Welcome to Round 11 of the Magic Formula Portfolio!

Last month marked the one-year anniversary of the portfolio and since then, every round is now both a sell and a buy.

Quick reminder if you are new to Guru Gems: while studying investing masters, I am creating two real-money portfolios to put my learnings into practice.

To learn more about the Guru Gems journey, start here.

Magic Formula Refresh

In ‘The Little Book that (Still) Beats the Market’, Joel Greenblatt suggests that a regular investor can beat the market averages by buying a group of ‘good’ companies at ‘bargain’ prices.

• ‘Good’ → High return on capital

• ‘Bargain’ → High earnings yield

Since he expects the magic formula to work on average, Greenblatt suggests to own a basket of 20-30 stocks, to buy this basket over the course of a year, and to hold each stock for exactly one year.

So that’s exactly what I’m doing…

You can read more on Joel Greenblatt and his Magic Formula here.

You can also download my Joel Greenblatt e-book for free:

Joel Greenblatt e-book by Guru Gems

494KB ∙ PDF file

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One Year and One Month in: Current Magic Portfolio Performance

The Magic Formula Portfolio returned +26% since I started on 7 July 2025.

On a YTD basis, the Portfolio (+21%) is well ahead of the S&P 500 (+12%).

Two observations:

• The gap vs S&P500 has significantly widened since last month. In Round 10 the YTD numbers were +14% versus +9%. The portfolio has kept pace with no exposure to the AI trade that continues to drive the index.

• The winners are still not the obvious ones. I have said this before and it keeps being true. The biggest winners are names I would never have picked on conviction so I’m glad the formula picked them.

“If you are able to stick with the magic formula strategy through good periods and bad, you will handily beat the market averages over time” — Joel Greenblatt

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Selling Cohort 2

Greenblatt’s rule is to hold each stock for exactly one year, then sell.

This week I am selling the names I bought on 15 August 2025: Crocs (CROX) and Molina Healthcare (MOH).

The third name in this cohort, Catalyst Pharmaceuticals (CPRX), already sold itself. Angelini Pharma completed its acquisition of Catalyst on 16 July at $31.50 per share, against my purchase price of $20.00. That is a 58% return!

Cohort two ends with an average return of roughly 41%!

New Magic Formula Stocks

As I explain in detail in my first Magic Portfolio post, I use Joel Greenblatt’s Magic Formula screener combined with financial ratios data to identify the top stocks in terms of combined rank for Return on Capital (using ROCE) and Earnings Yield (using EV/EBIT).

I extend the analysis with additional criteria: P/FCF (an alternative valuation lens to EV/EBIT), Revenue 3yr CAGR (is the company still growing?) and Net Debt/EBITDA (how much debt is on the balance sheet?).

Altria (MO, Market cap $114B)

Magic Formula metrics: ROCE 61% (3yr: 60%); EV/EBIT 8.4x; Net Debt/EBITDA 1.4x

Altria is the dominant cigarette maker in the United States. Marlboro holds roughly 40% of the US market, against 14% for the next-largest brand. Beyond tobacco it holds an 8% stake in AB InBev and a 41% stake in cannabis producer Cronos.

It is also a nicotine pouch business. Through its wholly owned subsidiary Helix Innovations, Altria sells the On! brand into a category that has grown more than tenfold in five years to over $5 billion. Pouches now account for close to 60% of the oral tobacco market.

Why it is cheap

US cigarette volumes declined roughly 9% per year between 2020 and 2025. That is a real, secular decline, and probably why the stock trades at 8.4x EV/EBIT.

But volume is not revenue. Over the same five years, price increases blunted the revenue decline to about 2.5%. Over the past decade Morningstar estimates volumes fell around 7% annually while prices rose roughly 6% per year.

The pricing power has some room to run since cigarettes also remain cheap in the US relative to income. The World Health Organization (WHO)'s affordability measure (the share of GDP per capita needed to buy 100 packs of the most-sold brand) puts the US at about 1%, which is low against both developed and most developing nations. A pack costs roughly $10 in the US against $21 in the UK and $40 in Australia.

Morningstar rates Altria a wide moat, built on brand loyalty, regulatory entrenchment that keeps new entrants out, and the addictiveness of the product itself.

Build-A-Bear Workshop (BBW, Market cap $488M)

Magic Formula metrics: ROCE 29% (3yr: 33%); EV/EBIT 8.5x; Net Debt/EBITDA 1.2x

Swapping one of Michael Burry’s largest holdings (MOH) for one of his newest (BBW).

That is a coincidence rather than a strategy. Molina is leaving on the one-year rule, but I thought it was too neat not to mention it.

In his most recent update, Michael Burry described Build-A-Bear as “a remarkably simple and yet misunderstood business” and added it to his portfolio.

That is not why I am buying it though. The Magic Formula Portfolio is meant to be mechanical. BBW is here because it ranks well in the Magic Formula screener.

The business

I have to admit I had never heard of this company before, but I assume that if you live in the US, it is a well-known name. Most people know Build-A-Bear as the mall store where children stuff their own teddy bear.

Here are some key figures for this business:

• 376 corporately-managed stores plus 112 international franchised locations

• Gross margin of 57% and operating margin of 13%

• 5-year average ROCE of 32.5%, with 5-year ROIC at 24.2%

• Trades at 9.1x earnings

These are software-like gross margins, but priced as though it were an ordinary mall tenant.

The growth is coming from asset-light channels: third-party retail locations grew 22% over the trailing twelve months and international franchised stores ~17%, both of which expand the footprint without the capital cost of opening corporate stores.

Blue Bird Corporation (BLBD, Market cap $1.96B)

Magic Formula metrics: ROCE 32% (3yr: 47%); EV/EBIT 10.2x; Net cash

Blue Bird makes school buses. Headquartered in Macon, Georgia, it is one of the “Big Three” in North American student transportation, building Type C “Vision” and Type D “All American” buses in diesel, propane, gasoline and increasingly electric.

Some key figures:

• 3-year ROCE of 47%, 3-year ROIC of 44.5%

• Net cash (roughly $117M of cash against effectively zero net debt)

• Revenue compounding at 15.8% over five years, with operating income compounding at 16.3% against revenue at 7.6% over the longer run: margins expanding, not just volume growing

Why a bus manufacturer has a moat

Blue Bird’s advantages are more durable than I would have thought:

• Switching costs. School districts standardise on specific chassis and body configurations. Changing manufacturer means retraining mechanics and retooling parts inventory across an entire fleet.

• Distribution. An exclusive dealer network built over decades that a new entrant cannot replicate quickly.

• Aftermarket. A large installed base generating recurring, higher-margin parts and service revenue.

The electric transition is strengthening rather than threatening this. Blue Bird is a first mover in zero-emission school buses and has extended into Blue Bird Energy Services, selling charging infrastructure and energy management alongside the vehicles.

Key risks

• Policy dependence. A meaningful part of demand is tied to federal and state electrification funding, including the EPA’s Clean School Bus Program. A shift in appropriations would hurt.

• Customer concentration. Buyers are school districts funded by tax levies. Budget austerity means deferred fleet replacement.

• Returns are off their peak. Current ROCE of 32% sits below the 47% three-year average. The base period was depressed, so some of that average reflects recovery rather than a run rate.

Three names in, bringing the portfolio back to 25 stocks.

That’s it for this week! Please like or share if you enjoy reading Guru Gems.

You can follow me on Substack @gurugems and X @guru_gems for more insights.

Until next week!

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Disclaimer: This newsletter is for informational purposes only and does not constitute financial advice or investment advice. Always do your own research before making any investment decision.

Welcome back!

It’s that time of the quarter when Superinvestors ($100M+) have to report their US equity positions held on 30th June 2026 (‘13F filings’).

I’m sure you have seen the headlines by now (“Ackman unveils six new investments including Netflix, Visa, Mastercard”; “Berkshire boosts Alphabet stake to third-largest holding”) and you have also been bombarded on X or Substack with screenshots from Dataroma showing individual portfolios.

What you haven’t seen however, is the analysis that distills the signal from the noise and identifies the hidden trends across the Gurus.

That is what I will try to share in today’s post.

• 👑 Alphabet: still the most-owned Guru Gem though also the most-trimmed

• 💾 Software buying continues, but it got selective

• 🛣️ The toll booths: Visa, Mastercard, Moody’s and S&P Global

• 👀 Multi-Guru accumulation: the names worth watching

• 🪄 What the Gurus think of my Magic Formula stocks

Let’s jump in!

New to Guru Gems? Start here

First, a detailed table listing most of the Gurus covered so far in the Guru Gems series as well as some other interesting Gurus.

The table shows the two largest positions in their portfolios (‘Gem 1’ and ‘Gem 2’) as well as the largest increase and largest decrease within their top 10 positions.

→ For the full table with more names and additional comments, access the Guru Master Google Doc, which also contains my full portfolio and latest activities

1️⃣ Are the Mag 7 still Guru favorites?

Alphabet remains the ultimate Guru Gem

Looking across the full table, Alphabet appears as Gem 1 or Gem 2 for more Gurus than any other stock. That has now been true for five quarters in a row.

• Li Lu holds it at a massive 48% of his US portfolio.

• It is also Francois Rochon’s largest position at 11%

• It is the second largest position for Bryan Lawrence (16%), Tom Gayner (9%), John Armitage (11%), Thomas Russo (12%), David Rolfe (9%)

• Berkshire significantly added, making it their 3rd largest position

At the same time, many Gurus (Oakmark, Russo, Rolfe, Armitage, Rochon) are trimming their Alphabet position, which is probably not surprising after Alphabet’s massive run over the past few years

Amazon is the clear second favorite

For the past quarters, Gurus were loading up on Amazon. AMZN was the laggard of the Magnificent 7, with barely a 1% return over full 2025 and a 7-8% decline over Q1 2026. This trend continued and more Gurus have been buying Amazon.

Seth Klarman made Amazon his #1 position in Q1 and continued buying in Q2 (+20%). Check out last week’s post where I unpack Seth Klarman’s investing philosophy and his thesis for owning Amazon:

David Rolfe added +35%, and ValueAct added a little bringing AMZN to 12% of the portfolio and making it their second largest position.

Not everyone was adding. Bill Ackman reduced by 25% (it remains a top-5 Pershing Square position), and Josh Tarasoff trimmed by 10%, though it remains his largest position at 18%.

Rest of the pack: META, MSFT, AAPL, NVDA, TSLA

Meta & Microsoft - Still Guru favorites

Apple - Many Gurus trimming

Nvidia & Tesla

NVDA and TSLA remain remarkably absent.

Except for John Armitage (NVDA 7%) and Josh Tarasoff (TSLA 7%) none of the other Gurus covered throughout the Guru Gems series so far have any positions in these 2 companies.

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2️⃣ Software buying continues, though more selective

In last quarter’s edition, I already highlighted how some Gurus were scooping up shares of companies hit by the SaaSpocalypse.

Q2 shows continued software buying, but more selective.

Bill Nygren at Oakmark continued to add to Salesforce (CRM), making it now a top 3 position. They also added to Adobe (ADBE, 1%) just like Samantha McLemore at Patient Capital Management.

Akre Capital continued adding to ServiceNow (NOW, 2%), a position they initiated in Q1. They also own Salesforce (CRM, 2%) and CCC Intelligent Solutions (CCC, 3%).

Finally, Bryan Lawrence (Oakcliff Capital), who rarely makes changes to his highly concentrated portfolio, increased his Guidewire Software (GWRE) position by 10%, following his 73% increase in Q1.

Lawrence views Guidewire as an ‘AI-Resilient’ software company, and this addition seems to double down on that conviction. I decided to add GWRE to the portfolio last month, after studying it in more detail:

3️⃣ Multi-Guru accumulation: the names worth watching

One of the most useful signals in a 13F analysis is when the same name appears in multiple portfolios at the same time. This quarter there are a few that have seen some significant Guru buying.

🛣️ The toll booths: Visa, Mastercard, S&P Global, and Moody’s

One clear trend in Q2 was the accumulation of positions in so-called ‘toll booths’, businesses that charge a small, non-negotiable fee or transaction tax for every use.

Visa (V) & Mastercard (MA)

• Bill Ackman initiated both (5-6% each), two of his six new positions

• Visa is Gem 1 for John Armitage (14%, +4%) and ValueAct (14%), and Gem 2 for Chris Hohn (20%), making it the second most-owned name in the whole table

• Mastercard is Akre Capital‘s largest position at 20%, though they trimmed it by 13%

• Terry Smith did both at once: Mastercard was his second-largest new buy, funded in part by cutting Visa, a position he has held for many years

• Dev Kantesaria cut MA by 28% (his largest decrease) but it remains his 4th largest position (18%).

S&P Global (SPGI) & Moody’s (MCO)

• SPGI was a new position for Ackman (5%), Triple Frond Partners (4%), Chris Bloomstran (2%) and Armitage (1%), plus a significant increase for Pat Dorsey (8%)

• Chris Hohn holds both MCO (12%) and SPGI (11%), both unchanged

• Dev Kantesaria also holds both: SPGI (20%, trimmed -13%) and MCO (19%, unchanged)

• MCO was a brand new position for Bryan Lawrence

Bryan Lawrence’s move is worth watching a bit more closely. When a concentrated investor who does nothing for quarters at a time opens a brand new position, it’s worth paying attention.

Netflix (NFLX)

Netflix was an equally popular name in Q2.

• New position for Bill Ackman (5%), Terry Smith (4%), Wallace Weitz (1%), and Tom Gayner (0.2%)

• Both Oakmark (1%) and Tom Russo (5%) added to their position and Josh Tarasoff still holds it 5% after he bought it in Q1.

Bill Ackman getting back into Netflix was big news.

Earlier this year I wrote about the lessons learned from Ackman’s first Netflix episode:

Marc Werres, a lesser-known Guru, also bought NFLX in 2022, at roughly the same time Ackman did. Werres made 4x his money after selling most at the highs in 2025.

In Q1 2026 Werres started buying again.

Read the full story in my post on Marc Werres:

Here are two excellent deep-dives I’m currently going through to gain a better understanding of the business: ’s Netflix ($NFLX) Deep Dive and ‘s Netflix ($NFLX): Down 50%. Is it Finally Cheap?

Uber Technologies (UBER)

UBER is also worth highlighting:

• It is Bill Ackman’s largest position and he added more during Q2

• Pat Dorsey significantly increased his position - now 8% of his portfolio

• Finally, UBER was one of the 12 new names Terry Smith added to the Fundsmith portfolio as part of his ‘Extreme Makeover’ (check his semi-annual letter if you haven’t yet). It’s the largest of the new positions and is now a top-5 of his US equities.

🪄 What about the Magic Formula stocks?

I thought it might be interesting to also have a look at the stocks in my Magic Formula portfolio (a portfolio of 25 names built on the principles laid out in Joel Greenblatt’s ‘The Little Book That Beats the Market’)

Small Caps

There are currently 8 Small caps in the Magic Formula portfolio, and only 1 of them appears in the portfolio of a Guru: Perdoceo Education (PRDO) is a very small position (0.3%) for Miller Value Partners.

This is not surprising as many of these companies are too small to own for larger funds.

In his book, Joel Greenblatt had already observed that the Magic Formula worked best for smaller-and-medium-cap stocks:

“It seems clear that there is a greater opportunity to find bargains in the small-cap arena both because there are more stocks to choose from and because smaller stocks are more likely to be lightly analyzed and, as a result, more likely to be mispriced.”

Mid Caps

There are also 8 Mid Caps in the portfolio and same story here, only 1 name comes up: Crocs (CROX) - the ugly shoe company.

• Norbert Lou holds it at a massive 27% of his portfolio

• Samantha McLemore, Li Lu, and David Einhorn all have smaller positions

CROX is one of my best performing stocks in the Magic Formula portfolio, currently up 57% in less than a year.

Large Caps

Finally, 9 large caps, and probably not surprising that 8 names out of the 9 appear in Guru portfolios: MOH / DECK / LULU / CTSH / CI / ADBE / BKNG

2 of them are worth highlighting:

Cognizant (CTSH)

Cognizant is one of the world’s largest IT services firms, and was cheap for the same reason many other service firms have been hit: the market fears AI will commoditize what IT-services firms sell.

I added Cognizant in the latest round in early July, and it is already up 40% (!) since I bought it, partly driven by a solid earnings report a few weeks ago.

• Rich Pzena has owned CTSH since 2024 and significantly increased his position over the past 2 quarters

• Chris Bloomstran initiated a new position during Q2

Booking Holdings (BKNG)

I added Booking Holdings, the world’s largest online travel agency, in early June.

The stock was down more than 25% over the past year, giving it a valuation that put it at the top of the Magic Formula screener: 3Yr ROCE: 72%; EV/EBIT: 13.6x

In my update I already highlighted that this was a ‘Magic Formula meets Guru Gems’ stock with François Rochon, AKO Capital and David Rolfe all owning it.

Interestingly AKO Capital sold their full position in Q2, but Bill Nygren started a very small position (0.4%) for Oakmark.

The stock is up 27% in the Magic Formula portfolio.

That's it for this week's edition!

A lot to digest from a single round of 13F filings, but a few clear trends came out of it, and a handful of names worth looking into.

For me, the two I’ll be watching most closely are Netflix and Moody’s. Both had multiple Gurus buying in Q2, and both could end up in the Guru Gems portfolio if I can get comfortable with the business and the price. I’ll keep you posted.

You can follow me on X @guru_gems and Substack @gurugems for more insights.

Until next week!

Disclaimer: This newsletter is for informational purposes only and does not constitute financial advice or investment advice. Always do your own research before making any investment decision.

In today’s edition:

👤 Guru in the spotlight: Seth Klarman
🛡 The six things Baupost does to protect capital
🫧 What Klarman says about today's AI market
💎 Gems in focus: Klarman's three largest positions

Today’s post is a bit longer, so grab a coffee and make yourself comfortable! If you’re in a rush, here is a 2-minute AI audio version of today’s post:

New to Guru Gems? Start here

👤 Guru in the spotlight: Seth Klarman

Seth Klarman has been running the Baupost Group in Boston since 1982. In those 44 years he has had five down years, and the worst of them was ‑12%.

This is probably not a coincidence when your whole investment philosophy is built around ‘downside protection’.

Regular readers will remember I shared some thoughts from Klarman’s June interviews in issue #63, and promised a full deep-dive.

Baupost’s origin story is an interesting one. In 1982 four Boston families were sitting on the proceeds of some business sales: a stake in Channel 5, the ABC affiliate, and a computer consulting and publishing business among them. Jordan Baruch, Isaac Auerbach, William Poorvu, and Howard Stevenson pooled $27 million and formed an expanded family office to protect and compound that wealth across generations. The firm’s name is an amalgam of their surnames (BA-AU-PO-ST).

They needed someone to do the actual investing. Poorvu had taught real estate at Harvard Business School, and he recruited a former student: a 25-year-old whose entire track record was a stint as an analyst at Max Heine and Michael Price’s Mutual Shares, the legendary value shop, between Cornell and his MBA.

So even though Klarman was not the founder, he was there from day 1, and hired to run it. The families were very clear about what they expected from him:

“Our mandate wasn’t really to grow an investment business. It was to deliver good returns with limited downside to those clients.”

Baupost today runs roughly $22 billion across public equities, credit, private investments and commercial real estate, and it still behaves like a family office that would prefer to miss an opportunity than lose the money.

Klarman wrote Margin of Safety in 1991, when he was 34. It sold badly, went out of print, and then became one of the most sought-after investment books ever written.

Over the past four decades, Klarman gave few interviews or talks in public. His explanation was that if you are accumulating a stock, you get a better price when nobody knows.

Over the past few years, it seems Klarman has been doing more interviews and I have gone through all of them to build this post.

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🛡 The Baupost Way

When Klarman was asked in a recent interview what makes Baupost unique, his answer was all about how the firm avoids losing money:

“The way we protect capital is we focus on downside as much as upside. We do meticulous fundamental research on every company. We will hold cash in the absence of immediate opportunity. We don’t leverage the portfolio at all. We’ll buy senior securities… so that we’re structurally senior in a lot of what we do, which protects on the downside. And finally, we do macro hedges.”

Klarman mentions six distinct practices to protect capital in a single breath, so let’s unpack this a bit more and go through them one by one.

1. On downside

You can see this in the way Baupost approaches new ideas for the portfolio. When an analyst pitches him, Klarman wants to run the post-mortem before the investment has been made:

“If we’re wrong and three years from now we’re sitting here… going over what went wrong, what are we going to be talking about?”

Readers of my Chris Hohn deep-dive will recognise this mindset. Hohn also applies a risk-first framing to every investment: “The vast majority of investors focus on return. But in my career I focused on risk.”

The key lesson from these two brilliant investors is that you should decide what you can lose before you get excited about what you can make.

2. On doing the work

Klarman describes Baupost’s research process as “a mile wide and then a mile deep”: a team of generalists scanning everything, then drilling into a single name until they know it unbelievably well. The point of all that depth is what the work buys you on the day the market turns against you:

“The challenge is the discipline to wait patiently until those bargains emerge, and then the temerity to stand there when it’s going down in your face. The market’s telling you you’re wrong, but you’re holding on because you’ve done the work.”

Months of that kind of work create their own problem, though. The analyst who went a mile deep does not arrive at the meeting neutral:

“The analyst needs to fall in love with the positions. As portfolio manager, I just date their ideas.”

To counter this bias, Klarman keeps asking his analysts questions. If we didn’t own this already, would we still buy it today? And before buying a single share, he wants to know where they would sell:

“If they say, ‘Well, I like it at 70, but I’d sell it if it got to 80’… it’s like, you’re that sure that it’s going to move 15 percent? Because what if it goes to 50 before it goes to 80? Maybe it’s not the right entry point.”

3. On cash

Baupost holds cash, sometimes a great deal of it, and Klarman has spent decades defending the practice against clients who reasonably ask what they are paying him for. Here is what he said on this during a lecture to a Columbia MBA class in 2010:

“To say you have to look only at today’s opportunity set, and therefore be fully invested all the time, is sort of like saying you have to marry someone from your high school graduating class as that’s the whole opportunity set.”

Although this is also the one guardrail he has since walked back. Baupost ran 30% cash and higher at times, and he told in an interview that he “almost certainly made a mistake”, because the optionality never paid for itself across a decade of suppressed rates and no serious drawdown.

So he changed the mechanism rather than the principle. In his words:

"We made our liquid books more liquid, especially our public equity book, where we used to own companies with 500 million or billion dollar market cap. Now we have much bigger market cap holdings on average… we can pivot on a dime with a large percentage of our book. So we don't need as much cash."

More on his portfolio later in this post.

4. On leverage

Klarman is very clear on what he thinks about leverage:

“If we can’t make money unleveraged, we’d rather go out of business.”

And one of my favourite lines, which should be an important reminder for anyone using leverage:

“The risk of leverage is that it’s like drowning in a pond that, on average, is one foot deep.”

Leverage is what turns investors into forced sellers, and Klarman is explicit that "you never want to be a forced seller, and you especially want to be able to buy from forced sellers in any asset class."

5. On seniority

A large part of Baupost’s book sits above the equity in the capital structure: senior debt, structured private deals, instruments with contractual claims. Credit is, according to Klarman, the firm’s best discipline.

“Bonds are a wonderful safe instrument in the following context: you get senior securities, you’re first in line, contractual terms, you get interest, you get your principal back, you know when you’re getting those things back… The problem is everyone knows that, so they don’t return very much, most of the time.”

Most of the time, safety is priced in and returns are dull. But in distress, when downgrades and defaults force other holders to dump, Klarman gets to buy equity-like returns wrapped in bond-like protections.

6. On hedging

Finally, an overlay of macro protection bought at the least intuitive moment:

“We’re buying macro protection when vols are low and people think nothing bad is going to happen. So we can sell that at a gain… during a storm.”

The logic is the same as with any insurance: it is cheapest when nobody thinks they will need it. And these hedges do more than soften the blow. When the storm arrives, Baupost can sell them at a profit, which frees up cash at exactly the moment the best bargains start to appear.

All six guardrails end up serving the same purpose, which is to make sure Baupost is still buying on the worst day of the cycle.

The guardrails at work: 2008

When Bear Stearns and then Lehman came apart in 2008, Baupost, closed to new money for much of its history, called up its waiting list and raised several billion dollars inside a single quarter. The team deployed it at a reported pace of roughly $100 million a day, buying residential mortgage securities, the debt of the auto finance arms, and "very interesting" pieces in the collapsed Lehman capital structure.

While much of the industry sat paralysed, Klarman described his team as “kids in a candy store.”

But when Klarman was asked about this period, he pushed back on the heroic version, and clarified that it was all very calculated:

“The way you’re conveying it probably comes across as we come in with giant satchels of money and hand over fist deploy it. It wasn’t like that at all. It was the same cerebral, methodical, painstaking environment that we do every day… I can buy this bond at 70 that I think is covered at par.”

🫧 What Klarman says about today’s AI market

When asked about today’s market in a podcast with Morgan Stanley’s Michael Mauboussin, Klarman called the current environment (Aug 2025) “a 4 out of 10 opportunity set.” Markets at all-time highs, very little despair, very little panic.

When asked in another interview more recently (Jun 2026) whether this is a bubble, he would not go all the way:

“I think it has characteristics of a bubble… you certainly see it in places like when Allbirds, the shoe company, added AI to their name and the stock did well. And that’s crazy. That’s reminiscent of the dotcom.”

(Note how the thumbnail below says “THIS IS A BUBBLE”….not really what he said)

His real concern is about which way the multiple is moving:

“If you threw this much uncertainty into a market, I think you’d say maybe the market should actually be at a lower multiple to accommodate all this uncertainty. And instead the multiple keeps going up.”

