Many dogs resemble their owners in either visage or disposition, or so the old trope goes. The psychological implication is that we are attracted to things that reflect our image, or more precisely, reflect the image we hold of ourselves. Portfolios and the investors that manage them share a similar phenomenon. The short-seller sees themself as a truth seeking maverick, the growth investor as having a prescient view of the future, and the value investor as being similarly undervalued and overlooked as the names in which they traffic.

There is nothing inherently wrong with this. Feeling deeply connected to a core motivating force is a prerequisite for doing any good work. Of course, investing as a vocation requires a certain cognitive dissonance. Successes are easily chalked up to good fortune, while failures must be attributed solely to error or misjudgment. To suggest that the entire enterprise were merely dictated by chance would undermine its pursuit.

This year, I have been considering the attributes that make a good investor. I have also been considering the station of everyday people who feel no intellectual connection to markets, but who nonetheless must make investment decisions as part of their effort to secure financial and material comfort. What constitutes prudence in a world in which the imprudent seem to experience more good fortune than the prudent are rewarded to for their piety?

Confidence and curiosity

Whether you manage capital for clients, your kin, or simply yourself, confidence and curiosity seem to be the prerequisites for success. Confidence expresses itself not in where you choose to invest your efforts, but in the areas in which you confidently ignore. Is the balance of capital tilted heavily in favor of those who watch each Federal Reserve meeting with bated breath? I would posit it is not. Is investment Valhalla on the other side of the next two-hour podcast? Were it so simple!

Curiosity is confidence’s foil. You must be voracious in your desire to understand the world, but judicious in believing that you can make tractable or actionable what you learn. Curious inquiry is the most speculative activity any investor undertakes. You set off down trails that may require backtracking, you collect intellectual scrip of uncertain value, and you plant seeds in infertile soil hoping to return to some green shoot in the future. And it is confidence that empowers you to turn around, to mark your scrip to zero, or to till the soil of your work for another day, month, year.

Doing less, by doing less

In 2025, I have made perhaps the fewest active investment decisions of my investing life. This is partially a function of circumstance and partially a conscious choice to determine the minimum effective dose of focus on capital allocation. That has, in turn, led me to consider the so-called “average saver,” the type of investor who only sees a Financial Times in the lobby of a hotel, who must make an investment decision once per year, or perhaps only when they change jobs.

I have watched as professionals consult ChatGPT on what their 401(k) investment elections should be. I have seen young, front-line workers allocate 100% to stable-value funds outpaced by inflation since inception. What do these portfolios say about the investors managing them? They are certainly neither confident, nor curious.

Their understandable disinterest in markets is placated by an industry all too eager to shoulder the complexity for a nominal fee. Dressed in the language of institutional prudence, asset managers take a Hippocratic approach to these clients, protecting the most extreme downside scenarios using relatively rudimentary heuristics about risk and return. The do-no-harm portfolio is typically a target-date fund (TDF) with a dynamic allocation that (theoretically) reduces risk as the hopeful retiree approached retirement age.

Consider, the Vanguard retirement glidepath, which logically starts you off overweight to equities, even a large allocation to international equities and then, rather abruptly, after age forty starts aggressively buying bonds.

The only input to this investment strategy is your birth year, which is entirely exogenous to markets or relative value. Did equities take it on the chin like they did in 2022? Doesn’t matter. If you are over fifty, you are buying less of them. Did rates rally such that long-term bond yields were less than 2%, like in 2021? Doesn’t matter, you are buying more of them with every paycheck. Why does a person who happens to be forty in a given year need to start selling down the international stock exposure that was additive just 12 months prior?

To my question of an appropriate level of focus on capital allocation, is one’s birth year sufficient data for making investment decisions? I don’t believe it is, and in 2005 as target date funds were beginning to chart their journey from innovation to default option, Alliance Bernstein (AB) came out with a report saying as much. AB concluded,

“It takes a lot of equity to generate sufficient growth. Our analysis of historical US stock and bond data shows that the conservative and moderate equity allocation…were likely to generate enough growth to fund spending for only 15 or 20 years. Over longer time horizons, their success rates dropped precipitously…While a classic measure of risk in investments is market risk, measured by the standard deviation of returns, we demonstrate that a myopic focus on this measure of risk is inappropriate for addressing the retirement-savings problem. Broadly speaking, risk for these funds is the likelihood of failing to build enough savings to fund spending throughout retirement.”

AB took the time to do a lot of math and backtesting to conclude that returns are, in fact, a function of risk, and turning risk exposure down too quickly can have disastrous impacts on actually being able to comfortably retire. As an aside they also found that REITs have an enormously beneficial impact on retirement outcomes overtime, but I’ll leave that for another day.

If you were 50 in 2020, the qualified-default investment options (QDIA) was likely to be a 2035 target date fund, perhaps even Vanguard’s. Assuming you have diligently contributed every month over the past five years, increasing your contributions at approximately the rate of inflation, your dollar-weighted annualized return has been 9.58%.

This is a respectable return, and I’m not going to suggest that a fifty year-old should continue to white-knuckle an increasingly less diversified index. During the emergence of the TDF, proponents tacitly admitted the returns would likely suffer. But, they argued, that the smoother ride of ramping bonds as a participant approached retirement would prevent some of the behavioral pitfalls of the reluctant investor. Namely, selling low and buying high.

Unfortunately, the downside protection offered by increasing bond exposure was pretty minimal, the worst year was only 160 basis points less bad, and the worst drawdown just 150 basis points better. Are we to believe that the investor who would have bailed down 23%, held steady at down 22%?

This is partially a design problem. Bonds, despite their reputation, are not a diversification panacea. As the team at Verdad Capital shows, the relative diversifying benefits of fixed income actually vary considerably.

More importantly, there is no single asset class which can reliably reduce volatility. The impact, as seen above, is periods where increased fixed income allocation simply lower returns without a commensurate reduction in exposure to market risk.

Since its inception in 2003, when our hypothetical retiree would have been 33, the Vanguard 2035 fund has an annualized return of 7.96%, versus around 11% for the S&P 500. Again, the point is not that 100% equities is a viable alternative, it’s that the conservative glide path has reduced returns without significantly reducing market risk.

AB finds in their analysis that, “[w]hen the investment horizon is very long, small differences in return can make a huge difference: Adding one percentage point to annual returns could provide over 10 more years of spending. Thus, target-date retirement funds should seek extra return wherever possible.”

Failing to meaningfully reduce market risk, the TDF has also significantly increases longevity risk (living beyond one’s savings) and inflation risk for the participant.

The quantitative justification for the TDF and its strategy is based on a pretty limited data set when considering the length of the investment horizon. Since 1960 there have only been two, distinct, non-overlapping 30 year return series, 1960-1989 & 1990-2019. There are 421 overlapping 30-year periods since 1960 if you calculate on a monthly basis. Monte Carlo analysis is used to fill the data gap. But that falls prey to its own biases. AB demonstrates the selection of data can have huge implications for asset allocation.

“If we had employed a static return-generation approach 25 years ago, using return data from 1965 to 1984, our assumptions might have called for nominal S&P 500 stock returns of just 9.1% per year and cash returns of 7.4%! These assumptions would have served as a poor basis for modeling returns in the subsequent 25 years, when the S&P 500 returned 14.5% per year versus 5.2% for T-bills.”

Despite this, the TDF sets you on a path that doesn’t vary. When the facts change, your TDF does not. Explaining why this product persists in its enviable position of being the regulatory default selection for reluctant investors depends on your level of conspiratorial thinking.

It could be that the TDF allows an asset manager to stuff multiple fee bearing products into one. It could be that avoiding the worst case scenario at the expense of returns actually stabilizes asset-based revenues and growth. More nefariously, it could be that having a demographic wave of price insensitive bond buyers has political benefits even as their retirement security slips out of reach.

Engaged stewardship as prudence

Has this lengthy discussion merely been a vehicle for my diatribe against traditional retirement planning? Transparently, yes, but it also shows that the cost of prudence, of doing nothing in service of doing no harm, carries real risk of its own. If your aims are to build wealth in financial markets, or even merely to achieve financial security through asset appreciation, average returns will not suffice.

Whether you are reluctant investors or an active one, understanding that above average returns will require above average risk, how do you manage your savings effectively? Sadly, there is no formula, no automated process for ensuring success.

The speculative fervor that retail investors have displayed recently, whether in traditional, crypto or prediction markets, have demonstrated some sort of intuitive rejection of the prescribed path of prudence. Perhaps, this is not such a bad thing.

Prudence, as it is commonly practiced in modern portfolio construction, has come to mean minimizing visible error rather than maximizing lived outcomes. In this framework, volatility is treated as risk itself, and judgment is deferred to heuristics that are easy to defend, if not particularly effective at funding retirement.

A more engaged model of capital stewardship—by institutions, professionals, or individuals—would almost certainly produce a wider range of outcomes. Some investors would fare worse. Many would fare meaningfully better. Markets have always compensated those willing to endure uncertainty in pursuit of growth, and long-term capital formation has never been a low-variance exercise.

What is required is not constant activity nor prescriptive formulas. Rather an understanding of what one owns, why one owns it, and when those reasons no longer apply. Stewardship accepts uneven paths and variable outcomes.

This view of stewardship is admittedly difficult to scale. Judgment does not compress well, and engagement cannot be mass-produced. Perhaps active management is due for a comeback. Regardless, our current model of treating long-term investing as a solved problem will come to be increasingly questioned.

When investors’ portfolios reflect their own confidence and curiosity markets tend to function better. Capital is allocated with intent rather than inertia, prices incorporate a wider range of views, and risk is borne by those who have consciously chosen to bear it.

Defaulted investment, by contrast, concentrates behavior, suppresses information, and turns markets into reflections of policy design rather than underlying economic reality. While engagement may introduce more dispersion in outcomes, it also restores the diversity of judgment that allows markets to discover value, absorb shocks, and reward long-term thinking. Ultimately, an investment system organized around avoiding regret is likely to produce it.

These days, it is hard to imagine a market headline that you would consider surprising. Whether it’s the circular financing arrangement of AI companies or the baldness with which stocks of uneconomic enterprises are promoted, incredulity is in short supply. Nonetheless, Apollo found a way to surprise me this week.

Joe Lonsdale’s 8VC announced a strategic partnership with Apollo Global Management that marries venture equity investment with private credit. The exact nature of the partnership is not entirely clear, but Lonsdale is plain spoken about its motivation,

“While venture capital is well suited to funding technological breakthroughs, it’s not sufficient to fund the huge projects that are required to increase our national productivity with the next wave of transformative technologies like AI, robotics, autonomous systems, biotechnology and nuclear energy…”

There had been some reticence to admit that you cannot achieve the returns venture investing requires when so much capital is needed for physical assets. For all the VC bluster about the need for a defense, energy and manufacturing renaissance, the business model does not fundamentally support asset heavy balance sheets. Marrying venture investing with structured debt solves a variety of issues for VCs, lenders, founders and investors.

Old Paradigms

It also represents a continued evolution of markets. Venture, and to some degree, private lending, were once seen as a form of bridge capital to public markets. As the attractiveness of public markets has waned and the scale of private credit has grown, permanent private ownership has become an aspirational structure.

In a prior era, software companies viewed a public offering as the top of the mountain, while asset-heavy companies needed to be traded between private hands until there was scant value in the equity and listing was the only option left. The most innovative companies today have valuable intellectual property like the software of yore, but their products require real capital formation in the form of factories, foundries, data centers and infrastructure.

Venture capital historically used little debt, if any, because the business models already had a high degree of operating leverage. Private equity gravitated to real economy businesses because their assets were easier to leverage to enhance the otherwise uninspiring returns on equity. As these two worlds merged, the obsolescence of the old model presented a variety of problems.

I recall showing Julius Krein, editor of American Affairs, an Anduil hype video for one of their drone releases. “All I care about is how many they can produce,” he responded. It carried more significance than I realized at the time. These companies’ innovations are only valuable to the degree that they can also control and scale the production of physical goods.

Early stage venture investors face a constant barrage of dilution in choosing to back an early-stage industrial company, while there isn’t yet the cash flow nor the asset base for debt markets to provide credit solutions. This has led to more essays than investment in what was becoming a glaring capital mismatch.

The 8VC-Apollo partnership theoretically presents a solution. Again, without the details of the partnership we can only speculate what it will look like in practice. One possible expression could be in the form of a “full-stack” term sheet for companies with promising technology that requires real capital formation. A defense tech company could arrange, in a single round, equity capital into an R&D entity, with a contingent term-sheet for debt capital to fund some form of off-balance-sheet SPV that would own the assets required to actuate the business model.

The venture investors are able to invest less capital with a higher degree of visibility on future dilution. The private credit lenders get to structure the credit de novo, without having to deal with broken capital structures or appeasing pre-existing senior lenders. The entrepreneur can raise at a higher “asset-lite” valuation. The LPs of VC and debt funds, via the terms of both, replicate the governance control of being majority equity owners.

