Client Update, July 2026: Shifting Tides

“Typically, we make money when we buy things. We count the profits later, but we know we have captured them when we buy the bargain.”

Billionaire value investor Seth Klarman

Interview with Jason Zweig at the CFA Institute Annual Conference (2010) (x)

Over the past several months, one of the themes I've returned to repeatedly has been the growing disconnect between price and value across different areas of the market.

A relatively small group of companies continued to attract an outsized share of investor attention within the technology sector. I’ve talked about this extensively over the past year, most notably back in January and February.

But in turn, many high-quality businesses have fallen out of favor despite little change in their long-term competitive positions.

This environment has created an unusually active period for the portfolio this year. Rather than representing a departure from our investment philosophy, however, it reflects one of its core principles. Value investing is not about holding every investment indefinitely. It is about continually comparing price to intrinsic value and allocating capital where the prospective long-term return is most attractive.

This year, the market has repeatedly presented opportunities to upgrade the portfolio by exchanging good businesses for equally strong (and in many cases stronger) businesses trading at materially more attractive valuations. Those opportunities do not come along every year. When they do, I believe it is appropriate to act aggressively.

But what is more interesting to me is that we are now beginning to see early signs that the market itself may be moving in the same direction.

Or, put more plainly, the AI bubble has not popped, but it is leaking; and this shifting tide will favor those companies that have been neglected.

How do we know the tide is shifting?

Recent earnings reports and market reactions have highlighted a shift beneath the surface of the market. For much of the past couple of years, companies connected in some way to AI often moved together, even when there were meaningful differences in their underlying businesses.

But markets function best when they discriminate between businesses rather than rewarding a single theme indiscriminately. That’s what we’re seeing more now: investors have begun distinguishing between businesses benefiting from current spending trends and those facing higher costs, tighter margins, and more demanding expectations.

Let’s look at some examples.

Micron Technologies (NSQ: MU) saw its stock jump 15% (hitting a 52-week high) in late June after a “blockbuster earnings” report. However, not all companies in the same space can say the same. The memory shortage is to MU’s benefit because it sits at the sweet spot of the supply crunch of compute and memory, but it is to the detriment of others like Microsoft (NSQ: MSFT), Sony (NYS: SONY), and Apple (NSQ: AAPL).

These latter companies have all been forced to raise prices of hardware products recently (e.g., Microsoft and Sony raised the prices of their gaming consoles by $100-150, and Apple has raised prices for Macs and iPads by $200 or more, all due to soaring memory costs).

Many of their stocks have suffered as a result. Microsoft and Sony, for example, are near 52-week lows (note: we had purchased MSFT earlier this year but subsequently sold it to reduce exposure among hyperscalers).

This tells us the market is taking a more demanding and critical approach to events in this space. In short, the rising tide for a chip maker like Micron isn’t lifting all boats anymore.

That said, the bubble clearly hasn’t burst entirely, not when a company like SpaceX (NSQ: SPCX, which includes xAI) has IPO’d at a nearly $2 trillion valuation.

But something is clearly churning under the surface, and insiders are showing signs of caution they weren’t showing before.

Think about it this way. If you’re a private owner (like a venture capitalist) of either a money-losing business or simply an overvalued one, and you want to reduce exposure, you need a liquidity event (like an IPO) to get out of your holding. You need to take advantage of the accommodating environment while you can, because you know those environments don’t last forever. But too many IPOs (OpenAI and Anthropic are looking to launch their own IPOs too) create an oversupply problem. Even if the demand remains at an insatiable level, oversupply is a headwind.

This is why bubbles historically tend to coincide with a large number of high-dollar IPOs. Business Insider even suggested last month that the current “IPO boom may mark peak of AI-fueled rally.”

Speculatively, this could also be why the SpaceX IPO was open to so many more retail investors (versus institutional investors) than most. It drew more than $100 billion (over 20%) of orders from retail investors, which is more than double than normal proportion (usually 5-10%).