But a low score is not zero, so it means there are still opportunities. Klarman splits the market into three buckets:

There are AI winners, which everybody wants. There are AI losers, which everybody is dumping. And then there is a third group he calls AI agnostic: businesses the technology simply will not affect much, which nobody finds exciting.

Baupost is spending its time in that third bucket, and picking through the perceived losers for anything that has been miscategorised.

As for the AI model companies themselves, Klarman is uninvolved. He argues that they have to spend enormous sums continuously just to stay in front, and if they ever fall behind they are in real trouble. For Klarman, that is not the description of a great business.

Which brings us, finally, to what he actually owns.

💎 Baupost portfolio

Below is an overview of Baupost’s top 10 US equity holdings at the end of Q1 2026.

This $5.1 billion, 22-stock portfolio is not all of Baupost. It reflects the 13F, which captures US-listed equities only, roughly a quarter of the firm. As highlighted in the introduction, Baupost’s total assets is roughly $22 billion across public equities, credit, private investments and commercial real estate.

[Unfortunately the latest 13F with Q2 holdings is not yet released so we are still looking at the positions held on 31 March 2026. I plan to update this post once the Q2 holdings will be out.]

Here is a closer look at the top 3 from end of Q1:

1. Amazon (AMZN) — 12.7%

Amazon is Klarman's largest disclosed equity position, and he built it over just 2 quarters.

He opened it in Q4 2025 at 9.3% of the portfolio, then added another 47% in Q1. Going from zero to a 12.7% position in two quarters is quite a statement of conviction.

Amazon was trading in the $200-250 range during those quarters, so with a current share price of $274, he is probably up somewhere between 15%-30% on this position.

A position this size in a mega cap is also exactly what Klarman described when he talked about the cash decision. This is one of the “much bigger market cap holdings” (together with Alphabet) that lets Baupost “pivot on a dime with a large percentage of our book”.

As for the business itself, what Klarman likes is that Amazon is an enormous cash flow machine, versatile enough to play several roles in AI, with a data centre business growing much faster than anyone expected a year ago.

Klarman saw an opportunity to buy this wonderful businesses at an attractive valuation:

“You don’t have to buy them this second… there are blips in almost every company where you get windows of opportunity.”

It’s always pleasing to see when a Guru confirms one of my earlier picks. I bought Amazon in February at $204.50 and added in March at $207.40, for an average of $205.20. My Amazon position is up 33%, putting it in the top 5 best Guru Gems performers. (Alphabet, the ultimate Guru Gem, remains by far my best performer)

Klarman and the Guru Gems portfolio are in good company: Josh Tarasoff, Bill Ackman, Dennis Hong, and John Armitage, all have significant positions in Amazon, with the last three all adding during Q1.

2. Restaurant Brands International (QSR) — 11.7%

QSR is the franchisor behind Burger King, Tim Hortons, Popeyes and Firehouse Subs; it’s a capital-light royalty stream on other people’s restaurants.

Compared to Amazon, Klarman’s second-largest position is the opposite story: he has been slowly adding to this position almost every quarter since end of 2024.

The stock has been trading in the $65-$75 range for most of that time so depending on his entry prices, this position is probably a modest gain until now, with an additional ~3.5% dividend yield on top.

Just like Amazon, QSR is also a large position in Bill Ackman’s portfolio. Below is an extract from Ackman’s February 2026 presentation detailing why he holds QSR.

If you want to learn more about Bill Ackman and his Pershing Square approach, check out my post from February:

Long-time readers know I also have my own history with this stock.

QSR has been on the Guru Gems watchlist since my Chris Davis deep-dive back in issue #7, and it earned a Silver medal on my Podium of Errors in March as an error of omission. The stock came very close to $60 in September, I waited for it to go a bit lower, and it never did.

With Davis, Klarman and Ackman all holding meaningful positions, this remains a highly Guru-endorsed name on my watchlist, and if it ever revisits those levels I won’t make the same mistake twice.

3. WESCO International (WCC) — 7.7%

A company I had never looked at before, and the hardest of the three to write about.

WESCO distributes electrical, networking, security and utility equipment, the unglamorous plumbing of construction sites, industrial plants, power lines and, increasingly, data centres.

It doubled in size by acquiring Anixter in 2020, and the data centre business (part of Communications & Security Solutions in blue below) has been growing at roughly 50% a year to more than 20% of revenue. Second quarter organic sales grew 13% and the backlog grew 60%.

Klarman opened the position in Q1 2024 and then built it aggressively: he almost quadrupled it in Q2, added another 57% in Q3, and kept buying through 2024 and into the first half of 2025.

We don’t know his exact entry prices, but his average cost is probably somewhere around $165.

The stock closed last week at $364, so that’s well over a double.

Klarman has already started selling. In Q3 2025, with the stock around $211, he cut the position by almost a third. He trimmed a bit more in Q4 at $245. This is exactly what he says he does:

“[We protect] on the downside as best we can, by doing deep fundamental analysis, by knowing our names unbelievably well, by not being afraid to sell them when the price is up. And the same way, same as we buy more when the price is down.”

Morningstar raised its fair value estimate for Wesco in July, but only to $275, roughly 25% below where the stock trades today. It rates the moat narrow and says that "the market seems to be extrapolating Wesco's supercharged organic sales growth too far into the future."

It will be interesting to see from the Q2 filings (reflecting holdings on 30 June) how much Klarman will have trimmed this position. Or does he see something in the data centre buildout that others are not seeing yet…

📌 What's next

Baupost’s Q2 13F should land around 14 August. When it does, I will update this section (what he added, what he exited, …) and pick one name to look at properly as a candidate for the Guru Gems portfolio.

Let's close with another great quote from this brilliant Guru. I've really enjoyed studying him these past weeks.

“People think they’re hiring a manager to make them money. But probably, they’re hiring a manager to keep them out of trouble and maybe fight their own instincts sometimes.”

As always, thank you for reading and following along on my journey. You can find me on X @guru_gems and Substack @gurugems for more Guru Gems insights.

Until next week!

Disclaimer: This newsletter is for informational purposes and does not constitute financial or investment advice. Always do your own research before making any investment decision.

This week's edition is a short one as I am taking some time off. But there is still something to celebrate, plenty to read, and a good investor letter to unpack.

• 🎉 Guru Gems is closing in on 500 subscribers: I’m giving away prizes!

• 📚 Summer reading: the most popular posts from the Guru Gems archive

• 📬 A quick review of Giverny Capital Asset Management's Q2 letter

🎉 Almost 500 of You

When I published the first Guru Gems issue back in April 2025, I would have been delighted with 100 readers. We’re now closing in on 500 subscribers (1150 followers on Substack!), and I’d like to celebrate that properly.

How to win (between now and subscriber #503, or 15 August at the latest):

🏆 Existing subscribers: the 2 readers with the most referrals win. Get your personal referral link here: gurugems.org/leaderboard

Share

🎲 New subscribers: everyone who subscribes before we hit #503 is entered into a random draw for the third prize.

Winners choose which of the three publications they’d like.

New here? Guru Gems studies the world’s best investors and applies their lessons to two real-money portfolios.

Why 503? It’s a nice prime number. The physics nerd in me occasionally leaks out :)

📚 Summer Reading

August is usually a good time of the year to catch up on some reading. Here are the posts I’d point you to, especially if you’ve joined recently and are wondering where to start.

My 3 most popular Guru deep-dives

• Norbert Lou — The Punch Card Mindset: why less is more, and how focus drives extraordinary returns. Also where the idea for the PayPal position started.

• Dev Kantesaria & The Valley Forge Way: extreme concentration, a medical doctor’s temperament, and FICO as the ultimate toll booth.

• Sir Chris Hohn & The TCI Way: fortress businesses, and why S&P Global sits in two of the world’s most disciplined portfolios.

My 3 favorite Gurus

• Bryan Lawrence & The Lawrence Method and, one year later, The Lawrence Method Revisited: six questions, being wrong 30% of the time, and a beaten-down software name.

• Timeless Lessons from François Rochon: the Rule of 3, the Podium of Errors and The Giverny Way: 32 years of compounding with patience, humility and rationality

• A Hidden Master: Marc Werres & The Hinde Way: seven positions, two years without a new idea, and one of the best letters almost nobody reads.

The quarterly Guru portfolio updates

Every quarter I go through the 13F filings of the most interesting Gurus and try to separate signal from noise. Here’s the most recent one: What Gurus are buying and selling — Q1 2026.

The Q2 update will land in two weeks.

And if you still want more to read…

…check out the full Guru Gems Archive:

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📬 A Good Letter: Giverny Capital Asset Management, Q2 2026

Regular readers know I always enjoy a good investor letter. I wrote about my three favourites a while ago:

David Poppe’s quarterly letter is certainly also one I always look forward to.

Quick context: Giverny Capital Asset Management (GCAM) is David Poppe’s New York firm, run in partnership with François Rochon’s Giverny Capital. Poppe previously ran Ruane, Cunniff & Goldfarb, the firm behind the Sequoia Fund.

So his letters are written from deep inside the quality-compounding tradition.

GCAM 2026 Q2 Letter

405KB ∙ PDF file

Download

Download

Three takeaways from the Q2 letter:

1. 🗳 The market is voting, not weighing

Poppe reminds us of Graham’s famous line: in the short run the market is a voting machine, in the long run a weighing machine. Right now, he argues, the voter has some fairly extreme views.

The S&P 500 returned about 10.2% in the first half, and yet 210 stocks in the index were down, while roughly 200 beat the index return. A 40/60 split isn’t unusual. What is unusual is that two-thirds of the laggards trailed by more than 10 percentage points.

That dispersion would make sense if the earnings were concentrated in the winners, except they aren’t.

We own Index constituents such as Charles Schwab, JP Morgan, Mastercard and Progressive Corp. that continue to grow their earnings per share at healthy rates and in some cases at higher rates than usual, but whose stock prices are lagging.

Poppe also highlights Constellation Software, which kept compounding adjusted EPS and free cash flow per share at roughly 20%, while the stock dropped 21%.

The market speculates that CSU’s earnings may grow in the near term, but over time Artificial Intelligence (AI) applications are going to enable lower-cost competitors to enter the business.

All of this is to say, we’re out of sync with the Index and we’re not inclined to change course. I believe we own high quality earnings compounders that will benefit from implementing AI capabilities and are likely to maintain their dominant competitive positions. We’re generating a good return, but I think our companies overall are performing better than their stock prices would indicate.

2. ⚡ Momentum has taken over

Poppe highlights a very interesting chart in his letter which counts the number of days per year the US Momentum Index moves up or down by at least 1.5%.

A decade ago: roughly 10 days a year. In 2020: 71. Annualised for 2026: 70, the most volatile since COVID.

Poppe writes that the market over the past few years increasingly has become skewed to chasing momentum and believes this is driven by “a push and pull between fear of missing out on a revolutionary technological advance and of being wiped out if the advance ends up delivering disappointing financial returns.”

He illustrates what that feels like from inside his portfolio: on a single day in May, one GCAM holding (AAON) reported strong earnings and rose 31%, while another (Installed Building Products) reported mildly disappointing earnings and fell 28%.

3. 🚀 Betting on moonshots

On the bubble question, Poppe sees some red flags, but also acknowledges that “Corporate America is remarkably efficient, with profit margins and returns on capital far higher than they were a generation ago”

The market is strong for good reasons, yet this feels like a moment where people are betting on moonshots.

The moonshots may well happen. But what if they don’t happen soon? In the meantime, some very good companies are being left on the floor.

He flags a risk we’ve also heard from Paul Tudor Jones, Seth Klarman, and David Rolfe at Wedgewood: the equity supply/demand balance is about to change drastically:

Massive IPOs either completed or on tap from AI darlings like Space Exploration Technologies, Open AI and Anthropic, plus chunky secondary stock and/or debt offerings from Alphabet, Amazon, Nvidia, Oracle and others may eventually drain what has been a very deep pool of investor liquidity.

📊 GCAM Portfolio Activity

Alphabet (the ultimate Guru Gem) and Arista Networks are GCAM’s largest positions, even after trimming both 20% and 17% respectively. Both positions were in the top 5 contributors to performance over the first half of the year:

My two cents on the best and worst contributors is that our top five are terrific, have run up a lot this year and now are expensive. Our bottom five are terrific, unpopular with Mr. Market and, as a result, are attractively priced.

They used the proceeds of the Arista and Alphabet sales to add to their financial stocks:

Charles Schwab ($92 and $85), Kinsale Capital (mid-$330s), TWFG (~$19) and Progressive ($205)

🔮 Next week

I’m doing a lot of reading during my break, partly for pleasure, and partly to finish a Guru deep-dive I’ve been working on for a while: Seth Klarman.

I finally managed to get my hands on a copy of Klarman’s iconic ‘Margin of Safety’, so this will hopefully be a nice add to the research I’ve already conducted.

Stay tuned!

Disclaimer: This newsletter is for informational purposes only and does not constitute financial advice or investment advice. Always do your own research before making any investment decision.

In today’s update:

• 💎 Guru Gems Portfolio — a mid-year look in the mirror

• 🔍 Alphabet’s phenomenal, historic, confusing quarter

• 📝 A quick word on⚕️ Baxter and 💸 PayPal

• 📜 Wedgewood Partners: Are Hyperscalers still Magnificent?

Start here if you are new to Guru Gems.

2-minute AI summary of today’s post:

💎 The Guru Gems Portfolio at Mid-Year

As I have written before, I’m all about transparency with Guru Gems, even when the numbers aren’t pretty.

The Guru Gems portfolio is up just 2.2% since inception (Apr 2025). Not exactly a wonderful result, and it stings even more considering my biggest position, Alphabet, is up 102% since purchase.

Three names carry most of the blame:

• CCC Intelligent Solutions (CCC, −33%) and Constellation Software (CSU, −32%) remain caught in the SaaSpocalypse, the market’s conviction that AI will let anyone rebuild established software.

• Copart (CPRT, −25%) is deeply out of favor, mostly driven by slowing revenue growth over the last several quarters. The shares are now down more than 50% from their peak, the largest drawdown in over 20 years. But as I argued in my recent Warning Signs post, the fundamentals seem to tell a different story. I still believe Copart is a wide-moat compounder working through cyclical challenges.

The Guru Gems portfolio performance stands in sharp contrast to the more ‘mechanical’ approach of my Magic Formula portfolio, which is up 16% since inception and 12% YTD, four percentage points ahead of the S&P 500’s 8%.

With high quality stocks underperformance currently at 1999 extremes (there is an interesting chart on this in Wedgewood’s latest letter; more on that further down this post), it’s too early to throw in the towel and give up on my Guru Gems portfolio.

So keeping François Rochon and Bryan Lawrence’s ‘rule of 3’ in mind, I’m giving myself another 2-3 years to see if I can do better.

🔍 Alphabet: A Phenomenal, Historic, Confusing Quarter

Alphabet released Q2 earnings this week, and since it is still my largest position, it deserves a closer look.

On the surface, the numbers look phenomenal:

The good:

• Revenue grew 24% to $119.8B: remarkable acceleration for a company this size. Search & other grew 17%, YouTube ads 13%.

• Google Cloud grew 82% (!!) to $24.8B, with operating margin jumping from 20.7% to 35.6% and backlog reaching $514 billion.

• Operating income grew 30%, faster than revenue; Alphabet keeps getting more profitable while investing heavily.

• The AI flywheel is spinning: the Gemini app reached 950 million monthly active users, and Alphabet’s model APIs now process ~22 billion tokens per minute, up from 16 billion just last quarter.

The bad (or at least, the expensive):

• Capital expenditures hit $44.9 billion in a single quarter, double of last year’s Q2, and management raised full-year capex guidance to $195–205 billion, with 2027 expected to be significantly higher again.

• As a consequence, for the first time in its history as a public company, Alphabet reported negative free cash flow: −$5.9 billion for the quarter.

• To fund its massive AI infrastructure push, Alphabet raised $49.6 billion of equity in June: a $20.5B public offering of common stock, a $10B private placement to Berkshire Hathaway, and $19.1B of 6.25% mandatory convertible preferred stock. This is on top of ~$56B of new debt in the first half. It also put a $40B at-the-market program in place (unused so far, and earmarked primarily to cover taxes on employee stock grants). Meanwhile, share buybacks have stopped entirely: zero in H1 2026, versus $28 billion in H1 2025.

• One more thing to keep in mind when seeing headlines about net income tripling: reported EPS of $9.11 (+294%) was inflated by a $99 billion mark-up of Alphabet’s equity investments, mostly its SpaceX stake. Strip that out, and the operating story is (only!) a 30% profit grower.

Alphabet is probably one of the most covered stocks on the planet, so rather than pretending I can add much new analysis, let me share some of the more interesting perspectives I came across this week:

• A good summary of the Q2 results by : Alphabet Inc. Earnings Update

• A very comprehensive deep dive on Alphabet by and how Alphabet is the only company paid at every layer of the token economy

• A much more bearish view by who expects Alphabet shares to fall much further than they already have this week

• One element that seems underreported: Alphabet’s equity issuance, and how it may be contributing to the current negative sentiment. Here is an interesting chart from Jeff Weniger

  

• Finally, an interesting take arguing Google’s search revenue growth is partly artificial and damaging for Google long term: Max Anderson on X

The market’s verdict, for what it’s worth: the stock fell about 7% the day after earnings and nearly erased all of its YTD returns. Over the past year the stock is still up 64% though…

As I shared in my Q1 13F update post, I trimmed my Alphabet position a bit in May at $395. Other than this small trim, I am keeping the position unchanged for now.

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⚕️ A Quick Word on Baxter (BAX)

Last week I re-examined the Baxter thesis and landed on "holding, not adding".

The next test comes quickly: Baxter reports Q2 earnings this Thursday, July 30. I'll be watching the three indicators I laid out last week: operating-margin progress toward the 13–14% guide, any timeline on lifting the Novum pump hold, and progress toward the 3.0x leverage target.

I’ll share a Note with my thoughts on Thursday or Friday, so make sure to subscribe/follow on Substack if you haven’t already (for all email-only subscribers, consider downloading the Substack app as this is where I share additional notes or interesting articles).

💸 A Quick Word on PayPal (PYPL)

Until last week, PayPal was also among the worst performers in the portfolio. That changed on July 15 when PayPal received a joint $53 billion takeover proposal ($60.50 per share) from Stripe and Advent International. The shares jumped ~17% on the news and have come back closer to my average purchase price of $59.9.

PayPal’s board of directors rejected the offer, signalling that the offer significantly undervalues the company.

I am not selling (yet) and will be watching closely how this further develops. PayPal is also releasing Q2 earnings this coming week, so it will be interesting to hear management’s outlook and any new comments on the takeover interest.

📜 Wedgewood Partners: Are Hyperscalers Still Magnificent?

The final piece this week: Wedgewood Partners’ Q2 letter, which connects nicely to the Alphabet story above.

Wedgewood Partners Q2 2026 Client Letter

3.88MB ∙ PDF file

Download

Download

I always enjoy reading Wedgewood’s Client Letters and I highlighted them as one of the picks in my 3 Favorite Investor Letters back in January.

Magnificent

Their latest letter contains a section titled “Are Hyperscalers Still Magnificent?”

Their answer: “We certainly think so, and have increased our weightings accordingly.”

A few interesting takeaways from the letter:

1/ The market is funding the AI trade by selling the hyperscalers

Wedgewood identifies three headwinds: negative sentiment around capex crushing profitability, billions rotating out of hyperscalers into semiconductor and memory stocks (semis are now ~25% of the S&P 500, up from ~5% a few years ago), and IPO funding for SpaceX (and prospectively Anthropic and OpenAI) coming at the expense of hyperscaler shares.

2/ Reframing the capex debate

Rather than staring only at collapsing free cash flow (see Alphabet above), Wedgewood looks at returns on the growing asset base:

“We think Alphabet is an exceedingly rare, if not entirely unique, business, growing a nearly $450 billion gross asset base by 40% while maintaining a 30% return on that massive asset base.”

They also make a point I haven’t seen anywhere else: the hyperscalers’ investment portfolios act as a hedge on their own capex inflation. Alphabet’s ~$150 billion of (unrealized) gains on SpaceX and its 14% Anthropic stake could effectively cover years of incremental memory-driven capex costs. Meta’s AMD warrants (~$90B by Wedgewood’s estimate) play the same role. The market ignores these “one-time” gains; Wedgewood argues they are an overlooked shock absorber.

3/ It's the second derivative that matters

Wedgewood has owned semiconductor stocks for decades (”we have the scars to prove it”), and their explanation of how cyclical top traps are set is worth reading:

“Memory company earnings will surely grow over the next few years, at least until demand cools and/or supply shortages wane. However, and this is key, it only takes a modest cooling in current red-hot demand or a modest easing of the significant supply shortage for these stocks to drop as suddenly as they have risen because expectations reverse; earnings expectations will always be too high once growth-rate deceleration kicks in. It is the second derivative change in the rate of growth that matters. This is how cyclical top traps are set. The market always sniffs out a peak in earnings growth acceleration well before the cycle turns. Again, it matters little if earnings continue to grow; the stocks lead fundamental results, often by years.”

If that sounds familiar, it’s essentially the same message Rich Pzena delivered in last week’s issue: today’s memory earnings are a cyclical peak, not a plateau.

4/ And finally: Zoetis, not so magnificent anymore

Wedgewood sold their entire Zoetis position this quarter. There is no explanation why and this seems like a strange move, as not long ago, they highlighted Zoetis as a high-quality business finally on discount:

“We believe that, over the long term, reality tends to win; high-quality businesses earn the valuations they deserve at some point and will outperform the broad market. We believe we have been given the opportunity to do this with Zoetis now.”

That makes two disciplined quality investors (Terry Smith at Fundsmith and David Rolfe at Wedgewood) who built Zoetis positions in early 2025 and have now walked away. (Smith did offer an explanation in his half-year letter: he pointed to management’s failure to respond to new generic competition, or to communicate clearly about it.)

Not everyone is heading for the exit, though. Michael Burry started buying in May, after the stock dropped further on a guidance cut. He believes the company is very well run, with strong capital allocation and conservative financing, in his words, a “fat pitch” that requires patience.

I made similar points in my May update when I added Zoetis to the portfolio, in addition to the exposure it gives to a powerful secular tailwind: the growing global animal health market.

That thesis hasn’t changed since May, so I’m happy to keep holding.

That’s it for this week…thanks for reading and I’ll be back next week.

Disclaimer: This newsletter is for informational purposes only and does not constitute financial advice or investment advice. Always do your own research before making any investment decision.

Welcome back!

In today’s update

• 🔭 Pzena’s Mid-year outlook for Value

• 📈 Deep Discounts in Deep Value

• ⚕️ Baxter - A closer look at one of my Guru Gems holding

New to Guru Gems? Start here.

Here is the 2 minute AI audio version of today’s post:

🔭 Pzena’s Mid-year Outlook for Value

I always enjoy listening to Rich Pzena. Pzena was Joel Greenblatt’s Wharton classmate and co-author of their 1979 research project that validated Ben Graham’s stock picking formula. Greenblatt once called him “one of the highest quality, smartest, nicest people I know”.

Earlier this week, Pzena Investment Management shared their 2026 mid-year outlook webinar.

Rich Pzena, together with portfolio manager Akhil Subramanian, shared what really matters for value investors in this volatile year. Three things stood out to me.

1/ The third technology cycle

Rich Pzena has now lived through three technology cycles as a professional investor: the internet bubble, the fintech boom, and now AI. His observation is that they all rhyme in the same specific way:

“The market sees it as great for the new entrants and poor for the incumbents... It’s not new technology versus old technology. It’s the purveyors of the technology versus the customers of the technology.”

In 1999, you could buy virtually any Western manufacturer for about five times its cyclical earnings power, while the internet builders were priced as if we already knew who would win. Instead, virtually every dominant incumbent adopted the new technology, ended up with higher margins than before, and the stocks were “doubles and triples and quadruples”.

Same story with fintech. Rich recalls the Citigroup CEO looking back in 2017 at the endless stream of 28-year-old founders who had promised to put him out of business five years earlier:

“Now I have a new crop of 28-year-old CEOs of startup fintech companies who are coming to sell me their technology, because they understand they don’t want to be a bank.”

The lesson for the AI era: don’t assume the customers of the technology are the losers. History suggests the opposite.

2/ Memory: peak, or plateau?

The most extreme exuberance today is in memory chips. Pzena’s view:

“While AI will change the world, it isn’t going to negate the cyclicality of memory demand.”

Akhil Subramanian on that cyclicality:

“My 8-year-old has lived through three memory cycles. He was born, there was a peak, then a trough, then a peak, then a trough, and now we’re at a peak again. My 5-year-old has lived through a cycle as well.”

Three years ago, Micron’s gross margins were roughly break-even. Today it is guiding to 85% gross margins, for an asset-heavy manufacturing business, higher than most asset-light software companies.

What’s even more striking: Micron, Samsung and SK Hynix currently earn higher gross margins than Nvidia and TSMC, the companies everyone considers the widest-moat monopolies in the industry.

Many argue memory has reached a “new plateau”. Pzena Investment instead anchors on normalized, mid-cycle earnings power five years out, factoring in new supply, potential Chinese entrants, and demand destruction from rising device prices:

“So we’re living in a moment where the demand is insatiable and everyone believes that this might be a plateau and we may not go back to the past cyclicality.

What we try to anchor ourselves to is what is the normalized earnings power of this industry based on competitive dynamics. So when we say normalized earnings power, we’re talking about 5 years out on a midcycle basis..

On the basis of normalized earnings, it’s not entirely obvious to us that this is a new plateau... it’s probably fair to say the earnings are at a peak.”

The lesson here is something I already highlighted in my Pzena deep-dive: value on today’s earnings is not value if today’s earnings are a cyclical peak.

