A Reddit thread caught my attention last week. Someone asked what a price target actually was. They’d read that Morgan Stanley set a $650 target on Meta, and wanted to know how much weight to give it. Is it a forecast? A recommendation? Something you should factor into a buy or sell decision?

It made me think of when I had the same questions. Why were professional analysts price targets so varied on the same stock and what exactly do they mean? It took me a while to find out, and it turned out to be part of a larger pattern I now watch for. A lot of tools that are confusing for individual investors are not actually designed for them. They are built for institutions. Price targets are one of them and once you understand how they came to exist, who they’re actually for, and what the research says about their accuracy, the whole thing looks less like an investment tool and more like another game you should stay away from.

Let’s go through it.

An Example

Back in October 2025, I added Celestica to the Davem Watchlist. The stock was already up 194% year to date, and trading around $273. At that time, RBC Capital’s target was $53. TD Securities had just moved from $130 to $238, a change they were framing as a downgrade, even though the number nearly doubled, because the stock was already running past their old estimate. Over the following six months, the targets kept climbing. TD Cowen raised to $430 in April 2026. Susquehanna went to $510. The consensus today sits between $328 and $427 depending on where you look.

That’s a target progression from $53 to over $500 in about two years on the same company. The analysts weren’t leading the market. They were watching the price and revising to catch up, and calling it analysis after the fact.

An investor who sold at the original $53 target would have missed the entire run. And an investor watching all of this trying to understand what a target actually meant was thoroughly confused.

This example isn’t unusual. It’s how the game normally works and to understand why, it helps to know what these numbers are and where they came from.

What a Price Target Actually Is

A price target is a sell-side (investment banks and brokerages) analyst’s projection of where a stock should trade over a defined horizon, almost always twelve months out. It sits alongside a buy, hold, or sell rating and it’s meant to communicate what the analyst thinks the stock is worth. Individual investors tend to read it as a prediction. Inside the industry, it functions as a marketing artifact, a client servicing tool, and a benchmark for portfolio managers to argue against or lean on.

The methodology behind the number is usually one of a few things. For profitable companies, analysts use a multiples approach, projected earnings per share times an assumed P/E ratio or a discounted cash flow (DCF) model, where the analyst projects free cash flows for years into the future and discounts them back to present value. For unprofitable companies, or ones with negative cash flow, they fall back on revenue multiples, sum-of-the-parts valuations, or path-to-profitability models that assume when the company will start making money and what margins will look like when it does.

All of these approaches are sensitive to their inputs. Change a growth rate assumption by a percentage point or two, adjust the discount rate a bit, push the profitability point out a year, and the output can swing 30% or more. The methods themselves are standard finance. The problem is that the inputs are guesses, and the output ranges wide enough that an analyst can honestly justify almost any number they want to publish. The complexity of DCF in particular gives an appearance of thoroughness that the outputs don’t really earn. I also use a DCF in my framework but only used as a check, not the primary analysis tool.

A Short History

Price targets weren’t always a standard product. Before the 1990s, analyst reports carried recommendations and earnings forecasts, but publishing a specific twelve month per share number wasn’t common practice. The dotcom era changed that. Banks were competing hard for IPO and M&A mandates, analysts were becoming quasi-salespeople for those services, and a headline number was a natural way to generate attention. The target became a marketing device before it was ever an investment tool.

Then came the scandals. In 2002, an investigation of Merrill Lynch surfaced internal emails where analysts privately described stocks they were publicly recommending as “junk” and worse. The 2003 Global Analyst Research Settlement followed, with ten of the largest investment firms paying $1.4 billion in fines and restitution. Structural firewalls were mandated between banking and research, analyst compensation was separated from banking revenue, and the industry got a superficial facelift.

What didn’t change was the underlying incentive economy. Analysts still needed corporate access. Brokerage revenue still depended on trading activity. Institutional clients still expected a number. The visible abuses got cleaned up while the infrastructure that produced them stayed largely intact.

Who These are Actually For

The audience these targets were built for is almost entirely institutional — portfolio managers at pensions, endowments, mutual funds, insurance companies, and hedge funds — the buy-side. These are people who have to justify their decisions to a committee, a client, or a board, and a Morgan Stanley target gives them cover. A State Street study of 200 institutional investors found that career risk was the single biggest factor in their decision making. If a portfolio manager buys a name after a major bank upgrades it and the trade goes wrong, they can point to the upgrade. Buy the same name without the analyst’s blessing and take the same loss, and they’ve got some explaining to do.

Look at Broadcom as an example. S&P Global’s aggregation of 48 analysts covering Broadcom shows a low target of $216 and a high of $650. Same company, same public filings, and one analyst thinks the stock is worth roughly half of where it’s currently trading while another thinks it’s worth nearly double. That’s a 200% spread on a single stock. If rigorous DCF work reliably produced fair value estimates, the range would be tight. The range tells you the models are backing into whatever number each analyst wants to publish, for reasons that have more to do with banking relationships and brokerage positioning than with what the business is actually worth.

Which means a specific target is telling you where one analyst has planted their flag inside an ongoing institutional conversation. What really matters isn’t the flag itself, but when someone moves theirs.

That’s why revisions drive the price action. When an analyst revises, trading desks get busy, institutional clients call for insight, and the firm gets paid. Every target change is as much a business development event as it is research.

It also generates herding. Academic research has documented that institutional investors buy the same stocks after upward revisions and sell the same stocks after downward ones, which contributes to the sharp price moves that follow. The revision is a coordination signal for a large group of buyers and sellers who all read the same numbers. That signal moves prices whether the underlying analysis is right or not.

Everything that flows down to your Yahoo Finance headline is the byproduct of a conversation that was never really about you.

What the Research Says

For a piece of information the industry treats as important, the track record is bad.

Studies of sell-side forecasting ability have found that only 24-45% of price targets are met over their twelve month horizon, and there’s no evidence that individual analysts can consistently forecast better than others. An academic study found a mean absolute error of 39% at the one year horizon and directional accuracy of about 54%, barely better than a coin flip.

The errors also skew in a specific direction. Analyst targets are systematically optimistic. Research by Brav and Lehavy found the average target implied a 28% return over the following 12 months — well above any realistic long-run average for stocks. Analysts consistently forecast 25-35% annual appreciation while realized returns average closer to 10-12%, roughly the long-run market average.

Post-Global Settlement research continues to find optimism bias correlated with banking relationships and brokerage client positioning. The firewalls got built, but the analyst who publishes a bearish target still risks losing corporate access — the phone calls, private meetings, and insight that makes them useful to institutional clients. Access is the currency of the job, and bearish research burns it fast.

Pitfalls to Avoid

Even understanding all of that, a few specific traps catch people who use targets as decision inputs.

The first is that the market reacts to the change in the target, not the level. A cut from $700 to $600 on a stock trading at $400 can drop the stock 5% that day even though the new target still implies 50% upside. Foundational research from the 1990s found upgrades producing about a 3% three-day price jump and downgrades producing about a 4.7% hit. The direction of the revision carries more information than the number itself, which is a strange thing when you think about it. If a target is meant to represent fair value, why does the market care so much whether the analyst nudged it up or down?

The second trap is that a target anchors your exit thinking to someone else’s guess. Once a number is in your head, it becomes a mental sell trigger. You bought a stock at $100, the consensus target is $180, so that’s where you’re planning to sell. You’ve now handed the most important variable in your investment, when to exit, to a group of people who miss two-thirds of the time and whose errors are systematically optimistic. Worse, their targets are updating in the background based on what the stock is already doing, which means your exit thinking is being dragged around by numbers that were catching up to the price in the first place.

That’s a strange person to trust with the decision.

What Targets Actually Tell You

This doesn’t mean you should ignore targets entirely. They’re not useful as predictions, but they are useful signals about how herd behavior moves prices.

If you already own a stock and the analysts catch up and upgrade, that’s a catalyst for the price to move higher, driven by all the portfolio managers who now have a reason to buy. You want to see this. It’s similar to a beat and raise on an earnings report. The same kind of buying coordination event, just triggered differently. Conversely, for a company on your watchlist where you’re waiting for an entry point, a target downgrade will likely push the price lower, sometimes to a level where you now have an attractive opportunity.