Engineering Liquidity

“Alpha” is a fickle term. In public markets it is relatively straightforward. Your benchmark represents the cheapest available option to capture the returns of your chosen market. In private markets, an umbrella term that often serves as a placeholder for a variety of strategies, alpha is in the eye of the beholder (the LP). In practice, it means absolute returns, an overly academic way of saying “not negative.” With rare exception, public markets will offer more opportunities for higher returns. Private markets may outperform or underperform publics over a specific time period but their core value proposition is that they won’t be negative.

Much has been said about the benefits of lower volatility, however illusory, and that the incentive structure of allocators has contributed to the growth of private assets. This critique is constantly overstated. It is almost always levied by public markets managers whose own relationship with allocators is dictated by a raj of arcane risk-reward statistics. Their argument is one of measurement, not results.

On a total return basis, active public managers have consistently been bested by private assets and their very own benchmarks. The harsh reality is that as private markets have grown, capturing financial asset beta has required their inclusion on portfolios, while the pursuit of alpha has been de-emphasized. This disadvantages public managers whether or not they can or have generated alpha in the past.

Combining venture investing with private credit represents an evolution of capital markets where alpha can be engineered ex-ante. That is, liquidity and returns are contractual agreements, not market outcomes. This is a bold claim that I will try to unpack as most of us live in a world where transactions between willing buyers and sellers is the ultimate arbiter of value.

In “The Covenant Structure of Yield in Private Credit,” Elham Saeidinezhad asserts (emphasis mine),

“Unlike public markets, where valuation is anchored in continuous pricing, dealer intermediation, and standardized benchmarks, private credit operates within a legal environment where liquidity is neither spontaneous nor infrastructurally produced. In this setting, capital movement depends entirely on what is permitted by contract. Yield, similarly, is not discovered through trading activity but structured ex ante through covenants that govern exit pathways, embedded optionality, and cash flow dynamics.”

Saeidinezhad goes on to lay out an approach to private credit valuation dubbed a “covenant-centric” model that effectively links the sources of private credit liquidity to their public markets equivalents: depth, breadth and immediacy. As corporate life unfolds, private credit creates liquidity via the covenant structure.

I will leave it to the reader to assess the veracity of this model, but in observing that private credit returns routinely outpace equity returns for similar company profiles, the approach seems prima facie correct. However, that also means we must call into question the more philosophical idea of ‘what is debt’?

Disappearing Boundaries

There is no hard line that turns a financial instrument from equity to credit, any attempt to distill it falls prey to abstraction. Who has corporate control and what claim they have on cash are the core concerns of the investor, the LP has to determine which “bucket” it belongs in. In trying to understand how capital markets are evolving today, it matters not.

I elicit this paper in part to highlight how similar venture capital and private credit are. While they may be perceived to be sitting on opposite ends of a spectrum they both seek to define outcomes contractually at origination. Venture uses liquidity preferences, ratchets, and vesting schedules to structure liquidity in a variety of outcomes. Where private credit uses contractual terms to manage downside exposure, venture capital uses those terms to capture more economics in upside scenarios.

If you want to see what this might look like in a live environment, look no further than Meta and Blue Owl’s massive bond issuance for its Hyperion data center in Louisiana. The $27.3 billion bond issuance is the largest investment grade bond sale ever. That investment grade rating comes with some footnotes though.

As FT Alphaville reports, the issuer is neither Meta nor Blue Owl, but rather a bankruptcy remote JV called Beignet Investor LLC. The issuer’s investment grade rating is courtesy of a 20 year lease agreement from Meta, who is on the hook to pay even if construction is delayed and will come out of pocket to finish the project up to 105% of the budget. FT’s Wigglesworth writes,

“Meta and Blue Owl’s Beignet structure blurs the line between traditional corporate bonds, project finance and private credit, and shows how the circa $174tn global fixed income market can actually be pretty adaptable — if you’re willing to do a bit of finessing”

Citing a JP Morgan research note,

“From a fundamental credit perspective, we are not aware of a prior A+ rated corporate bond with this degree of structural complexity and single-asset dependence. The Beignet notes are issued by a bankruptcy-remote vehicle, fully secured by the Meta-leased data center, and rely on project-finance-style cash waterfalls, reserve accounts, and mandatory amortization. Credit strength ultimately depends on Meta’s lease and residual value guarantees, not on diversified corporate cash flows.”

Worth noting, these bonds are already trading at a premium. Also notably, these bonds are 144-A for life, meaning they will only ever be able to be traded among institutional purchasers. Despite the size of the issuance, they are currently excluded from bond indices.

While neither venture capital nor private credit, the structure highlights the appeal of hybrid structures. Meta gets investment for real capital formation without having to take the debt on their balance sheet, even though their own lease is the sole security. The lender sees their credit improve as the project reaches completion, but they are virtually guaranteed a return at origination. Wigglesworth,

“[I]t’s very clearly a bit of clever financial engineering designed for Meta and its partners to have their cake and eat it. The cute structuring means that Beignet benefits from Meta’s creditworthiness, but Meta’s creditworthiness is magically not impacted by the financial liability that its long-term lease guarantee constitutes — at least according to S&P.”

The entire logic rests on the idea that the project cash flows are of little value to the equity if they require balance sheet capacity. It is fine if creditors get a greater share of cash flow from the project earlier because the equity is valued based on the companies’ ability to utilize the assets, not the assets themselves. 8VC and Apollo want to create this structure at the earliest stage of companies’ lives.

The idea of keeping corporate entities asset-lite is nothing new. In fact, fissuring the economy into each component of value creation has been the standard operating model. That is, “the separation of both labor and physical capital from profits, across the legal boundaries of different companies, rather than having the footprint of all three largely reside within the same company.” Apple is perhaps the most successful expression of this model, while Boeing demonstrates the pitfalls of following this model to its logical conclusion.

This model worked well for equity owners while it hobbled economic growth. Moving assets off the balance sheet but retaining profits drove up multiples and distributable cash, but it took away the incentive for the most profitable companies to also be the largest investors. Until now.

The AI arms race has put capex back on the menu. Showing the market you are building out digital infrastructure is now both a strategic requirement and driver of valuation. For the largest tech companies this bet amounts to a few years of cash flow, ultimately insignificant in the arc of time, especially if they are right about the future. However, for new firms, the capital markets have not fully figured out how to finance their growth.

The expansion of private credit beyond the confines of the sponsor-backed LBO market into growth companies and asset-based lending has spawned a new vision of the firm. The modern firm is not a self-contained entity of assets and labor, but a choreography of contracts that govern capital, risk, and production. Its value resides less in ownership and more in the legal architecture that determines how cash moves.

New Paradigms

Private capital now operates closer to the source of return creation, negotiating liquidity and yield at the moment of origination rather than hoping to harvest them later from market transactions. What we call “markets” increasingly look like the post-production department of finance. They are places where the finished product of private contracting gets sliced, repackaged, and re-rated for public consumption. And so the modern firm has become less something you invest in than something you invest through.

The terms we use to describe financial assets; public, private, debt, equity, have always just been a form of shorthand for the cascade of agreements each represents. Assets, liabilities, employees, and cash flows now orbit within a web of paper: term sheets, leasebacks, SPVs, revenue shares, covenants. The firm has become a collection of claims, its boundaries drawn less by what it owns than by what it can obligate.

The dividing line between debt and equity has melted into a gradient of structured promises. Credit investors now participate in upside through covenant engineering; equity investors protect their downside through liquidation stacks and preferred waterfalls. Both are just negotiating their place in the same contractual choreography. The growth of this phenomenon should encourage investors to evaluate their portfolios accordingly.

It is an old kitchen maxim that “a dull knife is more dangerous than a sharp knife.” It’s not so paradoxical for anyone who has done any cooking. Dull knives have quite literally lost their edge. They behave unpredictably, a risk compounded by the additional force the user typically applies to get them to work. They shoot to the left or right when they should descend straight down, catch in the middle of a long cut, and seem more prone to hop off the board entirely.

I recently had my kitchen knives sharpened and was shocked by their newfound efficacy. Knowing the instrument was sharp, I also noticed how much more care I took. Another risk of dull knives is the carelessness with which we wield them.

Knives are a form of leverage, a mechanical advantage that creates more output force than input force. Output force is more likely to turn back on you when using a dull knife.

In How to Lose Money, I wrote about Bob Citron’s blow-up of the Orange County Investment Pool, but countless sophisticated investors have been wounded by instruments they thought they understood. D.E. Shaw invokes the woodshop instructor:

"Leverage and power tools share three fundamental properties: they can be extremely helpful, they can allow for far greater precision, and they can be really dangerous, even in the hands of experts. We would wager that some of us who took a woodshop or metalshop class in high school had instructors—however masterful a carpenter or machinist—who were missing at least one finger due to a moment of inattention while operating a table saw."

Financial markets are littered with dull knives.

Zero-day options, levered ETFs, and betting markets that hide derivatives principles behind real-world binary outcomes are dull knives. While they may be transparent regarding the amount of leverage employed, the terms, reliability, and structure of the leverage are obscured.

Information asymmetry is great for the sellers of these products and bad for the users. It preys on a jackpot mentality that has spread rapidly through society since 2020. As wealth from crypto, SPACs, and gamified options trading seemed to be doled out randomly, investors saw a game they thought they should be playing. There is a simple bias at play: the fact that people can win far more than they lose gives an intuitive but entirely inaccurate view of risk and reward.

Scimitar Capital wrote an excellent explainer of “the Jackpot Paradox” a few months ago. Assume a coin flip game where one can double their net worth on heads, but lose 60% on tails. This creates an expected 20% net worth gain per flip. Stopping there, you should flip the coin infinitely.

But this expected value reflects the arithmetically average outcome, which includes the exceedingly rare consecutive heads outcomes that create extraordinary wealth. In fact, the expected (average) value is heavily skewed toward these outcomes. It’s the average of ALL possible outcomes.

When you use a geometric mean that reduces the statistical weight of jackpot outcomes, the expected value of the game turns negative; it compounds negatively over time.

Per Scimitar:

“The discrepancy between arithmetic and geometric means forms what I call the Jackpot Paradox. Physicists call it the ergodicity problem and traders call it volatility drag. You can’t always eat the expected value when it’s squirreled away in rare jackpots. Risk too much hunting jackpots and the volatility will turn positive expected value into a straight line to zero. In the world of compounded returns, the dose makes the poison.”

It’s hard to tell if a knife is sharp just by looking at it — most people rationally assume every knife is sharp. Most chefs will tell you the vast majority of knives are, in fact, quite dull. Investors face a similar paradox.

Financial markets do offer some sharp knives.

The zero-sum nature of markets leads people to believe that any time leverage is offered, the loser is more likely to be the borrower than the lender. However, terms and time horizons are not static across participants, and the entire function of finance is to move money through time.

Borrowers need future dollars today, while savers and investors require today’s dollars sometime in the future. Markets match these parties across price and terms. Occasionally, those factors align in favor of the borrower.

Home Mortgages

The most obvious example is the American home mortgage, which offers 30-year, fixed-rate debt with no prepayment penalty. The structure of this leverage is extremely borrower-friendly, but the terms also benefit lenders because it creates both a steady stream of origination and the homogeneous structure supports a robust secondary market for the assets.

The Equity of Investment-type Companies

There is an argument that balance sheet companies, or in Whitman’s words “investment-type companies,” such as REITs, BDCs and other specialty finance firms, are sharp knives that investors can access. The public equity of these firms allows investors to participate in the leverage extended to the entity, often term debt with lower rates, to make investments that yield above the companies’ cost of debt financing.

GP Participation in Private Equity and Credit

Equity participation in General Partnership stakes, such as the large public alternative managers Apollo, Blackstone, and KKR, is a sharp knife. These firms effectively get paid a steady stream of fees to originate call options on their underlying portfolios, with equity investors benefitting from the realized carry of those investments.

On financial innovation…

Finance gets a bad rap. The phrase “financial engineering” often carries a pejorative connotation. At the heart of most speculative blow-ups is some form of misunderstood or misapplied leverage.

At the same time, our quest for non-inflationary growth demands debt. Households don’t merely want to exchange goods; they also try to allocate their financial capital in ways that build long-term wealth, often involving some form of leverage. Hyman Minsky scholar Martijn Konings writes,

Economic interaction is ­shaped not primarily by the wish to exchange our surplus commodities but by the drive of economic units to secure their ­future by making the right investments. Financing such investments requires economic units to borrow from ­ others, and in this way households weave an intricate web of debt relations.

A huge whitespace exists for creating financial products that help investors make markets their servants, not their masters.

In 2012, Yale economist Robert Shiller wrote “Finance and the Good Society,” arguing that finance serves as a "social technology" that can advance human welfare by efficiently allocating resources and spreading risks across society.