3/ Opportunities in software

While the market crowds into the “purveyors” of AI, Pzena has been buying the customers. Specifically, software companies crushed by the SaaSpocalypse: the fear that AI lets anyone replicate established software over a weekend.

In the webinar they discuss 2 names:

Workday (WDAY) — mission-critical ERP software for people-centric businesses (think Chipotle or Walmart, hiring thousands of people a week). Retention runs at 97–98%, and AI cuts both ways in their favor: it powers new products (a conversational AI tool that filters 2,000 job applications for a single Chipotle store) and reduces R&D, the biggest cost bucket of any software company. Pzena calls it “a very compelling investment opportunity.”

SAP — another ERP giant, serving supply-chain-heavy customers like BMW and Mercedes. Same mission-critical profile, plus a catalyst: as SAP retires its decades-old ECC product, most of that installed base is migrating to SAP’s next generation, which is a multi-year revenue uplift the market is undervaluing.

If you read last week’s Guru Gems issue, the following description of WDAY and SAP will sound familiar:

Mission-critical system of record. Retention near 100%. Enormous switching costs. AI as an accelerant rather than a death sentence. Sold off indiscriminately in the AI panic.

That is, almost word for word, the Guidewire (GWRE) thesis from last week. Guidewire’s ~99% retention is even higher than Workday’s.

Two Gurus with completely different styles (Lawrence the concentrated quality investor, Pzena the deep-value contrarian) are finding opportunities in the same corner of the market.

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📈 Deep Discounts in Deep Value

I came across a piece from Oldfield Partners — Away From the Casino Tables: The Wildest Value Gap Since 1999 — which connects beautifully with Pzena’s webinar.

It was the most widely read piece in Latticework‘s Weekly Inspiration newsletter last week. I highly recommend subscribing; there are always fantastic articles.

The core of the piece is one chart and one statistic. Splitting global equities into four valuation buckets and comparing each to its own 40-year median:

• Deep value globally trades at a 45% discount to its historical average

• Extreme growth trades at a ~40% premium

The author, Sam Ziff, notes that only once before (late 1999, early 2000) has the market been more expensive than today based on the Shiller P/E ratio. Warren Buffett recently observed that “we’ve never had people in a more gambling mood than now”.

The last time markets were this concentrated and this expensive, the following decade (2000–2009) delivered roughly zero total return for the S&P 500 and MSCI World, while emerging markets doubled and value beat growth. This should serve as an important warning to index investors.

Now connecting this to what Rich Pzena said in the webinar. Asked whether value investing is broken after another stretch of index outperformance:

“Value investing can’t be broken... if you do it right and buy things for less than they are worth, you will win.”

And on today’s valuation spreads:

“Our portfolio sells at about 20 or 30% below the valuation [forward P/E] it did 10 years ago... and the market is roughly 30% higher than it was 10 years ago on the same metric. The spreads are as wide as they get.”

Betting that the same expansion repeats from today’s starting point is, in Pzena’s words, “a tough bet”.

Or as Oldfield puts it:

“The casino may stay open a while longer. However, the best returns over the next decade are unlikely to come from the tables everyone is crowded around.”

The point is not to see this as a signal to time the market, but rather as a signal about where the next decade’s returns are likely to come from.

Which brings me to one of the most out-of-favor stocks in my portfolio…

💎 A Gem Revisited: Baxter (BAX) — Hold, Add, or Fold?

The setup: Baxter is a 95-year-old medical technology company selling essential hospital products: sterile IV solutions and infusion pumps, smart hospital beds and patient monitoring, and specialty injectables. Its North Cove plant produces roughly 60% of all IV solutions used in US hospitals.

Baxter is deeply out of favor by any objective measure: the shares have lost over 70% over five years while the market sits near record highs, Wall Street's consensus rating is Hold with an average price target below the current share price, and the dividend cut expelled the income-investor base.

Exactly the kind of situation Rich Pzena hunts for. At the end of Q1, Baxter was among Pzena’s top-5 positions, and at the end of Q1 Pzena Investment Management owned more than 10% of the entire company.

In the mid-year webinar, when asked where he sees value today, Pzena pointed to healthcare, and named Baxter specifically:

“You have companies like Baxter, which hasn’t really rallied and has a very strong set of businesses that have earned high margins, strong free cash flows, modest growth rates — that have run into problem after problem after problem that the former management team was unable to solve, and the new management team is in the process of solving...

It’s priced as if they’re not going to succeed. And so if they do, you make a lot of money. If they don’t, you don’t lose a lot of money.”

I first bought Baxter in September 2025 around $23, added below $20 in November, and again around $20 in January. My average purchase price is $20.4. The stock closed at $22.6 this week, putting my position up 10.6%, and making Baxter a 5–6% position in the Guru Gems portfolio. A good moment to re-examine the thesis.

1/ What has gone wrong (a lot)

First a reality check. Since my original write-up, the “problem after problem after problem” list has grown:

• The Novum IQ pump hold. In July 2025, Baxter voluntarily paused US/Canada shipments of its Novum IQ infusion pump after reports of underinfusion were linked to 79 serious injuries and two deaths. The stock fell ~21% in a day. The hold remains in place, ceding pump share to BD and ICU Medical, and has triggered a securities class action.

• The dividend is essentially gone. In late 2025, Baxter cut its quarterly dividend from $0.17 to $0.01 (a 94% cut, ending a 55-year streak) to free up >$300M per year for debt reduction.

• The balance sheet is stretched. ~$8.6B of long-term debt remains from the 2021 Hillrom acquisition. S&P and Moody’s both downgraded Baxter in November 2025 to one notch above junk, and the 3.0x net-leverage target slipped from end-2025 to end-2026.

• Margins and earnings are going the wrong way. Adjusted gross margin fell 900 basis points year-over-year in Q4 2025, adjusted operating margin is guided at just 13–14% for 2026, and adjusted EPS is guided down to $1.85–$2.05 from $2.27 in 2025.

• Management churn. CEO Joe Almeida left abruptly in early 2025; new CEO Andrew Hider (ex-ATS and ex-Danaher) only started in August 2025, and the CFO seat is currently held on an interim basis.

This is not a quality compounder having a bad quarter. This is a genuinely wounded business. So why hold it?

2/ Is it ‘Good’?

The core franchise survived all of the above intact:

• Irreplaceable infrastructure: ~60% of US IV fluids from one vertically-integrated plant. When Hurricane Helene knocked North Cove offline in 2024, US hospitals rationed IV bags, which shows how few substitutes exist.

• Switching costs: infusion pumps and smart beds are wired into hospital electronic medical record (EMR) systems, drug libraries and biomed workflows

• Essential demand: hospitals buy these products in every economic scenario.

Morningstar still assigns a narrow moat, though it flags real erosion at the edges: pump share losses during the Novum hold, IV share slippage during the Helene outage, and generic price pressure in injectables.

Verdict: an essential, moaty core wrapped in a badly managed decade.

3/ Is it ‘Cheap’?

• At $22.6, Baxter trades around 11–12x forward earnings, which is a steep discount to the medtech peer group (typically mid-teens) and to its own pre-2022 history.

• Analysts’ average price target is ~$21.50 (consensus: Hold), which is below the current price. The market is pricing in that nothing improves.

• If new management delivers the margin recovery and the Novum hold lifts, earnings could reach ~$2.40+ by 2027 and a re-rating toward 13–14x would imply a stock around $30. If execution slips further, trough multiples on ~$1.80 of earnings suggest ~$15.

From $22.6, that is roughly +33% in the good scenario versus −34% in the bad one. This ‘bet’ only remains attractive if you believe, as Pzena does, that the odds of the fix are meaningfully better than a coin flip: the problems are operational rather than structural, demand is not in question, and a cost-focused outsider CEO with 92% performance-linked pay now runs the company.

Verdict: statistically cheap, but cheap for a reason. The bet is on execution, not on the multiple.

4/ To Hold or Not to Hold

Last week I scored Guidewire against Lawrence’s six questions. Let me do the same for Baxter and score it against Pzena’s own framework from my original deep-dive:

1. Is the business under-earning versus its historic norms? ✅ Operating margins of 13–14% sit well below medtech peers, returns on capital are currently below Baxter's cost of capital, and earnings are depressed by fixable operational issues (pump hold, hurricane costs, stranded costs, mix), not by falling demand.

2. Are the problems temporary and fixable, not structural? ⚠️ ✅ Pump holds, hurricane damage, bloated costs and bad M&A are all fixable in principle, but this management team hasn’t proven it can fix them yet.

3. Is the market pricing the downside case? ✅ ~11x forward earnings, consensus price targets below the share price, a departed income-investor base, and a 70%+ drawdown from the 2021 highs.

4. If they fix it, is the outcome skewed in my favor? ⚠️ Only with better-than-even odds on execution, and less skewed at $22.6 than it was at my $20.4 average cost.

📌 Final decision: Holding, not adding

Baxter stays in the Guru Gems portfolio as my designated deep-value turnaround, but I’m not adding at ~$23.

Baxter reports Q2 2026 earnings on July 30, its first quarter under a newly announced two-segment structure. Three things I’ll be watching:

1. Operating-margin progress toward the 13–14% guide;

2. Any timeline on lifting the Novum pump hold. Current guidance assumes the hold stays in place for the entire year, so any lift would be pure upside versus guidance;

3. Progress toward the 3.0x leverage target.

If those indicators start moving the right way, Baxter could be the kind of skewed outcome Pzena describes. If margins stall again, I may need to consider if holding this company still makes sense.

That’s it for this week! Please like or share if you enjoyed this post.

Thank you for reading and following along.

Until next week!

Disclaimer: This newsletter is for informational purposes only and does not constitute financial advice or investment advice. Always do your own research before making any investment decision.

For those of you that have been following Guru Gems for a while, you know that I am a big fan of the Richer Wiser Happier (RWH) podcast. A few weeks ago, William Green reshared clips from his interview with Bryan Lawrence, and the timing couldn't be better, since it's also the one-year anniversary of my deep-dive on Bryan Lawrence and Oakcliff Capital.

So this week, I revisit Bryan Lawrence one year later: what he said, what he’s been buying, and what he’s building.

I’m also taking a closer look at one of Lawrence’s holdings: Guidewire Software (GWRE)

Here is a 2-minute AI audio version of today’s post:

Guru in the spotlight: Bryan Lawrence

There is a lot to unpack in the below 30-minute clip from William Green’s interview with Bryan Lawrence. It is one of the best 30 minutes you can spend if you want to understand what a real investing process looks like: how ideas get sourced, filtered, researched, sized, and (inevitably) how some of them go wrong.

1. 🎲 The Rule of 3

A recurring theme in the clip is how Lawrence expects to be wrong about 30% of the time.

“If you measure being right as the stock that we bought, either we sold for more than we paid for it, or we own it still for more than we paid for it — we’ve been right 70% of the time and wrong 30%. Like, we’re definitively wrong 30% of the time.”

The last of Oakcliff’s six research questions (more on those below) also builds directly on this:

“Question number six: if we’re wrong — because we can expect to be wrong at least 30% of the time — how much money will we lose?”

Lawrence also points to Buffett’s famous 1984 “Superinvestors of Graham-and-Doddsville” essay: every single one of the Graham-school managers with market-crushing long-term records underperformed roughly a third of the years when measured annually. Lawrence went back and counted for Berkshire itself: 19 of 54 years (i.e. 35% of the time) Berkshire Hathaway stock underperformed the S&P 500.

If this number sounds familiar to Guru Gems readers, it should.

It’s part of François Rochon’s ‘Rule of 3’, which I covered in my Rochon deep-dive:

“One year out of three, the market will go down (by more than 10%). One stock out of three that we will buy will be somewhat disappointing. And one year out of three, we will underperform the indexes.”

Two great investors converging on the same ‘law’ for concentrated stock picking.

2. 😣 The Pain of Underperformance

Knowing you’ll be wrong 30% of the time is one thing. Living through it is another.

Green counted that Lawrence underperformed the S&P in 8 of his 20 years, and still beat the index by more than 100 percentage points cumulatively. Lawrence’s response to how he endures those stretches is really a masterclass in temperament.

An interesting data point he shares comes from DALBAR’s studies of mutual fund flows:

The average active manager underperforms the market by roughly their fees (~1% per year). Painful, but survivable. The real damage is how the clients behave: they add money after strong performance and pull money after weak performance. The result, per DALBAR:

“The client’s returns underperform the active manager’s returns by four percentage points… Four percentage points of underperformance over a 30-year investment horizon leading to someone’s retirement is a nest egg that is 70% less.”

This is quite a statistic. Investors don’t just underperform the market, they underperform their own funds, by a ruinous margin, purely through timing their entries and exits emotionally.

Lawrence adds a nice thought experiment:

“It’s 1975, over the prior 2 years Berkshire Hathaway stock has fallen by half and the market is flat. Do you sell your stock? If you had, that would have been a very bad decision.

It’s 1999, Berkshire Hathaway stock is up slightly but 40 percentage points less than the S&P. Do you sell your stock? That would have been a very bad decision in 1999.”

It’s clear that both would have been really bad decisions. Berkshire has lost half its value three times under Buffett — and underperformed in a third of all years — on its way to one of the greatest compounding record in history.

Which brings me to Terry Smith.

Terry Smith just released his Semi-Annual Letter to shareholders, and it contains the biggest changes in Fundsmith’s 15-year history:

• 13 names out: Atlas Copco, Coloplast, EssilorLuxottica, Intuit, LVMH, Nike, Novo Nordisk, Zoetis, Unilever, Mettler-Toledo, Otis, Wolters Kluwer, Magnum Ice Cream

• 12 names in: AppLovin, Netflix, Mastercard, Uber, Veeva Systems, TSMC, GE Vernova, Sage, Legrand, Nextpower, TJX, Yum! Brands

• Portfolio turnover in H1 2026: 51%. For a fund whose third commandment is literally “Do nothing”.

The fund was down 2.9% in H1 2026 while the MSCI World rose 11.2%, a 14-point gap in six months, on top of years of lagging a momentum- and AI-driven index.

Fundsmith has suffered massive redemptions, and it looks like this ‘Extreme Makeover’ is either an attempt to stop the bleeding or the result of significant pressure from the remaining investors to make drastic changes.

I have a lot of respect for Smith (he was the Guru of my very first issue!), but this level of change looks very strange and goes against many of Terry Smith’s own principles.

For further reading on Fundsmith’s Extreme Makeover, here are 3 posts I enjoyed:

• - Buy Good Companies, Don’t Overpay, Do EVERYTHING ...

• - Terry Smith’s Radical Strategy Shift

• - What Happens When Your Investment Philosophy Stops Working?

In closing, here is something which I realized is quite ironic: if you ask yourself who is actually living Smith’s famous mantra today...

1. Buy good companies ✅ Lawrence: natural monopolies, rational duopolies, low-cost operators + only businesses with durable cash flows

2. Don’t overpay ✅ Lawrence: his 15 holdings traded at ~14x trailing free cash flow at the time of the interview, vs. ~22x for the S&P 500

3. Do nothing ✅ Lawrence: roughly two new investments per year. “You may see us do nothing for a year.”

4. Strong performance ✅ Lawrence: while we don’t have the exact performance numbers, based on his reported US holdings, his performance over the past few years must have been very strong

...it looks a lot like Bryan Lawrence is applying Terry Smith’s mantra more than Terry Smith himself.

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3. 🤖 Meet Marvin and Vicki

The second clip I want to share is Lawrence’s recent presentation at ValueX, and it’s a very different flavor: Lawrence on how he uses AI in the investment process.

Oakcliff has built two AI agents, running on Mac minis:

• Vicki is a shop-bot: she hunts for real-estate deals, cars, and restaurant reservations, partly to stress-test Oakcliff investments in areas where agents might disrupt the business model, partly to see what the technology can actually do. Verdict so far: not much. Zillow, Cars.com, OpenTable and friends have all blocked her. The internet has become, in Lawrence’s words, a game of “spy versus spy.”

• Marvin is an investment research analyst, and here Oakcliff is having far more success. Marvin applies Oakcliff’s frameworks, monitors the portfolio and watchlist, writes reports, and has a compounding memory base. Lawrence says Marvin can do “weeks of work in seven minutes.”

An interesting insight comes from Marvin himself, commenting on a draft of Lawrence’s presentation:

“My memory compounds correct and incorrect beliefs equally. Human discussion is the quality filter. Without discussion with you, I drift towards confident mediocrity.”

Lawrence’s conclusion: the quality of the agent’s work depends entirely on the quality of the frameworks you feed it. An agent will happily marinate in your biases and amplify them.

“What we’re trying to do with Marvin is have a small number of curated frameworks that maximize a query’s focus on information that is knowable, important, and true.”

There is one more gem in the Q&A that ties directly back to how Lawrence invests. Asked whether AI-driven quant trading changes the game, he lays out the market’s structure: roughly half is indexed, ~40% is algorithmic, and only ~1% is concentrated, long-horizon stock picking.

The algorithms are optimizing for what happens in the next ten days. But gradient descent (the mathematical engine that allows Large Language Models to "learn") doesn’t work when the outcome of a decision is only knowable in two or three years.

Lawrence’s edge (and the edge of everyone practicing this craft) lives precisely in that time horizon the machines can’t optimize for.

4. 📂 Oakcliff’s Q1 2026 Portfolio

So what does Oakcliff actually own, one year after my original deep-dive?

The answer is: pretty much the same portfolio as a year ago.

Here is the Q1 2026 13F snapshot (as of 31 March 2026, ~$227M in US-listed holdings):

Two things jump out:

1. Interactive Brokers (IBKR) is now a 30%+ position. IBKR was the Gem of my original Lawrence deep-dive, and it is also one of the larger positions in Marc Werres’s Hinde Group portfolio.

   With IBKR up ~200% over the past 2 years, this position has kept compounding in a true “let your winners run” allocation.

2. Lawrence has been aggressively adding to Guidewire Software (GWRE). He added 73% in Q1 2026 alone, on top of adding 27% in Q4 2025. He’s been buying while the stock has been cut nearly in half from its highs.

A Guru I highly respect backing up the truck on a wide-moat software company during an AI-panic selloff? That sounds like a Gem I need to take a closer look at…

💎 The Gem: Guidewire Software (GWRE) — To Buy or Not to Buy

The setup: Guidewire Software (GWRE) has been caught in the great Software Selloff of 2026. The market has decided AI will eat software, and anything with “SaaS” in its description has been repriced accordingly.

GWRE trades around $136, down ~27% year-to-date and roughly 50% below its 52-week high of ~$273. Lawrence first bought Guidewire in 2020 and has been adding significantly for two quarters.

Let’s run it through the framework.

1/ Is it ‘Good’?

Guidewire provides the core software (the ‘system of record’) for property & casualty (P&C) insurers: ClaimCenter (claims), PolicyCenter (policies), and BillingCenter (billing). This is not a productivity tool an insurer could turn off; it is the operational nervous system of the company.

In the RWH interview, Lawrence shares what defines a good business for him: natural monopoly, rational duopoly, or low-cost operator. Guidewire is the closest thing to a natural monopoly in P&C core systems:

• It is the leading provider to the industry, larger by revenue than its next several competitors combined, and wins more deals per year than its largest competitors combined (per Morningstar)

• Its software already covers more than 25% of all direct written premiums in the industry

• Customer retention is estimated at ~99%, making the duration of customer relationships longer than average within the software industry

• Switching costs are enormous: insurers keep core systems for two or three decades. Ripping out the system that processes your claims and policies risks the entire business

• In late 2025, Liberty Mutual signed a 10-year, Tier 1 deal that management called "one of the most strategic partnerships in our history"

Morningstar assigns a wide moat, and in March 2026, when Morningstar downgraded six wide-moat software companies (Adobe, Descartes, Manhattan Associates, Salesforce, ServiceNow, and Shopify) over AI disruption concerns, Guidewire kept its wide moat. Its analyst argues that a core system of record for a famously slow-moving, heavily regulated industry is relatively insulated.

Guidewire management also argues that AI is an accelerant: legacy systems from the 1950s can’t deliver AI capabilities, making modernization more urgent, not less.

Finally, the business is executing beautifully through the panic: fiscal Q3 2026 revenue grew 27% YoY to $373M with a 20.9% non-GAAP operating margin, both above the high end of guidance.

This looks like a great business. ✅

2/ Is it ‘Cheap’?

This is the more difficult part. Here are a few elements to help us determine whether GWRE is cheap:

• Versus its own history, GWRE has de-rated sharply: the stock fell from a 52-week high of ~$273 to the $120s–130s, compressing EV/ARR from roughly 18x toward ~9x, near multi-year lows despite accelerating ARR* growth.

• Morningstar’s fair value estimate for GWRE is $220 per share. At ~$136, the stock trades at a Price/Fair Value of ~0.6, which is one of the largest discounts in their software coverage.

• On a current free cash flow (FCF) basis however, Guidewire does not look cheap. GWRE is trading at 33 times FCF, which is on the higher end for a software business and a multiple investors usually pay for expected future cash expansion.

In other words: investors are expecting strong growth and expanding FCF margins driven by the cloud transition.

Verdict: cheap compared to its own history; reasonably priced on the margin-expansion thesis; not cheap on today’s cash flows. ⚠️ ✅

3/ To Buy or Not to Buy

Before I make my final decision, let’s score Guidewire against Lawrence’s own six questions:

1. Do we understand the business? ✅

   Guidewire provides cloud-based core systems and data/analytic solutions to the global property-casualty insurance industry, serving hundreds of insurers in 30+ countries in claims management, policy administration, and billing.

2. Is it a good business? ✅ ✅

   Near-monopoly, ~99% retention, decades-long switching costs, wide moat

3. Does management think like shareholders? ✅

   Consistent execution; Morningstar rates capital allocation Standard; Well thought out acquisitions that complement the portfolio

4. Is it cheap? ⚠️

   ~0.6x fair value, but the IRR depends on future margin expansion

5. Why is it cheap? ✅

   Indiscriminate AI-panic selloff vs. an insulated (possibly AI-advantaged) system of record

6. If we’re wrong, how much do we lose? ⚠️

   Hard to assess. If the AI disruption is real, the stock can go much lower still.

📌 Adding Guidewire Software (GWRE) to the Guru Gems portfolio

I plan to add a starter position (1-2%) to the Guru Gems portfolio in the next few days.

This is a good business undergoing a temporary crisis of confidence, with a Guru I highly respect significantly increasing his position.

Since I expect to be wrong 30% of the time, and if the AI bears turn out to be right about even core systems software, there is still real downside from here. So position sizing will be key and hence a small starter position.

🧩 One More Thing: Guidewire Meets CCC

Regular readers will remember that I already own CCC Intelligent Solutions (CCC) in the Guru Gems portfolio: another insurance software name held by several Gurus. So am I doubling up on the same bet?

No, and it could be helpful to get a basic understanding of the four layers of the insurance software stack.

Guidewire and CCC sit in different layers. Guidewire is the operational backbone an insurer uses to issue policies and manage the claim file; CCC is the specialized auto-claims network the claim gets routed through.

A single auto insurer commonly runs ClaimCenter as its system of record and pushes the physical-damage workflow through CCC. They don’t bid against each other.

So rather than doubling the same bet, I now own two dominant, ~99%-retention franchises in two different layers of the stack: the core (Guidewire) and the claims network (CCC). Both have been de-rated by the same indiscriminate software selloff. Same storm, different moats.

That’s it for this week’s edition!

Thank you for reading and following along.

Until next week!

✅ Further Reading

This week’s issue connects across the Guru Gems archive:

• Bryan Lawrence & IBKR: the original deep-dive, one year old this week.

• Timeless Lessons from François Rochon: the Rule of 3, the Podium of Errors, and why patience is the rarest quality.

• Cloning the World’s Best Investors: my very first Guru Gems issue. Here I introduced Terry Smith’s framework.

• Marc Werres & The Hinde Way: Marc Werres, the other guru with a massive IBKR conviction position.

• Physics for Investors #2: on feedback loops

Disclaimer: This newsletter is for informational purposes only and does not constitute financial advice or investment advice. Always do your own research before making any investment decision.

Welcome to Round 10 of building my Magic Formula Portfolio

This one is a bit special: this week marks exactly one year since I bought the first 3 stocks on 7 July 2025.

Quick reminder if you are new to Guru Gems: while studying investing masters, I am creating two real-money portfolios to put my learnings into practice.

If you are new to Guru Gems, start here

Magic Formula Refresh

In ‘The Little Book that (Still) Beats the Market’, Joel Greenblatt suggests that a regular investor can beat the market averages by buying a group of ‘good’ companies at ‘bargain’ prices.

• ‘Good’ → High return on capital

• ‘Bargain’ → High earnings yield

Since he expects the magic formula to work on average, Greenblatt suggests to own a basket of 20-30 stocks, to buy this basket over the course of a year, and to hold each stock for exactly one year.

You can read more on Joel Greenblatt and his Magic Formula here.

You can also download my Joel Greenblatt e-book for free:

Joel Greenblatt e-book by Guru Gems

494KB ∙ PDF file

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One Year In: Current Magic Portfolio Performance

Last month I added Booking Holdings (BKNG) in Round 9, bringing the portfolio to its full size of 25 stocks.

The overall performance of the Magic Portfolio after year one: +18%.

On a YTD basis, the Magic Formula Portfolio (+14%) is beating both the S&P 500 (+9%) and the NASDAQ Composite (+11%):

Some observations after 12 months:

• The big winners were not the obvious ones. Lantheus (LNTH, +110%), Catalyst Pharmaceuticals (CPRX, +57%), Consensus Cloud Solutions (CCSI, +55%) and EverQuote (EVER, +53%) lead the pack. None of these were names I would have picked on conviction so I’m glad the formula picked them.