A revision doesn’t tell you what a company is actually worth, but rather what the large market players are about to do, which is a different thing that is still worth watching.

Buffett didn’t use price targets. He’s said in various forms over the years that Berkshire never bought with a target in mind, that what they look for is certainty about a business producing more cash over time.

I don’t treat any single investor’s approach as gospel, including Buffett’s. He was running a conglomerate, which we aren’t. But it’s a useful data point. One of arguably the best investors of the last several decades doesn’t feel the need for a number that half the market thinks it can’t function without.

How I Do It

My approach is deliberately built to sit outside the whole game. I don’t publish targets. I don’t publish buy-hold-sell lists. I don’t tell subscribers where a stock is going to be in twelve months, because I don’t know and neither does anyone else.

What I do instead has three steps:

The first is that I calculate a current fair value rather than forecast a future price. Fair value tells me what the business is worth today based on what it’s actually doing — revenue and earnings growth rate, margins, return on capital — not what an analyst hopes it will do in twelve months. That number updates as the fundamentals update, which keeps it grounded in the business rather than in a story about the business.

The second is that I only buy when two conditions align. The stock has to be trading below fair value with enough of a discount to earn my minimum required return, and it has to be near a technical support level so the entry price makes sense from a risk standpoint. Valuation tells me the trade is worth taking. Support tells me the timing is reasonable. Either condition on its own is not enough.

The third, and the piece that most differentiates the approach, is that the exit is dictated only by price. I use a trailing stop order on every position. If the price reverses meaningfully, the position closes. If it doesn’t, the position runs. I don’t sell because a stock hit somebody’s price target. I don’t sell because the thesis changed — competitors emerged, market share shifted, a bearish headline hit, a CEO left, a new threat surfaced. None of it. The market has already priced whatever news exists into the price, so watching the price is the honest way to know when the run is over. Everything else is noise.

This approach means I don’t need to know how high a stock will go. All I need to know is that a quality business is worth more than the market is charging for it and that the market is starting to agree. From there, I let the price tell me when the position closes.

That’s a very different game than trying to figure out whether Broadcom is worth $215 or $650 twelve months from now. It’s a game I can actually win, and one I can run consistently without depending on anyone else’s number to make the decisions for me.

Bottom Line

The price target industry exists because analysts, institutions, and brokerages all have reasons to keep it running. Individual investors don’t share those reasons. Playing a game that was designed for other players — using targets as buy signals, as sell signals, as forecasts you can build a plan around — is how you end up losing money without ever really understanding why.

Price targets are one instance of a larger pattern worth watching for. A lot of what looks like advice was built to serve professionals who need cover for their decisions and clients who need to feel informed enough to keep paying fees. None of it was built for you.

The alternative isn’t complicated. Figure out what a business is worth. Buy it when the market is offering it for less. Let the price tell you when to leave.

No headlines required.

Cheers,

Andrew

What’s another Wall Street output you never quite understood or one you followed and got burned by? Drop it in the comments.

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The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.

This is the second issue of Receipts & Reality, a recurring series where I take a finance-world claim and put it next to the reality. If you want to build an investing process that doesn't depend on anyone else's agenda, keep reading.

On June 25th, Jeremy Grantham went on Steven Bartlett’s Diary of a CEO podcast and told millions of listeners: “This is, I think, the biggest investment bubble in American history.”

Then he told everyone exactly what to do about it. Hold zero US equities. Put 60% in non-US indexes, up to 10% in precious metals, and the rest in bonds yielding 4.5% to 5%. For good measure, he predicted Bitcoin will eventually go to zero, dwindling away “not with a bang, but a whimper.”

The next morning he sat down on CNBC’s Squawk Box and repeated the case, telling viewers that based on market value compared to GDP, with modifications, this is the most expensive stock market in American history.

Longtime Squawk Box anchor Joe Kernen wasn’t having it. He challenged Grantham’s long-running bearish record on air, the exchange got heated, and commentators spent the next week arguing over whether the old man is a prophet or a broken clock.

I think both sides missed the interesting part. So let’s pull the receipts.

The Receipts

Let’s start with the background.

Grantham co-founded GMO in Boston in 1977 and built it into a firm that managed $165 billion at its peak. He helped create one of the first index funds in the early 1970s. And his bubble calls are legendary. He steered clients away from Japanese equities and real estate before the 1989 collapse. He called the dot-com bubble (sort of). He warned about credit and housing in 2006, two years before the financial crisis hit.

The dot-com call deserves a closer look. Grantham went bearish on US tech stocks in 1997 and 1998, refusing to put client money into what he considered grotesquely overpriced equities. He was right but was also two years early, and in those two years clients watched their buddies get rich in stocks GMO refused to own, and they left in droves. Depending on which telling you read, GMO lost somewhere between a third and half of its assets under management during 1998 and 1999. One client famously called him “dangerously persuasive and totally wrong.”

Then the crash eventually came, and GMO’s forecasts proved accurate. The firm made money through 2000 to 2002 while the Nasdaq lost over 80%.

Years later, Grantham described what happened after his vindication: “None of those clients came back. Not one solitary guy.”

Being right, but early, cost him half his business, and being proven right won none of it back.

The 2007 call was his best-timed warning. He started flagging housing in 2006, and his Q1 2007 letter described the first truly global bubble spanning nearly every asset class. Then in September 2007 he wrote in Fortune that US housing was in “genuine bubble territory.” Credit markets froze that August, the S&P 500 peaked on October 9, and the crash of 2008 followed. On that one, he was off by months, not years.

Before writing him off as a permanent pessimist, or permabear of his own book title, there’s March 2009. That month, with the financial system coming apart, Grantham published a letter titled “Reinvesting When Terrified,” telling clients stocks were dramatically undervalued and it was time to buy. The market bottomed on March 9, 2009. His buy call landed at the exact low of the worst crisis in 80 years.

So let’s build the actual timing ledger. Japan: right, roughly 2 years early. Dot-com: right, 2 years early, at the cost of half his firm. Financial crisis: right, months early. 2009 bottom: nailed it. That’s the full highlight reel from five decades. Early on tops, with one near-perfect top call and one perfect bottom call.

And here’s what Grantham himself says about those two perfect calls. In the same January 2021 letter where he declared the current market an epic bubble, he wrote that coming close on the 2008 peak and nailing the 2009 low was “far more luck than I could hope for even over a 50-year career.” In that letter he also stated plainly that calling the week, month, or quarter of a top is all but impossible.

His own written assessment of his own best timing calls is that they were mostly luck, and that timing the market can’t be done.

Now the other half of the record.

In January 2021, that same letter, “Waiting for the Last Dance”, called the market a full-fledged epic bubble and one of the great bubbles of financial history. The market fell about 25% in 2022, and for a time he looked vindicated again. Then it didn’t stay down. In February 2023 he warned the market could fall as much as 50% in his worst-case scenario. Instead, the S&P 500 went on a historic run. The letter was published on January 5, 2021, and since then the index has nearly doubled, not counting dividends.

An investor who followed his advice in 2021 and went to zero US equities missed that gain. In June 2026 he’s giving the same advice again, with more conviction, on bigger platforms.

That’s the ledger — good pattern recognition, spotty timing, and a written admission that the timing can’t be done.

Now put it next to what he’s selling today.

The Reality

Grantham is selling two different products, and his track record only supports one of them.

The first product is the diagnosis: this market is historically expensive, and every great bubble in history has formed around a genuinely transformative idea. Railroads in the 1840s. The internet in the 1990s. AI today. His best point in both interviews is something can be revolutionary and still be wildly overpriced. Amazon rose more than 900% in 1998 alone, then fell 94% from its peak by late 2001, and then went on to conquer the retail world. The company was transformative but the price was insane early on. Both things can be true at once.

That’s a pattern claim. It’s checkable, historically grounded, and genuinely useful.

The second product is the prescription: sell all your US stocks now. That’s a prediction, and it carries a timing signal his own framework can’t provide. Listen to his actual words on the podcast when Bartlett pressed him on when the collapse comes: “it would be compatible with history for the peak to be very soon.”