“The key to achieving our goals and enhancing human values is to maintain and continually improve a democratic financial system that takes account of the diversity of human motives and drives. We need a system that allows people to make complex and incentivizing deals to further their goals, and one that allows an outlet for our aggressions and lust for power. It must be a system that redirects the inevitable human conflicts into a manageable arena, an arena that is both peaceful and constructive.”

I used to work in timber markets and became fascinated with how environmental services markets formed, using regulation as a primer for liquidity in hard-to-price social and environmental outcomes like clean water or carbon capture. Last year, I explored an idea wherein homeowners could swap a portion of their home equity, and the “buyer” would take on the liability of their property taxes. The elderly could use this to manage their expenses on a fixed income. Conversely, younger home owners could apply the savings to build equity in their home faster than they would otherwise — property taxes can represent up to 20% of a mortgage payment early in the life of a mortgage.

We are far from the limit of what the social technology of finance can do, but we are even further from its spirit. Minsky called the inevitability of debt in social relations the “Wall Street paradigm,” a way of thinking that has infiltrated society far broader than when it was coined. Meanwhile, most “Wall Street” innovation has focused on distributing dull knives to amateur chefs.

UPDATED: There was an error in the “model” below that has been corrected

As President Trump makes a daily practice of pillorying Jerome Powell for failing to lower interest rates, let’s not forget the pioneer of the genre: Barry Sternlicht. Sternlicht told CNBC that the Fed was "attacking the economy with a sledgehammer, and they don’t need to," all the way back in March of 2023. A view that has, thus far, not been supported by the subsequent data.

Starwood is now putting their money (a lot of it) into bringing net lease operator Fundamental Income Properties into the complex, making an implicit bet on long-term rates falling just as the 30-year approaches a five-year high.

Starwood, with a market capitalization of $7 billion, is buying Fundamental for $2.2 billion, inclusive of $1.3 billion of existing debt. The transaction will nearly double STWD’s Property Segment, currently containing the Woodstar affordable housing business and a medical office building portfolio (plus one DC multifamily property).

Get up to speed on STWD here:

What we know about Fundamental Income Properties

Fundamental Income Properties is a net lease real estate platform founded in 2019. Following a $500 million equity commitment from Brookfield, the company rapidly scaled to a +$2 billion portfolio in just five years. Their first major deal was a $50 million purchase of a Carvana facility in Tolleson, Arizona.

Read more

A prevailing narrative has evolved around private credit's meteoric rise from roughly $1 trillion in 2020 to nearly $2.5 trillion of assets today. It is easy to suggest that hapless allocators were lured with high yields that didn’t come with the accompanying volatility. This explanation, while convenient, misses the fundamental driver: Equity markets have systematically failed to provide accessible capital to the broad swath of American enterprise, forcing a mass exodus toward private debt markets.

I’ve written my fair share about private credit and its expansion into insurance with more than a degree of skepticism. That private credit represents some sort of growing risk has installed itself as, paradoxically, a broadly held “contrarian” opinion.

Markets of all stripes climb walls of worry, but the expansion of private credit has been particularly vexing. I’ve heard a variety of theses that private lending is the next “Big Short.” Those theories presuppose that asset growth is downstream from buyside allocation decisions and not reflective of demand from the users of capital, i.e. companies themselves.

Just as investors seek out the best risk-return tradeoffs, so too do companies seek to minimize their cost of capital. Instead of asking why investors are so eager to lend, it is just important to try to understand why companies are so eager to borrow at ostensibly high rates.

Canary in the coworking mine

When WeWork's IPO collapsed in spectacular fashion, few recognized it as a harbinger of a fundamental shift in corporate America's financing landscape. Once valued at $49 billion, Neumann’s Folly found itself scrambling for survival after investors rejected its business model and excessive debt load. By March 2023, WeWork was negotiating a $1.5 billion debt restructuring with SoftBank – explicitly stating that traditional equity financing was not viable due to market conditions. What appeared to be an isolated corporate disaster was actually the first domino in a historic capital migration that would reshape how companies fund growth.

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There are several ways to impair a REIT’s share price: dilutive equity issuance, dividend cuts, and being diversified in a way that makes valuation and comparison difficult. AHH hits all three and as a result now trades at both a share price and multiple below its COVID lows. Since the end of 2020, the company has:

• Grown share count by 7.35% annually

• Grown the dividend by 5.84% annually, but recently cut by more than 30%

• Funds from operations have been flat, as has tangible book value per share

• The share price is down 38%, with 31% of that decline occurring in 2025

• Currently trading at 6.58x NTM FFO

The stock has entered the “looks cheap” universe with plenty of dumpster divers kicking the tires. While you can certainly argue that the REIT is significantly below NAV, perhaps by as much as 30%, it’s not clear that the market has ever really had much regard for the portfolio value. Since 2014, AHH has traded at an average 17% discount to NAV, compared to the 7% discount for the broader REIT universe.

I believe the company’s skill set lies in developing or redeveloping assets and then selling them to larger, often better-resourced owners. As a result, the stock works best when AHH is active in the market and languishes in “pencils down” environments.

This post will kick off my ongoing coverage of Armada Hoffler, so I will be laying the foundation for what, in my opinion, will matter for performance over the next 18-24 months, including:

• The company’s DNA as primarily a contractor and developer

• Mixed-use as a strategy and a differentiator

• Their big bet on the Baltimore Harbor

• What will drive shareholder returns, and how new management can catalyze those changes

Company Background and Strategy

Like all great real estate stories, AHH starts with a rich guy giving a kid a chance he probably didn’t deserve. Dan Hoffler founded what would become Armada Hoffler in 1979 as a commercial contractor and developer. Hoffler secured $2.7 million in initial funding from Jim Fisher, chairman of Armada Petroleum, who believed in his vision to develop corporate headquarters in the Greenbriar region of Chesapeake, Virginia, what was then considered the equivalent of "building in Outer Mongolia."

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There's no consultants. There's no investment committee in a lot of ways. It's much more: Does this make sense for what we want to do? Can we do it?... they don't have to follow what the rest of the institutions are doing. There's no career risk to them for making these decisions that might seem out of whack.

I met Adam Cohen three years ago. We were the only two “real estate guys” at an investment conference and, as a result, were summarily ignored. Adam has the polish and presentation that befits his institutional background but speaks with clarity and simplicity about real estate. We shared the low-level cynicism that comes with spending most of our careers primarily as allocators.

Adam brings 25 years of real estate investment experience, having spent 13 years at BlackRock managing separate account portfolios for institutional investors before founding Complement Real Estate Advisors. His firm delivers independent real estate investment expertise to private investors, family offices, and traditional investment advisors.

I wanted to have a conversation with Adam about our seemingly never-ending real estate cycle, as the post-GFC environment has offered few, if any, opportunities to “grave dance.” Most legendary real estate investors built the foundation of their careers in the depths of widespread turmoil. Today, most people active in real estate investing have only known an up-and-to-the-right market. We also discuss game selection in real estate and how long-term capital has a different opportunity set than more IRR-driven strategies. We cover the nuance and importance of capitalization and the opportunities available today and conclude with a fascinating comparison between institutional real estate investing and allocating permanent or family capital.

📝My full Armada Hoffler will be out soon for paid subcribers. AHH is a small-cap, diversified REIT currently in the penalty box after a series of equity raises and dividend cuts. Today, it looks like management has “taken their medicine” and, at the current valuations, has a variety of paths to value creation for shareholder.

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Game Selection

For investors with permanent capital, Adam advocates a different approach than the IRR-maximizing strategies dominating the market: "What I've landed on as a sort of investment philosophy is buy good assets. Most of the time or a lot of the times, it won't feel like a good time to buy... But if you can buy and hold, time cures a lot of ills in real estate."

This philosophy requires accepting lower initial returns in exchange for long-term stability. As Adam explains, "It's like buying in New York City. Every time you buy, it probably feels like it's a horrible – you're paying too much. It's super expensive. And then five years later, you're like, man, I should have bought that."

The Capitalization Advantage

The key to making this strategy work lies in thoughtful capitalization. Adam advocates for "lower leverage, longer term debt. Really, you want to match your debt to your holding period." This approach provides crucial flexibility when markets inevitably shift.

He draws a clear distinction between strategies: "On the sponsor side, or if you're trying to sort of get rich versus stay rich... the leverage and the financial engineering makes a ton of impact." For permanent capital, the goal is wealth preservation and steady growth, not maximum returns.

Current Opportunities

Despite the challenging environment, Adam sees compelling opportunities in small bay industrial properties.

"You get a diversified income stream that might be similar to an apartment income stream where you're not overly beholden to any one tenant. And you can capture some of that inflationary growth because you have shorter lease terms."

The supply-demand dynamics are particularly attractive:

"A lot of these things especially infill are getting... booted out of where they were before [for higher and better use]. And so you have decreasing supply as opposed to increasing supply of this type of product type."

The Reality Check on Office

While acknowledging potential fortunes to be made in distressed office, Adam remains pragmatic:

"I think there will be people who make billions of dollars buying office now, and especially at these discounted prices... [but] that's not my sort of strategy to go in and buy these deep value add things that are particularly capital intensive with an uncertain exit strategy."

Family Capital vs. Institutions

Adam compares working with family offices versus institutions: "There's no consultants. There's no investment committee in a lot of ways. It's much more, does this make sense for what we want to do? Can we do it?... There's no career risk to them for making these decisions that might seem out of whack."

This freedom from institutional constraints allows for more contrarian thinking and longer-term perspectives—crucial advantages in a market where everyone seems to be following the same playbook.

Find more insights from Adam Cohen at complementre.com

This week, I am sharing a collection of interesting data points from the world of listed real estate. Any of these would typically warrant a deeper dive all its own, but I wanted to give you all the quick hits on what is shaping up to be a busy summer for real estate markets. This note covers:

• Early reports from NAREIT’s REIT Week

• An analysis of the never-ending decline of REIT ETF assets

• REIT share buybacks have ramped this year…uh oh

• A theory of Jonathan Litt’s executive pay proxy campaign

I am also working on what I hope will be my first “initiation report” for Armada Hoffler Properties Smaller REITs suffer from lackluster sell-side coverage, so I am going to begin building a list of smaller companies for which I provide regular commentary and analysis. Paid subscribers can expect that report in their inbox sometime next week.

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REIT Week Kicks-Off

We are in the thick of NAREIT REIT Week, but investors seeking more incremental color from management teams are likely to be disappointed. The conference is coming on the heels of Q2 earnings releases, and most REITs are simply reaffirming their outlooks. Across sectors, demand trends are in focus as investors seek to understand how companies and consumers are adapting to trade and policy uncertainty. Here’s a summary of Day 1 notes from BMO (h/t ):

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Capitalism works. Especially for those who own capital. It is rather astonishing that some might propose abolishing capitalism instead of simply expanding the ownership base of capital.

All quotes in this piece are from Basic Capital founder Abdul Al-Asaad’s Harvard Innovation Lab whitepaper. There is a link to download the paper at the bottom of the post.

Credit markets have fundamentally transformed the investment landscape. An extended period of historically low interest rates has reshaped investor behavior, making leveraged positions increasingly attractive while rendering traditional unleveraged equity ownership appear conservative to the point of obsolescence. While the credit cycle is not new, our current paradigm seems unusual in its appeal to both borrowers and lenders. The Biblical admonition to “Neither a borrower nor a lender be” has given way to “both a borrower and lender be.”

The recent virality of Basic Capital is reflective of the mood. The product, the firm, and its founder, Abdul Al-Asaad (AA), were all thoroughly covered elsewhere a few weeks ago. Less covered was Al-Asaad’s Harvard white paper that laid out the intellectual case for the “pre-distribution” of capital. I’ll get to the term later; what’s compelling to me about both the product and the discourse it inspired is the continued desire for markets to deliver a specific outcome to participants: Retirement.

A demographic wave, on the cusp of transitioning from net savers to net spenders as they exit their prime earning years, meets the tumult of AI potentially cutting short a generation of workers entering theirs. When combined with waning population growth in advanced economies, the fabric of how labor and capital co-exist is beginning to fray.

AA provocatively includes “closing the wealth gap” in his title, but the primary focus of the paper is retirement, how it is traditionally funded, and why, in our financialized economy, new approaches are required.

Flawed Assumptions

There are three primary structures of retirement savings: the rapidly vanishing pension, private savings plans (such as 401(k)s and IRAs), and “pay-as-you-go” systems like Social Security. It’s worth focusing on social security conceptually because it captures the primary allocation decision most Americans face — their relative exposure to human capital and financial capital. Implicitly in the U.S. and explicitly in France, social security is a “social contract between generations,” where current earners finance the retirement of an older generation.

A central pillar of the design of the Pay-As-You-Go system is the inherent diversification it offers across the two sources of input (and hence income) in the so-called “Cobb-Douglas production function,” named after economists Charles Cobb and Paul Douglas who first proposed it in 1928. In its most standard form, the Cobb-Douglass production function states that there are two main factors of production: labor and capital.