Of course, none of these developments, viewed individually, prove anything. Taken together, however, they suggest that investors are beginning to evaluate these businesses more critically than they have over the past two years.

The question right now is more valuation than quality.

The central issue is less about whether these are good businesses (many of them are) than whether investors are paying too much for them.

That distinction lies at the heart of how I think about risk. Most investors naturally think about risk in terms of volatility and business risk, but I would argue that especially in a momentum market, the main risk is valuation risk.

In momentum-driven markets, paying too much for a business can feel inconsequential and/or justifiable because excitement and enthusiasm mask the risk. However, when you overpay, you have only a single narrow path to success: nonstop heroic execution.

The problem comes when sentiment shifts, which can happen suddenly. Even excellent businesses can produce disappointing returns if future growth simply falls short of the extraordinary expectations already baked into their stock prices. When sentiment shifts and people start taking a more critical lens to a company and what are people paying for, then there’s no bottom for those companies.

Faced with decelerating growth, investors will reprice appropriately, and those who paid too much will lose substantial amounts of money in the repricing, even if the underlying business remains fundamentally sound.

But when we underpay relative to inherent value, we have multiple paths to success. Earnings can go up, for example, and so can the multiple that investors are willing to pay.

So, where do we go from here?

Recent market action suggests investors are beginning to pay greater attention to valuation risk and, consequently, to discriminate between individual businesses again.

That has always been the philosophy guiding our portfolio construction. We have focused on opportunities that are cyclically out of favor and trade at attractive valuations that provide a meaningful margin of safety but still exhibit the characteristics we value most. That means durable competitive advantages, strong balance sheets, capable management teams, and business models built to create shareholder value over full market cycles.

These businesses simply became unpopular as investor enthusiasm gravitated elsewhere, allowing us to acquire them at prices reflecting 52-week or even multi-year lows that substantially underestimated their long-term value.

Housing remains a prime example of the type of opportunity we've been seeking: an essential industry facing cyclical headwinds rather than structural issues.

The need for housing is only growing even as it is currently undersupplied. Certainly, we can debate aspects of this sector, like housing starts, the impact of interest rates, etc. But what we have done is acquire, at disciplined prices, specific holdings led by capable, shareholder-oriented management teams in a market that might soon get a boost through policy initiatives like the 21st Century ROAD to Housing Act.

Altogether, I am confident that every company in the portfolio is a viable business and protected in terms of what they do, who their customers are, and the value proposition they deliver.

On My Desk This Month

• OpenAI has proposed that U.S. government take a 5% stake “to ease Washington pressure.” It’s genuinely shocking the degree to which “Pay to Play” is becoming a central ingredient in how the American government is regulating the private sector. The U.S. government is now a shareholder in a growing number of private companies. It’s an example of a government that, far from allowing the market to operate freely, is placing its thumb of the scales of business. Read the CNBC article about OpenAI’s proposal here.

• Value investing legend Seth Klarman has given a pair of fascinating interviews over the past month. Klarman is a peer to Warren Buffett: a billionaire investor famed for his ability to outperform the market by following a rigorous value investing philosophy. He spoke recently with Bloomberg Podcasts here and iConnections here in a pair of fascinating conversations well worth a watch.

• Rivian CEO RJ Scaringe recently gave a fascinating interview on the future of robotics in manufacturing. Robotics doesn’t receive nearly as much attention as AI, but it has the potential to be just as transformative in many industries. Beyond leading Rivian, Scaringe also founded the robotics company Mind Robotics and raised $1 billion in funding for the venture. In this interview, he discusses what robotics-driven transformation might look like. Read it here.

Closing Thoughts

Ultimately, I don't know precisely when market leadership will broaden further or when valuation discipline will once again become the dominant force driving returns. Predicting those turning points has never been our objective.

Rather, our objective is much simpler: we seek to own durable businesses with strong competitive positions, purchase them at prices that provide an appropriate margin of safety, and patiently allow time, disciplined management teams, and sound capital allocation to create value.

As always, thank you for your continued trust and the opportunity to invest on your behalf.

With warm regards,

Glenn