Compatible with history? It was also compatible with history in 2021, and in 2023, and the market roughly doubled anyway. And remember, this is the man who wrote in 2021 that calling the peak is all but impossible and that his own best calls were mostly luck. His written analysis and his television advice cannot both be right. If timing the peak is impossible, then “sell everything now” is a guess. Greenspan’s “irrational exuberance” warning in December 1996 was compatible with history too. The market more than doubled over the next three years, and when the crash finally bottomed in October 2002, the S&P still sat above where it traded the day he said it. The most famous overvaluation warning ever issued was never wrong. It just never told anyone what to do or when. I covered this in my overvaluation issue back in March, and Grantham is the same story with a longer resume: valuation is a description, not a strategy.

And then there’s the public document Grantham’s own firm files with the SEC every quarter.

While Grantham was on television telling retail investors to hold zero US equities, GMO’s most recent 13F filing (dated March 31, 2026, filed May 14) shows the firm holding roughly $39 billion in US stocks. The top five positions: Microsoft, Alphabet, Johnson & Johnson, Apple, and Meta. Amazon and Broadcom sit just below them. And during that same first quarter of 2026, the filing shows GMO adding to Microsoft, Broadcom, and Salesforce.

The firm co-founded by the man calling this the biggest bubble in American history spent the first quarter of 2026 buying more Microsoft and Broadcom.

Now, to be fair, The Diary of a CEO episode carries a disclaimer stating the views are Grantham’s and not GMO’s. He’s the chairman and long-term strategist, not the portfolio manager placing trades, and a 13F only captures US long equity positions, published up to 45 days after quarter end, with the trades behind it made anywhere in the quarter a slice of the firm’s total portfolio. By the time Grantham sat down for interviews, that snapshot was almost three months old, and some of the trades in it could have been nearly six. I can’t see inside GMO.

What the public record does show: as of the firm’s latest filing, GMO held roughly $39 billion in US stocks and added to three of them during the quarter. Nothing in its filings or public strategy materials points to any GMO fund moving toward the zero-US-equities allocation Grantham recommended to everyone listening.

And Grantham himself explained why, probably without meaning to. On the podcast, he made the point that investment firms rarely tell clients to exit overheated markets because the incentives punish it, citing GMO’s own near-death experience in 1999. Bartlett summarized it, “if you fight a bubble, you lose a lot of business.” What Grantham didn’t say is that the same incentive analysis applies to the 87-year-old on the promotional circuit. Bears get booked when markets are scary. Networks monetize the warning and the mockery of the warning, sometimes in the same hour. Kernen’s combativeness and Grantham’s doom both drive the engagement that keeps the lights on at CNBC. Neither man on that set was a neutral party, and neither one told you that.

Why This Matters for You

Grantham is a strong test for prediction-based investing. Sixty years of experience. Three bubbles identified before they burst. No apparent fraud, no pump-and-dump, and a man who has given most of his fortune to environmental causes. If anyone has earned the right to say “sell, the top is near,” he’s one of them.

And even for him, the approach crippled his firm, cost his clients years of returns, and produced advice that his own colleagues don’t seem to follow. The 1998 lesson of being early and being wrong are indistinguishable while you’re living through them. Grantham survived being two years early because he had a firm, institutional patience, and a reputation built over decades. You probably don’t have those. If you sold everything in January 2021 on his call, you had no way to know for the next five years whether you were early or just wrong, and either way you sat out a market that doubled.

My answer to Grantham on CNBC is the same as my answer to Ron Baron last issue, even though the two men are making opposite arguments. Baron wants you to buy his conviction. Grantham wants you to sell on his. Both are asking you to substitute their judgment instead of your process, and both have incentives, entry points, and time horizons that are not yours and may never be.

It’s worth taking what Grantham is saying seriously. Markets are expensive by most historical measures. The stocks that ran the hardest tend to fall the hardest when narratives turn. Great technologies produce terrible investments at the wrong price. All true, useful, and fully compatible with my process already.

What a rules-based exit gives you is something no forecaster can. You don’t need to know if Grantham is right this time. If he’s right and the market rolls over, my trailing stops trigger, I keep the bulk of my gains, and I redeploy at lower prices. If he’s wrong and the market runs another 40%, my stop order rides up with it and I’m still making money and not wondering “what if?” Last week I wrote about taking chips off the table when positions have run up, and about what some companies are doing to not repeat the dot-com bust. The mechanics haven’t changed. Protect the gains with price rules, not predictions, and let the market settle the talking heads debate without your portfolio riding on the outcome.

Grantham has spent sixty years studying patterns, with great success. But when the cameras turn on, the patterns become predictions, and predictions are the one thing his own history proves nobody can time.

Cheers,

Andrew

This is the second issue of Receipts & Reality — a recurring series where I take a finance-world claim and put it next to the actual numbers.

Issue 1 was a famous fund manager. This issue was a famous forecaster. Next up is a Nobel Prize winner. What will the receipts say? Make sure you’re subscribed for the first look.

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Thanks for reading The Davem Dish! If you enjoyed this issue, feel free to LIKE, subscribe and share it with other awesome people like you.

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The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.

I was in the Finger Lakes region of New York a few weeks ago on a family trip. If you’ve never been, the Finger Lakes are eleven long, narrow lakes gouged into the landscape by retreating glaciers about two million years ago. Seneca Lake, the largest of the group, is the deepest lake east of the Rockies, outside the Great Lakes themselves, with enough water to supply the entire United States for about two weeks. The Navy tests sonar equipment there because it’s one of the only inland bodies of water in the country deep enough to properly simulate ocean conditions. Some of the most beautiful lakeside country in the United States, all within a couple hours’ drive of each other. I grew up nearby.

We stayed on Keuka Lake, which I’d somehow never actually visited despite it being only about ninety minutes from my hometown. When I was a kid, I took the lakes and state parks nearby for granted. Visiting one was just something to do on a Saturday to pass the time, not something I truly appreciated. Returning as an adult, I see the area differently — well, at least in the summer.

Near the south end of Keuka Lake is a town called Corning. Same Corning as Corning glass, Corningware, and if you’re reading this on your iPhone, Gorilla Glass, the display cover the company has supplied to Apple since 2007. It’s the kind of town that used to be common in America and is now quite rare. A genuine company town, where one manufacturer employs a large share of the working population, has done so for over a century, and is still doing so today.

I was not totally surprised on how often the stock price came up in ordinary conversation. The restaurant server remarking it was above $200 the way you might mention the weather. The sommelier joking about it as he explains the intricacies of the region’s wines. Corning is a small town, and when the local company’s stock is on a tear, everyone knows.

Which made me think of the first stock tip I ever received.

The Stock Tip

Now you all know how I feel about stock tips, but bear with me.

When I was first getting interested in investing in my late teenage years, my grandfather told me I should look at a company called Corning . He’d worked in telecom his whole career, and I think he was excited about a couple of things — flat-screen televisions, the internet buildout, maybe both. Or maybe he just thought I would find the company interesting because it was near where I lived. I don’t remember a deep analysis. He was just offering the general kind of tip a family member offers.

I didn’t end up buying any shares. I didn’t have money to invest and I wouldn’t have known how to research it if I did. At that point, I didn’t yet know what I was looking for.

It’s probably good that I didn’t. If I had bought Corning in late 1999, when my grandfather was excited about it, I would have watched the stock go from around $24 to $113 by the fall of 2000, then all the way down to about $4 by the middle of 2002. A 96% decline in less than two years. It took until this year, roughly twenty-five years later, for the stock to surpass its 2000 peak. I would have learned a very expensive lesson early in my investing journey (perhaps not such a bad thing).

The Bust

How did Corning get caught up in the dot-com bust in the first place?

Corning was founded in 1851 and for most of its history it was a boring, patient, family-run industrial company that turned glass expertise into whatever the world needed. It made the glass envelope for Thomas Edison’s lightbulbs in 1879. It made the cathode ray tubes for the first generations of televisions. It made Pyrex coffee pots and Corningware bowls that your great aunt probably still has in her kitchen. In 1970, Corning researchers invented the first low-loss optical fiber — the technology that would eventually carry every phone call, every email, and every website across the globe. Even so, for another quarter century after that invention, fiber was one product among many, and Corning was still fundamentally the same patient industrial company it had always been.

The stock reflected that. It went from about $2.50 in 1984 to roughly $9 in early 1996. Slow, steady, unremarkable.

Then the internet happened.