• 19 of 25 positions are in the green. The formula does not need every stock to work. SIGA (-42%), H&R Block (-21%) and lululemon (-18%) are the biggest detractors. This is exactly what Greenblatt warns about: some cheap stocks are cheap for a reason, but that’s why you hold a basket of 25 names, allowing the formula to work on average.

“If you are able to stick with the magic formula strategy through good periods and bad, you will handily beat the market averages over time” — Joel Greenblatt

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Selling My First 3 Stocks

Greenblatt’s rule is to hold each stock for exactly one year, then sell. No exceptions and no second-guessing.

So this week, I am selling the 3 names I bought on 7 July 2025:

The first cohort ends with a losing average of roughly -6%: two modest winners and one heavy loser.

SIGA was my best performer in the early months after jumping nearly 40% on strong earnings, but it ends the year as my worst position. I held through the entire round trip, which was painful to watch, but part of the process.

What is interesting is that both metrics (ROCE and EV/EBIT) deteriorated, across all three names. None of the three would qualify for the formula today and this illustrates that the annual refresh is how the portfolio stays good and cheap, instead of drifting into “was good, no longer cheap”.

New Magic Formula Stocks

As I explain in detail in my first Magic Portfolio post, I use Joel Greenblatt’s Magic Formula screener combined with financial ratios data to identify the top stocks in terms of combined rank for Return on Capital (using ROCE) and Earnings Yield (using EV/EBIT).

This round, I extended the analysis with three additional criteria: P/FCF (an alternative valuation lens to EV/EBIT), Revenue 3yr CAGR (is the company still growing?) and Net Debt/EBITDA (how much debt is on the balance sheet?).

Two notes on this round’s selection:

1. I limited precious-metals miners to one. The raw screen currently ranks three gold/tin miners near the top (Alphamin, Andean Precious Metals, Wesdome). I guess this is a reflection of where we are in the metals cycle. Following the ranking blindly would have made this a mining round. I capped it at one miner and chose the highest-quality of the three: Wesdome.

2. I skipped HP Inc (HPQ) despite its high rank. HPQ ranked above two of my picks on the raw screen. But it has appeared on the Magic Formula screener for a very long time while its share price has declined over the past 5 years. You could argue that this is the classic profile of a value trap, and therefore I decided to pass.

Wesdome Gold Mines (WDO, Market cap $2.7B)

Magic Formula metrics: ROCE 63% (3yr: 42%); EV/EBIT 5.6x; Net cash

Wesdome Gold Mines is a Canadian gold producer with two high-grade underground mines: Eagle River in Ontario and Kiena in Québec.

What sets Wesdome apart from most miners is the balance sheet: completely debt-free, with the company buying back stock while funding growth internally. Revenue grew +55% over the past 3 years on the gold-price tailwind.

The Buckle (BKE, Market cap $2.1B)

Magic Formula metrics: ROCE 35% (3yr: 34%); EV/EBIT 8.1x; Net Debt/EBITDA 0.4x

A specialty apparel retailer from Kearney, Nebraska, known as a denim destination, operating ~440 stores across 42 states, including its own exclusive BKE brand.

This is the cleanest “boring quality” name on the screen: high returns on capital year after year, near-zero debt, and a consistent dividend.

Revenue has been relatively flat over 3 years though recent comparable-store sales are accelerating (+5.7% in Q1).

Cognizant Technology Solutions (CTSH, Market cap $20B)

Magic Formula metrics: ROCE 20% (3yr: 20%); EV/EBIT 5.6x; Net cash

Cognizant is one of the world’s largest IT services firms, operating across financial services, health sciences, products & resources, and communications/media/tech.

Cognizant is cheap for the same reason many other service forms have been hit: the market fears AI will commoditize what IT-services firms sell.

At a price below 10x earnings, with a net-cash balance sheet, revenue still growing, an expanding operating margin and $1.6B per year returned to shareholders via buybacks and dividends, the magic formula is suggesting that a lot of pessimism is already in the price.

What’s interesting is that Rich Pzena holds Cognizant as one of his largest individual holdings and further added to the position in Q1 2026. Here is an extract from Pzena’s US Focused Value Q1 Commentary:

Leading IT services provider Cognizant (CTSH) was weak, despite reporting robust 4Q earnings with peer-leading organic growth, due to fears around AI disruption to the services industry more broadly. We continue to see these fears as overblown and added to our position on weakness.

Pzena also still owns Baxter as one of his top 5 positions, a stock I added in September 2025 and which is up 11% since then.

This brings the portfolio to 25 stocks again, and ready for year two. From here on, every round will be both a sell and a buy: the Magic Formula flywheel is now turning.

That’s it for this week! Please like or share if you enjoy reading Guru Gems.

You can follow me on X @guru_gems and Substack @gurugems for more insights.

Until next week!

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Disclaimer: This newsletter is for informational purposes only and does not constitute financial advice or investment advice. Always do your own research before making any investment decision.

Welcome back!

A few things on my mind this week:

• ⚠️ Warning Signs - Some red lights are flashing in the stock market

• 🛡️ Downside Protection - Legendary investor Seth Klarman on the one thing he cares about as much as upside

• 🚗 Salvage Cars - A fresh, honest look at one of my Guru Gems holdings that’s been bleeding: Copart

New to Guru Gems? Start here.

Last week I covered lesser-known Guru Dennis Hong, founder of ShawSpring Partners, who runs a concentrated portfolio of companies in the technology, internet, and consumer sectors

Here is the 2 minute AI audio version of today’s post if you are short on time:

⚠️ Warning Signs

🎶

“A warning sign
I missed the good part, then I realised
I started looking and the bubble burst”

Warning Sign - Song by Coldplay

I’m fairly sure Chris Martin had something other than equity markets in mind when he wrote these lines. But listening to this song earlier this week, I realized how well these first three lines capture the mood around AI stocks right now.

I missed the good part

The rally has convinced a lot of people that they've missed the ‘easy’ money and that the only way to fix that is to pile into the 'hot' names before it's too late.

Howard Marks described exactly this psychology in his book Mastering The Market Cycle:

“But most investors do capitulate eventually. They simply run out of the resolve needed to hold out. Once the asset has doubled or tripled in price on the way up — or halved on the way down — many people feel so stupid and wrong, and are so envious of those who’ve profited from the fad or side-stepped the decline, that they lose the will to resist further.

My favorite quote on this subject is from Charles Kindleberger: “There is nothing as disturbing to one’s well-being and judgment as to see a friend get rich” (Manias, Panics, and Crashes: A History of Financial Crises, 1989).

Market participants are pained by the money that others have made and they’ve missed out on, and they’re afraid the trend (and the pain) will continue further. They conclude that joining the herd will stop the pain, so they surrender. Eventually they buy the asset well into its rise or sell after it has fallen a great deal.

In other words, after failing to do the right thing in stage one, they compound the error by taking that action in stage three, when it has become the wrong thing to do. That’s capitulation. It’s a highly destructive aspect of investor behavior during cycles, and a great example of psychology-induced error at its worst.”

Look at what is happening in Taiwan and Korea and tell me this isn't exactly what Marks is describing…

I started looking and the bubble burst

Is there an AI bubble? Is it 1999 all over again? I’m seeing many posts on Substack and finance news sites debating these questions, claiming either that we are reliving 1999-2000 or that “this time is different”.

As with everything, the answer needs some nuance rather than bold statements.

I have written in a few previous posts about how history seems to be rhyming lately:

• What Rich Pzena learned from the dot-com bubble (Dec 2025)

• GMO: “It’s probably a bubble” (But that’s OK) (Dec 2025)

• Berkshire’s Underperformance - History rhymes (May 2026)

• Paul Tudor Jones on whether this is 1999 again (May 2026)

Rather than repeating myself by listing every warning sign I'm seeing today, let me share two excellent pieces I read this week that captured my current thinking:

• - Episode 33: This Is Not 1999, Mostly. (free)

• - “We’re In A Historic Bubble” (paid)
  

Come on in… I’ve gotta tell you what a state I’m in

So what does all this mean for my Guru Gems portfolio?

Starting with Alphabet and Amazon, my two best performers. Both have benefited from the AI rally, especially Alphabet which I bought in April 2025 when everyone thought they were done because Search was no longer relevant.

Both companies would almost certainly take a hit in a broad selloff (in fact, both are down 13% and 14% over the past month as part of a broader tech sell-off). But I see them as genuinely high-quality businesses that should keep compounding over the long run, so I'm comfortable holding them. They also remain two of the most widely owned names among the Gurus, as the latest 13F filings confirmed.

Then there is a group of names that have been sold off on the fear that AI will disrupt them (Constellation Software, CCC Intelligent Solutions, S&P Global). I probably bought CSU and CCC too early, but I remain convinced all three will do well over time, and the long-term Gurus’ activity backs up that thesis.

And finally, a few companies that are essentially AI-agnostic and have been left for roadkill despite still being high quality (Zoetis, Copart). These are exactly the kind of unglamorous, high-quality names that tend to do well once the euphoria around the hot names fades. When the dot-com bubble burst, these type of boring businesses quietly compounded while the hot names were collapsing.

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🛡️ Downside Protection

I watched 2 very interesting interviews with Seth Klarman this week. Klarman is a legendary investor who runs Baupost, the Boston-based firm he has led for almost 44 years. In those 44 years he has had only five down years, the worst around −10%. He is also the author of the famously hard-to-find book Margin of Safety.

I will be doing a full post on Seth Klarman in the coming weeks or months, so stay tuned for that one.

For now, I just want to share one insight that stuck with me from the interviews.

It is about the importance of downside protection.

Here is the line from the first interview that captures it:

It’s a downer to talk about downside. Nobody wants to hear it when the market’s going up every day. But there’ll be a moment when things will correct. There’ll be a lot of pain and usually in those environments if we’ve protected well which so far we have, we’ll be able to put capital to work when our competitors are maybe standing back a little bit. So the opportunities that happen in the worst environments can lead to returns for years afterward from deploying more capital into those markets.

And from the second interview:

“The only place where we’re making decisions is if the downside is protected and if we can see lots of paths to winning, then we’re very interested”

In almost 44 years, Baupost only had five down years. That record came from an obsession most of the industry finds boring. As Klarman put it, “the way we protect capital is we focus on downside as much as upside.” In practice that means meticulous bottom-up research, no leverage, a willingness to hold cash when nothing is compelling, and buying unloved or distressed assets during market panics.

Protecting the downside is precisely what lets you show up on the day everyone else can’t. Klarman’s example was 2008–09: as markets fell apart after Bear Stearns and Lehman, Baupost raised significant capital within a single quarter and deployed it into distressed assets while much of the industry sat “paralyzed and frozen with fear.”

There's a deeper, mathematical reason protecting the downside matters, which a fellow Substack writer I follow, of Rock & Turner, laid out beautifully in his article Are You Losing A Game You Should Win?.

Using a simple coin-flip (win +50%, lose −40% on a 50:50 flip), he shows why a strategy that looks favourable can still destroy capital: a loss always needs a larger percentage gain to recover, so the typical compounded outcome is negative even when the average looks positive. His conclusion is perfectly aligned with what we just heard from Klarman: "large drawdowns damage compounding more than large gains help it."

💎 Copart (CPRT) — Undervalued or value trap?

Copart (CPRT) runs online vehicle auctions, primarily for salvaged and total-loss cars. Insurance companies rely on Copart to efficiently dispose of vehicles, while buyers around the world compete for inventory through Copart’s digital platform.

Copart has compounded capital through multiple cycles without relying on leverage or hype.

Its strength can be summarized in 3 dimensions

• Network effects: More buyers → higher auction prices → attracts more sellers (insurance companies) → more inventory → attracts more buyers

• Long runway: Increasing vehicle complexity and repair costs means more cars are written off

• Strong balance sheet: Cash is piling up, offering opportunities for buybacks and/or acquisitions

I first wrote about Copart in my review of Peter Keefe and his Rockbridge Capital portfolio.

I added the stock to the Guru Gems portfolio in January 2026, when it was down nearly 40% from its 52-week high. I added more in February when the stock kept falling.

The stock is deeply out of favor, mostly driven by slowing revenue growth over the last several quarters, and shares are now down more than 50% from their peak, the largest drawdown in over 20 years.

But the fundamentals seem to suggest a different story:

• Revenue 5yr CAGR: 9.8%

• ROIC 5yr Avg: 31.6%

Why I think this is still a high-quality compounder

First, let’s start with was has gone wrong:

• Volumes are soft. Unit volume has declined for several quarters. More Americans underinsured or uninsured (fewer claims → fewer salvage cars), plus some share shifting between insurers. Fiscal 2026 revenue is set to dip slightly year-over-year, the first stumble in a long time.

• A competitor woke up. IAA, Copart’s longtime #2, was bought by RB Global in 2023 and appears to be competing harder.

• The market lost patience. A couple of earnings misses compressed the multiple hard. The forward P/E has fallen from the 30s into the high-teens.

But none of that means the moat is broken:

• Pricing power is intact. Even with volumes falling, average selling prices have kept rising (mid-single digits globally, high-single digits for US insurance auctions). A broken business doesn’t get to raise prices into declining volumes.

• The balance sheet is a fortress. Roughly $4.2 billion in cash against essentially no debt, with ROIC around 29%. Morningstar still rates the moat Wide.

• Management is buying back stock. After years of hoarding cash, Copart repurchased about $1.6 billion of shares over the past year (~6% of market cap), most of it last quarter, with the stock below analysts’ fair value. This is the corporate version of Klarman’s “playing offense when competitors are sidelined.”

So: undervalued, or value trap? A value trap keeps getting less valuable with margins eroding and the moat crumbling. That isn’t what these numbers describe. This looks more like a wide-moat compounder working through cyclical challenges. The bear case to take seriously is “volumes staying soft longer than expected and the stock sitting in the penalty box for a year or two”. This would be painful, but survivable.

So I’m holding, and at ~$30, with the moat intact and management buying back stock, I believe the risk/reward has improved.

Red flag to watch for: if average selling prices start falling alongside volumes, that could mean the moat is genuinely eroding, and this is when I would revisit straight away.

That’s it for this week! Please like or share if you find these insights valuable.

Thank you for reading and following along.

Until next week!

Disclaimer: This newsletter is for informational purposes only and does not constitute financial advice or investment advice. Always do your own research before making any investment decision.

In today’s edition:

• 🕴️ The Guru: Dennis Hong — the shopkeepers’ son who grew ShawSpring from $10m to over $1bn, running just 5–10 stocks

• 🌐 The Playbook: Ecosystem Control — Hong’s framework for defining quality

• 💎 The Gem: Coupang (CPNG) — a new Q1 2026 position, and a stock Hong has held before

2-minute AI audio version of today’s post:

Guru in the spotlight: Dennis Hong

Background

Dennis Hong grew up as the son of two shopkeepers in Ontario (“We basically were purveyors of cigarettes and lottery tickets”) which is where he first learned about business. Neither parent went to university, Hong was the first in his family to do so.

One of his applications (“one of my lottery tickets”) hit, and he got into Yale. To cover ~$4,000 a semester he searched the campus job board for the highest hourly rate and landed, almost by accident, at the Yale Investments Office, which was run by the legendary David Swensen.

At the time he didn’t even know who Swensen was. Sitting in on manager meetings with the likes of Seth Klarman and Chase Coleman, and reading partner letters in the filing room, became his real education.

From there he spent a couple of years at Matrix Capital, then in 2009 he became employee number two at Altimeter Capital (founded by Venture Capitalist Brad Gerstner), which he helped scale from $2m to $400m.

Launching ShawSpring

At 30 he enrolled at Harvard Business School intending to network his way into a fund launch, and then dropped out after his first year when a Boston family office offered to back him. ShawSpring Partners launched on 15 July 2014 with $10m.

ShawSpring’s assets grew from $10m to over $1.5bn in less than seven years. (It did significantly decrease again over the past years, more on that later.)

There is no IR team and no marketing department. Hong is, in his words, the IR, the portfolio manager, the marketer and the CEO. The ceiling on the firm’s size, he says, is simply his own bandwidth to maintain a real relationship with every client.

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ShawSpring’s Playbook

ShawSpring’s Partner Letters are unfortunately not publicly available and there aren’t a lot of recent interviews, but there are some older interviews and letters that contain enough to study Hong’s thinking process and investment approach.

Here is a chat between Dennis Hong and Robert Vinall which I much enjoyed:

Hong’s firm runs on a single organising principle: maximise the return on time and effort spent. With a five-person team hunting for 5–10 stocks out of a universe of ~50,000, everything has to be “repeatable, replicable and scalable”.

Here are 4 pillars of Hong’s framework which I distilled from the different interviews or available letters

1. 🌐 Ecosystem Control: lock-in across every constituency

One idea sits at the centre of how Hong invests: Ecosystem Control

Think of every business as an ecosystem. The customer is the catalyst that brings cash in, and that cash then flows through all the other constituencies: suppliers, manufacturers, employees, management, investors…

The highest-quality businesses are the ones where every constituency is locked in so completely that it would be economically irrational for any of them to leave for a competitor ecosystem.

That dynamic is rare, and it’s the filter ShawSpring uses to sort ~50,000 companies down to a handful.

“If it doesn’t have this characteristic of ecosystem control, you just sort of drop it and go to the next one.” — Dennis Hong

Underpinning it is a definition of compounding borrowed from Peter Kaufman: “constant, continuous, dogged improvement over very long time frames”. Hong wants businesses that grow revenue, earnings and free cash flow with that kind of positive linearity regardless of the macro environment. Ecosystem Control is his test for which ones can.

2. 🎯 Concentration and a punishing hurdle

ShawSpring runs just 5–10 stocks in service of what Hong calls “Hall of Fame returns”

Over his ~40-year horizon he says he is aiming for a “two-handle” annualised return (20%+), with a very high bar for entry of roughly a 30% IRR (internal rate of return) over 3–5 years. (Whether he’s actually clearing that bar, we can’t verify, but it’s a useful way of how to think about a hurdle rate.)

As he tells his team, unless an idea could plausibly triple or quintuple over that window, it isn’t worth the time.

The firm runs as “one team, one portfolio, one P&L” (“there’s no ‘sleeves’ in our firm, everyone owns every position”), and to fight group-thinking, Hong appoints himself ‘chief pain in the a**’: once a new idea is about a third researched, his job is to try to kill it.

With ten strong names already in the portfolio, the bar to displace an existing name is meant to be very high.

3. 🛒 The ‘trigger-ready’ list: patience as process

ShawSpring keeps a shopping list of ~200 businesses that appear to have ecosystem control.

And within that shopping list they have a ‘trigger-ready list’, a subset of fully researched businesses which they really like, but where the only criteria missing is a good price.

When a sell-off drags a business down to Hong’s hurdle rate, the team can act immediately. His March-2020 purchase of Square, after a ~60% drop, is an example of this.

4. 🔭 Optionality: paying for the upside the market can’t see

If Ecosystem Control is how Hong defines quality, Optionality is how he thinks about growth the market is missing.

In a 2020 letter, Hong defined Optionality as “the expected value of a current or future investment that is unknowable or difficult for the market to discern.”

ShawSpring Partners Letter Nov 2020

675KB ∙ PDF file

Download

Download

He argues that the market prices the visible core business well, but struggles with the less knowable, so it tends to draw a straight line from today’s numbers and ignore what isn’t yet on the page.

Hong identifies four types of optionality:

• New business — leveraging the core’s infrastructure (Amazon → AWS; JD.com → JD Logistics).

• Product / category expansion — complements that deepen the value proposition (a marketplace adding groceries; software adding modules).

• Strategic shift — a related pivot to a better model (Netflix DVDs → streaming; Adobe → SaaS)

• Geographic expansion — replicating success in a new region (Starbucks into Asia; Sea’s Shopee across markets).

The ShawSpring Portfolio

Below is an overview of ShawSpring’s US equities portfolio at the end of Q1 2026.

This is a portfolio of high-growth technology and internet names: Okta, Zscaler, Braze,… businesses earlier in their potential compounding curve than a typical Guru Gems holding.

It’s also worth looking at the holdings history to get a sense of the turnover in the portfolio

Here is where I’m struggling a bit to match the frameworks and what I can actually observe. With no audited returns, the public 13F filing is the only view we have, and it may not be the full picture (US-listed long positions only, so no non-US names or cash).

But it’s still worth looking at it, because it raises some questions:

• The turnover looks relatively high for a framework built on the idea of ‘constant, continuous, dogged improvement’

  • Shift4 Payments (FOUR) was bought in Q1 2024, became the largest position by Q4 2024, then trimmed throughout 2025 (possibly taking profits as the stock peaked in early 2025), significantly adding again in Q3 2025, but then sold entirely during Q1 2026.

  • Intuit (INTU) became the largest position in early 2025 and is both much smaller and down sharply since.

  • Coupang (our Gem for today) was owned in 2022–24, exited, and is now back in the portfolio.

• The disclosed US equities portfolio has shrunk a lot. ShawSpring’s 13F value peaked over 1 billion in 2021 and stood at about $268m by Q1 2026. Some of that could be market drawdown, some could be client redemptions or it could be a move to cash or foreign equities (Dennis Hong did mention in an interview that he would be looking more at Asia). But a ~70% decline in disclosed US equities is still hard to reconcile with a smoothly compounding fund.

Of course, the above doesn’t prove the approach is flawed, a concentrated portfolio is volatile by design, and 13Fs certainly don’t tell the full story. But it does mean I can’t point to ShawSpring and say “look how well this works” like I may have done with Marc Werres and Hinde Group.

If anyone has access to ShawSpring’s performance or recent letters (@Dennis Hong, if you happen to read this ;-) ), I’d love to read them and will be more than happy to do a part 2 of today’s post.

💎 The Gem: Coupang (CPNG)

In Q1 2026, Hong re-opened a position in Coupang (NYSE: CPNG), the dominant South Korean e-commerce and logistics company often described as ‘the Amazon of Korea’.

It was one of four new buys in the quarter (alongside Zscaler, GDS Holdings and Constellation Energy), and he also added 57% to his Amazon position. With Alibaba as his 3rd largest position, his portfolio is clearly tilted toward scaled ecommerce platforms.

Hong is not the only Guru buying Coupang

I always look for Gems held by multiple Gurus and Coupang caught my eye in Hong’s portfolio because I had just read an investment thesis from Miller Value Partners on the same name. Here is the link:

Miller Value Funds - What We Own/Why We Own It - Coupang Inc. (CPNG)

Miller Value Partners was founded in 1999 as a joint venture between Bill Miller and Legg Mason Inc.

Bill Miller is most famous for his historic run managing the Legg Mason Capital Management Value Trust, where he beat the S&P 500 for a record 15 consecutive years (1991–2005). He’s definitely on my list of Gurus to cover in the future.

What does Coupang actually do?

Here is the introduction from Miller Value Partners’ write-up:

Dubbed the “Amazon” of Korea, Coupang is the leading e-commerce retail and logistics provider in the country. The company has over 100 fulfillment centers in Korea, with 70% of the nation living under 7 miles from a Coupang fulfillment center, enabling rapid delivery. In addition to selling owned inventory, Coupang sells advertising and goods from third-party merchants. It also provides restaurant ordering and delivery service through its Eats segment, while Coupang Play is a content-streaming service.

Coupang generates roughly $35bn in revenue across two segments: Product Commerce (~85% — its core retail, Rocket Delivery and WOW membership engine) and Developing Offerings (~15% — Coupang Eats, Play streaming, fintech, Taiwan and other bets). It serves Korea plus a growing international footprint, and employs over 100,000 people.

Not the first time Dennis Hong buys Coupang

Hong has owned Coupang before: it was the second largest ShawSpring holding in 2023 (around 22% of the 13F portfolio in Q2 2023). So it isn’t exactly a new idea for ShawSpring. While it’s unclear why they got out of the position in Q4 2024, I assume the reason they are getting back in, is because they believe it is a ‘great company temporarily on sale’:

• A late-2025 data-security incident and a large customer-voucher program hit margins, pushing Coupang to a Q1 2026 net loss of ~$266m on revenue of ~$8.5bn.

• The shares fell sharply, down roughly 30%+ year-to-date by spring 2026, resulting in multiple analyst downgrades.

• Underneath, the business kept growing (Developing Offerings +28%), membership recovered toward ~80% by April, and management expanded the buyback authorization to $2bn.

One of Hong’s favourite lines, from Intel’s Andy Grove, captures the bet he’s making on Coupang’s management:

“Bad companies are destroyed by crisis, good companies survive them, great companies are improved by them.” — Andy Grove

Why CPNG fits the Ecosystem-Control playbook

Coupang’s Rocket delivery network, WOW membership, Coupang Eats and Play streaming, and its third-party marketplace lock customers, merchants and the logistics fleet into a single web.

The more members join, the denser the delivery network; the denser the network, the harder it is for a customer or a merchant to leave. That is lock-in across constituencies, exactly what Hong screens for.

Let’s look at some of the key elements from Hong’s framework

🔒 1. Customers locked in ✅

Coupang has built one of the strongest consumer ecosystems in South Korea.

Rocket Delivery, Rocket Fresh, Eats, Travel, and the WOW membership create increasing switching costs. Once consumers become accustomed to same-day or next-day delivery and bundled services, changing platforms becomes inconvenient. The WOW membership is particularly powerful because it increases engagement across multiple services.

🏪 2. Suppliers/Merchants locked in ✅

Coupang is becoming an increasingly important sales channel for merchants, but merchants are generally less captive than consumers. Large brands can still sell through multiple channels, while smaller merchants benefit greatly from Coupang's logistics and customer reach. The marketplace is strong, but merchant lock-in is probably not yet at Amazon Marketplace or MercadoLibre levels.

