2025 Commentary and Outlook

2025 Commentary and Outlook

Most investors consider Benjamin Graham’s The Intelligent Investor one of the most important investment books ever written. It inspired Warren Buffett’s career and created generations of value-investing disciples. However, many young investors today are thoroughly disappointed by this classic framework. What’s underappreciated about this book is the market environment in which it was written.

When it was first published in 1949, the financial devastation of the Great Depression was still fresh in people’s memories. This book served as a guide to reintroducing people to the stock market in a “safe” way. The system primarily focused on investing in companies trading below book or cash value. This approach dramatically reduced actual risk in a market where perceived risk was extremely high. This approach eventually allowed investors to reintroduce themselves into the market with confidence.

Fast forward to the contemporary market, post-2008, this approach is not only irrelevant but completely impossible to apply to this market. Other than a handful of distressed biotech companies, we have not seen any examples of major contemporary companies trading at values below cash. Instead, the past 15+ years have been dominated by an underappreciation of the tech and innovation factor, which includes the emergence of highly divisive tech themes ranging from Tesla to crypto. Similar to 1949, for the last 15 years, most investors have still had the pain of the 2001 tech depression fresh on their minds. The most successful investors of the past 15 years are the ones who embraced tech and innovation as actually less risky than its broadly perceived risk. This is why I have been pounding the table on innovation themes for the past 5-6 years in these articles and highlighting it as the most critical and broadly underappreciated factor in markets.

As we enter 2025, tech and innovation are the dominant themes in all public markets and are no longer underappreciated. Even 18 months ago, most wealth managers on CNBC were still trepidatious about investing in tech, whereas today, it is firmly a TINA asset class (There Is No Alternative).

This market’s future returns will mainly depend on earnings growth. The fear about tech is gone, and the multiples are moderately high, leaving far less room for continued multiple expansion.

Innovation continues to be the dominant force for global prosperity, and there’s no question that the US is the dominant player in that field. For a bit of history, we can thank Ronald Reagan for founding the modern VC industry by being the first person to allow pensions to systematically and broadly invest in venture capital as an asset class. Before that rule change, venture was considered an imprudent asset according to the “prudent man rule” dating back to the 1800s. Venture was considered speculative rather than prudent. This is another great example of the gap between perceived and actual risk and what turned out to be a brilliant choice for the growth engine of the US and overall prosperity.

As part of human nature, most people misclassify ‘unfamiliar’ investments as ‘risky‘ investments. This is probably the most significant source of strong returns going forward. Those who take the time to learn the ins and outs of niche assets outside of the broad S&P will be best suited to assess where actual risk and returns differ from broad, generally accepted views. That gap is where the most significant opportunities lie, just like with the Intelligent Investor in the 1949-era markets.

We will continue to write about innovation breakthroughs that will impact the world and market returns, as this is the dominant theme of our time. We will also continue highlighting the ‘unfamiliar’ niche market examples.

Overall the economy is strong heading into 2025. Mag7 has proven to be insensitive to higher rates due to its current profitability rather than its promise of future profitability. Rates are a future cash flow discounting mechanism, so current profitability matters greatly. A big surprise in 2025 would be rates falling. It’s impossible to predict the future of rates, but the consensus today is a hope that rates will drop but an expectation that they will stay higher.

One line I’m thinking about heading into the new year: “In bull markets promises trade at a premium, but in bear markets reality trades at a discount.” Sell-offs should be treated as opportunities.

The best investment opportunities exist when a significant gap exists between perceived and actual risk. The emergence of the original value investing framework following the Great Depression is a great historical example that is difficult to apply to today’s market. Today, that gap centers around underappreciating the impact and scale of technology and innovation. It also exists among smaller niche asset classes, where a simple lack of familiarity is reflexively labeled as risk.

I hope everyone had a restful holiday and new year, and we look forward to a great 2025.