1Q26 Investor Letter
“ “It’s not supposed to be easy. Anyone who finds it easy is stupid.” is a famous quote by Charlie Munger to Howard Marks. As we navigate through the greatest valuation dislocation we’ve ever encountered, we certainly picked up what Munger said in an uneasy way.
Our top two holdings, PDD and TME, now trade at < 5x EV/EBIT, adjusted for highly liquid investments. Fake or commoditized AI companies we short trade at 100x revenue. There seems to be only two classes of assets: AI bottleneck companies and AI melting icebergs.
Enterprise software companies are, among all, the worst victims. BVP’s Nasdaq Emerging Cloud dropped 25% and underperformed the S&P 500 by 50% in the last twelve months. We sold our entire U.S. software positions when ChatGPT came out in Jan 2023 - therefore, we missed a great run of 40% in the following year. This is an example of how early we could get in with our judgment. We never touched the sector again until last quarter’s sector meltdown. And we bought one company - Constellation Software, for reasons outlined in this letter.
Market return dispersion coincides with a dispersed world - South Koreans are cashing out of insurance policies to invest in AI bottleneck stocks, while Eric Schmidt, Gloria Caulfield, and Scott Borchetta were booed by students when they talked about AI at university commencements. ”