🚚 3. Logistics moat (scale) ✅

This is probably Coupang's strongest advantage. The company has spent years building a nationwide fulfillment and last-mile delivery network that would be extraordinarily expensive to replicate. The density of its network creates faster delivery, lower costs, and better customer experiences, reinforcing its competitive position. Few competitors can justify the capital required to build a similar infrastructure.

🔭 4. Optionality ✅

Coupang scores exceptionally well here and fits all four of Hong’s types: new businesses, category expansion, strategic evolution, geographic reach.

The company continues to launch new businesses that leverage its existing customer base, logistics network, and brand. Advertising, Eats, Travel, Fintech, WOW, and future services all represent potential growth engines. Importantly, these initiatives are not standalone ventures, they are extensions of the existing ecosystem, which increases their probability of success.

To Buy or Not to Buy

Now that we’ve shown that Coupang fits the Ecosystem-Control playbook, let’s have a closer look at whether I should add it to the Guru Gems portfolio

Is it ‘good’?

As of 2026, Coupang’s gross margin sits at just below 30% and has nearly doubled over the past 5 years. This shows that Coupang’s warehouse automation, AI demand forecasting, and scale are working to lower product costs.

However, Coupang’s operating margin is razor-thin, hovering near 0-1%.

Management is choosing to reinvest its gross profits immediately into capturing new markets

• Building a massive delivery network (logistics moat)

• High expansion costs into new markets (Taiwan, luxury platform Farfetch)

• Heavy spending on its WOW membership ecosystem to maintain its dominant market share,

The recent data breach and massive $400m fine will also have an impact.

The investment thesis is that once Taiwan and other growth engines scale up and one-time legal issues fade, Coupang’s high gross profits should theoretically trickle down into a much stronger operating margin.

Is it ‘cheap’?

This is the part where I have done the least research on and therefore is a bit ‘too hard’ for me to assess right now.

When looking at some traditional metrics like EV/EBIT or P/FCF, Coupang may look very expensive.

However, Miller Value Partners writes that Coupang shares “trade at a forward (FY27) EV/Sales multiple of 0.6x, a ~71% discount to the stock’s peer group (AMZN, MELI, BABA, ETSY, EBAY, SE, Naver) average multiple”

Final decision

📌 Adding CPNG to the Guru Gems watchlist

Coupang ticks the Ecosystem and Optionality boxes, and the fact that it’s down nearly 40% over the past year means there is probably a lot of negative expectations already priced in.

But unlike a company like S&P Global, where the quality already converts to fat margins, Coupang’s profitability is still unproven.

So for now it goes on the Guru Gems watchlist rather than the portfolio. I do plan to study this business in more detail and will especially be looking for investment theses from other Gurus holding the stock (Oakmark, Chase Coleman).

That’s it for this week’s edition!

Thank you for reading and following along.

Until next week!

Disclaimer: This newsletter is for informational purposes only and does not constitute financial advice or investment advice. Always do your own research before making any investment decision.

Welcome back!

Last month I launched a new series within Guru Gems: Physics for Investors.

In the first issue, I covered the second law of thermodynamics and the idea that businesses, like cups of hot coffee, naturally cool toward equilibrium unless work is done to hold them apart from it.

Today’s issue builds on that first one.

If the natural tendency of every business is to decay toward the cost of capital, then how do we explain the few businesses that seem to do the opposite? The ones that do not resist decay, but actually get stronger the bigger they get? Amazon, Visa, Alphabet…

These businesses are governed by a different principle which I will cover in more detail below.

2 minute AI audio version of today’s update:

New to Guru Gems? Start here

🎤 Why Microphones Scream

Picture a microphone held too close to a loudspeaker. A faint sound is picked up by the microphone, amplified, and pushed out through the speaker, now louder. That louder sound is picked up again, amplified, pushed out and so on… Within a second or two, the whole room is filled with a sharp, uncomfortable noise (a ‘screech’).

What you have heard is the result of a positive feedback loop.

Feedback is a fundamental concept in control theory and comes in two flavours:

Negative feedback is self-correcting. A classic example is a thermostat: the room gets too warm, the thermostat switches the heating off, the room cools back to the set point. Any deviation triggers a force that pushes the system back toward equilibrium.

As I explained in last month’s post, negative feedback is the reason most businesses drift back toward average returns. Competition is a negative feedback loop. It punishes success and erodes excess profit, always nudging the system back toward equilibrium.

Positive feedback is the opposite. Instead of counteracting a change, it amplifies it. A produces more of B, which produces more of A, which produces more of B again. The microphone screech is positive feedback. Or a snowball rolling downhill, gathering mass and speed as it goes. Each turn of the loop strengthens the next.

I will show later that the same concept applies to businesses: A negative feedback business fights just to stand still. A positive feedback business compounds.

One important thing to note is that positive feedback loops are almost always self-limiting. The microphone screech stops when the amplifier maxes out. The snowball stops at the bottom of the hill. Nothing compounds forever, because every loop eventually runs into a constraint: a saturated market, a physical limit, a competitor, a regulator…

⚙️ The First Feedback Machine

Last month’s Physics guru was James Clerk Maxwell. In 1868 Maxwell wrote a short paper titled “On Governors.”

A “governor” was the spinning-ball device that James Watt had attached to steam engines decades earlier to stop them running away with themselves: as the engine sped up, two weighted balls swung outward, closing a steam valve and slowing the engine back down. It’s the textbook example of negative feedback: a machine using its own deviation from a target to correct itself.

Maxwell was the first to analyze the mathematics of why such a device stays stable rather than oscillating wildly, and his paper is now regarded as the first significant paper on control theory. It was so dense and barely illustrated however, that it was almost entirely overlooked for eighty years.

The person who rediscovered it, and recognised its importance, was the guru of this month’s issue: Norbert Wiener. When Wiener built the science of feedback in 1948, he reached back to Maxwell’s forgotten paper as a foundation, and even borrowed his new field’s name from it. “Governor” comes, via Latin, from the Greek word kybernetes (χυβερνήτης), meaning “steersman.” Wiener took the same Greek root and coined the word cybernetics.

So the man who taught us about entropy also planted the seed of the science of feedback, which the man we are about to meet grew into a field.

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🧔🏼‍♂️ The Guru: Norbert Wiener (1894-1964) - The Father of Feedback

Norbert Wiener was a child prodigy. He graduated from Tufts with a degree in mathematics at 14, briefly tried graduate study in zoology at Harvard (he gave it up after discovering he was hopeless at lab work), and completed a PhD at Harvard at 19, on mathematical logic.

He then studied in England under Bertrand Russell and in Germany under David Hilbert, two of the greatest mathematical minds of that time. In 1919 he joined MIT, where he would remain for the rest of his career.

Although Wiener is usually described as a mathematician, his most important early work sat on the border of mathematics and physics: Brownian motion, the random movement of tiny particles suspended in a fluid.

Brownian motion (sometimes referred to as a ‘Random Walk’ process) was first explained by Einstein in 1905, in one of the four ‘Annus Mirabilis’ papers he published that year). Einstein provided the first hard evidence that atoms and molecules actually exist.

15 years later, Wiener built on Einstein’s work and developed the mathematics that define the process. To this day, the process is called the Wiener process in his honour, and is denoted as W_t.

In 1948, Wiener wrote his most popular and influential book ‘Cybernetics: Or Control and Communication in the Animal and the Machine’ and coined the term cybernetics to describe the study of control and communication in machines and living beings. Wiener realized that “almost all complex systems are driven by feedback loops of information”.

For Wiener, a system becomes “intelligent” if it uses past outputs (feedback) to improve future behavior. His work showed that whether in a thermostat or the human brain, feedback loops allow a system to adjust its actions based on results.

Wiener’s book formally established how feedback stabilizes or destabilizes systems. As he noted, no one before had fully recognized how feedback and information processing keep systems stable. In doing so, Wiener bridged engineering and biology, influencing later fields like systems theory and AI.

📖 For more on Wiener's life and his line from cybernetics to modern AI, Max Planck Neuroscience has a short, accessible piece: From Cybernetics to AI: the pioneering work of Norbert Wiener. Britannica's biography is also excellent.

🌀 The Engines of Compounding

Wiener’s great insight was that you can understand a complex system by asking a simple question: what are its feedback loops, and which way do they run?

Applying that same question to a business can help us to identify compounders.

Most businesses are dominated by negative feedback. Grow too fast and you attract competitors. Get too big in one market and you saturate it. Raise prices too far and customers leave. These are all corrective forces (the competitive equivalent of Maxwell’s steam-engine ‘governor’), and they are why, as we saw last month, the typical business regresses toward the cost of capital over time.

Few businesses are dominated by positive feedback. For these companies, each unit of success makes the next one easier, not harder. Size becomes an advantage rather than a burden. These are the great compounders, and almost all of them run on one of four engines:

1/ Network effects

Each new user makes the product more valuable to every other user.

Visa is a textbook case: The more consumers carry Visa cards, the more merchants must accept them; the more merchants accept them, the more consumers want them. The network feeds itself.

Uber, which I wrote about through Bill Ackman’s lens, is based on the same idea: more drivers mean shorter wait times, which attract more riders, which in turn attract more drivers.

Mastercard and MercadoLibre, both on my watchlist, run on versions of the same loop.

2/ Scale economies

As a business grows, its cost per unit falls, letting it lower prices, which wins more volume, which lowers costs further.

This is the engine of Amazon and Costco for example. Wise, a cross-border payments company and a newer name I have started studying in more detail, also has this engine (more on Wise below).

The investors Nick Sleep and Qais Zakaria gave this model the memorable name “scale economies shared”. Jeff Bezos famously popularised the same idea as the “flywheel”, which is simply positive feedback drawn as a circle.

3/ Data and learning loops

More usage generates more data, which improves the product, which attracts more usage.

This is Google’s search advantage, and increasingly the engine of every serious AI business. The system gets smarter the more it is used.

4/ Brand and reputation flywheels

Success builds trust, trust builds more success.

Think of the credit-rating duopoly of S&P Global and Moody’s, or the slow-compounding prestige of a luxury house. Reputation, once earned at scale, becomes very hard for a newcomer to replicate.

These four engines nicely connect back to last month’s post. A positive feedback business is one whose compressor gets cheaper to run as the business grows. The network, the scale, the data, the brand: each does work of holding back competition with every passing year. That is why these businesses are so extraordinarily valuable, and so rare.

💳 WISE: A Scale Economies Case Study

Wise (formerly TransferWise) illustrates a powerful scale-driven feedback loop.

Wise built a global payments network enabling low-cost cross-border transfers.

The more money customers move through Wise, the lower its cost per transaction becomes, and rather than pocketing the savings, Wise passes them back as lower fees, which attracts still more volume.

This is a textbook positive feedback loop.

By FY2025 Wise was processing over $185 billion in annual transactions for about 15.6 million people and businesses.

I have a personal connection with Wise. I have been an expat for more than a decade and have used Wise for most of that time either to transfer money between international accounts, or to pay for things while travelling.

For years I was a happy customer without ever thinking of it as an investment. Only recently, when Wise came in the news quite a bit after shifting its primary listing from London to New York, did I start looking at Wise through an investor's eyes.

Here are some excellent deep-dives on Wise worth reading:

• - Wise: The Holy Grail Investment?

• - Wise: The Real-Time Dismantling of Cross-Border Banking

• - Deep Dive: Wise Plc. – Betting on the Unexpected?!

✔️ Three questions to ask before owning a compounder

In the spirit of last month's issue, here are three feedback questions worth asking before owning a business:

1. Which way does the feedback run? Does growth in this business invite correction (negative feedback) or does it reinforce itself (positive feedback)? Does getting bigger make the company stronger, or does it simply invite competitors and diseconomies of scale?

2. What is the engine, and is it still turning? If there is a positive feedback loop, name it precisely: network, scale, data, or brand. Then ask whether it is still strengthening or beginning to mature. Remember that every loop is self-limiting. A network effect in a saturated market is a spent force, however powerful it once was.

3. What could break the loop? A positive feedback loop can turn negative if external conditions change. Could new regulations, competitors, or technology shifts weaken the loop? For example, a company’s social network might flourish until a tough privacy law emerges, or a market leader might lose its edge if the industry “heats up” with insurmountable competition. Investors should check whether the business’s feedback mechanism still holds in tomorrow’s environment or if it’s at risk of reversal.

Closing Thought: The Investor’s Job

Negative feedback is everywhere. It is the governor of the whole economy, always pulling the exceptional back toward the average. Every so often, however, a business builds a loop that compounds instead of corrects, and those loops are where the big winners are made.

But finding the loop is only half the work. Every loop is self-limiting; the snowball always reaches the bottom of the hill.

The investor’s real job is not just to spot a positive feedback loop, but to judge how much room it has left to run.

That’s it for this week!

I hope you enjoy these ‘Physics for Investors’ issues. Please give me feedback (pun intended) on how to make these even more interesting or what topics you would like to see covered.

If you enjoyed this post, I would really appreciate it if you could like or share it or leave a comment!

You can follow me on X @guru_gems and Substack @gurugems for more insights.

Until next week!

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Disclaimer: This newsletter is for informational purposes only and does not constitute financial advice or investment advice. Always do your own research before making any investment decision.

Welcome to Round 9 of building my Magic Formula Portfolio.

Quick reminder if you are new to Guru Gems: while studying investing masters, I’m creating two real-money portfolios to put my learnings into practice.

Check out my recent 1-year anniversary post to learn more about my journey:

In the most recent Guru deep-dives I covered 2 lesser-known Gurus, who have both delivered exceptional results:

Magic Formula Refresh

In “The Little Book that (Still) Beats the Market”, Joel Greenblatt suggests that a regular investor can beat the market averages by buying a group of ‘good’ companies at ‘bargain’ prices.

• ‘Good’ → High return on capital

• ‘Bargain’ → High earnings yield

Since he expects the magic formula to work on average, Greenblatt suggests to own a basket of 20-30 stocks.

You can read more on Joel Greenblatt and his Magic Formula here.

You can also download my Joel Greenblatt e-book for free:

Joel Greenblatt e-book by Guru Gems

494KB ∙ PDF file

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Current Magic Portfolio Performance

Last month I added lululemon athletica (LULU), Exelixis (EXEL), and MediaAlpha (MAX) to the portfolio in Round 8, bringing the total number of holdings to 24 stocks.

The overall performance of the Magic Portfolio is currently +8.2%, which is the best performance I have had until now.

Considering that many names are in small-cap, out-of-favor industries and that there is virtually zero exposure to semiconductor/AI stocks, an 8% return after a bit less than a year is not that bad.

• Lantheus Holdings (LNTH), a radiopharmaceutical company, is my best performer, and at some point was even a 2-bagger. The main driver was the FDA approval for a new formulation called Pylarify TruVu on March 6 2026.

• Catalyst Pharmaceuticals (CPRX) is my second-best performer with a 56% return since buying it last August. The big ‘catalyst’ here was the company securing extended U.S. patent exclusivity for Firdapse until 2035.

• lululemon (LULU), a name I added in the most recent round in April, sank more than 10% this week after reporting Q1 2026 earnings, in which they lowered full-year outlook. While this was somewhat expected, multiple analysts further adjusted their price targets downward, putting more pressure on the stock.

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New Magic Formula Stocks

As I explain in detail in my first Magic Portfolio post, I use Joel Greenblatt’s Magic Formula screener combined with financial ratios data to identify the top stocks in terms of combined rank for Return on Capital (using ROCE) and Earnings Yield (using EV/EBIT).

Since I am already at 24 names in the portfolio, I will be adding just 1 name in this round, to get to a full portfolio of 25 names.

#25 is a bit special since it is a ‘Magic Formula meets Guru Gems’ stock.

Booking Holdings (BKNG, Market cap $130B)

Magic Formula metrics: ROCE 3Yr: 72%; EV/EBIT: 13.6x

Booking Holdings is the world’s largest online travel agency, operating across five primary consumer-facing brands: Booking.com, Priceline, Agoda, KAYAK, and OpenTable.

The company serves travelers and accommodation providers in more than 220 countries, processing over 1.2 billion room nights in 2025, a new all-time record.

With $27B in revenue and $9B in free cash flow in 2025, this is a software-like business operating in a growing $3+ trillion global travel market.

Magic Formula meets Guru Gems

Not only does BKNG rank high on the Magic Formula screener (3yr ROCE 72%, EV/EBIT 13.6), but it also appears in the portfolios of some of the Gurus I am tracking.

François Rochon holds a ~3% position, AKO Capital has it at ~4% and for David Rolfe at Wedgewood Partners it is a ~5% position.

What’s happening

The stock is down more than 25% over the past year, now trading at around $165 (there was a 25-for-1 stock split in April).

Here is what David Rolfe wrote in his latest Q1 2026 Client Letter on why he believes the stock went down:

Booking Holdings detracted from overall performance during the quarter. Earnings per share grew +17%, with revenues up +16%, as travel demand remained strong late into 2025 and into early 2026. Most of the stock’s weakness stemmed from investors labeling it an “AI loser” and, later in the quarter, the outbreak of war in the Middle East.

Consumer AI, as a disruptive force in existing commerce, is proving to be much more difficult than markets expect. We view these AI tools and distribution channels as incremental rather than as drivers of the “zero-sum” dynamics that markets have been craving. As for the Middle East, for now, it represents a short-term disruption to travelers, particularly air travelers, given credible risks to international airline fuel supplies. However, we expect this will not be a multi-year headwind - more like a few quarters.

When both a quantitative screen like Greenblatt’s Magic Formula and long-term quality investors like Rochon converge on the same name, it’s usually worth paying attention.

On Monday, I’m adding BKNG to the Magic Formula Portfolio and I will then hold it for exactly one year, as Greenblatt prescribes.

This brings me to 25 stocks in the Magic Formula portfolio, which means I am now fully invested. I started on 7 July 2025 so in my update next month, I will be selling the first 3 names and add 3 new names.

That’s it for this week! Please like or share if you enjoy reading Guru Gems.

You can follow me on X @guru_gems and Substack @gurugems for more insights.

Until next week!

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Disclaimer: This newsletter is for informational purposes only and does not constitute financial advice or investment advice. Always do your own research before making any investment decision.

Welcome back!

After several longer deep-dives in recent weeks, I wanted to keep this week’s issue short and focused.

Here is what’s on the menu for today:

• 1️⃣ A quick update on the Guru Gems portfolio

• 2️⃣ A look at the current watchlist

• 3️⃣ One interesting thing I read this week

Start here if you are new to Guru Gems.

💎 Guru Gems Portfolio update

The Guru Gems portfolio currently includes 13 stocks and a 26% cash position.

At the end of March, the portfolio was down nearly 6%, after a perfect storm of SaaSpocalypse and Luxury sell-off had hit the portfolio.

Since then there has been a nice rebound as can be seen from the chart below.

The portfolio is up 4% since I started Guru Gems a bit more than a year ago. Not exactly a spectacular result, but also not terrible…

The bounce back was driven by Constellation Software (+15% from end March), Amazon (+30% from end March) and who else than the ultimate Guru Gem Alphabet (+32% since the start of Q2).

Over the past month, there were only 2 ‘activities’ in the portfolio:

• I trimmed Alphabet a little, keeping the position capped to 15% of the portfolio

• The only new position this past month was Zoetis. Read more below on why I added this global leader in animal health:

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👀 Watchlist update

Following the latest 13F releases a few weeks ago, I updated the Guru Gems watchlist, which now includes more than 35 companies that are in Gurus’ portfolios and that may be interesting to study in more depth.

A few names which I’m watching very closely:

• Interactive Brokers (IBKR)

• Netflix (NFLX)

• MercadoLibre (MELI)

• Molina Healthcare (MOH) (part of my Magic Formula portfolio)

Interactive Brokers (IBKR) is a company I reviewed in more detail in last week’s update. At the right price, this is a company I would definitely like to add to the Guru Gems portfolio.

Check out last week’s post if you haven’t yet, where I cover Marc Werres, a lesser-known Guru who has compounded at ~20% per year over the past decade.

📖 One Interesting Thing I Read This Week

I re-read Warren Buffett’s 1999 Berkshire Hathaway shareholder letter, published in March 2000, near the peak of the dot-com bubble.

At the time, Buffett was underperforming badly and many people believed he had “lost it” because he didn’t participate in the internet mania.

History doesn’t repeat itself, but it often rhymes

Back to 2026. Berkshire is again significantly underperforming the S&P 500, by more than 30% over the past year, having ‘missed out’ on the rally driven by mega-cap AI and semiconductor winners.

Has Berkshire lost it?

Or could it be that we are in a phase of the cycle that rhymes a lot with what happened in 1999 and early 2000?

Here are some numbers that should at least make investors think about whether this time is really different:

• Semiconductor index (SOX) up 175% over the past year and 81% year-to-date

• Intel, Micron (chart shown below), AMD, Dell, ASML are within 5-10% of their all-time high

• NASDAQ 100 up by more than 8% in May

• Korea Composite Stock Price Index (KOSPI), in which Samsung and SK Hyninx make up more than 40% of the index, is up 214% over the past year

With the current context in mind, now read the extracts below from Buffett’s 1999 letter (and I highly recommend to read the full letter).

To me, this sure rhymes with the current environment.

(Bold emphasis is mine)

The numbers on the facing page show just how poor our 1999 record was. We had the worst absolute performance of my tenure and, compared to the S&P, the worst relative performance as well.

[…]

We made few portfolio changes in 1999. As I mentioned earlier, several of the companies in which we have large investments had disappointing business results last year. Nevertheless, we believe these companies have important competitive advantages that will endure over time. This attribute, which makes for good long-term investment results, is one Charlie and I occasionally believe we can identify. More often, however, we can’t — not at least with a high degree of conviction. This explains, by the way, why we don’t own stocks of tech companies, even though we share the general view that our society will be transformed by their products and services. Our problem — which we can’t solve by studying up — is that we have no insights into which participants in the tech field possess a truly durable competitive advantage.

[…]

Our reservations about the prices of securities we own apply also to the general level of equity prices. We have never attempted to forecast what the stock market is going to do in the next month or the next year, and we are not trying to do that now. But, as I point out in the enclosed article, equity investors currently seem wildly optimistic in their expectations about future returns.

[…]

Meanwhile, if anyone starts explaining to you what is going on in the truly-manic portions of this “enchanted” market, you might remember still another line of song: “Fools give you reasons, wise men never try.”

As a reminder, Berkshire significantly outperformed the S&P 500 during the market’s ‘lost decade’ of 2000 - 2010…

That’s it for this week! Thank you for reading.

Disclaimer: This newsletter is for informational purposes only and does not constitute financial advice or investment advice. Always do your own research before making any investment decision.

In today’s edition:

• 🕴️ The Guru: Marc Werres — founder of Hinde Group, one of the best investors you’ve probably never heard of

• 🏛 The Playbook: The Hinde Way — The 5 Pillars of a great business

• 📺 The Playbook in action: A Netflix case study (a 4× return in under four years)

• 💎 The Gem: Interactive Brokers Group (IBKR) — Werres’s decade-long compounder

2-minute AI audio version of today’s post:

Guru in the spotlight: Marc Werres

Marc Werres is the founder and Managing Partner of Hinde Group, a San Francisco–based investment firm he launched in August 2015.

His performance over the past decade has been outstanding. Since inception in 2015 through the end of Q1 2026, the portfolio has compounded at ~20% net per year, significantly outperforming the S&P 500’s ~13% return.

He has done this with a concentrated portfolio of less than ten names, no leverage, and through periods where he held meaningful cash when nothing looked attractive.

I came across Hinde Group thanks to a reader recommendation, and the more I read, the more convinced I became that this is a ‘hidden master’ worth highlighting.

Like other great investors, Werres focuses on the long horizon. Hinde holds many positions for years (some since inception) and places almost no weight on short-term benchmarks.

The team’s information edge comes from deep primary research and alternative data, but above all it is the investment discipline characterized by concentration, patience, and strict quality filters that defines the ‘Hinde Way’.

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And if you learned something useful, consider buying me a virtual coffee ☕

The Hinde Way

Hinde Group’s investment approach is built on a small number of clear principles.

1️⃣ Two categories: Compounders & Special Situations

Hinde Group’s investments fall into two categories:

🟡 Compounders are great businesses that are out-of-favor, misunderstood, or underappreciated. The intended holding period is indefinite. Most positions get held for many years.

⚫ Special Situations are less-than-great businesses trading at a meaningful discount to intrinsic value, where a specific catalyst like a spin-off, merger, restructuring, or litigation outcome, is expected to close that gap within two years.

That’s the entire universe. Just compounders to own (most of the portfolio) and special situations to harvest (smaller part of the portfolio).

2️⃣ The 5 pillars of a great business

According to Marc Werres, a great business has all five of the following characteristics

🏰 1. Meaningful & Durable Market Power

Great businesses are those that create large amounts of value for their owners over time. One of the essential elements to achieving that, is meaningful and durable market power.

These businesses are characterized by pricing power, high returns on investment (ROE of 15–20%+), and barriers to entry that protect those returns from competition over the long term.

Pricing power and barriers to entry are also at the core of Chris Hohn’s investment framework:

🔮 2. Predictable Performance

It is hard to overstate how unpredictable the future is. Precisely forecasting the performance of any business over an extended period of time is a fool’s errand.

[…] But it is more reasonable to make such forecasts for some companies than it is for others.

Some companies have certain characteristics that make their performance relatively predictable: a stable market demand, recurring revenue, long product cycles, diverse sources of demand, limited dependencies, flexible operations, high profit margins and conservative financing.

The point is not to forecast quarterly EPS but to be confident that the business will look meaningfully bigger and more profitable in 5–10 years.

Predictability is also the #1 criteria Dev Kantesaria looks for in a business:

🚀 3. Abundant Growth Opportunities

Great businesses have abundant growth opportunities from multiple sources that should allow them to grow earnings per share at a compound annual rate in the high single digits or more over the next decade.

