneous" performance in a French restaurant. This is how music should be. I bet many people in this restaurant would never be caught dead in a symphony hall or an opera house, but here this music truly touched them and maybe even changed them a little.

Click here to listen.

I'm about to share Part 2 of the letter, where I'll take you deep into the "inside baseball" of our investment process. Specifically, I'll discuss how we structure and determine the position size of each stock in our portfolios – something I haven't covered before (at least not in this detail) and haven't seen other investors discuss much either.

If you read my articles primarily for the stories, feel free to skip this one. But if you're a serious weekend warrior investor, don't skim – read this carefully. This portfolio construction framework is crucial, because it skews the portfolio toward higher returns per unit of risk, where risk means permanent loss of capital. While this is just one module of our investment process, it's an exceptionally important one.

Inside Baseball: How We Build Portfolios (Part 2)

An investment process is a living organism because it’s applied by living creatures. We continue to improve it and have made considerable strides over the years. The biggest leap came in 2016, caused by a very difficult and quite painful 2015 (I wrote about pain being a great instigator in the “Pain, Opera and Investing” chapter of Soul in the Game). Then in early 2019, our investment process took another significant step forward by assigning ratings to our companies across two dimensions:

• Quality: The highest quality companies were graded A, the lowest D

• Valuation: The cheapest companies were assigned a 1, the most expensive a 4

This may not look like much, but it helped us quantify our otherwise very qualitative research and substantially improve our portfolio construction.

Rather than resting on our laurels after our recent success, I wanted to capitalize on what we had learned and improve what we do. In reviewing our positions over time, I discovered a bias – I didn’t like giving C and D grades. I realized that the scars from a decade of attending school in Russia and receiving poor grades were stronger than my rational assessment of these companies. (Side note: I used to teach investing at the University of Denver but quit because I hated giving out bad grades.)

On the one hand, this might not seem like a big deal; after all, we only wanted to own A and B companies. But the original intent of this system was to take the highest quality layer of the global stock market and segment it into four useful categories. My aversion to C and D grades flattened the nuanced qualitative understanding we had developed about these companies. We needed a new rating system that captured these distinctions.

And so we have changed our ratings to A, B, B-, and V. Here’s what those grades mean:

A: A company with an unassailable moat, incredible management, flawless balance sheet, high return on capital, high recurrence of revenues, and a non-cyclical business.

B: A company with many of the characteristics of an A, but which has a certain flaw. Maybe its revenue recurrence may be lower, or we don’t have enough data to fully evaluate management. To be clear, the management isn’t “bad” – if it were bad, we simply wouldn’t buy it. There is just some factor about it that makes the company lower in quality than those we give an A to.

B-: Could be an A or B company in a cyclical, commodity business, located in a riskier country (for example somewhere in Latin America). Or could be an A or B non-cyclical company in the early phase of a turnaround. In either case, these firms face transitional “headwinds” that quality companies can work through, making it lower in quality than B companies.

V: A, B, B- companies are solid compounders that are aimed at growing while preserving capital. But certain public companies are early in their corporate journey and offer substantial asymmetry of returns. If they succeed, they may go up as much as 5–20x, but if they fail, losses may be as high as 100% (though in the companies we’ve looked at, they seem closer to 30–50%).

These “venture” companies are disruptors, typically run by founders who have skin in the game. Most importantly, they have a long-term runway for earnings growth, with a large market and a significant chance of capturing a substantial share of it.

We’re not becoming venture capitalists and won’t have a portfolio of Vs, but we’ve bought a few of these over the last few months – I’ll mention them later in the letter. This shift introduces significant asymmetry to our portfolio at the edges. The core of it will continue to be A/B/B- stocks, while Vs bring extreme optionality and hopefully returns.

Currently, across all clients and all strategies, we own 33 stocks in our portfolio: 10 A’s, 12 B’s, 8 B-’s, and only 3 V’s.

As companies evolve, so do their ratings. Ideally, we want Vs to turn into As. That’s the evolution we look for – companies that mature from disruptive potential into established quality.

For example, Microsoft in the early 1980s would have been a startup, run by ambitious founders who aimed to put a personal computer on every desk and in every home. It was a bold, contrarian vision at the time, but it was also one of many young software firms chasing a rapidly evolving market.

Microsoft graduated to a V rating in the late 1980s after it won the DOS wars with IBM and secured its place as the de facto operating system provider. Arguably it became a B- a few years later: the upside remained substantial, but questions emerged around potential competition and the durability of its moat.

By the mid-to-late 1990s, Microsoft had clearly become B and then an A – it had established an unassailable moat in operating systems and productivity software, generated enormous recurring revenue, and built one of the strongest balance sheets in the market.

Our rating system is a continuum that captures companies across their entire lifecycle as they move up the quality spectrum and even down (this happened to one of our companies in 2025). As they move up, so does our tolerance for increasing their position size in our portfolio (which I discuss next).