Corning’s revenue nearly doubled from $3.8 billion in 1997 to $7 billion in 2000. Management decided to lean all the way in on fiber, betting that internet traffic would keep growing exponentially forever and every telecom company on earth would need Corning’s cable to move it. The Wall Street hype machine bid the stock from around $10 to $113 by late 2000. The company’s market value passed $115 billion. The founding Houghton family became the twelfth-richest family in America.

Then the telecom and dot-com bubble burst, and everything unwound in about eighteen months. Revenue sank from $7 billion to about $4 billion. The company wrote off nearly $5 billion of goodwill from acquisitions it had made in the peak year of 2000, producing a $5.5 billion loss for 2001. It laid off 12,000 workers, or 28% of its workforce, then another 4,000 the following year. It closed seven of ninety plants. It eliminated the dividend for the first time since 1881 — a 121-year streak of paying shareholders. James Houghton, the great-great-grandson of the founder, came out of retirement to take back the CEO chair and try to save the company.

The stock hit about $4 in 2002. It would not surpass its 2000 peak again until this year.

This Time Is Different

So how is Corning doing today?

The stock hit an all-time high of $271.78 in June, up over 200% from where it started the year. Meta signed a fiber deal worth up to $6 billion through 2030. Amazon signed a multiyear, multibillion-dollar contract. Nvidia signed a deal starting at $500 million that could scale to more than $3 billion. Google, Microsoft, and OpenAI are all customers. Optical communications revenue grew 35% in 2025 and now makes up 37% of the company’s total sales. Corning is expanding its Hickory, North Carolina plant into what it says will be the largest fiber-optic cable factory in the world.

Twenty-five years ago, Corning leaned all the way into the bet that internet traffic would keep exploding and everyone would need their fiber. The bet was correct in the long run but painful in the short run.

Wendell Weeks, Corning’s current CEO, was running the fiber optic business during the last cycle. He watched the boom and bust and now is the CEO steering the company through this cycle. And he is doing something different this time.

According to a Wall Street Journal piece from June, Weeks has structured the multibillion-dollar deals with Nvidia, Meta, and Amazon to include risk-sharing provisions. The customers are required to bear demand uncertainty. Corning is demanding upfront capital commitments before it expands capacity. Weeks told the Journal the company will not “bet the family farm” on AI spending cycles.

An analyst at Raymond James told the Journal that these terms are unusual. Large customers typically dictate vendor economics, not the other way around. Weeks countered that Corning’s decades of research and specialized fiber technology give the company the leverage to demand the upfront money.

The CEO of a company whose stock tripled in six months, in a market cycle that looks a lot like the last one he lived through, is quietly taking chips off the table, by restructuring the business so that if the AI spending cycle slows down, Corning does not have to eat the loss the way it did in 2001. He is negotiating profit protection into the contracts themselves.

Your job is to do the equivalent for your portfolio and the mechanics are much simpler than negotiating risk-sharing clauses.

How the AI Trade Got Here

The AI trade started in 2023, alongside the launch of ChatGPT with the “picks and shovels” companies. NVIDIA made the chips that made everything else possible, and the market rewarded that position with a climb from a couple hundred billion dollars in market cap to more than three trillion. What people miss about NVIDIA is that it never actually got expensive on the way up. Earnings grew even faster than the price, so the forward P/E ratio compressed. The stock today trades around 22 times forward earnings, which is cheaper than the Nasdaq 100.

What the market did next was extrapolate. As NVIDIA’s data center revenue became visible and hyperscaler capex numbers came into focus — Microsoft, Meta, Alphabet, and Amazon have guided to over $600 billion in combined AI infrastructure spending for 2026 alone — investors started asking who else benefits from those checks.

The trade migrated outward through every layer of the buildout. Power generators, distributors, and cooling. Then networking gear. Then the memory chip supercycle. Then fiber optics to connect the racks and campuses.

Not every stock in that memory chip and fiber optics chain is the same. Micron makes memory and is up 672% over the past year. It’s a decades-old cyclical business just now hitting its supercycle and trades at 21 times earnings. Sandisk is up 3,945% on the same memory demand, but only spun off from Western Digital a year ago and trades at 59 times earnings. Intel is up more than 349% on a turnaround story that is being underwritten by a direct US government equity stake and a $5 billion NVIDIA investment, while the company is still losing money. Corning at 87 times earnings is priced for AI capex to keep growing at the current rate for years.

Each hop outward from NVIDIA carries a different flavor of risk. Some of these names have earnings behind the rally. Some are still trading on a story and government support. But every one of them shares the same underlying exposure. If the AI capex cycle even pauses, these names will fall the hardest.

When you own a stock whose earnings already justify the current price, a pullback is just noise, and maybe even a buying opportunity. The business keeps compounding and eventually the price catches back up. When you own a stock whose earnings would have to grow dramatically from here just to make the current price look reasonable, the story has to keep expanding at exactly the rate the market has already assumed, or the price has to come down to meet reality. The peripheral names in this cycle are almost all in the second category and they will give back the fastest when the narrative shifts.

The Buy the Dip Reflex

What happens after a pullback, which is exactly where we are right now?

Sandisk is down 19% from its June peak. Micron down 22%. Corning down roughly 30%. The reflex for a lot of investors, especially anyone who missed the run on the way up, is to see the pullback and think this is finally the chance to buy in. Buy the dip. The stock is on sale. The story hasn’t changed.

That instinct is one of the most expensive habits in investing, and it’s especially dangerous in exactly this kind of setup. A stock that has tripled or quintupled in six months and then given back 25% is not on sale. It is still up dramatically for the year on a story that may or may not survive the next few quarters of earnings. What the pullback is actually telling you is that the marginal buyer has stopped showing up at the previous price. The people who wanted to own the stock at $200 have already bought it. The stock now has to find buyers at a lower price, and there is no rule that says the process stops at a 20% or 30% discount. The Corning shareholder who bought at $113 in 2000 saw the stock down 25% and probably thought the same thing. Then he watched it fall another 90% from there.

For the investor who already owns the position and is sitting on huge gains, the correct response to a sharp pullback in a stock that has run this hard isn’t buying more. It is checking whether you have a plan to protect what you have. It is asking whether you would still buy the stock today at the current price if you didn’t already own it. Most of the time, that question forces you to admit you would not.

The urge to chase and the urge to buy the dip are ways of participating in the momentum without thinking about the price. Both are ways of ending up as the person holding the bag when the narrative finally turns.

Taking Chips Off the Table

You do not have to guess the peak. You just have to have a plan.

The mechanics are simple. When a position has run up meaningfully — say, doubled or better from where you bought — you decide in advance what return you are willing to lock in and set an order that executes automatically. You can set a stop order at a fixed price that guarantees a minimum profit. Or you can set a trailing stop order that follows the stock up as it rises, moving your floor higher as the price climbs, and only executing if the stock reverses by a set percentage. When the reversal finally comes, the order sells you out somewhere near the top rather than after a full round trip.

Neither approach requires you to guess where the top will be or to predict whether the AI trade is a bubble and when it will burst. Both let you keep participating in the upside while removing the possibility of a ride back to zero. If the stock keeps rising, great. Your trailing stop moves up with it and you keep making money. If the stock reverses, you are out with a big profit instead of holding a bag for the next twenty-five years.

This is the unglamorous discipline in investing. You are not giving up on your investment. You are just making sure you do not watch your gains evaporate.

The Woman at the Ice Cream Stand

After visiting the Corning Museum of Glass one afternoon, we stopped at an ice cream place downtown. There was an older woman ahead of us in line. Plain clothes, tired posture, looked a little down on her luck. She ordered a small cone, paid in exact change, and walked out to the parking lot.

I watched her get into a brand-new BMW 7 series and drive away.

I obviously don’t know that woman, but I couldn’t help but think that she might have been a retired Corning employee or the widow of one. Someone who watched the stock go to $113 and back to $4, felt what a 96% drawdown does to a household in a town where the company is the town, and quietly decided that this time, with the stock back at multiples of anything she ever expected to see again, she was going to take some chips off the table before the cycle turned.

Wendell Weeks says he isn’t going to bet the family farm on AI. The woman with the ice cream cone, whatever her story actually was, looked like someone who wasn’t either. Neither should you.