While there are different ways a business can grow (Improving existing products, enhancing pricing effectiveness, reducing costs … ), the most noteworthy way is to develop new products and services, which when done successfully “can create abundant growth opportunities for decades.”

Hinde looks for systematic innovation: maintaining a ‘stock and flow’ of products and services across Core, Emerging, and Viable horizons.

Amazon is a prime example of a company whose ability to successfully develop new products and services seems to provide it a nearly limitless source of growth.

🧠 4. Talented, Honest & Driven Leaders

Leaders who embrace reality, move fast, advocate simplicity, and obsess over attracting top talent. Similar to what I have seen with many other Gurus, they look for owner-operators whose incentives are aligned with long-term shareholders.

🔥 5. A Cult-Like Corporate Culture

Great businesses have cult-like corporate cultures that play an essential role in their success. Those cult-like corporate cultures share three fundamental characteristics:

• Clear & Compelling Vision

• Permeating & Guiding Ideology

• Zealot Employees

You can read more about each of these pillars on Hinde Group’s website.

3️⃣ Concentration with a margin of safety

Hinde Group typically holds about 10 positions or less.

This is a deliberate concentration that focuses capital on their best ideas. At the end of Q1 2026 the portfolio was just seven long positions plus cash.

At the same time, they insists on a margin of safety for every position: a discount relative to a conservative appraisal of intrinsic value. The combination of high concentration and high selectivity is the engine.

We do not need every investment to be successful for the overall portfolio to deliver exceptional results. We only need to limit unsuccessful investments in number and magnitude. Hinde Group’s investment process is designed to target a 90% success rate over time and to ensure unsuccessful investments are not disasters. Even if everything is working exactly as planned, 1 in 10 of our investments will fall short of our 15% hurdle rate when all is said and done.

At the same time, just because we expect to have some unsuccessful investments does not mean that we should just brush them off when they occur. One of Hinde Group’s principles is ‘Own the Outcome’. Putting that principle into practice means recognizing unsuccessful investments when they occur, critically examining what mistakes may have been made, and learning whatever we can from the experience.

🎬 The Hinde Playbook in Action: Netflix (2022–2026)

Before we get to the current portfolio, I want to take a brief detour through what I believe is a brilliant illustration of The Hinde Way.

Werres has a favorite Warren Buffett quote:

“A great investment opportunity occurs when a marvelous business encounters a one-time huge, but solvable problem.”

Netflix in early 2022 was, in Werres’s words, an “archetypal example” of that pattern.

Act 1: Building a position into a 75% drawdown

Hinde began building its NFLX position in Q1 2022, when the stock had fallen sharply from its November 2021 high. They kept adding right through the brutal April 2022 earnings crash that ultimately took the stock to nearly 75% off that all-time high.

The investment community had largely written Netflix off after just a couple of quarters of softer membership growth.

Werres ran Netflix through the 5-pillar framework and concluded it was the rare company that scored well on all of them: meaningful and durable global-scale market power; predictable, low-churn subscription revenue; a vast unpenetrated TAM (only ~6–7% of US TV viewing time, even in its most established market); an elite founder-led management team in Reed Hastings and Ted Sarandos; and a famously cult-like corporate culture.

Some of the challenges that were feared by the market he saw as solvable.

A key signal for Werres was also the fact that Reed Hastings personally bought $20 million of stock in the open market at roughly the same time Hinde was building its position.

Act 2: A strong contrast with Bill Ackman

Werres was not the only great investor who saw Netflix in early 2022 as a “marvelous business with a one-time, solvable problem.”

Bill Ackman saw exactly the same setup.

In January 2022, at almost the same moment Werres was building his Hinde position, Pershing Square put over $1.1 billion into Netflix at similar prices, for almost identical reasons.

Then came the April 2022 earnings report.

Netflix announced it had lost 200,000 subscribers (its first decline in over a decade) and forecast a steeper drop ahead. The stock crashed more than 25% in a single day.

Ackman sold the entire position the very same day, locking in a ~$400 million loss after just three months of ownership.

I covered this full episode in Bill Ackman & The Pershing Square Playbook 👇

As I highlighted in my Ackman post, being “right” about the quality of a business clearly doesn’t help if you sell too soon.

[Quick sidenote: it looks like Bill Ackman and Marc Werres have a very similar investment framework since quite a few names have appeared in both investors’ portfolios at similar times: Netflix, Alphabet, Amazon, Uber, …]

Final act: The payoff

The stock fell further in 2022 before having one of the greatest recoveries of the decade.

By early 2025, NFLX had climbed above $1,000 and became Hinde’s second-largest position at just under 18% of the portfolio.

And this is when Werres started reducing his position:

“Netflix remains a great business with a bright future, but its stock clearly offers a notably lower prospective return above $1,000 than it did below $300.”

Hinde began trimming at the start of 2025, and by the end of Q2 the position was down to just ~2% of the portfolio.

Over a 41-month holding period, the Netflix investment delivered a 62.7% IRR and a 4.1x MOIC (Multiple on Invested Capital, i.e., Hinde got 4.1× their money back).

Bought when the business was great but the market was terrified. Held while the thesis was proven out. And trimmed when the prospective return no longer cleared the hurdle.

Perfect execution…

The sequel: Act 1, Take 2

As I was finishing this piece, Hinde Group released its Q1 2026 letter and Werres has started buying Netflix again.

NFLX is now down more than 30% from its June 2025 high, weighed down by AI-related disruption fears and the company’s failed bid to acquire Warner Bros. Discovery.

The Q1 2026 letter confirms that Werres used the weakness to increase both his Netflix and Amazon positions.

He is not alone. As I covered last week in What Gurus are buying and selling — Q1 2026 13F updates, several other long-term Gurus were also adding to Netflix during the quarter:

• Josh Tarasoff initiated a new ~8% position

• Thomas Russo added +12%

• Bill Nygren significantly increased Oakmark’s stake

The shared thesis is that Netflix is entering a new phase of pricing power and margin expansion, with or without transformative M&A.

In other words, we are watching the Hinde playbook run a second time on the same business with the same framework, but as a new opportunity.

The Hinde Group Portfolio

At the end of Q1 2026, the Hinde portfolio consisted of just seven long equity positions and ~10% cash.

There are no exact weightings available of the positions, but from the letters we can get a pretty good idea of what the portfolio looks like:

Interactive Brokers Group (IBKR), Uber Technologies (UBER), Northeast Bank (NBN), Alphabet (GOOG)

• At the start of 2025 these 4 companies accounted for most of the portfolio’s equities

• Werres mentioned some trimming and adding during 2025, but it looks like these are still significant positions in the current portfolio

• In the Q1 2026 letter, Werres mentions that IBKR “still represents a mid-teens percentage of the portfolio’s value”

Amazon.com (AMZN), Netflix (NFLX)

• Positions that had been trimmed during 2025

• Werres has been adding again to both names in Q1 2026

Becton, Dickinson and Company (BDX)

• BDX is a ‘special situation’ stock added in Q3 2025

• It was their first new position since 2022.

Three observations from this portfolio:

1/ Having the patience to wait for 2 years before buying something new, reminds me of Norbert Lou’s Punch Card mindset:

2/ Several names overlap with the Guru Gems portfolio (GOOG, UBER, AMZN), which is obviously a great validation of what I have done so far :)

3/ Finally, the portfolio’s evolution over the past decade is also quite fascinating.

• Werres bought IBKR at inception in 2015.

• He added Alphabet in 2017 and UBER in 2020.

• He initiated Netflix during the 2022 valuation collapse and harvested most of it in 2025.

• Werres is comfortable holding meaningful cash when attractive opportunities are scarce. In Q1 2017, after some big wins, cash was nearly at 48% of the portfolio.

In summary: The discipline is to ride winners while constantly hunting for the next mispriced great business or special situation and having the patience to wait if nothing good shows up.

💎 The Gem: Interactive Brokers Group (IBKR)

Werres has owned IBKR since Hinde Group’s first day. The position has delivered a ~27% compound annual return over more than a decade.

IBKR is the position he keeps returning to in his letters, and IBKR was the largest single contributor to Hinde’s 2025 performance.

So if there is one Gem worth studying from this portfolio, this is this one.

A brief callback: Bryan Lawrence

Long-time readers may remember that I touched on IBKR last summer in The Lawrence Method, where Bryan Lawrence’s Oakcliff Capital held it as their largest position at over 22% of portfolio (now 30%).

Lawrence’s four-question framework gave IBKR a green check on three of four boxes (Business We Understand, Good Business with Durable Cash Flows, Shareholder-Aligned Management) and a question mark on valuation.

When I wrote about Lawrence in July 2025, I concluded that while IBKR looks like a high quality business, I should do a bit more research on this company, and that’s exactly what I did when researching for today’s Guru Gem.

What does Interactive Brokers actually do?

IBKR is a highly automated global electronic brokerage firm founded by Thomas Peterffy. It provides ultra-low-cost trading across stocks, options, futures, FX and other assets in 150+ markets.

Key customers are primarily professional traders, hedge funds, and financial advisors, but also include active retail traders.

The business has two main revenue streams:

• Commissions earned on trades. In 2025, commission revenue grew 26%.

• Net interest income earned on customer credit balances and margin loans. In 2025, this grew 13% despite multiple Fed rate cuts, because customer credit balances grew 28% and margin loans grew 31%.

IBKR’s Q1 2026 results show how impressive this business really is:

• $1.7 billion in net revenue (+17% YoY)

• $1.3 billion in pre-tax income (+22% YoY)

• 77% pre-tax margin (highest profit margin in the industry)

• 4.8 million customer accounts (+31%)

• $789 billion in client equity (+38%)

Why IBKR is a ‘great business’ by Hinde’s 5-pillar framework

🏰 1. Meaningful & Durable Market Power ✅

IBKR’s automation-first cost structure lets it offer what Werres calls “the least expensive brokerage services while maintaining the highest profit margins in the industry.”

In his Q3 2019 letter he highlighted that IBKR was charging 3.40% on a $25,000 margin loan while Schwab and Fidelity each charged 8.82% for the same loan. Today, per IBKR’s Q1 2026 investor materials, US margin rates are 4-5% for IBKR Pro, still well below larger retail brokers.

When Schwab and TD Ameritrade went to zero-commission in late 2019, Werres argued in that same letter that while this would hit some online brokers hard, IBKR would be “relatively unscathed”, which turned out to be a correct analysis.

🔮 2. Predictable Performance ✅

IBKR’s ‘Total Customer Equity’ has grown at a 25% annualized rate over the last decade, proving its intrinsic value grows regardless of the macro environment.

This is the metric Werres started emphasizing in his 2023 letters because it captures intrinsic value growth without the noise of interest rates and trading volumes.

Customer accounts have grown alongside it at a similar high pace.

🚀 3. Abundant Growth Opportunities ✅

IBKR has penetrated less than 1% of its addressable market.

Growth levers include introducing-broker partnerships (the “white-label” model that fueled Asian growth), new geographies and new products (crypto, prediction markets via ForecastEx, overnight trading, mutual funds, bonds, event contracts).

🧠 4. Talented, Honest & Driven Leaders ✅

Founder Thomas Peterffy is still chairman, still owns roughly 73% of the underlying LLC, and still drives the company. Senior management is dominated by software engineers, not bankers. And the company emphasizes long-term growth over short-term metrics.

🔥 5. A Cult-Like Corporate Culture: ✅

The mission has not changed since 1977:

“Create technology to provide liquidity on better terms. Compete on price, speed, size, diversity of global products and advanced trading tools.”

Every product decision like the recent push into prediction markets and AI tools, runs through that same lens. This is the kind of cultural continuity that tends to survive the founder.

Five out of five… looks like we found ourselves a ‘good’ business :)

To Buy or Not to Buy

Now that we’ve established that IBKR is a great business, let’s look at the valuation

IBKR was up 113% in 2024, 46% in 2025 and currently trades at roughly 36x earnings.

Has it become too expensive?

The fact that IBKR is still a significant position in the portfolios of Bryan Lawrence and Marc Werres, indicates that they still expect to earn a decent return from this stock, even at the current levels.

Here is what Werres wrote in his Q4 2025 letter:

“Interactive Brokers should still grow its earnings at least at a mid-teens annual rate. […] Interactive Brokers also aims to pay out a dividend equivalent to a 0.5% to 1.0% yield. Between earnings growth and its dividend yield, IBKR seems poised to deliver a high teens or better annualized return over the coming years. IBKR would need to trade at more than $100 per share today to offer a market-level return.”

At the price IBKR traded at end of 2025 ($65-70), Werres is implicitly saying IBKR still offers above-market prospective returns, even after the recent run.

At the same time, Werres indicated in his latest letter that he sold some IBKR (probably in the $75-80 range), not because the thesis broke, but because the price had run hard:

While IBKR gained only 4.3% for the quarter as a whole, we trimmed some of our position early in the quarter at prices notably higher than where IBKR ended the quarter

Final decision

📌 Keeping IBKR on the watchlist (but moving it to the top of the list)

The business is exceptional, the long-term thesis is intact, but entry price matters as we have shown with the Netflix case study.

The long-term thesis is supported by two of the most disciplined long-term investors I have studied, who have both built their portfolios around this stock:

• Bryan Lawrence (Oakcliff Capital): IBKR held since 2017, now 30% (!) of portfolio

• Marc Werres (Hinde Group): IBKR held since 2015, ~15% position, ~27% CAGR over the holding period

That is a meaningful long-term endorsement.

My entry trigger: I will initiate a position if IBKR pulls back to around $65 or below, which is the Q1 2026 closing level and would put it materially below Werres’s trim range and meaningfully below his $100 market-level-return threshold.

That’s it for this week’s edition!

Thank you for reading and following along.

Until next week!

Disclaimer: This newsletter is for informational purposes only and does not constitute financial advice or investment advice. Always do your own research before making any investment decision.

Friday was the deadline for Superinvestors ($100M+) to report their US positions held on 31st March 2026 (13F filings).

In this post I share my takeaways from the latest changes in the portfolios of my favorite Gurus.

• 👑 Does Alphabet keep its crown as ultimate Guru Gem?

• 💾 Software recovery continues

• 👀 Other names worth watching

Below is a table listing most of the Gurus covered so far in the Guru Gems series as well as some other interesting Gurus.

→ For the full table with more names and additional comments, access the Guru Master Google Doc, which also contains my full portfolio and latest activities

1️⃣ Alphabet, Amazon, and the GOOG vs MSFT debate

Alphabet is still the ultimate Guru Gem

Alphabet continues to dominate Guru portfolios.

• Li Lu holds it at a massive 45% of his US portfolio.

• John Armitage tripled (!) his position (+221%), making it his second-largest holding.

• Seth Klarman added +9%.

• Berkshire Hathaway dramatically increased their stake (+204%, though from a small base).

• Chris Hohn further increased his Alphabet stake.

Looking across the full table, Alphabet appears as Gem 1 or Gem 2 for more Gurus than any other stock.

Amazon remains the clear second favorite

Last quarter, Gurus were loading up on Amazon because it was the laggard of the Magnificent 7, with barely a 1% return over full 2025. That thesis hasn’t gone away.

Seth Klarman made Amazon his #1 position this quarter (+47%). Bill Ackman holds it as his #2 (+19%). David Rolfe added aggressively (+72%). Samantha McLemore increased by +16%. And Josh Tarasoff holds it as his largest position at nearly 19% of his portfolio.

The picture is more mixed than Q4 however. Berkshire sold their full Amazon position, Armitage cut by 60%, and Druckenmiller exited entirely.

But the buyers are some of the most conviction-driven, long-term oriented names in the business.

The thesis: Amazon’s return on invested capital has recovered strongly from its 2022 lows, AWS and advertising continue to grow, and the valuation (particularly on EV/EBITDA) remains attractive relative to the business quality.

When Gurus disagree: the GOOG vs MSFT debate

Two high-profile investors just made almost exactly opposite bets on Google and Microsoft.

Bill Ackman announced a new position in Microsoft, calling it a “highly compelling valuation.” At the same time, Chris Hohn was selling more than 80% of his Microsoft stake, citing “uncertainty over Microsoft’s competitive position in the future.”

Ackman’s move was not just a buy of Microsoft, he effectively sold Alphabet to fund his purchase.

On X (Twitter), Bill Ackman reacted to Chris Hohn’s move and later also clarified why he sold Alphabet.

Finally, John Armitage made an even bolder move: he sold his entire Microsoft position (which was Egerton Capital’s largest holding just two quarters ago), reduced Amazon by 60% and tripled his Alphabet stake.

Three exceptional investors, with very different conclusions on the same companies.

This is the kind of divergence that makes pattern-finding hard, but it is also a fascinating debate worth following closely over the coming quarters.

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2️⃣ Software recovery: the SaaSpocalypse buying continues

In last quarter’s edition, I wrote about how we were probably reaching ‘peak fear’ in software stocks following the AI agentic tools scare.

The data from Q1 13Fs suggests that some Gurus have acted with conviction.

Salesforce (CRM) is the clearest signal. Oakmark increased their position by 52%, making it their single largest holding at ~3.7% of a $75 billion portfolio. Akre Capital initiated a new position. The stock has been a frequent target of “AI disruption” fear, and both firms are effectively saying that the fear is overblown.

Bill Nygren’s Oakmark, who published a letter ‘Why we’re buying software today’ in February, has clearly acted on that thesis. In addition to CRM, they added a new position in Roper Technologies (ROP) as well as Adobe (ADBE). Samantha McLemore at Patient Capital Management also bought Adobe.

Akre Capital initiated ServiceNow (NOW) as a new position, in addition to CRM. This follows their letter to shareholders in February, where they expressed high frustration, but even higher conviction in the face of fear-driven selling.

On the smaller end, Bryan Lawrence (Oakcliff Capital), who rarely makes changes to his highly concentrated portfolio, increased his Guidewire Software (GWRE) position by 73%. As I discussed in the Q4 update, Lawrence views Guidewire as an ‘AI-Resilient’ software company, and this addition seems to double down on that conviction.

Finally, Gurus seem to also double down on CCC Intelligent Solutions (CCC), one of the most beaten down stocks in my Guru Gems portfolio. Akre Capital (+27%), Peter Keefe (+47%) and Triple Frond Partners (+13%) all significantly increased their position in this SaaS company operating in the insurance industry.

3️⃣ Multi-Guru accumulation: the names worth watching

One of the most useful signals in 13F analysis is when the same name appears in multiple portfolios at the same time. This quarter there are two distinct groups worth highlighting. I’ll be adding these to my watchlist.

The under-the-radar names

These are lesser-known companies that most people on X and Substack won't be writing about, but where multiple long-term investors are quietly building positions.

Linde Plc (LIN)

This industrial gas & engineering giant shows up across three different Guru portfolios.

• John Armitage initiated a new 6% position (making it an immediate top-5 holding for Egerton Capital);

• AKO Capital also added a 1.3% position;

• Tom Gayner at Markel holds a 0.9% stake.

Linde is a high-quality compounder with global scale and pricing power. It could be considered the industrial equivalent of the quality compounders these Gurus typically love.

Lennar Corp (LEN)

Lennar, a homebuilder, is another convergence.

• Berkshire Hathaway significantly increased their holding (they now own approximately 5% of Lennar);

• Greenhaven Associates has it as a 15% position;

• Bryan Lawrence holds a 4.5% position.

One of the main argument for owning homebuilders is that the US housing market is undersupplied. This supply/demand imbalance will take years to address and should support ongoing pricing power for homebuilders.

Sunbelt Rentals (SUNB)

Sunbelt Rentals, an equipment rental business, might be the most intriguing name.

Looking at the 13Fs, it looks like Thomas Russo, AKO Capital, Bill Nygren at Oakmark, François Rochon and Tom Gayner all initiated a new position.

However, the company has been public for decades, but was previously trading primarily on the London Stock Exchange, and recently moved their primary listing to the U.S. because the vast majority of their operations and revenue are generated in North America.

Therefore it is possible that all the Gurus above already owned the company through the UK listing and it just looks like they now have a new position.

In any case, it’s an interesting name to have a closer look at, as it may be one of those unglamorous compounders that fits the Guru playbook well.

Well-known names, but with a new story

Uber (UBER)

Uber continues to attract serious Guru conviction. Bill Ackman holds it as a core 16% position, and John Armitage increased his stake by +74% this quarter, making it one of his largest additions. Thomas Russo also slightly added.

Uber's dominant position in ride-hailing and food delivery, combined with improving margins and a growing advertising business, makes it a compounding story that fits the Guru playbook well. It is a Guru Gems portfolio holding, so it is reassuring to see investors of this caliber adding with conviction.

Netflix (NFLX)

Netflix (NFLX) attracted some buying during a quarter where the company's failed bid to acquire Warner Bros Discovery played out. A deal which was ultimately lost to a superior bid from Paramount. The episode highlighted Netflix's M&A ambitions and financial firepower.

Josh Tarasoff initiated a new 8% position, Thomas Russo added +12%, and Bill Nygren significantly increased Oakmark’s stake.

The thesis: Netflix is entering a new phase of pricing power and margin expansion, with or without transformative M&A.

Moody’s (MCO) and S&P Global (SPGI)

Moody's and S&P Global may be the clearest multi-Guru signal of the quarter.

Armitage doubled MCO (+100%), Hohn holds it at 14% and added, Li Lu initiated both MCO and SPGI as new buys, and Kantesaria holds SPGI as his second-largest position at 22%.

I already own SPGI in my Guru Gems portfolio, so it’s a nice validation to see this level of Guru conviction.

💎 What this means for the Guru Gems portfolio

I’m pleased to see several Guru Gems portfolio holdings being reinforced by multiple Gurus this quarter.

Alphabet continues to enjoy wide ownership and some high-profile additions, and positions in SPGI, UBER, and CCC are also being added by Gurus I follow.

One question that is on my mind: should I trim Alphabet?

Alphabet has been an exceptional winner and now represents more than 15% of my portfolio. That’s a large concentration in any single name (even a great one).

In my recent post on Stock Master Maestros, one of the investors profiled in the book, Greg Padilla, has an elegant framework: he starts every position at a standard 2–2.5% weight and then simply lets it run.

His only exception is a hard rule to trim when a position reaches 6% of the portfolio. Not because he’s lost conviction, but purely for risk management purposes.

Alphabet is now well more than double that 6% threshold. By Padilla’s framework, a trim here isn’t a lack of conviction, it’s the disciplined, rational thing to do. Alphabet doesn’t need to collapse for it to hurt the portfolio significantly; it just needs to underperform.

The fact that a number of Gurus who held large Alphabet positions (Ackman, Armitage, and others) have been trimming (and in Ackman’s case, exiting) after the stock’s strong run gives me further reason to act.

My plan: trim Alphabet back towards a 14-15% weighting and keep that as a maximum for any holding.

That’s it for this week’s edition!

You can follow me on X @guru_gems and Substack @gurugems for more insights.

Until next week!

Disclaimer: This newsletter is for informational purposes only and does not constitute financial advice or investment advice. Always do your own research before making any investment decision.

Welcome back!

Today I’m sharing my thoughts on 2 interesting pieces I came across this week. I also started a small position in a new company.

This company reported Q1 2026 earnings on Thursday and the stock dropped more than 20% in a single day after missing expectations and cutting full-year guidance. Both Terry Smith (Fundsmith) and David Rolfe (Wedgewood Partners) are shareholders, and after a drop of this magnitude, I think it’s worth a serious look.

Last week I started a new regular series where I bring a single idea from physics and apply it to how we think about businesses and markets. Make sure to check it out and tell me what you think!

Here is the 2 minute AI audio version of today’s post if you are short on time:

1️⃣ Paul Tudor Jones: “Buffett is the OG of compound interest”

Paul Tudor Jones is one of the most legendary traders alive. Famous for predicting the 1987 Black Monday crash, Paul Tudor Jones (‘PTJ’) is a pioneer in global macro trading, often focusing on currency and interest rate fluctuations.

He is also the founder of the Robin Hood Foundation and runs a fund that has delivered significant returns while having roughly zero correlation to the S&P 500 over four decades.

He recently sat down with Patrick O’Shaughnessy on the ‘Invest Like the Best’ podcast for a wide-ranging conversation.

The whole interview is worth watching, but a few moments stood out.

PTJ’s respect for the GOAT

For decades, PTJ used to “rail on Warren Buffett year after year after year”, dismissing him as a guy who just happened to be in the right place at the right time during the great American bull market.

And while he envies the ‘belief system’ on which Buffett’s approach was based, he realized that he didn’t have Buffett’s calm, patience and fortitude to sit through a significant market drawdown and do what Buffett does. He jokingly says:

“Why couldn’t I be Warren Buffett? Just believe in America. When you’re down 50%, who cares? America’s going to bring you through.”

But after listening to an ‘Acquired’ podcast on Berkshire Hathaway, something clicked:

“For the first time I learned that at 9 years old, 9 years old, he understood the power of compound interest. And actually when I listened to that podcast, I just went, Oh my god, this guy is a genius and I have been the biggest fool.”

And he closes with his characteristic humor:

“Warren, if you happen to hear this, I’m deeply apologetic. You are the OG of compound interest, and I wish I was one-tenth as smart as you are.”

For someone running a strategy with 0.12 negative correlation to the S&P 500 for 40 years, this is a great acknowledgment of the power of the approach I study here at Guru Gems: owning great businesses and letting them compound.

Trading as boxing

When the interviewer asked PTJ to describe what trading actually feels like, he uses a boxing analogy:

“You’re going into the ring with this opponent who’s after you the whole time. You’re pairing, jabbing, feeling each other out, looking for an opening. And then every now and then you’ll have a great opening and you take a big shot. And you may land one.”