Hence, at any point in time, any active member of the labor force has two potential sources of income: labor income from work and capital income from return on savings. Assuming every active worker saves, active workers are fully diversified across these two factors of production because they have labor income from work and capital income from savings.

Like all economists, Cobb and Douglas had a fixation on equilibrium. They believed that labor and capital incomes were perfect substitutes with an elasticity of 1. In plain language, if you could replace your income from the earnings on your capital, you would stop working. As more people did so, the returns on capital would fall, pushing people back into the workforce. Over the long run, the balance of labor and capital’s respective share of national income would be stable.

As someone reaches retirement age, their returns on human capital decline. If Cobb-Douglas were true, a combination of private savings and pay-as-you-go retirement schemes would work. Retirees’ allocation to factors of production would remain balanced between capital return on their savings and exposure to human capital through social security. AA argues that it does not, and the lived experience of most retirees shows that they are heavily reliant on capital returns to fund their lifestyles.

Capital Wins - r > g

Economists have long concerned themselves with the relative advantages of capital. AA notes that as early as 1817, David Ricardo warned that the increased economic output would disproportionately accrue to landowners, possibly to the point of causing social unrest. Later, following the Industrial Revolution, Karl Marx expanded on this sentiment. Noting that now freed from the constraint of land scarcity, capital is infinitely reproducible.

Those who already have capital have a higher capacity to accumulate more of it by investing. Both believed these systems were unsustainable, and both were ultimately proved wrong. Writing in the late 19th century, they had a forgivable blind spot for the impacts that technology and innovation would have on productivity and, in turn, returns on capital.

It is the same oversight that upends Cobb-Douglas. The supply of capital can increase without the returns to capital decreasing. Innovation increases productivity; so long as the demand for capital outpaces the growth of its supply, returns can outpace the accompanying growth for a long, long time. They have:

The ever-increasing rate of return on capital seems to be desperately trying to
inform us that capital always finds a home: whether it is in the development of new electric vehicles, like Tesla, or in new geographic frontiers, like India. I’m not entirely sure why economists find it inconceivable that the rate of return on industrial capital will continue to increase as the stock of capital also increases.

AA leans heavily on the work of Thomas Piketty1 and the idea that “r” the return on capital can outpace “g” for extremely long periods. This drives ever-greater inequality as financial capital compounds at a rate far faster than the economy and, by extension, the rate at which wages grow.

Initial Endowment Effect

Labor’s share of national income shrinks as productivity gains are disproportionately captured by the owners of capital. A blackboard solution to this problem is simply for people to save more, but in a period of stagnating wages and above-trend inflation, that “solution” is some mix of callous and impractical. Thrift may be a virtue, but not one we necessarily live out as options for consumer credit proliferate, fueling growth of consumption and further improving capital returns.

It is important to highlight that there is not anything inherently problematic about
capital outpacing economic growth or wages. If capital ownership is evenly distributed, then society as a whole can benefit from this divergence. The critical insight here is that in advanced capitalist societies where growth is slow, the initial capital endowment plays a vital role in wealth formation. Hence, it is especially important for citizens of advanced capitalist societies with low population and rapid technological growth to own capital assets.

In terms of closing the wealth gap, a noble but perhaps futile goal, or the more immediate concerns of funding retirement for a workforce in a lower-growth economy, there is little that can be done to overcome the advantage of starting with a larger capital endowment.

AA uses a capitalization model to illustrate the point. In real estate, a property that trades at a 5% cap rate can be thought of as a 20x multiple on operating income or, more simplistically, that it will take 20 years of income to recoup the purchase price. The same property purchased at a 10% cap rate will have a 10-year payback period.

For savings, the logic is similar. It will take someone saving 10% of their income 10 years to save one year's income. If they earn 8% on those savings, the timeline drops top to just under 8 years. Now consider that same person with a $100,000 income who already has $100,000 in savings. Saving 10% of their income and earning another 8% from capital, they will have replaced a year of income in under 5 years. With $500,000 of savings, they are replacing a year of income every two years. Starting from $0 and saving 10% of a $100,000 income, earnings 8%, it will take 20 years of working to accumulate $500,000 of savings.

Don’t get intimidated by the numbers; the point is simple: in periods of slow economic growth, the initial capital endowment critically impacts the implied savings rate and the capacity for wealth accumulation because it inflates the implied savings rate if the returns are reinvested.

Broad-based re-distribution of capital is politically fraught to the point of being a non-starter, nor is it entirely clear it would provide a long-term solution in a late-stage, financialized economy. Expanding or enhancing social security is also impossible without a growing workforce with growing wages.2 Pre-distributing capital is the only remaining solution.

The present phenomenon of wealthy boomers jumpstarting their own children’s wealth accumulation through home purchase assistance is a form of pre-distribution of capital. The creation of government-sponsored home lending is a more institutionalized version of capital pre-distribution. The Basic Capital product is a private version of capital pre-distribution funded by private sector debt. It differs substantially from the proposal AA ultimately lays out in his paper, but such is the nature of financial innovation. It is unlikely, in my opinion, that the current iteration of Basic’s offering is the end-state of private pre-distribution efforts.

While we seem to have no problem extending credit for consumption or for depreciating assets, or offering wrapped leverage to investors for speculation, the notion of extending revolving credit to purchase financial assets hit a nerve in financial circles. As is often said, leverage enhances outcomes, but it does not necessarily improve them. The merits, drawbacks, and risks inherent in the product were pilloried as yet another transfer from savers cast as rubes to sophisticated financial engineers. AA,

The question is not whether financial innovation and action can lead to increased risk. More financial activities inherently mean more risk. The question is, rather, who benefits from this increased risk, and more importantly, who benefits from the lack of action and financial innovation? The extremely affluent and sophisticated capitalist class have always benefited from debt-based financial innovation and have always privatized gains and socialized losses…

The question is not whether innovation belongs in the financial sector, rather, who does the innovation primarily benefit? And whether we can afford to move forward without innovation the financial sector.

The Rise of the Rentier

People’s response to the environment provides the basis of economic truth, not theoretical models. By that measure, society has internalized the ideas of AA’s paper even if they’ve never heard of Cobb, Douglas, or Ricardo.

Working for a living is increasingly seen as a loser’s path. A friend of mine is in a family of doctors. When he hangs out with his siblings and their fellow M.D. friends, they all express a desire to practice medicine only long enough to build a portfolio of rental real estate to live off of passive income. These are people who have trained in their chosen field for more than a decade in some cases, and yet they view being a small-time landlord as a more appealing path.

Giant social media followings are dedicated to escaping the labor class by purchasing small businesses. Interestingly, this path often involves taking on a high degree of personally guaranteed leverage from the Small Business Administration. There is no outcry about the recklessness of this version of capital pre-distribution. Why is taking a government-sponsored loan to buy a plumbing contractor seen as more noble than simply working a job with an equivalent degree of leveraged exposure to financial markets?

Finally, there is the question of retirement, which increasingly requires a full commitment to capital returns, given the dire outlook for Social Security’s sustainability. I wrote earlier this year about the rising popularity of annuities. In that arrangement, savers are the providers of leverage, handing over their capital endowments to private equity firms that apply ever-increasing layers of debt to generate financial returns. AA merely proposes inverting that structure.

Increasing the supply of capital may not drive down capital returns, provided innovation continues apace; however, as AA notes, more financial activities invariably increase risks. Privatizing gains while socializing losses has certainly not embedded a sense of financial prudence. If reversing the march of financialization is pollyannish, then spreading those risks more broadly may be the more moral path. At least then, both the upside and the downside would be socialized.

A Radical-yet practical – Framework to Closing the Wealth Gap Why shareholders capitalism (not stakeholder) is the solution

761KB ∙ PDF file

Download

This paper provides an in-depth examination of the current retirement savings system in developed economies, and the underlying demographic and economic themes shaping the system and pushing it towards further fragility.

Download

1

Piketty's r > g framework has faced substantial criticism from economists on multiple grounds. The most technical critiques focus on the "elasticity of substitution" between capital and labor—for r > g dynamics to persist, this must exceed 1, but most empirical studies find values below 1. Lawrence Summers and Matt Rognlie argue Piketty conflates gross and net returns, noting that modern capital (like software) depreciates much faster than historical equipment, potentially negating his thesis when accounting for depreciation.

Critics also challenge Piketty's broad definition of "capital" as actually measuring wealth (including land appreciation) rather than productive capital goods. Many economists argue inequality stems primarily from other factors—technological change, globalization, educational premiums, and labor market institutions—rather than capital-labor dynamics.

With regard to wealth distribution, the Brookings Institute notes that a large portion of Piketty’s chart is explainable by the increase in the value of housing, which is more broadly distributed. However, that broad distribution was itself the result of policies and financial products designed to offer concessionary financing to homeowners…a form of capital predistribution.

"God didn't create a perfect world a priori. He created a world with time and in some sense enabled or engendered time to work its magic."

Several years ago, I wrote a post titled “Toward Shores Not Yet Visible.” The title was taken from a line written by Perry Mehrling:

“The web of interlocking debt commitments, each one a more or less rash promise about an uncertain future, is like a bridge that we collectively spin out into the unknown future toward shores not yet visible.”

The piece was, to put it mildly, poorly received. It was too heady, too philosophical, or maybe just poorly written. My goal was to explore how we use finance to contend with our inability to predict the future and the temporal nature of finance, which is both defined and affected by the passage of time. I wanted to use philosophy and metaphysics to make a point about finance.

Sometime later, I began reading , a rabbi, philosopher, and poet who was using financial concepts in his writing as a grounding point for teaching philosophy. We both had the same notion: That financial markets reveal something crucial about human experience. They aren’t simply abstractions designed for value capture.

Our conversation covers a variety of topics including optionality, Buffett, and the cultural impact of “spiritual ZIRP”. Perhaps most counterintuitively, philosophical skepticism emerges as a market advantage. Atkins provocatively states that

"Being a stock picker is cringe... the chances of you being wrong and overstating your expertise and getting outside your circle of competence when you think you're inside of it are quite great."

Instead, "Humility might be the thing that allows you to buy Carvana when it's trading at two bucks a share. Because what you're really betting on is the possibility that consensus is way wrong."

In today's hyper-connected world, social media has "turned everybody into a day trader of opinion," creating reflexive loops where our thoughts and beliefs rapidly fluctuate based on external feedback. Amid this volatility, perhaps the wisdom of ancient skeptics offers not just philosophical insight but practical advantage.

The language of finance provides powerful metaphors for understanding our existence, while philosophical frameworks help us navigate market complexity with wisdom.

As Atkins concludes, humans are like spiders "caught up in a web of significance" that we ourselves have spun—constructing meaning through both financial and philosophical frameworks that, together, help us chart a path through an uncertain world.

Finally, we discuss Atkins new project, Lightning, an AI-based LLM called “Virgil” loaded and trained on the texts of great philosophers. Unlike most LLMs trained on sycophancy, Virgil is Socratic, responding to your questions with deeper questions and guidance from history’s greatest thinkers. The experience starts with a 30-question quiz that matches your current philosophical framework with philosophers that are both most aligned, as well as those that will most challenge you.

You can get a sense of the role Lightning could play in your own intellectual journey via a new Substack that Zohar has launched:

Second Voice

A place for thoughtful inquiry at the intersection of Philosophy, AI, and the Future of Learning.

In the end, markets and metaphysics share a common truth: both are human attempts to navigate uncertainty through time. The real wisdom may lie not in claiming certainty, but in embracing the humility that comes with recognizing our limitations.

In this light, both finance and philosophy become not competing disciplines, but complementary languages for describing our shared journey into the unknown—bridges we collectively spin toward shores not yet visible.

This year, the outperformance of international equities relative to the U.S. has been well-reported. Listed real estate has been no exception. At least as measured by the public-traded firms, international property markets have been on fire.

There has been surprising dispersion amid some clear themes. Europe has been a winner, while French property firms have outperformed German ones by 20%! Brazil and Chile are off to rip-roaring starts as well. Are these results just the impact of a general rotation into international markets, or are underlying property fundamentals creating more sustainable tailwinds for international real estate?

The country returns below are dollar denominated through the end of the first quarter. Of course, the decline in USD has boosted these returns. In general, you are looking at a +5-8% currency effect. In some sense, foreign real estate is a good option if you are trying to reduce dollar exposure. For the most part, property firms collect revenue in their local currency. Conversely, a German manufacturer that exports to the U.S. will find their products less competitive as the dollar weakens. As I discussed with last week, foreign securities with hard asset bases act as a natural currency hedge over reasonable time periods.

REIT structures are only available in ~40 countries, so looking across REOCs (real estate operating companies) and REITs helps ascertain the whole picture.

A Distorted Snapshot of Value

At the index level, international real estate looks cheap. Reporting and structure differences make NAV and cap rate comparisons challenging. As a result, I look at price-to-book ratios to arrive at a more standardized view of relative value.