Let the winners keep running if they will, and take some chips off the table if they don’t. It isn’t exciting. Nobody will write a book about it. You’re just quietly protecting the compounding that actually builds wealth over the decades.

Cheers,

Andrew

If you're looking at positions that have run up hard this year and you're not sure how to think about protecting the gains — that's exactly what the Davem Investor Audit is for. Ninety minutes, your portfolio, your specific situation. We work through what to protect, what to keep running, and how to structure the decisions so you're not up at night thinking about “what could have been”.

Learn more about The Davem Investor Audit here.

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The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.

Every few weeks a new headline claims data centers are draining lakes, hollowing out aquifers, or sucking small towns dry to feed the AI boom.

A hyperscale facility uses 5 million gallons a day. ChatGPT burns through a bottle of water every hundred words. Phoenix is parched and the tech giants keep building anyway.

Some of those claims are accurate in narrow ways. Most are misleading once you back them out. The more interesting story, with actual investing implications, sits underneath it all.

This post has two halves. The first walks through the receipts on data center water use — what’s true, what’s exaggerated, and where the real industrial shift is happening. The second is the part where investor money is actually won or lost. Spotting a trend in the world doesn’t tell you what to buy. The work is finding a business that deserves to be owned in that trend at a price that makes sense.

The Numbers Most People Don’t See

Let’s start with the headline water figure. U.S. data centers directly consumed about 17.4 billion gallons of water in 2023, or roughly 48 million gallons per day. Total U.S. water withdrawal sits at around 322 billion gallons per day. Data centers represent less than 0.02% of the national total. Even adjusting for the fact that most withdrawn water gets returned to the watershed, the share stays well under 0.1% — a rounding error compared to agricultural irrigation, which accounts for roughly 42% of U.S. withdrawals and the majority of consumptive use.

Even the dramatic sounding “5 million gallons a day at one site” figure deserves context. That’s an upper-bound number for a large hyperscale facility on a hot day, not an average. Google’s reported data is the cleanest public dataset we have, and most of their 24 U.S. and Canadian sites use a fraction of that. Their largest site in Council Bluffs, Iowa consumed about 2.8 million gallons a day in 2024. Most of the rest are well below 1 million.

The nuance is in the gap between water withdrawn and water consumed, and most reporting doesn’t separate them. When a data center withdraws water, some fraction returns to the local watershed as discharge. The rest evaporates out of cooling towers and is gone — for that particular watershed — until it falls again as rain somewhere else. For evaporative-cooled facilities, 70 to 80% of withdrawn water typically evaporates. So the headline “they’re using a billion gallons” is technically accurate but doesn’t separate the gallons returned from the gallons that are actually gone.

The Full Picture

Data centers themselves are a small share of national water consumption. The picture changes when you add up everything the AI buildout actually requires.

Thermoelectric power plants — coal, natural gas, nuclear — withdrew 52.8 trillion gallons in 2017, the last comprehensive federal figure. They account for around 40% of total U.S. water withdrawals. Coal plants use roughly 19,000 gallons of water per megawatt-hour. Natural gas plants use closer to 2,800. Most of that water is returned, but the actual consumption number for the U.S. fleet still runs to about 3 billion gallons per day. Every kilowatt-hour a data center uses carries a water footprint upstream at the power plant.

Semiconductor fabrication facilities (fabs) are the thirstier piece of the chain on a per-site basis. An average chip fab uses around 10 million gallons of ultrapure water per day, comparable to roughly 33,000 households. Taiwan Semiconductor’s Arizona fab will draw 8.9 million gallons a day to operate one site. Intel’s Ocotillo campus, also in Arizona, is modeled at 14 million gallons a day across three advanced fabs.

So the AI water footprint has three layers stacked on top of each other. The data center itself withdraws water for cooling. The power plant that feeds it withdraws water for thermoelectric generation. And the fab that builds its chips withdraws water for wafer processing. Stack them together and the total is larger than any single facility suggests, but it also makes the picture more complicated, because those three layers don’t sit in the same place geographically.

Geography Matters

The reason any of this becomes controversial is concentration. Data centers cluster. About 40% of U.S. data centers sit in regions classified as high or extreme water stress. Phoenix hosts more than 58 facilities. Loudoun County, Virginia is the densest data center market in the world. Together those two regions account for a meaningful share of the national footprint.

A 0.02% national water share doesn’t mean much when dozens of facilities are pulling from the same desert aquifer. Local capacity is what matters, not the country-wide average. Phoenix’s water utility doesn’t care that Michigan has water to spare. So while the national alarmism is overstated, the regional pressure is real, and it’s pushing operators to change how they cool facilities.

Which raises the obvious question — why build in Arizona at all? Because everything else about the location works. Dry desert air is ideal for cooling and chip manufacturing because low humidity prevents corrosion and condensation on sensitive equipment, and evaporative cooling works more efficiently in dry conditions than in humid ones. The state offers cheap, flat, developable land at a scale that doesn’t exist on the coasts. It has minimal earthquake, hurricane, and tornado risk. It has mature power infrastructure including the country’s largest nuclear plant and significant solar generation. It has aggressive tax incentives, expedited permitting, an educated workforce and a dwindling but managed water supply backed by Colorado River allocations and groundwater reserves. Roughly 70% of state water currently goes to low-value agriculture like alfalfa and cotton, where a million gallons used by a semiconductor fab supports orders of magnitude more high paying jobs than the same water in alfalfa. Reallocation from agriculture to industry is a policy lever the state has, and is using.

The neighbors have their own constraints. Nevada has weaker Colorado River rights and less groundwater. New Mexico is smaller, less regulated, and just lost a Supreme Court case forcing it to cut pumping. Texas has its own electric grid problems. Each southwest location has its tradeoffs, and Arizona’s happen to favor industrial use.

What the Operators Are Doing

Three shifts are already underway.

The first is a slow move away from open-loop evaporative cooling toward closed-loop systems. Closed-loop cooling can reduce water consumption by 70 to 90%, at the cost of higher electricity use. Microsoft’s newest data center designs are targeting near-zero evaporative loss, with pilot facilities expected this year. Google’s air-cooled site in Pflugerville, Texas used about 270 times less water per day than their evaporative-cooled Iowa site in 2024. The design choice was the difference.

The second is a change in the input source. Reclaimed wastewater, treated industrial water, and other non-potable supply are replacing drinking water at a growing number of facilities. Google reported reclaimed water accounted for about 22% of their cooling volume in 2023. Across the broader industry it remains under 5%.

The third is direct-to-chip and immersion cooling, where the coolant goes straight to the server hardware rather than through cooling towers at all. These approaches use less total energy and far less water but require purpose-built infrastructure and different facility designs.

All of this is in motion. Companies build whole product lines around it. Which is where the investing question finally enters.

Spotting the Trend Is the Easy Part

This is where a typical investing newsletter would list five stocks “set to benefit from the data center water shift” and expect you to follow along and buy or name a relevant ETF that holds a basket of these companies.

That isn’t how my process works.

Identifying the direction of an industry is relatively straightforward. Finding a specific business that participates in that shift and deserves to be owned is a separate question. Most thematic stocks fail their fundamentals test. Some are unprofitable, and others are diversified industrial companies where the relevant business unit is too small to move the share price. A few have the right exposure but the wrong valuation. And an ETF basket mixes a couple good companies with several not so good companies.

So let’s begin with the candidate universe. Two categories are worth evaluating — cooling and thermal management for the data center itself, and water treatment and recycling for the input side. None of these are recommendations.

Cooling and thermal management

Vertiv Holdings, Modine Manufacturing, AAON, Munters, Trane Technologies, Johnson Controls, and Carrier Global.

Water treatment and recycling

Xylem, Pentair, Watts Water, A.O. Smith, and Ecolab.

The next step is running each through our process. That means putting them through the same screen as any other company: financial quality of the business, valuation, operating history, margin trajectory, and capital allocation.

Of the twelve names on the list, only Vertiv Holdings passed the screen. Here’s what that looks like:

Vertiv checks the boxes the Davem Method requires — consistent double and triple-digit sales and earnings growth over one, three, and five-year windows, solid returns on equity and invested capital, healthy free cash flow, and a forward growth forecast that supports the story going forward. Fundamental value works out to $388 against a current price near $300, which puts the stock in undervalued territory.