A few examples from his career:

• Bitcoin in 2020 (a ‘knock-out’): When central banks and treasuries were intervening at unprecedented scale, he saw Bitcoin as the best inflation hedge available

• Two-year rates in 2022 (also a ‘knock-out’): As inflation surged, PTJ believed the Federal Reserve would be forced to aggressively tighten policy, leading him to bet against the short end of the yield curve.

• Dollar/yen today: He believes the yen is grossly undervalued and with Japan’s first dynamic prime minister in half a century, he sees a yen ready to repeat what happened to the dollar under Reagan and the pound under Thatcher.

The pattern he looks for: under-owned, undervalued, way out of whack, plus a catalyst.

Are we 1999 again?

The most interesting part of the interview for me was PTJ’s view on today’s market. He went through the big moments of his career: 1987, 1998, 2000, the GFC, and noted most of them shared a common feature: too much leverage, often derivative-driven.

But 2000 was different, and that’s the one that today’s market reminds him of:

“2000 was the easiest bear market I’ve ever seen my whole life. It’s got so many similarities to right now in the sense that the bear market of 2001 and 2002 were a consequence of all the IPOs in ‘99-2000 and then as they unlocked you just had this never-ending cascade of selling.”

His worry today is based on a simple piece of math:

• For the past 10 years, S&P 500 buybacks have retired 2-3% of market cap every year.

• Planned IPOs over the next year are estimated at 5-6% of market cap.

• Hyperscalers’ massive AI capex commitments are eating into the cash flow available for buybacks.

In other words, the equity supply/demand balance is about to flip: new equity supply rising while retired equity supply shrinks. Add the unlock schedules from a wave of IPOs and you have the same setup that produced the 2001-2002 bear market.

The lesson for me

I’m not going to start trading the dollar/yen anytime soon (although it may be a great time to look for undervalued Japanese stocks). But two things from this interview that I think are worth remembering:

1. Even legendary traders eventually recognize the value of compounding. PTJ’s career has been spectacular, but his honest reflection is that Buffett’s “boring” approach has been mathematically superior. That’s a powerful endorsement of what we try to do here.

2. Be aware of the supply/demand math for equities. With the IPO pipeline filling up and buybacks under pressure from AI capex, this is something worth watching, even for long-term investors.

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In my latest deep-dive I covered Josh Tarasoff, a lesser-known Guru who is not only a brilliant investor but also a great thinker

2️⃣ Christopher Tsai: Value Investing 4.0

Last year I covered Christopher Tsai of Tsai Capital, who runs a quality-growth strategy with a portfolio of long-term compounders like Apple, Brookfield, Amazon and Markel.

Tesla is Tsai’s largest position, and while I struggle to see Tesla as an attractive investment at its current valuation, the stock went more than 5x since Tsai started buying it in 2020.

Tsai just published an essay titled “Value Investing and the Emerging 4.0”, which is an interesting framework for thinking about how the discipline of value investing has evolved over the past century.

He breaks it into four eras:

Value Investing 1.0 — Graham’s “cigar butts” (~1930s)

Buying assets at a steep discount to book value, or even net current asset value… for less than two-thirds of [a company’s] net liquid assets alone — getting the plant, property, and equipment for free.

Value here was immediate: it resided entirely in the company’s balance sheet. This worked brilliantly in a manufacturing-heavy world full of forced liquidations, but Tsai argues most investors are still mentally trapped here, fixating on a single year of earnings rather than long-term earnings power.

If you want to learn more about Benjamin Graham and his book ‘The Intelligent Investor’, make sure to check my deep-dive:

Value Investing 2.0 — Buffett & Munger’s “wonderful companies” (~1970s onwards)

Value Investing 2.0 is best expressed by Buffett’s famous shift: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Value here became the present value of discounted future cash flows, projected meaningfully into the future. Margin of safety still applies, but it’s calculated against intrinsic value, not against book value.

Value Investing 3.0 — “The Medium is the Moat” (today)

This is Tsai’s preferred lens for evaluating great growth companies. Borrowing from Marshall McLuhan, he argues the new moat isn’t the product, but rather the environment built around the product:

Leading companies don’t merely sell products or services; they architect entire digital infrastructures and economic castles that redefine how we live, work, and interact — often invisibly.

Within 3.0, he highlights a particularly powerful subset: scale-economies-shared businesses, and (building on Nick Sleep’s foundational work) makes a distinction between:

• Supply-side scale economies (positive marginal cost): companies like Amazon, Tesla, and SpaceX that pass scale benefits back as lower prices, igniting a flywheel of more customers → more scale → lower prices

• Demand-side scale economies (zero marginal cost): platforms like YouTube, Instagram, and Google Search where the price is already free, so the company instead competes on user experience. Tsai coins a term for this: “Engagement Value per Unit Time”

In both cases, the company builds latent pricing power that it deliberately chooses not to flex, which means surface-level multiples often understate true intrinsic value.

Value Investing 4.0 — Intelligence as the castle (emerging)

In Tsai’s Value Investing 4.0, the company doesn’t just operate on top of an established platform. It must first build the platform itself, and the platform is intelligence.

In Value Investing 4.0, the economic castle is intelligence itself. And for the first time, the primary output that consumers are buying is digital labor.

Because the upfront capital required is enormous, Tsai argues that true 4.0 businesses don’t yet exist as standalone public companies. The closest examples are subsidiaries inside profitable 3.0 companies that can fund the bets:

• Tesla (Dojo + FSD + Optimus) - Funded by profitable car and energy businesses

• Frontier AI labs (Anthropic, OpenAI, xAI) - Funded by large 3.0 technology companies

Valuing a 4.0 business requires “an even more probabilistic, optionality-rich mindset”, projecting not five- or ten-year cash flows, but the present value of capabilities that may reshape entire industries.

My thoughts

I have to admit that Tesla is where the 4.0 lens gets hardest for me to apply. Paying today’s valuation for an “optionality-rich future” that may or may not arrive requires more conviction than I currently have, and I suspect many readers feel the same.

It doesn’t invalidate the framework. What I like is that the framework explains why the most successful quality-growth investors of the past decade have leaned into businesses that look “expensive” on a 1.0 or 2.0 basis but are deeply undervalued through a 3.0 lens.

Tsai’s 4.0 lens is certainly interesting food for thought…

💎 New Gem: Zoetis (ZTS) — A wide-moat compounder on sale?

Now to this week’s main event.

Zoetis reported earnings on Thursday and the stock dropped 21%, its largest single-day decline as a public company.

Zoetis Q1 2026

1.61MB ∙ PDF file

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Two very disciplined quality investors, Terry Smith at Fundsmith and David Rolfe at Wedgewood Partners, have been building positions in Zoetis since early 2025.

When two great investors land independently on the same business and the price drops 20%+ in a day, that deserves a very close look.

Let’s evaluate Zoetis through our Terry Smith-inspired framework.

What does Zoetis do?

Zoetis is the global leader in animal health. Spun off from Pfizer in 2013, the company sells medicines, vaccines, diagnostics, and genetic tests for both companion animals (dogs, cats, horses) and livestock (cattle, swine, poultry, fish).

The mix is roughly 70% companion animals / 30% livestock, with the U.S. accounting for ~55% of revenue and operations in more than 100 countries.

1/ Buy good companies

✅ Wide moat in an attractive industry. Morningstar rates Zoetis as having one of the widest moats in animal health: 300+ products across 8 species, 17 therapies generating over $100M each annually, long product lifecycles (less generic pressure than human pharma), and decades-deep veterinary relationships.

✅ Powerful secular tailwinds. The global animal health market is forecast to grow at ~8-10% CAGR (~$70B in 2025 → $150B by 2032), driven by the humanisation of pets, rising emerging-market pet ownership, pets living longer, and growing global demand for animal protein.

✅ Strong financials and capital allocation. 5yr ROCE of 26%, net margin of 28%, ~15% annualised dividend growth, and an active buyback program which was recently increased.

⚠️ What the market hated this quarter. The Q1 weakness was concentrated in one segment: U.S. companion animal. Total revenue grew just 1.9% to $2.26B (a miss); U.S. business declined 8% (companion animal alone -11%); but International grew 10% and livestock grew 12%. CEO Kristin Peck cited “a more price-sensitive and competitive environment” and lowered FY26 guidance accordingly.

2/ Don’t overpay

Here is where it gets interesting. Zoetis has historically been a “premium” stock. But after Thursday’s drop, ZTS trades at ~12x forward earnings, a historically low valuation.

With a 5yr ROCE of 26% and a EV/EBIT multiple of 12, Zoetis is now entering ‘Magic Formula’ territory…

Here is what David Rolfe wrote in his Q2 2025 letter, when the stock was much higher than today:

“We believe that, over the long term, reality tends to win; high-quality businesses earn the valuations they deserve at some point and will outperform the broad market. We believe we have been given the opportunity to do this with Zoetis now.”

3/ Final decision

Zoetis looks like a great Guru Gems portfolio candidate: a wide-moat business, in a structurally growing market, owned by two very disciplined quality investors I follow, and now trading at the cheapest valuation in a decade.

The Q1 results are genuinely disappointing, but the weakness is concentrated in one segment where the issues appear cyclical and competitive rather than structural. International and livestock continue to grow, and the long-term tailwinds for animal health are intact.

As Howard Marks often points out:

“In the real world things fluctuate between ‘pretty good’ and ‘not so hot’, but in the minds of investors they go from ‘flawless’ to ‘hopeless’, and so prices fluctuate enormously around intrinsic value.”

This feels like one of those moments.

📌Adding Zoetis (ZTS) to the Guru Gems portfolio.

I plan to add a starter position (1-2%) to the Guru Gems portfolio in the next few days and may buy more if the price continues to fall.

That’s it for this week! Please like or share if you find these insights valuable.

You can follow me on X @guru_gems and Substack @gurugems for more insights.

Until next week!

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Disclaimer: This newsletter is for informational purposes only and does not constitute financial advice or investment advice. Always do your own research before making any investment decision.

Welcome to a new edition of Guru Gems, where I study the world’s long-term investing masters and build a portfolio of quality companies based on their wisdom.

In my most recent Guru deep-dive, I covered Josh Tarasoff, a lesser-known Guru, who is not only a brilliant investor but also a great thinker.

Today’s edition is a bit special…

And while it may not be everyone’s cup of tea, I still hope you’ll get something out of it. Please do share your thoughts and suggestions!

2 minute AI audio version of today’s update:

🔭 Introducing a new monthly series

Long before I started studying investing masters and companies’ balance sheets, I had a very different interest: physics.

When I was 17, I got intrigued by reading Stephen Hawkings’ popular book ‘The Universe in a Nutshell’, and it led me to studying physics at university.

After graduating, I went into consulting and never returned to physics professionally. But the fascination certainly remained.

Over the years, I noticed that some of the laws (or principles) that describe moving objects or a cup of coffee cooling on your desk, show up in the world of investing too.

To revive this old passion of mine, I am starting a new regular series at Guru Gems where I bring a single idea from physics and apply it to how we think about businesses and markets.

I promise there won’t be a lot of equations, and the focus will be more on frameworks and mental models.

In keeping with the spirit of Guru Gems, each issue will also feature a guru. Though this time, a guru of physics rather than of investing.

Let’s start with one of the most foundational ideas of all.

The most pessimistic law in science

Of all the laws in physics, the second law of thermodynamics is one of the bleakest.

The first law tells you that energy is conserved. It can’t be created out of thin air or destroyed, only changed from one form to another.

The second law tells you that while the amount of energy stays the same, the useful portion shrinks every time it changes form.

Each time energy is transformed, some of it is "lost" as waste heat, dispersed into a form you can no longer harness. Heat spreads out and hot things cool down.

The arrow of time, as physicists call it, points in one direction only: from order to disorder, from concentration to dispersion.

A famous example is dropping a sugar cube into a hot cup of coffee. Watch what happens. The sugar dissolves. The coffee cools. Both the sugar and the heat spread out evenly, and they never spontaneously go back.

The technical name for this tendency toward disorder is entropy, and it always increases in a closed system.

The British astrophysicist Arthur Eddington wrote in 1928 that entropy holds “the supreme position among the laws of Nature.”

He warned that if your theory is found to be against the second law of thermodynamics, “I can give you no hope; there is nothing for it but to collapse in deepest humiliation.”

Why am I telling you this? Because I believe the second law of thermodynamics also describes the world of business. And once you see it, you cannot unsee it.

🚦Businesses obey the second law too

Imagine the economy as a giant thermodynamic system. In this system, “heat” is excess profit, the returns a business earns above its cost of capital.

And just like heat in a coffee cup, those excess profits do not stay concentrated. They diffuse, competitors arrive, margins compress, customers become choosier, patents expire, brands fade...

The default state of any business, left to itself, is the economic equivalent of room-temperature coffee: returns roughly equal to the cost of capital, no more.

This is not just a metaphor, it is empirically observable. In their landmark 2024 paper Measuring the Moat, Morgan Stanley's Michael Mauboussin and Dan Callahan show that companies earning the highest returns on invested capital tend to see those returns ‘fade’ over the following decade as competition arrives.

This is essentially the second law of thermodynamics applied to ROIC.

High returns attract competitors the way heat attracts cold air. Most businesses, given enough time, regress toward the mean.

So how do some businesses stay hot for decades? The answer in physics is the same as the answer in business: work.

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👷 What “work” means in physics, and in business

In physics, work has a precise meaning: it is the act of using energy to push a system away from where it naturally wants to go.

A refrigerator is the classic example. The inside of your fridge is colder than your kitchen. Left alone, the cold would leak out and equilibrium would win. So a compressor (the small motorized pump at the back of your fridge) runs continuously, doing the work of pushing heat from the cold inside into the kitchen. Stop the compressor and within hours your milk starts to warm up towards room temperature.

Now think of a great business like a refrigerator.

Here the fridge’s cold air is the company’s excess profits. The warm kitchen is the surrounding economy, pulling everything toward the cost of capital. And something, the moat, is the compressor doing the work to keep the two apart.

Here is where Chris Hohn’s “fortress business model” framework perfectly fits in.

When I wrote about Hohn last month, I described his obsession with barriers to entry. Re-read that issue with thermodynamics in mind, and you realize he is essentially asking: what is doing the work to keep this business away from competitive equilibrium, and how much does that work cost?

Look at the kinds of moats Hohn lists: irreplaceable physical assets, intellectual property too complex to replicate, network effects, switching costs, brand strength, regulatory protection. Each is, in physics terms, a different mechanism for keeping the system far from equilibrium. And the very best businesses use several at once.

As Warren Buffett puts it:

“All economic moats are either widening or narrowing, even though you can’t see it.”

That is the second law at work. A moat cannot stand still. Either work is being done to push it further from equilibrium, or it is silently decaying back toward it.

🧓 The Guru: James Clerk Maxwell (1831–1879)

Before we go further, allow me to introduce the man who played a key role in better understanding the second law of thermodynamics.

James Clerk Maxwell is, in my view, an underrated genius in the history of science.

Einstein kept three portraits on the wall of his study: Newton, Faraday, and Maxwell. When Einstein visited Cambridge in 1922 and was told he had achieved great things by standing on Newton’s shoulders, he replied: “No, I stand on the shoulders of Maxwell.”

A quiet Scottish physicist who died of cancer at just 48, Maxwell unified electricity, magnetism, and light into a single set of equations that still govern every wireless signal, every radio wave, every visible color. If you ever had advanced physics classes, you may have learned about Maxwell’s equations.

Maxwell showed that light itself is an electromagnetic wave, a theoretical breakthrough that lay the foundation for Einstein’s relativity and also made the wireless age possible.

Without Maxwell, no GPS, no Wi-Fi, no mobile phones.

But the work most relevant to investors came from his other great obsession: the behaviour of gases. Maxwell, along with Ludwig Boltzmann, laid the foundations of statistical mechanics, showing how temperature, pressure, and entropy emerge from the collective behaviour of countless jiggling molecules.

🎥 To learn more about Maxwell, the BBC documentary James Clerk Maxwell - The Man Who Changed The World is a wonderful introduction to his life and work.

⭕ Maxwell's demon: a very special type of compressor

In 1867, Maxwell described a thought experiment that would unsettle physicists for the next century.

He pictured a tiny intelligent being (Lord Kelvin would later call it a “demon”) sitting at a gate between two chambers of gas.

Whenever a fast molecule approached from the cold side, the demon opened the gate to let it pass into the hot side. Whenever a slow molecule approached from the hot side, the demon let it pass to the cold side.

Over time, all the fast molecules end up on one side and all the slow ones on the other. The demon has separated hot from cold without doing any apparent work. He has, in effect, broken the second law.

For nearly a hundred years, physicists struggled with this puzzle. The eventual resolution came through information theory: the demon does do work, the work of information processing. He has to observe each molecule, decide what to do, and remember. That information has a thermodynamic cost. You cannot get something for nothing.

But the demon does represent something profound: a system where the work required to maintain order is so cleverly leveraged that it almost looks like magic.

What this means for investors

Maxwell’s demon is obviously just a thought experiment. But it points to something real and important about businesses.

Every great company has a compressor, something doing the work to hold back competitive equilibrium. But the amount of work required varies enormously from one business to another.

The very best businesses look, at first glance, like Maxwell's demons. S&P Global, which I added to the Guru Gems portfolio after my Hohn deep-dive, is a good example. Every bond issuance needs a credit rating. The fee is tiny relative to the bond size, the regulators essentially require it, and S&P collects with almost no incremental work.

Moody's, Visa, and similar Hohn and Kantesaria favourites are variations on the same theme: every transaction, a small toll, with the network running itself. The ratio of work done to heat captured is extraordinary.

At the other end of the spectrum sit businesses where the compressor is real, durable, but loud. GE Aerospace (Hohn) and HEICO (Rochon) earn their returns through continuous R&D, regulatory certifications, and layered switching costs.

And then there are businesses that sit somewhere in between or are still moving along the spectrum. Uber (Ackman) is a good example: billions of dollars were burned over a decade to create a network effect that, now that it has reached critical mass, increasingly runs itself. A demon being built in real time.

The investor's job is to figure out what the compressor looks like that is doing the work to hold back competition. 3 question can help with this.

🏰 Three questions to ask before owning a moat

Knowing where on the spectrum a business sits is only the beginning. To put the second law to practical use, here are three thermodynamic questions worth asking before investing in a company.

1. Is there a compressor and what does it look like? What specifically is doing the work to keep this business above competitive equilibrium? Is it scale? A network effect? A regulatory license? A patent? A brand built over decades? If you cannot name the compressor in one sentence, you probably do not yet understand the business well enough to own it. “They have a moat” is not an answer. What the moat is, and how it does its work, is.

2. What is the work-to-heat ratio? A business that captures enormous heat for very little work (think Visa, Moody’s, S&P Global) is a different animal from a business that captures enormous heat for enormous work (think GE Aerospace, HEICO). Both can be excellent investments. But they require different mental models. The first kind throws off cash and needs little reinvestment. The second kind compounds beautifully but requires constant feeding, and the moment management starts under-investing to flatter quarterly earnings, the compressor might start to fail.

3. Is the kitchen heating up (too much)? A moat that worked in 2010 may not work in 2030, not because the company stopped trying, but because the world around it warmed up. Newspapers did not get lazy; the internet simply raised the temperature beyond what their compressor could handle. The question worth asking of any long-term holding is whether the surrounding environment is becoming hotter or cooler relative to the work the compressor is designed to do.

This last one is also a useful lens on the current AI fears around SPGI. The market is essentially asking whether AI raises the temperature of S&P’s kitchen. My own view, for what it is worth, is that S&P’s particular form of work is proprietary, regulated, embedded in workflows. This is not the kind that AI easily commoditizes. If anything, AI needs S&P’s data to function. But that is a question every investor should evaluate for themselves.

Closing thought

Let’s close with a perfect quote from Buffett, taken from his 2007 letter to shareholders

"A moat that must be continuously rebuilt will eventually be no moat at all."

The truly great businesses are not the ones doing the most work to hold back competition. They are the ones where the work is structurally cheap, where the compressor runs quietly because of the way the system is built, not because of how hard management is pushing.

Most “moats” are not really moats. They are construction sites, perpetually rebuilding. The second law catches up with them eventually.

The investor’s job is to tell the difference. To find the businesses where the work is done by the structure itself, not by the people running it.

That’s it for this week!

As you can see, a bit of a different issue this time but I believe that studying frameworks from the field of science can really help us become better investors.

If you enjoyed this post, I would really appreciate it if you could like or share it or leave a comment!

You can follow me on X @guru_gems and Substack @gurugems for more insights.

Until next week!

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Disclaimer: This newsletter is for informational purposes only and does not constitute financial advice or investment advice. Always do your own research before making any investment decision.

Welcome to Round 8 of building my Magic Formula Portfolio.

Here is the 2-minute AI audio version of today’s update:

Quick reminder if you are new to Guru Gems: while studying investing masters, I’m creating two real-money portfolios to put my learnings into practice.

Check out my recent 1-year anniversary post to learn more about my journey:

Last week’s Guru deep-dive covered a lesser-known Guru, who happens to be not only a brilliant investor but also a great thinker

Magic Formula Refresh

In “The Little Book that (Still) Beats the Market”, Joel Greenblatt suggests that a regular investor can beat the market averages by buying a group of ‘good’ companies at ‘bargain’ prices.

• ‘Good’ → high return on capital

• ‘Bargain’ → high earnings yield

Since he expects the magic formula to work on average, Greenblatt suggests to own a basket of 20-30 stocks.

Here is a great clip from an interview with Howard Marks where Greenblatt talks about how buying good businesses at attractive prices is the key to beating the market. His “Magic Formula” investing strategy is built on this very principle of simplicity and consistency.

You can read more on Joel Greenblatt and his Magic Formula here.

You can also download my Joel Greenblatt e-book for free:

Joel Greenblatt e-book by Guru Gems

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Current Magic Portfolio performance

Last month I added Adobe (ADBE), Deckers Outdoor (DECK), and EverQuote (EVER) to the portfolio in Round 7, bringing the total number of holdings to 21 stocks.

The overall performance of the Magic Portfolio is currently +1.4%, which is definitely not beating the index (yet), but it is back in the green after some painful months.

A few big ‘winners’ were responsible for most of the gains over the past month:

• Molina Healthcare (MOH) is up nearly 25% over the past month and jumped 14% on Thursday alone after reporting Q1 2026 earnings. Molina’s solid quarter was driven by better than expected Adjusted EPS ($2.35) and medical loss ratio.

• Catalyst Pharmaceuticals (CPRX), a name I added in August, was also up ~15% over the past month and hit a new all-time-high this week. The big ‘catalyst’ here was the company securing extended U.S. patent exclusivity for Firdapse until 2035, which removes the most pressing near-term overhang on the stock.

• Crocs (CROX), the ‘ugly’ shoe company, is up nearly 30% over the past month. Crocs received multiple analyst upgrades after their strong 2025 earnings report in February, which has probably boosted investor confidence in Crocs’ growth potential. Some recent product collaborations with popular brands also generated significant social media buzz among younger consumers. The next test will be the Q1 2026 earnings report on April 30.

Of course, not everything has been working. SIGA Technologies (SIGA) and Rigel Pharmaceuticals (RIGL), 2 small-cap pharma companies are down more than 30% and H&R Block (HRB) is even down 40%.

But that’s why Greenblatt says to hold 20-30 stocks, so that the formula can work ‘on average’. And with the portfolio containing many out-of-favor businesses where sentiment is washed out, it usually doesn’t take much in terms of positive catalyst to drive a sharp re-rating.

Also, Greenblatt himself warned that:

Over one-year periods, the magic formula stock portfolios underperformed the market averages in one out of every four years tested.

The real test is over a 3-year period, where Greenblatt observed outperformance in every single rolling 3-year window in his original tests. I am only ~10 months in, so there’s still a long way to go. Sticking to the process!

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New Magic Formula Stocks

As I explain in detail in my first Magic Portfolio post, I use Joel Greenblatt’s Magic Formula screener combined with financial ratios data to identify the top stocks in terms of combined rank for Return on Capital (using ROCE) and Earnings Yield (using EV/EBIT).

Here are the 3 companies I will be adding to the Magic Portfolio on Monday

1. lululemon athletica (LULU, Market cap $16B)

Magic Formula metrics: ROCE 3Yr: 44%; EV/EBIT: 7.4x

Lululemon is a global athletic apparel company best known for its premium yoga, running, and training wear. The brand built its reputation through community-driven retail experiences and product innovation, and it has expanded internationally over the past decade, particularly in China.

LULU ranks quite high on the Magic Formula screener with a 3yr ROCE of 44% and an EV/EBIT of 7.4x. That combination of consistently high returns on capital with a single-digit EV/EBIT multiple is rare for a brand of this size and quality.

Here is a really good deep-dive from January from , who I highly recommend following/subscribing to:

The Pursuit of Compounding

lululemon athletica: Mismanaged Compounder, or Value Trap?

Source Over the last 18 months lululemon athletica inc. (LULU) has been a perpetual (downward) dog. For shareholders, the ride has been anything but a smooth vinyasa flow…

Read more

7 months ago · 9 likes · 4 comments · The Pursuit of Compounding

A few things stand out about Lululemon today:

• The stock is down ~58% from its 52-week high of $340 (June 2025), and ~32% year-to-date. The decline has been driven by slowing growth in the Americas, a Texas AG investigation around product chemicals, and most recently a sharp 13% drop on April 23 after the company appointed former Nike executive Heidi O’Neill as new CEO. The choice for O’Neill was a disappointment for activist investors Elliott Management.

• Despite the noise, the underlying business still generates $11B in annual revenue with strong international momentum (China, EMEA).

• The current P/E of ~10.8x is well below LULU’s 5-year median of ~37x, suggesting the market is pricing in a lot of bad news.