U.S. REITs currently trade around ~2.0x book value, while international real estate trades at ~0.80x book value. There is no doubt that international real estate companies trade at meaningful discounts to the U.S. REITs, but they are in line with the broader discount of international equities (~2.5x discount).

For real estate specifically, index construction and market structure skew those comparisons. In the U.S., the index is overweight tech-levered REITs like towers and data centers, pulling valuations up, while abroad, many REITs are diversified, which generally pulls their multiples down. Further, the largest developed international real estate market is Japan, where the largest REITs tend to be in the office sector. In short, the decision to rotate from domestic REITs to international ones is complicated by market structure and local nuances.

To better understand what spread actually exists, we can zoom in on a subsector. I will use multifamily as a proxy, looking at the largest operators in the U.S., Germany, and Japan: AvalonBay (AVB), Vonovia (VNA), and Advance Residence (3269). Continuing with price-to-book (specifically price-to-tangible book value), we can modify the justified price-to-book formula for REITs to use FFO instead of EPS.

As a quick review, justified price-to-book is a metric of a REIT’s returns on equity relative to what investors demand from a cost-of-equity standpoint. The numerator is the FFO over TBV minus the long-term growth rate over the implied cost of equity minus the same long-term growth rate1. If you are a finance professor about to have an aneurysm, please see the footnote.

For our first look, I will set all the long-term growth outlooks to 2.5% (roughly a developed market GDP growth estimate). By this measure, Germany looks undervalued but not more than the U.S., while Japan is roughly at fair value. This view is both currency and local conditions agnostic.

Per CenterSquare and CBRE, Germany is experiencing substantial urban rent growth. Also, keep in mind that ECB rates are expected to fall over the next year,

German residential should benefit from declining interest rates and remains attractive in a low-growth, low-inflation environment. Indications from both appraisers and the companies lead us to believe we are likely close to a trough in values. This reduces deleveraging requirements for the companies and opens the opportunity for more meaningful external growth as companies begin making acquisitions again in the coming year.

The supply and demand imbalance remains very favorable, with new completions having averaged below 300,000 units annually for over ten years against a German government target of at least 400,000. This trend is set to continue as the number of new building permits for apartments continues to fall. When combined with rent caps in place, the sector should continue to grow rents regardless of the economic environment, as a significant rent mark-to-market exists in all regions of Germany.

Meanwhile, Japan is breaking out of a decades-long malaise and is finally experiencing a modicum of inflation and wage growth. As a result, Tokyo's rent growth has begun to resemble other global gateway cities.

When we adjust our long-term growth rates up for these specific markets, including 50 basis points of currency appreciation, the relative value story begins to come together:

Interestingly, the international real estate companies above pay out less (30-40%) of FFO than their American counterparts (50-60%), so their sustainable growth rates are already slightly higher.

Whether closing an NAV discount or general multiple expansion, low starting valuations with positively revised growth are a promising set-up. Even with the recent strong performance of international real estate, there is still a disconnect between international valuations and the developing growth stories in Europe and the APAC regions.

These are not finely tuned valuations; they simply use a more standardized, forward-looking metric to better understand relative value. They also illustrate how investment returns are a function of both starting valuation and changing growth outlooks. 100-150 basis points of macro or currency tailwinds fundamentally change the relative value picture. However, as I’ll show, market structure makes re-rating a poor investment thesis.

Challenging Allocations

Perhaps uniquely, listed real estate suffers from index construction challenges. Some indices include cell towers, others do not, some include REOCs, while others limit the universe to REITs. Size and liquidity requirements restrict how expansive or narrow passive real estate products can be.

When you seek to add international exposure, all of those problems are compounded. Adding a “global” real estate ETF will still leave you overweight U.S. real estate, while ex-US Real Estate ETFs vary substantially by country and sector, which informs median market cap. As with all public investments, these minor variances leave you vulnerable to unintended factor exposures.

The three products I’ve examined - , , and highlight these inconsistencies. Despite targeting similar exposure, they deliver fundamentally different investment profiles. The heavy concentration in Japan across all three funds (23-32%) represents a single-country risk that many investors may not realize they're assuming.

Similarly, the significant differences in market capitalization bias (VNQI's $5.2B median versus IFGL's $1.2B) create unintended size-factor exposure. For example, VNQI and IFGL both include Vonovia, which owns over 500,000 rental units in Germany and has a massive $23 billion market capitalization, while RWX perplexingly excludes it.

Another critical limitation is emerging market representation. VNQI includes countries like China, India, and UAE, while the others exclude them entirely. This creates not just country risk differences but fundamental differences in property rights, capital markets maturity, and currency risk profiles. These ETFs also skew sector diversification, with each product weighting property sectors differently based on their benchmark methodology.

This isn’t to say these products don’t add value. Liquidity is a challenge in many of these markets, even for larger companies. Fibra Prologis, a Mexican industrial REIT with a dollar-denominated market capitalization of more than $5 billion, trades just $6 million of daily volume on the Mexican bolsa, and the U.S. ADR has less than $50,000 of daily trading volume.

The passive ownership of Fibra Prologis in just “international real estate” exchange-traded products is nearly 4 times the average daily volume. That doesn’t account for the ownership in country-specific ETFs and other index-linked products.

Even if those limitations would not impact your ability to build a position, it means that if international real estate were suddenly of interest to larger allocators, they would all but be required to buy cap-weighted products versus being more targeted. If the Yale endowment, in their infinite wisdom, decided to move some portion of their capital from, say, private equity funds to south-of-the-border warehouses via public markets, who would be there to sell them that equity?

If you’re simply looking to capture international real estate beta, it becomes choosing a lesser evil among your options. For the longer-term investor, though, smaller names may be structurally overlooked. Moreover, those willing to express conviction in specific geographies and asset types could be rewarded for taking non-consensus views.

The prevailing view of Japan is that it is a low-growth country destined for stagnation due to its aging population. But as we saw, Tokyo is experiencing high rent growth as Japan’s nascent inflation appears to be flowing from the top down. Do changing trade patterns benefit the LATAM region, creating a larger middle class that can consume more like their developed market counterparts?

Listed real estate is a good way to express these views. Partly because they are underfollowed and partially because the residual value from all economic activity tends to accrue to real estate.

nota bene

Despite a significant democratization of financial data in the past twenty years, some of these companies still do not translate filings into English, historical data on “prosumer” research portals can be spotty, and few countries outside of the U.S. offer much in the way of shareholder engagement. This is not to suggest there is some great informational edge going unexploited in smid-cap international property companies. I am moreso flagging the difficulty and analytical creativity required to even make sense of them.

Turning Over the Global Rocks

Here are a few interesting companies worth focusing on. Not all are necessarily promising set-ups, but they are useful bellwethers for their underlying markets and sectors.

The following are all presented in local currency terms…

DEXUS (DXS)

Australia | Diversified Real Assets | AUD 7.76B Market Cap | 3.93M shares Avg Daily Volume

DEXUS dominates the Australian real asset market with an AUD 53.4 billion portfolio. Their holdings span prime office towers, industrial complexes, healthcare facilities, and infrastructure assets. DXS’s trophy development is the currently under construction Atlassian tower in Sydney. With direct ownership of AUD 14.5 billion and management of an additional AUD 38.9 billion, DXS has an embedded asset management business that can help drive its multiple.

The company is pushing forward with an AUD 15.6 billion development pipeline across multiple sectors, positioning it for significant future growth. DEXUS recently upgraded its development pipeline to AUD 16.1 billion, focusing on value-add investments in its current portfolio.

Allos SA (ALOS3)

Brazil | Shopping Centers | BRL 10.69B Market Cap | 3.86M shares Avg Daily Volume

Brazilian retail powerhouse Allos operates an impressive network of shopping destinations across all five regions of the country. The company has become Brazil's dominant mall operator, formed from the 2023 merger of Aliansce Sonae and brMalls, with a portfolio of 58 malls in 40 cities.

The company is guiding for BRL 2.07-2.15 billion in EBITDA for 2025. With an enterprise value of BRL 18.4 billion, the company is trading at 8.7x EBITDA, around a 13% discount from its three-year average.

Gecina SA (GFC)

France | Office & Residential | EUR 6.93B Market Cap | 124,833 shares Avg Daily Volume

This one has the distinct benefit of saying you are a Parisian property owner. Gecina is a premier Parisian real estate operator with a EUR 17.4 billion portfolio in the city's most prestigious locations. Their holdings include 1.2 million sq.m of office space and over 9,000 residential units, with nearly three-quarters located in Paris proper or Neuilly-sur-Seine.

The company owns irreplaceable trophy assets, including buildings in the iconic Place Vendôme and the Louis Vuitton building on the Champs-Élysées.

Most recently, Gecina fully pre-let their Icône office development in Paris' Golden Triangle ahead of its H1 2025 delivery, securing a 9-year lease with Qube Research & Technologies at premium rental rates. Q1 2025 saw rental income jump 3.6% year-over-year, with a particularly strong performance from their central Paris properties.

Land Securities (LAND)

UK | Diversified REIT | GBP 4.38B Market Cap | 1.83M GBP Avg Daily Volume

Land Securities commands one of Europe's largest real estate portfolios, focusing on retail, leisure, office, and residential properties across the UK. The company has been recycling the portfolio from what it considers cyclical properties into asset classes with more defensible growth. In some ways, it is following the capital reallocation taking place in the U.S., focusing on Class A office and grocery-anchored retail parks instead of shopping centers.

Japan Hotel REIT (8985)

Japan | Hotel Properties | JPY 354.24B Market Cap | 20,121 shares Avg Daily Volume

Japan Hotel REIT Investment Corporation maintains a specialized portfolio of hospitality properties throughout Japan, spanning major urban centers and tourist destinations. Their properties range from business hotels in metropolitan cores to resorts in vacation hotspots.

A yen double whammy — you get a somewhat levered play on yen strength amid Japanese inflation. If the yen weakens, you should benefit from the uptick in foreign travel. A key attraction of hotels is the extremely short duration of “leases” and the real-time mark-to-market of rents. I actually think there may be some pull-forward here as people push to travel to Japan ahead of further yen strength.

Samhallsbyggnadsbolaget (SBB B)

Sweden | Residential & Public | SEK 11.73B Market Cap | 30.8M shares Avg Daily Volume

I’d include a link to the pronunciation if I thought it would help; ticker SBB is sufficient for our purposes. The company operates a diverse Swedish property portfolio across three key segments: Residential apartments and townhouses, Community properties including elderly care facilities and municipal buildings, and Education facilities ranging from preschools to universities. That diversity has not been to the company’s benefit — overlevered with expensive cost of equity the company has been in the process of spinning out its non-core units and selling off JV interests.

A large portion of SBB’s property portfolio is linked to inflation.

Elsewhere…

I wrote about the changing nature of CRE data and the implications for investors on :

Thesis Driven

The CRE Data Power Curve

Real estate investing has quietly undergone a massive shift in recent years as the production and distribution of CRE data has proliferated. As a market once defined by local knowledge, most real estate capital was similarly invested locally. When institutional capital began allocating aggressively to real estate, they needed formalized data to make inf…

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a year ago · 12 likes · Hunter

1

The odd adjustments to this formula require the kind of nerdy exploration that footnotes are made for. I have come full circle on the importance of price/book for REITs. I used to believe the complicating factors of real estate depreciation on book value made the metric mostly irrelevant to REITs.

I now think there is some important, but thus far unexplored signal, in price/book for REITs. If you run IYR through a Fama-French factor model, HML has statistical significance and a beta of .40, second only to market beta.

How does the factor perform if you adjust the metric to more accurately reflect real estate dynamics? I don’t know; perhaps an enterprising finance PhD will pick up the banner. I can say that when I looked into what was driving the results, it was REITs with high cash flow multiples trading at low price-to-book values. Their cost of equity was much lower than the cash return on equity.

How is this possible? A REIT showing high cash flow multiples but low price-to-book ratios often reflects an active rather than passive investment approach. This financial profile typically indicates a REIT engaged in significant development activities, where projects carried at cost on the balance sheet haven't yet generated their expected cash flows. It may also signal a strategic property recycling program, with the REIT selling appreciated assets and reinvesting in properties with higher growth potential but initially lower yields. Additionally, this pattern often appears during portfolio transitions when REITs are actively upgrading their asset quality or pivoting to stronger markets.

My modified justified price-to-book attempts to incorporate those factors. It suffers from some shortcomings, though. First, as a rearrangement of the Gordon Growth Model, it presumes reinvestment and yields in perpetuity — an obvious impossibility for most real estate. Secondly, the value of factors partially depends on the market using similar definitions of yield. Especially across international markets, participants look at value differently. In the U.S. Price/AFFO is standard, Japan focuses on distribution per share, while other countries lean on EBITDA. I think most listed real estate investors still discount price/book as I used to.

