VD114: One thing you can count on

In this issue:

• One thing you can count on

• Stock in focus: Jensen Group

• The Rationality Test: BP

• What I’ve been reading these past few weeks

• News from our companies

• Doubler Portfolio update

One thing you can count on

I just got back from the Nordic Value conference. It was another great experience, finding myself surrounded by a community of people who are active in the financial world purely out of love for the game. Of course, it’s also about making money, but for many there, that’s clearly not the primary driver.

Because of this, communities like these are a real breath of fresh air compared to what you see across much of the financial industry. If there’s one thing you can always count on, it’s that people in the financial sector work to move money out of your pocket and into theirs. In the best-case scenario, it’s a win-win, but it’s always a win for them. Whether it’s a win for you depends entirely on who you partner with.

We’re seeing this play out again today. The Nasdaq and S&P 500 indices are being—or have already been—adjusted to pave the way for the massive initial public offerings (IPOs) of SpaceX, Anthropic, and OpenAI. Essentially, the financial industry is making sure these highly hyped and, in my view, overvalued companies can go public and find willing buyers for their shares. Whether you like it or not, if you hold a Nasdaq, S&P 500, or global index ETF, these companies will automatically land in your portfolio. At what price or valuation? That doesn’t seem to matter.

It’s not always driven by bad intentions, mind you. ETFs weren’t originally designed to dump loss-making giants onto everyday investors, but they’ve become a very convenient tool for doing just that. I also believe that the CDOs that triggered the financial crisis started out as a perfectly good idea.

Follow one simple rule

There’s a very simple rule that can help you avoid a lot of trouble if you stick to it: “follow the money.” Look at the incentives: how does the person offering you the product actually make their money?

With an IPO, this usually means insiders or early investors are looking to cash out. For private equity players, it’s the ultimate way to unlock their capital when there are no buyers left in the private market. Companies used to go public to accelerate their growth, but given the sheer size of these firms, I highly doubt that’s the real reason anymore.

If you’re looking to invest in a fund, it’s just as straightforward. Don’t worry about short-term returns. Instead, ask yourself how much of the fund managers’ own net worth is tied up in the fund. The return on their own capital should matter far more to them than the management fees they collect on other people’s money.

You can ask the exact same question when it comes to investment newsletters. What matters more to them: subscription revenue or their own investment gains? Usually, the answer is pretty obvious.

Are we in a bubble?

I’m not going to point out all the signs of an overheated market again; by now, you know the drill. And it’s never been my intention to definitively state that we’re in a bubble. Because even if we knew the answer to that question, we still wouldn’t know how much bigger it could get.

The right question to ask is whether the expected return is still worth the risk. And that usually leads to a follow-up: can I even accurately assess that risk?

I’m going to take a swing at my favorite target again: Nvidia. Nvidia is an absolute beast. Looking at historical data, no company has ever sustained such explosive growth over such a long period. We are witnessing something truly unique here.

But can we really project what kind of growth Nvidia can maintain over the coming years? Could Nvidia themselves have predicted this a decade ago?

Nvidia has always been a solid company, and its graphics cards have always commanded a premium. However, it was the bitcoin hype that injected enough cash into the company to fund the rapid development of its AI chips. Without that hype, today’s evolution simply wouldn’t have happened. Is that something you could have known in advance?

The same goes for what’s happening today. Mind-boggling amounts of money are being poured into building out AI infrastructure, without a fully-fledged business model to back it up yet. It’s clear that something substantial will come out of it, but we don’t yet know what it will look like or how profitable it will actually be.

Meanwhile, we read reports from Microsoft showing that two-thirds of AI investments are going toward chips with a useful lifespan of three to five years, even though they are typically depreciated over five to six years. This means the actual costs for Nvidia’s customers are much higher than what they are currently showing in their books. Can they really sustain that pace?

On the flip side: if the lifespan turns out to be only half of that, could Nvidia end up selling even more?

And if AI is truly that revolutionary, what’s stopping these AI giants from designing their own chips that are vastly superior and much cheaper?

Every bubble has its believers—otherwise, prices wouldn’t soar the way they do. They dismiss anyone questioning the sky-high valuations. They point to the world-changing new technology and, in this case, the massive profits (though I’ve previously explained the underlying mechanics of why those profits appear so high right now). The possibility that these earnings might represent a cyclical peak is completely ignored.

On the other side of the spectrum, you have the doomsayers who spend far too much time hunting for parallels with past crashes, looking for whatever pin will pop the bubble this time around.

To repeat: the only question that truly matters for us is whether we are getting enough return for the risk we are taking, and whether we can accurately evaluate that risk. As long as we can find stocks that fit those criteria, we remain buyers. Conversely, we become sellers the moment the return is no longer sufficient or the risks take a turn for the worse. The result? A cash position of over 36% in our Verdubbel Portefeuille. Perhaps that speaks for itself?

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