But I’m still not buying it here.

The stock has run 85% year to date, and support at $280 gives a cleaner entry with a better margin of safety. Waiting for that level costs me nothing if it comes. Chasing a name because the underlying trend is compelling is how investors turn good analysis into bad returns. Vertiv earns a spot on the watchlist for now. If price meets fundamentals, it becomes a buying opportunity. Until then, I sit back and watch.

That’s the ending. Not a buy or a pass. A name that’s earned the right to be waited on.

Most investors won’t do this. They want the trend to do the work — a shift in the world to hand them a return. The trend can’t do that. It only tells you where to look. The fundamentals tell you whether to buy, and the price tells you when.

Simple but not easy.

This is the summary version of how I evaluate an idea. Stock Selection Simplified is the full walkthrough. Every screen, valuation step, and judgment call, laid out in the order I use them. If you want to run this same process on your own ideas, the guide is where the details live. Founding Rate is good until August 1st.

Stock Selection Simplified

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The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.

This is the first issue of Receipts & Reality, a recurring series where I take a finance-world claim and put it next to the reality. If you want to build an investing process that doesn't depend on anyone else's agenda, keep reading.

Last Monday, Ron Baron went on CNBC’s Squawk Box and told viewers that SpaceX will be worth $20 to $40 trillion within the next decade. “I think we’re going to make hundreds of billions of dollars,” he said, sitting across from the anchors like a man delivering a weather forecast rather than predicting something that would make SpaceX larger than every publicly traded company on Earth today. He said what SpaceX has accomplished “isn’t possible for anyone else” and that Elon Musk is at least ten years ahead of everyone in satellites, rockets, and networks.

You might think he was SpaceX’s chief marketing officer, or chief cheerleader, which he kind of is.

While he said all of this, the banner on the side of the screen reminded you why you should listen: Founded Baron Capital in 1982. $55 billion in assets under management. Over four decades of outperformance.

That banner isn’t lying. Ron Baron’s track record is verifiably excellent. Baron Partners Fund has returned 17.7% annualized since its inception in 2003, against 13.1% for its benchmark, and those numbers are net of fees. Fifteen of his funds have beaten their benchmarks since inception. He has earned roughly $57 billion in cumulative profits for his investors, as of late 2025, across four decades. If I’m going to put someone’s claims next to the actual numbers — and that’s the entire point of this series — I have to start by acknowledging that the numbers here are real.

Which is exactly what makes this one worth writing about.

The Receipts

Ron Baron started Baron Capital in 1982 with $10 million. He grew up working as a cabana boy and lifeguard in Asbury Park, New Jersey, turning a $1,000 investment into $4,000 as a teenager. Chemistry degree from Bucknell, law school at George Washington, a stint as a patent examiner, and then twelve years at various brokerage firms where he learned how to evaluate small companies from the ground up. The origin story is impressive. A self-made investor who built something real through decades of patient, research-driven work.

The fund’s strategy has always been concentrated and high-conviction. Baron holds positions for years, sometimes more than a decade, and looks for companies with what he considers durable competitive advantages and exceptional management. Portfolio turnover runs around 5%, compared to a category average north of 50%. He doesn’t chase quarterly earnings or hop in and out of momentum trades.

So far, so good.

Now let’s look at what that strategy has evolved into.

Baron Capital’s SpaceX position, as of the IPO on June 12th, is worth approximately $25 billion. That single holding represents 33% of Baron Partners Fund and 25.5% of Baron Asset Fund. Add in Tesla , and roughly half the assets in some of Baron’s portfolios are tied to companies led by one person: Elon Musk. His personal portfolio is even more concentrated. Around 65% allocated to Musk-led companies, split roughly 40% Tesla and 25% SpaceX.

One thing worth understanding about how Baron operates: most mutual funds are classified as “diversified” under the Investment Company Act of 1940, which means they’re required to limit the size of any single position relative to total assets. Baron Partners Fund is classified as non-diversified, which gives it much wider latitude to concentrate in fewer names. That’s a deliberate structural choice, and it means the portfolio can look radically different from what most people picture when they hear “mutual fund.” Even with that flexibility, the fund still faces constraints that hedge funds don’t, including leverage caps and daily liquidity requirements. The concentration here is legal and transparent, but it’s unusual enough that Morningstar concluded the portfolio has become so “unorthodox and extreme” that it “isn’t a recommended choice for most investors.”

The fund is also leveraged. It can borrow up to one-third of its total assets to invest. That leverage, combined with the concentration, produced a standard deviation of 26%, well above the benchmark’s 16%. In 2022, the fund dropped 43% and landed in the bottom decile of its category. It recovered nicely in 2023 and 2024, but the volatility profile tells you something important about the kind of ride investors are actually on, even when the long-term return numbers look exceptional.

And this isn’t new behavior from Baron. His admiration for Musk has been building publicly for years. In a November 2025 CNBC interview, he compared Musk to Da Vinci and said his impact dwarfs “Rockefeller, Carnegie, Mellon, Morgan, Ford — the great industrialists.” He said in that same interview that he never expects to sell a single share of Tesla or SpaceX in his lifetime, and that he would be “the last person out of the stock.” He named his newest ETF the “Baron First Principles ETF,” borrowing Musk’s personal branding catchphrase, and in his Q1 2026 shareholder letter, he quoted Grok to explain Musk’s philosophy to his fund’s investors.

The Reality

Here’s where I think this matters for anyone who watched that interview and felt a pull to invest.

When Ron Baron goes on national television and tells you SpaceX will be worth more than every publicly traded company on Earth today, he’s doing so while sitting on a $25 billion position. He bought another $1 billion worth of shares during the IPO itself. Every word that comes out of his mouth on that segment, every projection of $30 trillion or $40 trillion in future value, lands differently when you understand that he’s talking his own book with one of the largest concentrated bets in the history of mutual fund investing.

That doesn’t mean he’s wrong. He might turn out to be exactly right, and SpaceX might become the greatest investment of this century. But you and I are not being asked to evaluate a disinterested analysis. We’re watching a man with a quarter of his firm’s assets in a single stock tell us that stock is going to multiply by ten or twenty.

And the thing nobody on that CNBC set asked him about — the one risk that SpaceX itself considers significant enough to disclose in its own prospectus across 38 pages of risk factors — is key-man dependence.

SpaceX’s S-1 filing says it plainly – the loss of Elon Musk, whether through death, disability, or anything else, “could significantly disrupt our management structure, adversely affect our ability to execute our strategic plans, and negatively impact our reputation and relationships with customers, partners, and other stakeholders.” Analysts reviewing the filing noted that SpaceX lacks a formal succession plan. Musk holds 85% of the voting power needed to remove him from leadership, which means the company is structurally designed so that no one can replace him, and also that no one has been prepared to try.

Ron Baron has half his fund’s assets and 65% of his personal wealth riding on the continued health, focus, and judgment of a 54-year-old who runs six companies simultaneously. And as far as any public filing, interview, or disclosure reveals, there is no hedge — no puts, no structural downside protection. This is the same fund that let Tesla climb to 54% of net assets at its peak without trimming, and that bought another billion dollars of SpaceX on IPO day instead of taking profits after a roughly 1,300% gain. Neither position appears to have a contingency plan for the one scenario the company itself warns about in its own paperwork.

Why This Matters for You

This is the first installment of a series I’m calling Receipts & Reality. The premise is simple: I take something a well-known finance figure says publicly and put it next to the actual numbers — their positions, incentives, track record, the fine print they’d rather you not read. The goal isn’t gotchas or bad-mouthing successful people. It’s building the habit of asking yourself one question every time someone credentialed and confident tells you what to do with your money: what’s in it for them, and how does this apply to me?

Ron Baron is a fitting place to start, and more nuanced than an easier target would have been.

Baron’s track record isn’t manufactured. His conviction in Tesla and SpaceX has generated extraordinary wealth for his investors over the past decade, and if you’d invested in Baron Partners Fund at its inception and held through every drawdown, you’d have beaten the market by a wide margin. He earned that credibility and I’m pretending otherwise.