In my view, the benefits outweigh the drawbacks. So much REIT analysis depends on non-GAAP/IFRS metrics subject to a high degree of management judgement. Using tangible book value, gives you a grounding in a standardized balance sheet number. As a result, high/low price-to-book ratios can provide important signals about what is happening strategically.

In developing an investment strategy, you should be more like a mushroom forager. Most long-run successful investment track records are partially defined by identifying what you can safely ignore. has made his career by ignoring large swaths of the market. His firm, Alluvial Capital Management, has traditionally focused on thinly traded over-the-counter securities. Stocks that not only lack any sell-side coverage or large passive ownership, but also for which even active buyers and sellers are scarce.

Exploring with Alluvial Capital

In search of value in the market's forgotten corners.

By Dave Waters

There's no magic to this strategy. It requires just as much, arguably more, analytical rigor than the largest, most liquid names. By not chasing the hot dots of growth and attention in public markets, Waters is able to develop pattern recognition in a smaller universe of investment options. The analysis requires less fidelity to an unpredictable future and more awareness of current dislocations from a known present.

Several months ago, I was excited to see a deck land in my inbox for a new strategy Waters was launching, focusing on "extraordinary physical assets." I have limited my own investing universe to companies with asset-heavy balance sheets, believing that asset values and the income they derive provide a larger margin of safety than purely operating businesses.

Tactile Fund LP

And, We're Off!

Tactile Fund LP is off and running! We have invested in a collection of companies with extraordinary physical assets from around the world. These are companies that offer goods and services that humans have always wanted and needed, that enjoy competitive barriers to entry and long-term pricing power. I have no idea how these companies will perform in t…

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a year ago · 15 likes · 8 comments · Dave Waters

In an investment landscape dominated by tech giants and asset-light business models, Waters' new Tactile Fund represents a return to tangible value. The strategy focuses on companies with “extraordinary physical assets.” This is a deliberate counterpunch to the prevailing market wisdom that favors intellectual property and digital platforms over real asset-driven operations.

This approach seems particularly well-timed as tech giants like Amazon and Microsoft announce massive capital expenditure plans. As Waters observes, these companies are "essentially telling us that to do…to continue growing their earnings at double-digit paces, they're going to need a lot more physical assets than they used to." In his estimation, the asset-light trend is "looking a little long in the tooth."

What's particularly fascinating about Waters' approach is that it requires fundamentally reconsidering how most of the market values companies. Standard accounting practices often understate the true worth of physical assets, especially in inflationary environments. While GAAP accounting rules dictate that companies depreciate physical assets over time, the replacement costs of those assets may actually be appreciating, creating hidden value that patient investors can capture.

What Makes a Physical Asset "Extraordinary"?

Waters' investment thesis hinges on a specific definition of what makes a physical asset truly extraordinary. His framework divides these assets into three categories that together form a balanced approach to physical asset investing:

The first and most fundamental are assets related to food, water, and shelter—the base of Maslow's hierarchy applied to investing. These assets tend to be naturally defensive, maintaining their relevance and value regardless of economic conditions.

The second category encompasses industry and infrastructure—the skeletal system of a functioning economy. These include ports, toll roads, warehouses, and terminals facilitating essential economic activity. While perhaps less glamorous than high-growth tech stocks, these assets provide steady, reliable cash flows that often trade like interest rate proxies.

The third category, luxury, is perhaps the most intriguing and frequently misunderstood. Waters emphasizes that he's not talking about luxury brands, which depend on changeable consumer preferences and mindshare. Instead, he focuses on physical places and components that have maintained their appeal for generations due to inherent qualities that cannot be replicated.

"When I talk about luxury in this category, I'm talking about more places and things…Real estate in the Swiss Alps or the French Riviera or places people have gone for hundreds of years because of the climate or the topography that won't change and can't change and has barriers to entry."

French company Robertet (RBT on Euronext) that controls exclusive access to fields of jasmine for perfumery components perfectly illustrates the concept. The company is built on assets acquired centuries ago that would be virtually impossible to replicate today, creating an enduring competitive advantage.

Foraging in a Global Haystack

The challenge in implementing this strategy lies in finding these extraordinary assets, which are often hidden on balance sheets and cannot be easily identified through standard screening methods. Waters acknowledges it took him 11 years of professional money management to build a sufficient list of compelling opportunities.

"No, it's not like you can set up a screen in Bloomberg or whatever you're using to say find me companies with great physical assets…It's a lot of painstaking work."

This difficulty creates an opportunity for investors willing to do the detective work. Many of these companies fly under the radar of institutional investors due to their size, structure, or liquidity constraints. They're often family-controlled businesses or have large core shareholders, making them uninvestable for large pools of capital.

Waters specifically targets companies with market capitalizations of $500 million to $1 billion—too small for giants like Blackstone, which would rather deploy $100 billion into infrastructure than $1 billion. This focus on smaller, overlooked companies helps insulate the strategy from competition with large capital flows that could compress future returns.

A key aspect of Waters' approach is its global scope. While U.S. investors have enjoyed exceptional returns over the past decade, many international markets offer attractive assets at more reasonable valuations. Waters argues that investor perceptions haven't caught up with improvements in governance and transparency in many international markets.

"I think investor perceptions are lagging reality," he observes.

"Certain economies have made great strides in updating their legal systems, updating their systems of investor protection, updating their standards for transparency and management responsibility."

This global perspective leads to fascinating discoveries, from Swiss Alpine Railways to an auction market in Belgium that "trades every Tuesday morning" and hosts some "reasonably good companies."

Backing the Right People

Management quality becomes particularly crucial for companies with extraordinary physical assets. Since many are family-controlled or have concentrated ownership, investors must assess whether controlling interests will act in ways that benefit all shareholders.

"One of my kind of fundamental beliefs is management doesn't tend to change its stripes…If they have a history regarding shareholders and treating minority partners well, they continue to do that. If they don't, they basically don't."

The exception can be generational transitions, where new leadership might bring different priorities and a greater focus on shareholder returns. These transitions can create particularly attractive entry points for investors who recognize the potential for improved capital allocation or operational efficiency.

Building a Balanced Portfolio of Extraordinary Assets

Waters approaches portfolio construction by allocating roughly one-third to each of his three categories. This creates balanced exposure where different parts of the portfolio shine in different economic environments:

"Maybe you're never in an environment where everything is working at the same time, but you're also never really ever in an environment where nothing is working,"

This balanced approach creates a portfolio that, while "never likely to be the fastest car on the road," should deliver reliable performance across a range of market conditions—"a minivan strategy" as Waters puts it, referencing a car that won't win speed contests but will get you to your destination comfortably in most situations.

Durable Means Duration

Perhaps the most critical aspect of investing in real asset-driven companies is the time horizon. These investments rarely offer immediate catalysts or quick wins. Instead, they reward patient investors who can hold for the long term, allowing asset values to appreciate and management to compound returns through disciplined capital allocation.

That's why Waters created a separate strategy for these companies rather than including them in his main portfolio.

"I can't really identify a catalyst, so maybe they're not appropriate for my main strategy…but I have every confidence that if I own this for 20 years, it'll come out, it'll work out well for me."

For investors who have grown weary of chasing the next big thing in technology or trying to predict disruptive innovations. Waters' approach is an investment strategy grounded in physical reality rather than digital potential, focused on assets that have maintained their importance and scarcity for generations and likely will for generations to come.

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Somewhere you made a choice. All followed to this.

- Anton Chigurh, No Country for Old Men

It could have been when the Fed bought high-yield bonds in 2020 or quantitative easing following the Global Financial Crisis. It may be as far back as the 1999 Gramm-Leach-Bliley Act or the Telecommunications Act of 1996. It could have been developments beyond our control, like China’s ascension to the WTO in 2002 or as far back as the Berlin Wall coming down. At each moment, we took a turn further toward the way of organizing the world most of us are now accustomed to. It was, and is, a historical aberration. A world where the free flow of capital meant that peace among superpowers was maintained by the tensions of highly integrated trade has never existed at the scale achieved over the last 40 years.

Corporations, increasingly driven by shareholder primacy, redirected investment from domestic production toward global supply chains and financial engineering. This architecture generated substantial aggregate wealth but distributed it with growing inequality. The availability of ever-cheaper imported goods alongside the distribution of high-speed broadband and mobile telephony offset middle-class wage stagnation. These forces, once celebrated as engines of prosperity, now reveal themselves as architects of the very instability they were meant to prevent.

When President Trump unveiled his hastily assembled posterboard with effectively arbitrary tariffs, far more severe than anyone (perhaps even their author) expected, that way of organizing political and economic life ended. In the following week of tumult, when the harshest version of the policy was eventually downgraded or delayed, many intelligent writers and analysts opined. They have crunched the numbers, been apoplectic about the recklessness, and applied all manner of game theory to attempt to make the unintelligible intelligible. I have no interest in rehashing those exercises here. Instead, I wish to explore the collective delusions about our economy and its future revealed by this episode.

The central question is not whether Trump's tariffs are economically optimal—they almost certainly are not—but rather what their implementation reveals about the fragility of our economic consensus.

The first delusion is that Trump’s extreme trade policy differs from any other exogenous shock to the system that could have arisen in such a highly levered and geopolitically tense environment. We would be in nearly the same place today had China invaded Taiwan, or if the EU had become more fractured, or if Russia made another military overture.

Protectionism was growing, and any number of developments would have accelerated its more extreme forms. It may feel different since the spark was an admittedly ham-fisted policy unveiling from the leader of the Free World. Still, practically speaking, it was always going to be something that eventually cracked the reign of globalization.

The Cargo cult mentality that technocratic competence could overcome growing unrest hid a surfacing crisis of faith. Brexit, the growing popularity of far-right politicians in Europe, and of course, the heavily lopsided election in the U.S. were all directly counter to the perceived universal acceptance of liberalism and free trade. These political shifts were only tangentially and often wholly unrelated to trade.

In fact, the second such delusion is in narrowly defining trade as the central issue. Trade has been a necessary, but not sufficient, condition for the divide in perception between growing economies and stagnating social mobility. In 2023, the FIRE sectors (Finance, Insurance & Real Estate) contributed more than 20% of value-added GDP, while professional services added another 13%. This has famously corresponded with a decline in manufacturing, which has fallen from 20% of GDP in 1980 to less than 10% today. While much of the public messaging around trade has focused on restoring American manufacturing, shrinking the FIRE sectors, and “rebalancing” corporations are the more immediate and salient impacts.

As Russell Napier points out, the world fell into a monetary and trade system imposed from abroad,

“When interest rates appear to be permanently depressed relative to growth rates, asset valuations rise, leverage increases, and investors are incentivized to pursue gain through rising asset prices rather than through investment in new productive capacity. The decoupling of growth and interest rates was driven by the People’s Bank of China’s (PBOC) appearance as a non-price-sensitive buyer of U.S. Treasury securities, and indirectly by the role China’s excessive fixed-asset investment played in reducing global inflation and hence interest rates.”

In the U.S., the most successful companies have pursued high-value-added services or business models that extract rents from intellectual property, moving actual production to progressively cheaper geographies. In the blackboard understanding of free trade, “the winners win, more than the losers lose.” That understanding is based on the belief that the availability of cheap goods is more than ample compensation for the loss of social mobility or security through traditional employment. For most economists, cheaper goods and higher consumption are values in themselves.

The expansion in the U.S. has been driven by hyper-profitable firms that require relatively fewer employees, driving up productivity but at the cost of economic dynamism that spreads those gains more broadly. The economies of Ghana and Germany wrestle with unique issues of their own, but they represent the two sides of globalized trade. Ghana is a Ricardian dream of specialization and enjoys lower unemployment and a higher GDP per capita growth rate than Germany's. Germany’s economy is more diverse but sub-optimal in the traditional understanding. Ghana is unlikely to ever Westernize or become a functioning social democracy. Nor will Germany ever be able to fully capitalize on the innovations its diverse, complementary industries may generate. The populations of both find themselves in perpetual malaise.

The U.S. economic schema has become an amalgam of the two. With a concentrated economy primarily focused on finance, services, and software, the US has experienced the same free trade “wins” of low unemployment and GDP growth. Like Germany, it has benefited from access to low-cost goods manufactured elsewhere. And, like Germany, its politics have moved further to the right, rejecting little by little the policies to which elites credit its abundance.

The wonks consider these populations rubes, simpletons taken with populist rhetoric. A more rational explanation is that free trade's “winning winners" simply got too concentrated in a few industries, specifically a few geographies. Eventually, the larger population no longer felt that the benefits of cheap goods were adequate compensation for their declining employment prospects and growing economic precarity. The same statistical aggregates that economists celebrate obscure experiences of citizens increasingly alienated from globalization's promised benefits.

The fundamental conflict the current trade disruption exposes is between efficiency and resilience. We prioritized efficiency through global specialization for decades, creating complex, interdependent systems that maximized short-term economic gains while introducing systemic vulnerabilities. The pendulum is now swinging toward resilience. The messier, costlier arrangement in the short term but potentially more sustainable in an era of mounting geopolitical tensions and social unrest. This rebalancing will be painful and disruptive, challenging the primacy of shareholders and forcing a reconsideration of how economic value is created and distributed.

