When you hear or read about ‘the market’ being up or down, this is usually a reference to the S&P 500 market-capitalization-weighted index. The equal-weighted index, where the Mag 7 have only a 1.4% weight, has underperformed SPY by 27% since January 2023.

P/Es mean-revert from above-average through average to below-average levels.

We have this mechanical, quantitative position-sizing framework to protect me from myself. When you find a company, you can fall in love with it and get emotional, thinking it should be a 50% position. But it’s not, because things can always go wrong.

Thinking about thinking, or being aware of making decisions. It requires you to take a step back from yourself, to become almost an outside observer of yourself and your programming.

GoPro was a momentum stock that was riding a wave about to break.

When people pay for my creation, there is meaning in that exchange. It signifies that my effort, my dedication of time, are voluntarily honored by someone’s stored time — which is what money truly is.

Nonlinear means that when you double the dose of, say, a medication, or when you double the number of employees in a factory, you don’t get twice the initial effect, but rather a lot more or a lot less.

We don’t own the market; instead we have humbly assembled a portfolio of $0.30 to $0.60 dollars. One stock at a time.

RX has incredible operational leverage since the bulk of its costs are fixed, with the exception of consulting. Operational leverage coupled with high sales growth should help to lift profit margins.

P/E compression acts like gravity pulling stocks downward, while earnings growth provides counteracting force.

The P/E expansion represents a powerful tailwind during bull markets but creates headwinds during subsequent periods when expansion stops.

A patient investor is in scientist mode — his position is a thesis and he is actively looking for all data. A stubborn investor is engulfed by his ego, not willing to change his mind, cherry-picking data to confirm his unshakable belief.

Companies that are run by owner-operators that have a high return on capital and a long growth runway.

We put in a small hedge (in accounts where we had option authorization) by buying puts on the S&P 500.

Think of it as a matrix. You have quality and valuation. Let’s say you have a very cheap, high-quality company — that’s a 5 to 7% position. Then you have low-quality and expensive, which would be on the opposite corner. It’s a spectrum.

I think of quality as a spectrum of light: black and white and color. Black and white are the fundamentals — the essential craftsmanship. In research, it’s building financial models where we stress test every assumption. The color is more elusive — where art lives.

I like Warren Buffett’s definition of quality: if the stock market was closed for ten years, would I be comfortable holding this stock?

Quality is multiplicative, not additive. Like multiplying numbers, one zero brings the whole product to zero. One poor surface can undermine everything.

During range-bound periods, P/E compression acts like gravity pulling stocks downward, while earnings growth provides counteracting force. The benefits from earnings growth become gradually offset by ongoing P/E compression. Stocks move sideways for extended periods during this process.

High Return on Capital (and economic value added returns) far exceeding the cost of capital, another scorecard for value creation.