But credibility earned over decades can become the most effective sales tool in finance. When someone with Baron’s track record goes on television and says SpaceX will be worth $30 trillion, the credential does the heavy lifting. You stop scrutinizing the concentration risk, the leverage, the non-diversified structure, the fact that the company’s own filing says there’s no plan for what happens if the one person the entire thesis depends on is no longer there. You hear “44 years of outperformance” and “billions in profits” and you absorb the prediction as informed analysis rather than what it actually is — a promotional appearance by someone with a massive financial interest in the outcome.

This is where even a great investor becomes dangerous to follow. The gap between Baron’s entry price and your entry price is enormous. He started buying SpaceX at a $20 billion valuation. You’re being invited in at $2 trillion — a hundredfold difference in starting price. The leveraged, non-diversified, unhedged structure that worked for him across a decade of compounding would destroy a retail investor who buys at these levels on the strength of someone else’s enthusiasm.

And that’s the real lesson, the one that connects everything I write about in this newsletter. The answer to Ron Baron on CNBC isn’t to decide he’s a fraud, because he doesn’t appear to be one. The answer is to recognize that even genuinely talented investors operate inside incentive structures that make their public pronouncements unreliable as investment advice for you. Baron’s interests, his entry point, his risk tolerance, and his time horizon are not yours and can’t be. No amount of admiration for someone’s track record should change the way you make your own decisions.

You need a process that doesn’t depend on someone else’s conviction — entry and exit criteria, position-sizing rules, and a loss cap that protects you regardless of who’s on television saying what. The person on television, even the brilliant one with the real track record, is always making the case for their own position.

Cheers,

Andrew

Have someone you think deserves the Receipts & Reality treatment? Drop a name in the comments.

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Thanks for reading The Davem Dish! If you enjoyed this issue, feel free to LIKE, subscribe and share it with other awesome people like you.

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The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.

You’ve heard this one a thousand times. Invest in companies where management has skin in the game. Find the founder-led firms. Back the visionaries who eat their own cooking.

The logic is sound. A CEO with personal money on the line will protect shareholder wealth like it’s their own, because in a real sense, it is their own.

Then you look at how executives actually get paid in 2026, and the whole mantra starts falling apart.

Where the Idea Came From

The underlying problem was real to begin with. In the 1970s and early 1980s, executive compensation was overwhelmingly salary and bonus. A CEO’s pay barely moved when the stock moved. Whether the stock doubled or got cut in half, the CEO took home roughly the same paycheck. Research published in the Quarterly Journal of Economics in 1998 captured the scale of the disconnect. In 1980, a 10% change in a company’s stock price moved the CEO’s total pay by only about 12%. By 1994, the same 10% stock move shifted CEO pay by nearly 40%. The change came almost entirely from one source. Boards had started paying executives in stock and stock options instead of cash. The gap between what was good for shareholders and what was good for executives narrowed dramatically, and equity-based pay was the mechanism that closed it.

Buffett saw the misalignment early and started preaching the fix in the 1980s. His annual letters return to it again and again. Back companies where the people in charge are putting their own money where their mouth is. The value investing tradition built around him absorbed the idea as gospel. By the late 1990s and through the 2000s, “find managers with skin in the game” had become one of those mantras you’d hear everywhere and read in every Buffett-adjacent newsletter. The logic was simple. An executive paid only in cash has no reason to care about the stock price. One paid in equity has every reason to.

The mantra got fresh philosophical weight from Nassim Taleb’s 2018 book Skin in the Game: Hidden Asymmetries in Daily Life, which argued that decision-makers across every domain should bear real risk from their decisions. Taleb wasn’t writing a stock-picking guide. He was making a moral argument about who should carry consequences. The investing application was already three decades old by the time he wrote it, and his framing fit so naturally with what value investors had been saying that the two became hard to separate.

By the time Taleb’s book came out, the original problem had largely been fixed. Boards had spent thirty years rebuilding executive pay around stock and options. Within a decade or two, every public company had adopted the model.

What CEO Pay Actually Looks Like in 2026

Here’s the structure top to bottom. The Conference Board’s 2025 analysis put median Russell 3000 CEO compensation at $6.7 million, with $850,000 of that in salary and the rest dominated by stock awards and options. Performance-based stock awards at the Russell 3000 median came in at $3.3 million and stock options at $2.4 million, with options grants up 21% year over year while base salaries crept up just 3%. A separate AP and Equilar analysis of 344 S&P 500 CEOs put the S&P 500 median at $17.1 million in total pay against $1.3 million in salary, with stock awards alone running $10.2 million at the median and up almost 15% year over year.

The dollar amounts scale with company size but the structure does not. Salary makes up a small minority of total pay at every market cap, roughly 8% at the median S&P 500 company and closer to 13% at the median Russell 3000 company. The smaller end of the market is slightly more cash-heavy at the top, but only slightly. Equity dominates the structure everywhere.

The implication is straightforward. The problem that “skin in the game” was originally invented to fix has been engineered out of the system. Every CEO in the investable public market already has equity on the line. If the mantra worked as a stock-picking filter, you’d expect equity-heavy comp structures to predict outperformance. They don’t, because everyone has them. The fix became universal, and a universal filter filters nothing.

This is the pattern worth holding onto, because it shows up everywhere in investing. Every alignment mechanism that becomes universal stops aligning. The first companies to offer stock options had a real edge. By the time everyone offered them, the edge disappeared. The same logic applies to independent boards, audit committees, ESG disclosure, and almost every other governance reform of the last forty years. Each one solved a real problem when it was introduced. Each one then became standard enough to stop being a filter. Skin in the game is the most cited example because it sounds the most virtuous, but it’s the same pattern.

So when someone tells you to invest in companies where management has alignment through equity, the honest follow-up question is: which ones don’t?

The Real Alignment Mechanism

The skin in the game framework assumes CEOs are primarily money-motivated, and that the right amount of equity will buy you their attention and care. The framework misses who actually ends up running a Fortune 500 company.

The people who reach the CEO chair are not optimizing for the next $10 million. By the time someone runs a large-cap company, they already have generational wealth. The marginal compensation dollar doesn’t change their life. What changes their life is reputation, the next board seat, the prestige of running a company that wins, and standing inside their peer group of other CEOs and directors.

The traits that get someone into a CEO role — extreme ambition, competitive drive, need for recognition, willingness to put in 70-hour weeks for two decades to get there — produce people who cannot tolerate being seen to have failed. A CEO whose company underperforms doesn’t lose meaningful money. They lose status and perhaps the next, bigger opportunity. They lose the story they’ve been building about themselves their entire career.

That’s the alignment mechanism that actually does the work at the upper end of the market, and it runs independently of the equity grant. A Fortune 500 CEO with zero equity exposure would still try their damndest to make the company succeed, because failing in the role ends their career trajectory and threatens their identity. The equity is a sweetener.

The Visionary Founder Problem

The cousin mantra is “invest in founder-led companies,” and it travels well across market caps. At the large end, it survives on the back of about four names — Bezos, Zuckerberg, Musk, and Huang. Those four did enormous long-term work for shareholders, and they’re the names cited every time someone advocates the strategy. The harder question is what those four actually prove. They prove that being founder-led can produce extraordinary outcomes. They don’t prove that founder-leadership is the cause, or that picking founder-led companies as a class would have led you to them in advance. For every Bezos there’s an Adam Neumann. The trait is too common at the start and too rare at the finish to function as a filter.

A Bain study often cited in support of the strategy found that founder-led companies outperformed the index by a factor of 3.1x. That study, like nearly every founder-outperformance analysis you’ll see, has a survivorship problem. It captures the founders still standing at the time of measurement and quietly leaves out the ones that destroyed shareholder capital. Neumann walked away from WeWork with an exit package valued at up to $1.7 billion, on top of the roughly $700 million he’d already cashed out before the IPO through a mix of share sales and loans against his stock, while the company’s market value plummeted from roughly $47 billion to $8 billion. Elizabeth Holmes at Theranos, Travis Kalanick at Uber, Sam Bankman-Fried at FTX — every one of those founders had massive skin in the game, all of them wore the visionary halo, and every one of them burned shareholder money.

The micro-cap end of the market has its own version of this. Founder-CEOs with large personal stakes can absolutely build great compounders, and any reader who hunts in the small-cap universe has probably seen a few. They’ve also seen the other kind — the founder-CEO whose 25% ownership stake somehow correlates with declining margins, and a refusal to ever take outside advice. The personal stake didn’t prevent the value destruction. In some cases it enabled it, because nobody in the building had the standing to push back.