Tariffs, as currently conceived, aren't a complete solution to our economic imbalances, but they do directly challenge the conditions that have allowed specific industries to flourish disproportionately. While I don’t expect any of the promised gains for Main Street anytime soon, the specter of upended trade will change corporate investment patterns. Just as COVID inspired a re-jiggering of supply chains that continued long after the immediate impacts of the pandemic subsided.

Many have suggested that uncertainty will freeze investment capital required for corporate rebalancing into productive asset development. Perhaps, but policy volatility tends to be directional, so while the exact breakdown of tariffs and the carve-outs remains to be seen, corporations have undoubtedly gotten the message that we have taken a decisive turn away from the unfettered march of globalization. Just as the seemingly disparate policies of the 1990s and early 2000s created a progressively more integrated world, tomorrow’s policies will walk us back from it.

The reconfiguration of global trade will inevitably produce outcomes that defy our current projections. While protectionist rhetoric often evokes nostalgia for mid-century manufacturing dominance, replicating developing nations' manufacturing capabilities would be economically unviable and strategically misguided. The goal is not to turn back the clock but to catalyze new forms of productive investment better aligned with America's existing capabilities and future needs. Economic disruption has historically been the crucible in which innovative business models and technologies emerge.

We may see the emergence of advanced manufacturing ecosystems centered around critical technologies such as semiconductors, biotechnology, clean energy infrastructure, and defense-adjacent industries. We might witness investment in currently undervalued domains such as infrastructure modernization, housing development, and regional economic diversification. Or we may not, but it was abundantly clear that the existing paradigm would never deliver them.

Perhaps the most profound irony of our economic moment is that the dogmatic adherence to free trade principles has sown the seeds of its own rejection. By elevating economic efficiency above all other considerations, the architects of globalization dismissed legitimate concerns about social cohesion, community stability, and national resilience as parochial or misguided.

This intellectual hubris bred a dangerous disconnect between policy elites and the citizens who experienced globalization's dislocations firsthand. Over time, this disconnect fostered a deep skepticism toward expert opinion and institutional authority, creating fertile ground for political movements that promised to upend the system experts insisted was optimal.

Economic systems ultimately require social and political legitimacy to endure. Western liberal economies benefiting from or even relying upon the innovations, labor, or resources of authoritarian or communist states is an obvious incoherence. Trump's tariffs represent not an aberration but a predictable culmination of contradictions built into the globalized economic framework.

For decades, the neoliberal order rested on tenuous contradictions: democratic legitimacy alongside increasingly concentrated economic gains, national sovereignty alongside borderless capital flows, and domestic stability alongside perpetual creative destruction. It operated on borrowed time, sustaining itself through elite consensus, institutional inertia, and the absence of viable alternatives. This system maintained credibility only as long as its broader benefits remained visible to the average citizen.

The panic, the bargaining, the anger—it was always going to be this way. What we witness now is not a temporary deviation from an optimal economic arrangement but rather the system's internal logic reaching its natural conclusion. Despite a decades long effort to silo them, markets ultimately require public consent to function.

As is often the case with algorithmic ad delivery, the targeting is logical but its relevance often misguided. I have been following developments at Cushman & Wakefield since last year. As a result, when I visit the Financial Times website, it is festooned with Cushman & Wakefield’s paradoxical ad campaign which reads “We Didn’t Come This Far, To Come This Far.”1

Exactly how far CWK has come and how much further it will go is pertinent as they filed a proxy this week to move their parent company’s corporate domicile from the U.K. to Bermuda.

As a private equity hydra created by TPG, one can assume the company’s U.K. domicile resulted from some sort of legal or tax-related expediency as TPG jammed together U.K.-based DPZ, Cassidy Turley, and the legacy C&W. As I covered last year, the goal was to create a third brokerage franchise that would compete with the dual reign of and & .

Brett White, the would-be Cushman CEO (now Executive Chairman) at the time said the transaction would create a “third formidable competitor at the highest end of this industry.”

This has not happened. See the post linked below for a full accounting of CWK's current situation. As ten31’s Hiten Samtani aptly covers, CWK has spent most of the last year “balance-sheet babysitting,” and in May of last year, TPG and its partners in the CWK deal began aggressively cutting bait.

I theorized then and still believe CWK is an attractive target for its largest competitors. Last year, some tea leaves in the proxy set up management for change of control payouts, but I overlooked the challenge that the U.K. domicile presented for a potential deal.

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Cold Storage is commercial real estate’s perpetual industry of the future. The sector's outlook always appears bright, yet the promised future seems never to arrive.

With the July 2024 IPO of Lineage Logistics cold storage stands alone as a sector where listed operators represent the bulk of market share. More than 70% of North America’s cold storage supply is held by either Lineage or Americold .

The $160 billion global industry is expected to grow at an annual rate of 18% through 2030. While cold storage is most commonly associated with the food supply chain, it is also critically important for pharmaceuticals like vaccines and insulin. During COVID, the Department of Homeland Security even classified cold storage facilities as “essential infrastructure.” Like all industrial real estate, land constraints and high construction costs limit supply. Additionally, the added complexity of cold storage means new deliveries can take 12 to 18 months.

Despite these tailwinds and its enviable infrastructure classification, Americold has had a -17% total return over the previous five years, and Lineage is 30% below its IPO price. Understanding why these haven’t worked as public companies is key to evaluating under what conditions they could be attractive.

Volume-Based Business Models

Cold storage is unique from traditional industrial in various ways, but the most crucial is that the top line is heavily influenced by actual facility throughput. Instead of leasing on a two-dimensional square footage basis, cold storage is leased and managed three-dimensionally and quoted in pallet positions. Customers pay for both the storage and movement of goods through facilities.

Lineage’s 86 million square feet of property converts to 3.1 billion cubic feet and nearly 10 million “pallet positions.” The revenue per pallet position is a mix of storage and service costs. It follows that revenue is total pallet positions multiplied by economic occupancy multiplied by the storage revenue per occupied pallet plus the services revenue per pallet multiplied by total pallet throughput. This introduces a much higher degree of revenue volatility than would be found in traditional industrial real estate.

Since Americold has a more extended history as a public company, we can compare the quarterly year-over-year change in revenue versus the year-over-year change in operating profits against a traditional industrial REIT of similar size (First Industrial ). As you can see, the revenue dispersion is much greater, and the relationship between revenue growth and margins is not uniformly positive.

Even this understates the variability of cold storage revenue. Lineage outlines four different types of agreements it has with its customers:

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The first time I met Evan Lorenz, I asked him directly about the outlook for Grant’s business model. “Competition is legion,” he said. Grant’s publishes 24 bi-monthly issues per year. It is delivered primarily in print through the U.S. postal service. It is prohibitively expensive compared to other subscription media.

While those attributes certainly make Grant’s unique, what the publication doesn’t do really sets it apart. Grant’s makes limited use of charts or other data visualizations, has a scant social media presence, and does not “atomize long-form content” into potentially viral short-form video. In other words, they eschew basically all of the modern “best practices” for building a media company. And yet, Grant’s persists, recently publishing its 1,000th issue.

It persists, uniquely, by the quality of its thought and the virtue of its writing. Even when Lorenz made his “legions of competition” comment, the true impact of AI-generated research and writing was not readily apparent. Today, neither subject-matter expertise nor even the ability to link words and phrases into sentences is required to produce “content” on just about any subject. The technology, rapidly improving though it is, begs the question: If it wasn’t worth the time for a human to write, what makes it worth the time for a human to read?

A profile of Grant’s in Institutional Investor relays founder Jim Grant’s approach:

His job is not simply to take the world as it is, “but to speculate as to what it just might be, and to criticize institutions as they are.”

Lorenz points out that despite the multi-decade campaign to make finance and economics a natural science, it is still “done by humans." As a result, markets rely on understanding the underlying values the system represents as much as the mechanical outputs of model inputs. Grant’s excels at holding this mirror to financial markets. They combine headlines, historical analogs, and data into crystalline, often humorous, prose highlighting human judgment's fallibility.

One of my favorite writers, , recently wrote about how the vital knowledge in any discipline is illegible. True breakthroughs in understanding exist where the information cannot be neatly structured.

Leo Strauss argues that the deepest philosophical teachings are esoteric. You have to learn from a “rebbe,” so to speak, or else you’re left with the standard, consensus reading of the text, not the method for discovering its subversive teaching. Each describes the same pattern: vital knowledge resists formalization.

For finance and economics, a parlance exists, a patois that can sound like ideas or information but contain neither. Flip on CNBC if you need proof of this. Writing incisively about markets is a uniquely human skill because the required insight is non-concensus.

Yet, the entire media apparatus marches towards greater and greater formalization of information. Content has never been more exalted as a way of connecting with humans or more vapid in its attempt to do so. Writing is increasingly being engineered, optimized for either tricking algorithms or paradoxically being recognized by non-human AI “readers.” Large language models reinforce the primacy of the written word while simultaneously devaluing it.

, writing in Splice Today,

That’s the trouble. The machine doesn’t care. It’ll give you competent, lifeless prose forever. The burden shifts to the person in the chair. Can they still recognize warmth? Authenticity? The faint pulse of a real idea? Or have they been numbed by the sheer volume of almost good enough?

As for Grant’s, Lorenz summarizes what generations of writers know: You write to reveal the limits of your own understanding. Writing exposes the lies lurking in your meandering thoughts, it is an intentional practice to shake your illusions of understanding. The very best writing can give the reader that same experience.

You can read a recent sample of Grant’s at the link below.

Bubble, Interrupted...

The asset management industry loves to find an investment theme with an opaque or poorly understood definition and then stuff a bunch of assets it was already pursuing into products that claim to capitalize on the theme.

ESG and “sustainability” funds were a glaring example from the socially piqued days of 2016-2021. A look under the hood revealed that many of those funds held the same mega-cap tech stocks that populated the tops of many non-sustainability-marketed funds. Eventually, the SEC proposed some additional rules around fund names to mitigate investor confusion, but of course, asset managers pushed back, claiming that things like sustainability were uniquely nuanced, perhaps even ineffable.

The Infrastructure Theme

As a thematic investment, infrastructure currently finds itself in the sun of investor attention. Higher rates, a revival of industrial policy, and geopolitical volatility have made the defensive, mission-critical nature of infrastructure assets appealing. Per the Financial Times,

In the first half of 2024, North American infrastructure funds raised a further $10bn, compared with $4bn in the same period last year, according to Preqin data. The third quarter has also started strongly, with almost $7bn raised in July and August so far, compared with just $2.5bn in the same period last year.

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Summary

This week, American Affairs published an extended version of my Ouroboros piece. I support American Affairs’ mission to be “a forum for people who believe that the conventional partisan platforms are no longer relevant to the most pressing challenges facing our country.”

I’d encourage anyone interested in long-form commentary on industrial policy, cultural evolution, and political theory in America to consider subscribing. The quarterly print version is a high-quality journal worth saving or, ideally, passing along to intellectually curious friends.

The below is an abstract; paying subscribers can download a PDF of the entire essay below the paywall.

Subscribe to American Affairs

Last week Amit Seru, a professor of finance at the Standford Graduate School of Business, published an op-ed in the Financial Times urging private equity to be cautious in pushing for “retail” adoption of the asset class. In doing so, Professor Seru seemed to tacitly acknowledge the shortcomings of the strategy. It’s risky, illiquid, expensive, and, most importantly, free from onerous regulations like the Employment Retirement Income Security Act (ERISA). Seru writes,

Regulations such as the Employee Retirement Income Security Act and securities laws exist to shield retail investors from illiquidity and leverage risks. Private equity funds are currently not subject to Erisa unless retirement plan investments account for more than 25 per cent of total assets. More retail money could see funds cross this threshold.

Seru seems unaware that the proverbial fox has already found a side door into the henhouse via the annuity channel. In July of last year, I wrote about Apollo’s unique approach to insurance and how their merger with Athene represented a new era in the insurance market. Private credit grew rapidly even before the demand from increased annuity flows. However, the combination of stretched equity valuations, poor fixed-income performance, and higher yields made the perceived safety of annuities appealing.

My argument then, as now, is that supplanting traditional savings with an insurance product fed by credit created to meet retirees' needs upends a fundamental economic identity. In both Keynesian and Classical economic models, investment equals savings, and savings are forgone consumption. There is nothing wrong with choosing an annuity as a savings vehicle, provided the insurer matches liabilities with assets already in the capital markets.

Alternative manager-led annuities differ because they use the insurance balance sheet to originate de novo debt via the private credit market. The more annuity contracts, the more private credit assets must be originated. In doing so, asset-backed debt becomes a deep pool of potential credit origination, including consumer finance pools. In a dystopian end-state, savers might enter annuity contracts funded by their own levered consumption.

