Understanding investor psychology is one of the most crucial elements to investing successfully.  The ebbs and flows between exuberance and pessimism creates both opportunities and risks.  The current equities market is being driven by euphoria surrounding artificial intelligence technology.  The 7 or 8 companies that are perceived to the primary beneficiaries at this early stage are being rewarded with dramatically increasing price to earnings multiple.  Much of the equities market  outside of those leading names have been much more stagnant.  We’ve seen a similar dynamic in both 2000 and 2020, during both internet boom and the work-from-home beneficiaries, which you can see from the chart in the image at the top of this email.  In both 2000 and 2020 when we’ve seen such extreme divergence, growth stocks sold off quite hard and value outperformed by a substantial margin.  I believe there is an excellent chance we will see a similar occurrence once again, as value stocks are quite cheap both on an absolute and relative basis.

We’ve seen companies gain $1 trillion in market capitalizations, despite their earnings estimates not increasing.  We’ve seen companies gain more market cap than their previous ten-year total net income, in just one day.  These are very strange occurrences, which you don’t often see when we aren’t in a market mania.  Conversely, there are highly profitable companies trading at mid-single-digit earnings multiples, material discounts to book value, and with extremely high dividend yields.  These stocks are cheap because they don’t have the super exciting story lines of AI, and instead people are too worried about what the impact of a potential recession would be.  This is what creates the opportunity for us to attain very strong returns while not following the sheep off the cliff.  I think we have some solid catalysts coming up over the next two to three months for some of our key investments, which I’m optimistic about, along with our options and bond strategies playing out.  Let’s keep a cool head because I think there are quite a few risks that people aren’t fully appreciating in some of these super expensive areas of the market.