To be clear, C and D companies haven’t completely disappeared from our process; we encounter them frequently during research, but we just are not interested in them.

What constitutes C or D companies? Simple: they are not quality. I like Warren Buffett’s definition of quality: if the stock market were closed for ten years, would I be comfortable holding this stock?

Stock market liquidity – the ability to buy and sell at any time – often turns investors into traders. Buffett’s quality framework, however, puts us firmly in the seat of an investor. C and D companies are those that fall into the “not comfortable” bucket.

The beauty of our approach is that with 10,000 publicly traded companies globally and perhaps only a thousand or two meeting our quality criteria, we can afford to be extremely selective. We don’t need to compromise on quality when there’s such an abundance of opportunities to choose from – we only need to find 25 stocks.

The Power of Combining Quality with Valuation

Up to this point we’ve discussed company quality and ignored valuation – what the business is worth and how much we should pay for it.

Our valuation analysis involves two extremes: smothering the business in our models with a pillow (stress testing for when “life happens” – i.e., declining margins, slowing revenue growth, worsening unit economics) and, just as importantly, envisioning its full potential. Through this exercise, we arrive at a range of values.

The worst-case scenario sets our floor. If we think the company is worth $50 in a disaster and $100 in the most probable scenario, we don’t want to pay much more than $50. This is our margin of safety.

Our quality rating system becomes incredibly powerful once it’s married with valuation analysis. We spend hundreds of hours researching stocks to arrive at these two inputs (quality and fair value). Here’s how combining these ratings works in practice using a grossly simplified example (I use significantly oversimplified numbers here, but they are directionally similar to what we do in your portfolios).

Let’s say we have three companies, all worth $100 in five years:

(Between you and me, I’m not sure if Macy’s even deserves a B-, but let’s use it for illustrative purposes.)

The pattern is clear: the lower the quality, the bigger the discount we demand. If all three stocks traded at $50 today:

Now, V-rated companies are a different animal entirely. These are our venture-like investments, and we’re betting on explosive return potential. For these, we size positions small (1-3%) and look for multiples of return while accepting higher risk of loss.

Position Sizing

The quality rating and valuation system is a cornerstone of our portfolio construction. The higher the quality of the company and the more undervalued it is, the larger its position is going to be. This makes perfect sense since higher quality reduces risk and significant undervaluation leads to higher returns.

Why is this important? This system forces high-quality companies that are significantly undervalued to rise to the top while limiting our exposure to relatively low-quality companies. If “life happens” to a lower-quality company, the impact on the portfolio is lower; however, if things work out, we’ll get compensated for taking a higher risk.

Equality of outcomes was never my thing. I love meritocracy, and our portfolio is built on merit.

Sometimes clients ask why we bother with small position sizes. There are various scenarios where this makes sense. For example, we may have started buying a B quality company when it had a valuation of 1, then the stock price went up and it became A3. We may still buy 1% for new clients.

Additionally, we may have conducted research on the company and at present believe it deserves a 1% position, but the price may decline or quality may improve – in both cases meriting a larger position size. Buying even a small position ensures we stay on top of the name.

Let me end this first part of the letter by sharing three final thoughts about our valuation process and position sizing.

First, there’s value in the process itself – deciding company quality creates creative friction as we debate whether a company is A or B and challenge valuation assumptions. Just doing this makes us better investors and enriches our understanding of what we own.

Second, quantifying position sizing removes emotions. It’s done almost automatically and calculated daily by our systems – the variable that changes most is not quality or fair value but market price.

Finally, as I was writing this, I noticed a few areas where we can already improve – and this is our goal: not to stand still, but to continually evolve.

I hope this explains portfolio construction, especially for new clients.

And one more thing – options

In accounts with sufficient cash and options trading permissions, we established several small options positions as hedges.

We purchased calls on gold (GLD), making a modest bet that gold prices will rise as currency debasement continues. We also bought puts on 20-year treasuries (TLT) to hedge against potential spikes in long-term interest rates resulting from increased money supply. Additionally, we acquired puts on the S&P 500 to partially hedge our portfolio against a broader market decline.

None of these investments serve as a panacea for current global economic conditions. The core of our returns and our ultimate success or failure will continue to depend on thoughtful stock selection.

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I'd love to hear your thoughts, so please leave your comment and feedback here. Also, if you missed my previous article "Skating on Thin Ice: Discipline, Doubt, and the Long Game (Part 1)", you can view it and leave a comment here.

Rusalka – Four Sopranos

Today I want to share with you a special performance of the aria “Song to the Moon” from the opera Rusalka, composed by Antonin Dvorak. I had never seen four sopranos sing this aria together. It is stunning. (Angel Blue, about whom I wrote in the past, is one of the performers.)

Click here to listen.