Even short of this, debt creation no longer follows equity in the traditional sense of allocating capital; rather, debt creation becomes a goal in itself. In the forthcoming Spring issue of American Affairs, I chart the longer history of retirement in America and how the credit-led annuity market is really the convergence of three secular trends: The end of defined benefit pension plans, the dominance of passive investing, and the ascendance of private equity.

It is telling that Seru specifically touched on ERISA in his FT piece. ERISA arose after several high-profile pension failures and began the march towards defined contribution retirement offerings. In trying to protect pensioners, ERISA ultimately created an entirely new market of financial product consumers.

Whereas defined benefit pensions had assumed investment risk, defined contribution plans shift that risk to employees and, in doing so, create the perception that financial markets are savings vehicles. Investing is, of course, a form of savings. Still, for much of financial market history, capital allocation was carried out by active investment managers, bank loan officers, and others who carried the burden of identifying productive enterprises and avoiding value-destroying ones.

ERISA’s establishment of a fiduciary duty focused heavily on minimizing investment management fees, creating a regulatory moat for passive investment vehicles.

A debate rages about the influence of passive investing on price discovery, but what is not debatable is that passive investing significantly impacted the margins of the asset management business and created a handful of dominant firms whose assets are overwhelmingly managed in passive strategies.

Innovation in asset management took the form of “alternative investments,” of which private equity was the primary expression. The fallout of the Global Financial Crisis simultaneously made private equity's optically low volatility look even more attractive, while the monetary response of low rates boosted the value of their assets. At the same time, banking reforms created an industry of non-bank lenders that specialized in lending into the rapidly growing private equity market.

Multiple analyses show that nearly half of the private equity returns come from multiple expansion, not a fundamental business improvement. When multiples stopped rising, private equity leveraged company cash flows for dividend recapitalizations, adding debt to generate returns.

Private equity is now struggling to return capital to their LPs (mostly pensions and endowments), constraining new fundraising. When debt markets became less amenable to dividend recaps, private equity began putting the assets on the balance sheet in hock, structuring asset-backed paper that could be distributed to different pools of capital. Perhaps annuitants can squeeze a few more drops from the dirty sponge.

In fairness, annuities are still a tiny part of the global market pie. If rates stay sustainably higher, annuities may maintain their popularity, but if a prolonged recession or exogenous shock were to reset asset prices, savers might again be willing to assume more traditional risks. Right now, outside of acutely speculative markets, there seems to be a general unwillingness to take equity risk.

I won’t claim to know where all of this is heading. There is an impulse driven by GFC muscle-memory to predict some sort of fallout, or “Minsky Moment,” but the reality is that risk is far more diffuse than either the GFC or the Savings & Loan Crisis. Should the primacy of debt in financial markets continue, I think a more likely path is that returns across the capital stack gradually degrade as malinvestment proliferates.

With long-run domestic GDP growth of 3%, everyone seems to be underwriting 6-8% nominal investment returns. What’s unclear is where all these pockets of high-value-added economic activity are taking place. Could the marginal productivity of this new debt really be greater than one? Or are we just slicing, dicing, and structuring secularly shrinking real returns? Running in place may be sufficient for those on the cusp of retirement, but for everyone else… devils take the hindmost.

Paying subscribers can download a full PDF of the American Affairs essay below the paywall.

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Summary

In general, there are securities analysts and business analysts. As a listed real estate investor, I am often wearing the hat of a securities analyst, understanding how mostly known cash flows will flow through a capital structure. Occasionally however, I must lace up my business analyst skates and look at an operating company that is benefitting from an established real estate trend.

The strength of retail real estate has not gone unnoticed, however, as I wrote in my 2025 REIT outlook,

The structural undersupply of retail real estate has been one of the most well-distributed theses in the CRE market. The looming threat of e-commerce disruption, COVID-19, and NIMBY politics have each taken their turn constraining retail development in the past decade. Eventually, however, the indefatigable U.S. consumer won out, availability has plummeted, and asking rents have risen.

Unfortunately, I just don’t see much in the way of compelling value in …

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From The Intelligent Investor to The Big Short, an image of professional investing has been formed as a truth-seeking pursuit. Asset prices reflect the so-called “wisdom of crowds,” and the fundamental investor frequently considers the crowd wrong enough to be exploited. The job of investing is, through deep diligence, discipline, and research, to be less wrong than the masses, profiting from their short-sightedness and misconceptions.

That thousands upon thousands of intelligent professionals dedicate their lives to this pursuit does not seem to dissuade the fundamental investor from continuing to believe that their view of the future is sufficiently differentiated. They seek opportunities where today’s price is wrong and will correct as time plays out. They believe the future will ultimately align with their vision and line their pockets along the way.

The first threat to this worldview came in the 1960s when academics began studying asset prices as stochastic variables and not solely as reflections of company valuations. Eugene Fama determined that these prices follow a random walk. Later, he and Ken French expanded this work, explaining equity returns as a function of known factors.

Said plainly, all known information was near-instantaneously captured in equity prices. The movement of markets is thus dictated by the parts of the future that are fundamentally unknowable – a terrorist attack on lower Manhattan, a spark that spreads into a raging wildfire, a technological breakthrough from a communist nation.

This view chafes the fundamental investor as it casts their pursuits as futile. However, a larger portion of the investing public found this vision of investing not only true but comforting. That market returns were the best one could hope for eliminated the apparent challenge of identifying investment talent. The rise of low-cost passive investing followed, forming its own sort of religious zealots.

Of course, passive has its own shortcomings. What happens as passive strategies slowly approach 100% market share is unclear. Suppose one considers the “modern” market structure to begin sometime between when Jack Bogle launched the first index fund in 1976 and when Michael Milken was indicted for securities fraud in 1989. In that case, we don’t have much history to judge the efficacy of any investment approach.

Further, piety to indexing forecloses on the quick riches markets seems to have doled out randomly over the past decade. As Charlie Munger famously quipped, “There will always be someone getting wealthier quicker than you...” Today’s investors are left with the choice of chasing alpha and being (statistically) disappointed or ceding the possibility of generating life-changing wealth by adhering to disciplined low-cost indexing.

Dan Rasmussen of Verdad Advisers offers a middle path for investors in his forthcoming The Humble Investor: How to find a winning edge in a surprising world. Rasmussen’s thesis rests on an unassailable truth: The future is hard to predict. But that’s not all; humans’ reluctance to accept this reality is precisely why investment opportunities persist.

Rasmussen relays the experience of Nobel Prize winner Kenneth Arrow, who began his career in the Weather Division of the US Army Air Corps. Arrow noticed that his group, which was responsible for long-range weather forecasts, was underperforming the results using simple historical averages. Arrow submitted his findings to the commanding general, recommending the group be disbanded. When a response finally arrived from the general’s secretary, it read:

“The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.”

An entire financial planning industry is built on this kind of delusion. Rasmussen argues that this misplaced confidence is both the problem and the solution.

Focusing on the much-maligned approach of value investing, the buying of companies trading at low multiples, Rasmussen concedes that the recent past has been unenjoyable. However, over the long run, value wins not because of some natural pull to the mean but because the future's unpredictability ultimately upends the assumptions that drove multiples either up or down in the first place.

Rasmussen quotes Demis Hassabis, CEO of Google’s DeepMind, who argues there are “striking similarities between remembering the past and imagining or simulating the future, including the finding that a common brain network underlies both memory and imagination.” For investors, this expresses itself as a tendency to extrapolate the recent past, positively or negatively. However, Verdad’s own research has found that there is no statistical evidence of the persistence of either revenue or earnings:

In the table below, we show the proportion of all US companies that sequentially have above-median growth over forward annual periods ranging from one year to five years in a row. For example, within the data, companies that grow above the market median for three years in a row are tagged with a one, and all other companies in the three-year column are tagged with a zero.

The average of that three-year binary column gives us the proportion of companies that outgrow the median each year for three years. This sequential measure of three-year persistence is compared against the probability of randomly flipping the same side of a coin three times in a row (12.5%).

“Sure,” the newly minted Nvidia millionaire may say, “but what about exceptional companies.” Verdad reran the analysis, focusing only on companies in the top quartile. The results improve, but not meaningfully.

Of course, the market is not totally inefficient; some future Nvidias will actually become Nvidia, but mostly they will not. Just as some deep-value companies ultimately fold, many do not, and their fundamental performance improves. In this natural and persistent re-sorting, superior returns can be harvested. Rasmussen,

“The crux of why value investing works is simple. Analyst estimates of future growth are the most important variable in predicting valuation multiples, dominating all other predictors. But growth is neither persistent nor predictable…

…And so, reliably, investors extrapolate past earnings into the future, bidding up the fastest-growing companies and selling down yesterday’s losers, expecting future financials to follow from past financials like eight follows four follows two. And yet, by the time a year or two has passed, the data supported their original thesis has all changed, their forecasts are based on a different set of facts, and what looked like a sure bet then might now have become far less certain, as investor enthusiasm might have moved on from electric vehicles to cryptocurrency to AI.”

Rasmussen takes other “sacred cows” of investing to task with similar quantitative rigor. International investing is dead. It’s not. Private markets are less volatile. They aren’t. Gold and commodities are portfolio diversifiers. Sometimes. Rasmussen tells his readers, in essence, not to trust their lying eyes.

What forms is an approach to investing centered on the belief that the future cannot be predicted and with the humility not to invest based on narratives, no matter how rigorously modeled. Alas, certain beliefs about the future become crowded, and Verdad, to use gambling parlance, “fades” those beliefs.

This works not because theoretical economics suggests that means are reverting or because of some proprietary intrinsic value model. Instead, as the future plays out, the overconfidence of the market gets re-sorted into reality and new outlooks. The strategy relies on maintaining exposure to that re-sorting. That can mean enduring painfully long stretches of euphoria, such as the one we are experiencing now.

“Happy families are all alike; every unhappy family is unhappy in its own way,” wrote Tolstoy. Rasmussen argues that markets are the opposite. Every bull market has different darlings, driven by different trends and narratives, making active investing especially challenging in bull markets. “But crises are alike. Most importantly, we know when we’re in one,” Rasmussen writes. In this way, crises are a bit of a gift to the humble investor.

“Investors who can keep their heads when everyone about them is losing theirs can therefore exploit simple predictable rules to make significantly outsize returns—and have the confidence that the probability of achieving these higher returns is much higher in times of crisis than otherwise.”

Rasmussen quotes a study that found that standard models for predicting equity returns are eight times more predictive during recessions than expansion. Verdad’s research finds that while market returns aren’t much different in crises, factor portfolios perform dramatically better.

📚 A brief factor review...   The Fama-French factors are constructed by sorting stocks based on characteristics, then creating long-short portfolios from the top and bottom 20% (quintiles) of stocks. 
##
⚖️ Some examples of factors are:  
- Market factor (overall market returns) 
- Value (HML) "high minus low" High book-to-market vs. low book-to-market stocks  
- Investment (CMA) "conservative minus agressive" Conservative asset growth vs. aggressive asset growth  
- Size (SMB) "small minus big" Small companies vs. large companies  For example, the HML portfolio goes long stocks in the highest book-to-market quintile and shorts those in the lowest quintile.    
##
📈 The difference in returns between these quintiles represents the factor premium. The graph shows these factor portfolios significantly outperform the market (25.5%) in both normal and crisis periods, with HML delivering the strongest returns at 79.5% during crises.

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Crises restore financial propriety. Fundamental precepts about profitability and economic utility that may have been sloughed off during the boom are brought back to the forefront of investors' minds. In the words of mid-century economist John Kenneth Galbraith, “The disenchantment was bound to be as painful as the illusions were beguiling.” Similarly, Rasmussen writes,

“During crises, markets panic, and investor forecasts become too correlated in predicting worse to come. But the humble investor knows that these dire predictions are unlikely to come to pass, as unlikely as the fever dreams that characterize stock manias.”

Today, markets seem to be ascending to unprecedented levels of euphoria. The proverbial Shoe Shine Boy offering stock tips now has a large social media following and a paid Discord. The President and First Lady have launched “official” (unclear what this means in this context) meme coins. If we’re being honest, the exit for Crazytown was actually a few miles back. In such an environment, the thought begins to sneak in, even echoed by famous investors, “Are markets broken?” Rasmussen doesn’t think so,

“I think you just have to remember that part of this is that we live in the US that we're embroiled in this culture, which is simultaneously embracing the S&P 500 and passive index funds and embracing gambling culture. And those things are converging. But we live in a moment of time. And those two phenomenon will not always be the case.”

Staying true to his principles and accepting the consequences, Rasmussen sees our present moment as one where too many people behave with certainty about an uncertain future. Yet across all investment philosophies, humility remains the contrarian trade everyone claims to make, but few actually execute.

The Humble Investor: How to find a winning edge in a surprising world is available for pre-order now and coming out on February 4th.

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