Large-cap tech’s planned capex for 2025 is worrying investors. What will be the return on that capital? Never before have these companies made such large bets. Before DeepSeek, it was assumed the tech giants – with their deep pockets and almost limitless resources – would enjoy a wide moat in the AI arena. And from there, that justified the high valuation multiples. Not now. DeepSeek’s arrival challenges those long held assumptions (and valuations).
Valuations
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Simplifying Quality & Value
Charlie Munger once joked “all I want to know is where I’m going to die, so I’ll never go there.” Jokes aside – it’s the same approach you should apply with investing. And it’s not difficult to do. The math is very simple — addition, subtraction, division and multiplication. If you have access to a calculator – you’re all set. The challenge is mastering your emotions (and any self-defeating behaviors). A calculator (or AI) can’t help you with that. This game is more EQ than it is IQ. Think of it as a test of your character versus your intellect. For e.g. – many highly intelligent people get investing wrong (e.g., due to emotions such as greed, fear or some inherent bias). This post talks about how we can simplify our approach to avoid taking excessive risks
2025 – Finding Quality at Reasonable Prices
The S&P 500 recorded a 23.3% gain for 2024. For the first time since 1998 – posted two consecutive years of gains above 20%. Not bad right? Well if we extend our time horizon to include 2022 – the market’s CAGR is just 7.2% (below its long-term average of ~8.0% exc dividends) Mmm. Not as good. And over 5 years – the S&P 500 CAGR is is 12.7%; and over 10 years its 12.4%. It’s important we measure results over a period of at least 5 years (preferably 10). 2-3 years is a very short amount of time… where all kinds of distortions will happen. But over time – these distortions are always corrected. My point? Things always mean revert… and one should never ‘cherry pick’ dates to fit a narrative.