I realize LULU is a controversial pick and may be considered a value trap. But the Magic Formula doesn’t ask whether a story is comfortable, it asks whether the business is high-quality and cheap. On those two dimensions, LULU is hard to ignore.

2. Exelixis (EXEL, Market cap $12B)

Magic Formula metrics: ROCE 3Yr: 26%; EV/EBIT: 11.5x

Exelixis is an oncology company best known for CABOMETYX (cabozantinib), a tyrosine kinase inhibitor approved across multiple indications, including renal cell carcinoma, hepatocellular carcinoma, and most recently neuroendocrine tumors.

EXEL ranks strongly on the Magic Formula with a ROCE of 36% (3-year average of 26%) and an EV/EBIT of 11.5x.

A few things to note about Exelixis:

• The company generated $2.1B in revenue in 2025 (up 17%) and guided for ~$2.4B in 2026, driven by continued momentum in renal cell carcinoma and the new NET launch.

• The market is clearly pricing in the August 2026 patent cliff for cabozantinib, which currently accounts for ~90% of revenue which explains the relatively low valuation.

• The company has been aggressively returning capital to shareholders, having repurchased $2.16 billion in stock since March 2023. A new $750 million repurchase program was authorized in October 2025.

• The pipeline successor, zanzalintinib, has a potential FDA approval decision in December 2026 for colorectal cancer and mid-2026 readouts in non-clear cell renal cell carcinoma.

This is a classic Magic Formula setup: a high-quality, cash-generating business trading cheaply because of a real but well-known overhang. If the patent extension litigation succeeds or zanza launches well, today’s multiple looks too low.

3. MediaAlpha (MAX, Market cap $600M)

Magic Formula metrics: ROCE 3Yr: 43%; EV/EBIT: 8.7x

MediaAlpha is the leading programmatic customer acquisition platform for the U.S. insurance industry. The company connects insurance carriers with online shoppers. They operate primarily in property & casualty (auto/home), health, and life insurance, and earn a fee on each consumer referral.

MAX ranks well on the Magic Formula with a ROCE of 43% and an EV/EBIT of 8.7x.

I picked MAX over CorMedix (CRMD), which actually ranked a bit higher on combined rank, because I am already heavily exposed to pharma/healthcare in this portfolio (HRMY, RIGL, CPRX, SIGA, LNTH, EXEL, plus MOH and CI on the insurance side).

A few things to note about MediaAlpha:

• 2025 was a record year, with revenue of $1.1B (up 29%), transaction value of $2.2B (up 45%), and net income of $26.8M.

• The Property & Casualty insurance vertical, which is now the core of the business, grew transaction value 65% in 2025 to $1.9B as auto insurance carriers ramp customer acquisition spending after years of pullback.

• The stock has been volatile and well off the 52-week high of $13.71 from December 2025, partly driven by a Q4 2025 revenue miss reported in February and broader macro concerns weighing on cyclical names. Goldman Sachs cut its price target from $13.50 to $11.50 in February.

• Q1 2026 earnings on April 29 will be a near-term catalyst (but also a risk as this is the kind of stock that can move 15%+ on earnings).

On Monday, I’m adding these 3 names to the Magic Formula Portfolio and then hold them for one year, as Greenblatt prescribes.

That will bring me to 24 stocks in the portfolio. The goal is to get to a full portfolio of ~25 names, so I will be essentially fully invested.

That’s it for this week! Please like or share if you enjoy reading Guru Gems.

You can follow me on X @guru_gems and Substack @gurugems for more insights.

Until next week!

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Disclaimer: This newsletter is for informational purposes only and does not constitute financial advice or investment advice. Always do your own research before making any investment decision.

In today’s edition:

• 🕴️ The Guru: Josh Tarasoff — Founder of Greenlea Lane Capital

• 📈 The Playbook: The Greenlea Lane Way — Permanence, Quality and the Indirect Path

• 💎 The Gems: A Tour of Greenlea Lane’s top holdings

• 🔄 The Confirmation: Why Tarasoff’s portfolio validates several of our existing positions

Today’s Guru deep-dive is a bit longer, so here is a 2-minute AI audio version if you are short on time (bonus point if you can find the error)

Start here if you are new to Guru Gems.

Welcome to Year 2 of Guru Gems

Last week I published newsletter #52, the one-year anniversary edition of Guru Gems

In the ‘What’s Next for Year 2?’ section I wrote:

“In my first year I have covered mostly well-known names, so going forward I will try to also cover some lesser-known Gurus.”

Well here I am, making good on that promise already :)

Josh Tarasoff is probably one of the lesser-known investors I have covered until now, but a very interesting Guru nonetheless. He has no public profile, no media presence, and no marketing operation of any kind. He runs a fund of just 8-10 stocks out of his home in Connecticut, entirely on his own.

There isn’t much available in terms of interviews or investor letters, especially from the past couple of years, but after some research I still managed to find a few very interesting interviews and materials published on his website that allow me to understand his investment framework.

Let’s dig in.

Guru in the spotlight: Josh Tarasoff

Josh Tarasoff is not a household name. He does not appear on CNBC or Bloomberg TV, does not publish on X (at least not anymore), and has never run a marketing campaign. He operates out of Weston, Connecticut, with no employees, no formal office, and no analyst team.

He launched Greenlea Lane Capital in 2006 with about $2 million raised from himself, friends and family and has compounded at 17.3% net of all fees from inception through 2021 (this is based on an interview from 2021, I couldn’t find any more recent performance data)

Tarasoff is a Duke University philosophy graduate (2001), had an earlier career at Goldman Sachs and later attended Columbia Business School.

He started Greenlea Lane immediately after graduating from Columbia, moving into a cheap place with friends, working out of his bedroom, investing his own capital plus a small sum from his network.

The fund's first real test arrived almost immediately. In 2008, Greenlea Lane was down 51%, something Tarasoff had prepared himself to accept before he ever launched. Rather than retreating, he used the crisis to buy quality businesses when they finally got cheap.

It was also when he crystallised what he actually wanted: not mature businesses bought at a discount and sold at fair value, but genuine compounders, companies growing intrinsic value at 15–20% or more that you could simply hold. By 2012 this conviction led him to Amazon, a stock he has now held for 14 years, made it nearly a 25-bagger, and which is still his largest position today.

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The Greenlea Lane Way

Tarasoff is an unusual figure in money management because he is not just a practitioner, he is also a great thinker.

Over the past five years he has published four essays that form the basis of his intellectual framework. I highly recommend reading these for everyone serious about investing.

Here are the four ideas that define how Tarasoff invests.

1. 🚗 The Self-Driving Portfolio

The most distinctive concept in Tarasoff’s framework is what he calls the “self-driving portfolio.”

Most investment firms operate under implicit time pressure: a portfolio of two dozen stocks with a two-year average holding period requires one new market-beating idea every single month, without end.

The necessity to be continuously on the verge of some great new idea sows an endemic hurriedness that can be seen on people’s faces and heard in their voices. This struck me as unhealthy for decision making (and perhaps even unhealthy, period).

His solution is radical in its simplicity: approach every investment with a permanent attitude. Not a five-year time horizon. Not a long-term view. A permanent view: the expectation that the company will compound itself indefinitely.

“I call this approach self-driving because — though it might not be achievable in practice — the ideal is for the portfolio to take over all the work.”

The benefits compound on themselves: less time pressure leads to better decisions, which strengthens the portfolio, which further reduces time pressure. Most importantly, it enables him to be calm and ready to act when exceptional opportunities arise.

A self-driving portfolio is antifragile by design, and Tarasoff notes that it is probably also more sustainable over a long career than investing under constant pressure.

This connects directly to what I wrote about Chris Hohn: that long-termism in a great company is a free lunch. Tarasoff would no doubt 100% agree with Hohn’s statement, as Tarasoff sees long-termism as “a way of being”.

2. 🔁 Feedback Loops & The Endgame

These two concepts come from the same 2021 essay and belong together. They are both about understanding a company’s long-term system rather than its near-term events.

On feedback loops: Tarasoff believes sustainable long-term growth is impossible without them. Growth that is not self-reinforcing is, by definition, fragile. He looks for loops everywhere, not just in the classical categories like network effects.

The deeper implication is that feedback loops guide you toward dynamics rather than events. A price cut may be scale economies shared at work, not competitive pressure. Rising expenses may reflect investment in a loop, not deteriorating fundamentals.

On endgames: An endgame is a long-term state of affairs, typically 10+ years out, grounded in what Tarasoff calls overwhelming logic: forces that make too much sense not to prevail in the fullness of time.

The key insight is that while the path to the endgame is almost always unpredictable, the destination can be foreseen because feedback loops and quality will eventually play out.

“Long-term investing means letting go of the path’s false comfort and embracing deeper currents.”

One of his favourite situations is when a company’s best decade won’t even begin for five years or more: the endgame is clear, but there is near-term murkiness as the pieces fall into place. Most investors focus on the noise. Tarasoff waits for the endgame.

3. ✨ Quality, Conviction & The Implicit

This idea is developed across his 2024 and 2026 essays. It starts with a distinction between two kinds of conviction.

Explicit conviction can be written down and modelled in Excel: forecasts, margins, intrinsic value ranges.

Implicit conviction is different: it is felt rather than calculated. It is the deep qualitative knowing that a company will do what it needs to and ought to do, even when the numbers are temporarily disappointing.

Both are necessary, but the investment industry systematically underweights the implicit, because it cannot be transmitted from analyst to portfolio manager to client, and cannot be turned into a “repeatable process”. That gap is precisely where the opportunity lies.

The deeper-something that underlies implicit conviction, Tarasoff calls ‘Quality’, in homage to the philosopher Robert Pirsig. A company with Quality has a soul. It is mission-driven. It thinks holistically in time horizons long enough that any distinction between mission and value creation dissolves.

“Some companies have a soul, and others are just going through the motions.”

In his February 2026 essay he argues that AI and technology make more investors increasingly reliant on quantification, and that the ability to perceive what cannot be measured will become rarer and more valuable, not less.

“To the extent that market participants become increasingly immersed in and reliant upon technology, it is possible that the capacity to incorporate what lies beyond the reach of technology will become even rarer and more valuable.”

4. 🌳 The Indirect Path

Tarasoff’s July 2024 essay, “Direct and Indirect,” starts with a simple distinction: some activities are simple and can be approached directly (assembling a Lego set: just follow the instructions). Others are complex, and their outcomes cannot be aimed at directly. Growing a tree is the example: you cannot coax a seed to germinate or pull on a sapling’s branches. You plant it in fertile soil, ensure water and sunlight, and let it grow itself.

Investing is a complex activity. The appropriate approach is therefore indirect.

For Tarasoff, this means starting from a foundation of studying companies and industries he finds genuinely interesting, something pursued for its own sake, as a default mode.

“Occasionally investment conviction falls into place, which feels as much like good fortune as the fruit of hard work.”

The same principle applies to how he thinks about the future. Rather than building forecasts and working backward to a price target (which is the industry’s standard direct approach) he concentrates on the past and present of companies until a strong view of the future comes into focus.

This emphasizing of ‘Potential over prediction’ as he calls it, is the indirect approach applied to investment thesis-building.

The Greenlea Lane Portfolio

Here is Josh Tarasoff's portfolio at end of Q4 2025. Just 8 positions, $343 million in US equities holdings:

Eight stocks. That’s it. The top 4 positions alone represent nearly 70% of all assets. This is a level of concentration similar to Bryan Lawrence or Dev Kantesaria.

This level of simplicity also echoes what I admire most about François Rochon: both men have structured their professional lives to think clearly, over the longest possible horizon, free from the business pressures that corrupt so much of the industry. The difference is that Rochon runs 20-30 positions; Tarasoff runs 8. Same philosophy, taken one step further.

What strikes me immediately when looking at this portfolio is how many of these names I have already encountered on my Guru Gems journey.

Let’s take a closer look.

💎 The Gems: A Tour of Greenlea Lane’s Top Holdings

Rather than deep-diving a single name (as I normally do), given that Tarasoff’s largest Gem Amazon has already featured before, I want to walk briefly through each of Tarasoff's positions using the lens of his own framework.

🥇 #1: Amazon (21%)

Amazon is a core holding of Bill Ackman, John Armitage, Seth Klarman and quite a few other Gurus. I added it to the Guru Gems portfolio about a month ago, and with the stock already up 22% since then, that seems to have been a good decision.

Seeing it as Tarasoff’s #1 position at 21% of a fund he has managed since 2006 is a powerful confirmation.

In June 2012, Tarasoff pitched Amazon at VALUEx Vail when the shares were trading at approximately $11 (split adjusted). His verdict at the time:

“AMZN is the finest business of which I am aware, and I believe it is (very) cheap.”

In his pitch, he laid out five structural advantages: cost structure, selection, convenience, personalization, and habit formation, and showed that each one compounds further with scale. He called them “advantages that widen every single day.”

Here is his pitch, it’s really cool to see his thinking process and how he was already thinking about the next decade for Amazon:

Josh Tarasoff Amazon Pitch at VALUEx Vail 2012

396KB ∙ PDF file

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Amazon today trades at around $250. From the split-adjusted 2011 entry, that is roughly 23 times his money in 14 years.

His decision to hold through every bit of market skepticism about Amazon’s margins is itself the self-driving portfolio in action, a textbook illustration of feedback loops, endgame thinking, and Quality all converging in a single position.

🥈 #2: Brookfield Corporation (19%)

Brookfield Corporation, an alternative asset management powerhouse, is another Gem held by many Gurus: Bill Ackman, Akre Capital, Tom Gayner.

Brookfield is almost certainly the unnamed company in Tarasoff’s “Direct and Indirect” essay:

“Whereas its peers started life knocking on doors to raise capital for dealmaking (direct), what might be surprising is that this company existed for decades before hanging out its shingle as an asset manager (indirect). During that period, it was solely a principal investor whose goal was to compound its capital at attractive rates with a generational time horizon.”

Beginning as a Brazilian utility in the 19th century and evolving into a global owner-operator of real assets, Brookfield built its competitive position over generations. This is the indirect path Tarasoff talks about: the $1 trillion AUM franchise was never engineered from day one; it emerged from decades of mastery.

🥉 #3: Berkshire Hathaway (15%) & #4: Markel (14%)

Berkshire Hathaway and Markel I covered previously. Tarasoff holding both at a combined 29% of his portfolio is consistent with the principles he writes about: Quality culture, long time horizons, and compounding capital through ownership.

“Reading Buffett was a moment of clarity, and I knew value investing was what I wanted to do.”

#5: Alphabet (9%)

As regular readers know by now, Alphabet is the ultimate Guru Gem and it’s great to see Tarasoff holding it as well.

#6: Trupanion (8%)

Trupanion is a pet insurer provider and seems a bit of an unusual name in the portfolio. But as Tarasoff explained in a 2017 interview, it is his clearest public example of "certain change": a situation where a new way of doing something is a genuine win-win with no losers.

As he put it in 2017: if a pet owner can't afford $5,000 to save their pet's life but can pay $40 a month in insurance, then the pet benefits, the owner benefits, and the veterinarian gets to perform the highest-level procedure.

"There's literally no loser in pet medical insurance."

It is also almost certainly the unnamed pet insurer from his "Direct and Indirect" essay, with a veterinary distribution model that is nearly impossible to replicate.

#7: Tesla (8%)

Tesla is the position that will raise the most eyebrows. It was ~10% of the portfolio in Q3 2025 before being trimmed. Tarasoff has not written publicly about why he holds it, so any explanation is just me guessing.

Through his own framework, one could see it as a company with strong positive feedback loops in its technology and manufacturing, a founder with unlimited ambition, and a long-term endgame.

Tesla's endgame, articulated in their Master Plan Part 4, is achieving "sustainable abundance" through AI, robotics, and energy dominance.

I also see parallels with Christopher Tsai, an investor I covered before who has Tesla as his largest position, but also holds significant positions in Brookfield, Amazon, Markel and Berkshire.

#8: Burford Capital (5%)

Burford Capital is equally unusual. Burford is a leading litigation finance company, providing capital to plaintiffs or law firms in exchange for a share of legal proceeds.

Again, Tarasoff has not publicly commented on this position, but its inclusion is consistent with his endgame framework: a genuinely differentiated business model in a market still in its early innings, with a long-duration return profile and high barriers to replication at scale.

🔄 The Confirmation: What Tarasoff's Portfolio Tells Us

One of the most valuable exercises when studying a new Guru is to check how their portfolio overlaps with previous Gurus I have studied, and with the Guru Gems portfolio itself.

The convergence across Gurus is striking. Amazon, Brookfield, Berkshire, Markel and Alphabet show up across multiple portfolios of investors with entirely different styles and processes. That kind of multi-Guru overlap remains one of the strongest signals this newsletter tracks.

Final Thought: The Philisopher-Investor

Most people in money management see investing as a profession with defined best practices. Tarasoff sees it as something closer to an art: something that must be cultivated from within, tailored to your unique personality and interests, and pursued for its own sake rather than for the validation of others.

His north star has always been the same: to be the best investor he can be, in his own way, for partners who want exactly that from him.

I really enjoyed the research for this deep-dive as so much of it resonates with how I think about investing.

That’s it for this week’s edition!

Thank you for reading and following along.

Until next week!

Disclaimer: This newsletter is for informational purposes only and does not constitute financial advice or investment advice. Always do your own research before making any investment decision.

Welcome to a very special edition of Guru Gems.

This is newsletter #52. One full year of studying the world’s long-term investing masters every single week.

When I started Guru Gems in April 2025, I had a simple idea: study the best investors, share what I learn, and build a real-money portfolio based on their wisdom.

Along the way, I also started running a Magic Formula portfolio inspired by Joel Greenblatt, giving me two very different lenses on investing: concentrated quality on one hand (Guru Gems portfolio), systematic value on the other (Magic Formula portfolio).

52 newsletters later I can tell you this has been a very rewarding learning journey.

In today’s anniversary edition:

• 📊 Guru Gems Year 1 by the Numbers

• 💎 How the Portfolios Are Doing

• 📚 3 Lessons I’ve Learned After Studying Gurus for a Year

• ☑️ The Intelligent Investor Checklist 2.0 (refreshed with new Guru wisdom)

• 🏆 The Guru Gems Hall of Fame

• 📋 2026 Watchlist

📊 Guru Gems Year 1 by the Numbers

One year ago, I wrote one of my first posts asking: “Is Alphabet the ultimate Guru Gem?”. At the time, it was the most-held stock among long-term Superinvestors, yet the market was done with Alphabet (“ChatGPT will kill Google!”). Buying it at $157 turned out to be my best decision of the year.

The most popular post of the year? My deep-dive on Norbert Lou and the Punch Card Mindset. Something about a quiet, ultra-concentrated investor who only needs a handful of great ideas in a lifetime clearly resonated with this community, and was viewed 1300 times.

You can browse the full archive of all 52 newsletters here, categorized by theme.

💎 How the Portfolios Are Doing

One of my goals with Guru Gems is that I want to be fully transparent about the performance, both the good and the not-so-good.

Guru Gems Portfolio

The portfolio finished 2025 up +17% on invested capital, driven primarily by Alphabet’s phenomenal run (+99% by end of December).

But 2026 has been a different story. The SaaSpocalypse hammered Constellation Software (CSU) and CCC Intelligent Solutions (CCC), LVMH had its worst-ever start to a year, and PayPal fell 20% in February following weak earnings and a CEO change.

As I shared in last week’s “Podium of Errors,” I made mistakes, particularly on position sizing with CSU.

I still strongly believe in the companies I am invested in as well as my process. As Rochon wrote about one of his long-term winners: after the first four years of owning it, they still hadn’t made a profit.

Magic Formula Portfolio

My Greenblatt-inspired portfolio, which I started in the summer of 2025, naturally tilts towards small-cap value names, particularly in healthcare. Small caps have been significantly underperforming the S&P 500 (I wrote about this cycle in November).

The Magic Formula portfolio has had a bumpy ride, and is currently at -2%.

I continue to add new names every few months as Greenblatt instructs. The whole point of this strategy is mechanical discipline over a multi-year period, so it’s too early to judge.

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📚 3 Key Lessons After Studying Gurus for a Year

After spending hundreds of hours reading investor letters, studying portfolios, reviewing books, and listening to podcasts, here are the 3 key lessons that have stuck with me the most.

1️⃣ Patience is the ultimate edge

I know this sounds like a cliché. But after studying 15+ Gurus for a year, patience really is the ultimate edge.

Chris Hohn, who has compounded at 18%+ per year, put it best: “They say there is no free lunch in finance, but I do think long-termism in a great company is a free lunch.”

François Rochon owned O’Reilly Automotive for four years before making a profit, and it went on to become one of his biggest multi-baggers. Chuck Akre thinks in 5 to 10 year horizons. Bryan Lawrence may go a full year without a single new idea. Peter Keefe described Copart as a “multi-decade compounding opportunity.” Chris Davis has held Capital One for over a decade.

All of them essentially apply the same principle which Terry Smith nicely summarized as:

2️⃣ How you behave after you invest matters more than what you pick

This is the most powerful insight I took away from the book Stock Master Maestros. Lee Freeman-Shor’s data showed that what separated great investors from the rest was not stock selection but execution: how much they let winners run, how fast they cut losses, and whether they doubled down on losers.

Greg Padilla's 216% payoff ratio comes from a simple rule: invest a standard 2-2.5%, let the position float, and almost never add to losers.

The first part of this rule, a smaller position size, is something I had to learn the hard way. I bought CSU right before the SaaSpocalypse, and as it kept falling, I added more. If I had followed Padilla's approach, the damage would have been much smaller.

This is why in my recent “Podium of Errors,” I gave the 🥇 gold medal mistake to position sizing on Constellation Software.

3️⃣ A checklist saves you from yourself

Finally, the third big lesson for me is the importance of imposing (and following) a set of pre-defined rules for yourself.

I wrote about this in November when reviewing ‘The Intelligent Investor’, but it’s clear that this is something all of the successful investors apply.

“By imposing a rule on yourself - I will never buy a stock without first completing a checklist - you can avoid the heartache that comes from selling in a panic after buying on an impulse.”

—Jason Zweig

When I published the original Guru Gems Intelligent Investor Checklist back in November, it was inspired by the wisdom of Benjamin Graham and Jason Zweig, with Guru-specific checks layered on top.

After studying more Gurus, I think it’s time for an upgrade, and I am happy to share with you the Guru Gems Intelligent Investor Checklist 2.0

Guru Gems Intelligent Investor Checklist 2.0

297KB ∙ PDF file

Download

Download

The WAWI exercise from Greg Padilla (“Why Are We Idiots?”) is my favorite addition. I really like this idea of writing down the top 3 reasons why an investment could fail. If you can’t identify clear risks, you probably don’t understand the company well enough.

🏆 The Guru Gems Hall of Fame

Looking back at Year 1, I want to highlight the Gurus that left the biggest impression on me.

🥇 François Rochon — 15% annualized returns over 30+ years. His annual letters are masterclasses in rational, long-term thinking and his humility and consistency are very inspiring. Re-reading his letters from 2010 onward was one of my favorite research projects this year.

🥈 Chris Hohn — 18%+ annualized returns over 2 decades, using a ‘Fortress Business model’ playbook. Hohn is very selective in the industries and companies he invests in, and once he finds a fortress business, he uses time horizon arbitrage as a competitive advantage (he calls it ‘Extreme long-termism’).

“If you find something good — and it’s going to be good long term — stick with it. Don’t assume newer is always better.”

🥉 Bryan Lawrence — Running a portfolio of just 10 stocks with extraordinary discipline. Lawrence has proven that focused, patient investing can generate exceptional returns. His ‘concentrated quality’ approach and his willingness to go a full year without a single new idea really challenge you how to think about portfolio construction.

📋 Guru Gems Watchlist

The market turbulence in Q1 has made several high-quality companies significantly cheaper.

In my recent post on Stock Master Maestros, I included an update on 5 companies on the watchlist that I believe are becoming attractive: MOH, FICO, MELI, CPNG, MA.

I’m watching these very closely and may add them to the portfolio at some point.

Here is a screenshot of the top companies on my watchlist.

You can access the full watchlist in the Guru Gems Master Google Doc.

🔮 What’s Next for Year 2?

A few things I’m excited about for the year ahead:

More Guru deep-dives — There are so many incredible investors left to study. In this first year I have covered mostly well-known names, so going forward I will try to cover also some lesser-known Gurus.

More international Gurus — Most of my coverage has been US-focused. I want to explore great investors in Europe and Asia.

Continuing the Magic Formula — Ever since I read Greenblatt’s book for the first time many years ago, I was fascinated by this idea that if you consistently buy companies that are ‘cheap’ and ‘good’, you can beat the market. So far, this hasn’t proven to be true, but I definitely want to give this 2 full years before rethinking it.

Continuing to share openly — I believe my recent ‘Podium of Errors’ post was well received. I plan to keep sharing both the wins and the losses. That’s what makes this real.

Please share any suggestions you may have on investors, companies, books, podcasts, … you would like me to cover with Guru Gems.

Thank You 🙏

To every single person who has subscribed, read, liked, shared, or commented on Guru Gems this year: Thank You!

Writing Guru Gems every week has been intellectually very rewarding. I started this as a way to document my own research and to keep myself accountable as an investor, and didn’t know if anyone would care about a newsletter where someone studies the world’s best investors.

Now with hundreds of followers and subscribers, I am even more motivated to keep going, so I hope you’ll stay for the journey and please make sure to spread the word ;)

Here is to finding more Gems in Year 2!

Thank you for reading, I will be back next week with a new Guru and a new Gem!

Disclaimer: This newsletter is for informational purposes only and does not constitute financial advice or investment advice. Always do your own research before making any investment decision.