The pattern with charismatic founders, at any market cap, is that the same traits that build a multibillion-dollar valuation — conviction, control, contempt for conventional wisdom — are the traits that erase shareholder value when the business model can’t support the story. Investors mistake confidence for competence and vision for viability.

What’s Actually Keeping CEOs Honest

There’s also a backstop at the upper end of the market that has gotten much more aggressive in the last few years. If a large-cap company underperforms for any sustained period, an activist shows up. That used to be rare but now it’s routine.

Activist investors launched 255 campaigns globally in 2025 according to Barclays, a record. Elliott Investment Management alone ran 18 of them, deploying close to $20 billion of capital and securing 17 board seats. Their targets included Lululemon, Lyft, PepsiCo, Yeti, Barrick Mining, and Phillips 66 — none of them obscure small caps. A record 32 CEOs stepped down within a year of an activist campaign in 2025. Push-to-sell demands hit a five-year high, according to a separate Diligent Market Intelligence report, with over 70 U.S.-based companies facing activist pressure to pursue strategic transactions.

What activists actually threaten is reputational, not financial. The ousted CEO doesn’t lose meaningful money. They lose the next board seat or the next operating role, and everyone in their peer group knows why. That’s the punishment that produces the discipline “skin in the game” was supposed to produce through equity. The equity didn’t keep them honest. The career trajectory did.

This safety net operates mostly in large-cap and upper-mid-cap territory by dollar volume, but it has been moving down-market. First-time and lesser-known activists started launching more campaigns against smaller-cap companies in 2025, with institutional investors and proxy advisors like ISS and Glass Lewis backing them. If you own large caps, the alignment problem gets resolved externally, and often faster than any equity grant could produce internally. If you own mid caps, the same mechanism applies in a thinner form. If you own micro caps, you’re largely on your own, which makes the quality of the underlying business numbers more important, not less.

What to Look at Instead

The reason skin in the game caught on as a heuristic is that it offered a shortcut. Read the proxy, see how much equity management owns, and feel like you’ve done due diligence. Process-driven investing doesn’t work that way. The questions that actually predict whether a business will compound capital over the next decade have very little to do with how the CEO is paid, and they apply equally to a $300 million micro cap and a $300 billion large cap.

Look at whether earnings are growing, whether sales are tracking alongside them, whether free cash flow is expanding, whether return on equity and return on invested capital are strong and stable, and whether margins are moving in the right direction. Those patterns are visible on any financial website and remain stable across management changes. They don’t ask you to evaluate someone’s character, vision, or charisma. They ask you to evaluate the business.

The mantra had its moment. It belonged to an era when boards underpaid executives in equity and ignored shareholder returns, and that era ended decades ago. What’s left is a phrase that sounds wise but tells you almost nothing about whether a stock will work.

The deeper problem with the mantra was always that it gave investors a way to evaluate CEOs without actually evaluating anything. Read the proxy, count the shares, move on. The work of figuring out whether a business is actually compounding capital is harder, slower, and less satisfying.

It’s also the only work that pays.

Follow patterns, not predictions, and definitely not proxy statements.

Cheers,

Andrew

What's your take? Has the "skin in the game" framing ever actually helped you avoid a bad stock or pick a good one? Or has it functioned more like a vibe check?

Leave a comment

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The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.

Last week I wrote about why you don’t need to buy SpaceX, OpenAI, or Anthropic at IPO. The structural design of the IPO favors the people selling to you, and the data on the first 24 months of public trading is brutal.

A different fear has been making the rounds since. What if SpaceX gets added to the S&P 500 right after going public, then craters? Will my index fund returns get dragged down with it?

The answer is no. If you own an S&P 500 index fund, the waiting I argued for last week is already being done on your behalf. You just didn’t know it.

The Rules

To be added to the S&P 500, a company has to clear a list of hurdles that read like a patience checklist. Twelve months of public trading. Positive earnings the most recent quarter, with the trailing four quarters profitable in sum. At least 10% of shares actually trading on the open market. A minimum company market cap around $22 billion. A liquidity test, a domicile rule, and after all of that, an active vote from the committee.

In other words, the S&P 500 committee does exactly what last week’s piece argued retail investors should do. It waits for the lockup to expire. It waits for quarterly reports. It waits for a public-market valuation to settle. Then it considers a position.

The discipline you may not enforce on yourself is built into the index.

Let’s look at another Elon company. Tesla IPO’d in June 2010. By 2017, the company had grown to the average market cap of an S&P 500 component, big enough to qualify on size alone. The index didn’t take it and wouldn’t for three more years.

The reason was the profitability rule. Tesla lost money for nine consecutive years as a public company. Every time it looked like Tesla might post a positive quarter and finally clear the bar, the next quarter would slip back into the red. Year after year, the company sat outside the S&P 500 despite being one of the most valuable in the market.

Tesla finally posted its fourth consecutive profitable quarter in July 2020, ten years after the IPO. It was officially added to the index in December 2020 with five straight profitable quarters behind it.

The rule wasn’t bent for Tesla. It actively kept Tesla out for a decade, at a top 10 market cap, while retail investors who bought at the IPO watched the stock trade sideways and then collapse during the 2018-2019 stretch before finally taking off in 2020.

And just last Thursday, S&P Dow Jones formally rejected proposals to waive those same rules for megacap IPOs like SpaceX, OpenAI, and Anthropic. The framework that held Tesla off for ten years still holds.

Even If SpaceX Did Qualify

Suppose the rules do end up getting relaxed and SpaceX was included in the S&P 500 at the IPO.

What you’d own through your index fund is roughly 0.14% in SpaceX. That’s the initial weighting under the float-adjusted methodology the S&P 500 uses, where only the shares actually available to public investors count toward your weight. Headline valuations of $1.75 trillion don’t translate to index weight. The float does.

For context, NVIDIA already sits at 7% of your fund. Apple at 6%. Microsoft at 5%. The top ten holdings combined are close to 40% of the index. That’s the concentration that’s been driving your returns for years, in both directions. SpaceX would be noise in that picture.

Forget day one. What happens if SpaceX gets added to the S&P 500 in year three or year five at a meaningful weight?

That’s actually the version you want. By the time SpaceX or any newly public company earns its way into the index, it has had to clear the profitability bar. It has delivered four straight profitable quarters. It has survived the 12-month minimum. By the time the committee adds it, the company has done the work to prove the IPO valuation wasn’t fiction.

Your index fund won’t get SpaceX at the hype valuation. It will get SpaceX at the “real” valuation, several years after the people who bought day one have had time to learn whether their thesis was right.

Bottom Line

Last week I argued that the structural design of an IPO favors the seller. This is the other half of the same argument. The structural design of the S&P 500 favors the buyer, because the rules force the waiting that most individual investors won’t.

If you own an S&P 500 index fund, you’re holding a portfolio that someone else has already set up to do the waiting. The committee is not going to chase IPO hype. They’re going to wait for the data. Then they might add the name, and only at a weight proportional to the float that actually exists, by which point the company has already proved itself.

Hype builds an IPO. Rules build an index and only one of those consistently compounds over the long term.

Cheers,

Andrew

Are you trusting the index to do the waiting, or are you planning to make active bets around the IPO wave anyway?

Leave a comment

Thanks for reading The Davem Dish! If you enjoyed this issue, feel free to LIKE, subscribe and share it with other awesome people like you.

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The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.

Should you buy SpaceX when it IPOs? Or Anthropic. Or OpenAI. Maybe all three?

The 2026 IPO calendar is one of the biggest in modern memory. SpaceX is targeting a $1.75 trillion valuation. OpenAI is reportedly preparing for a debut at up to $1 trillion. Anthropic is in talks at around $900 billion. Three companies, any one of which would be the largest IPO in history.

The pitch you’re being sold, implicitly or explicitly, is that you need to be there on day one. Get in before the run. Don’t miss the next NVIDIA or the next Amazon.

I want to tell you. You don’t need to be first.

The history of public markets is full of investors who built fortunes off companies they bought years after the IPO. It’s also full of investors who lost real money buying IPOs at the open. The structural design of the IPO favors the people selling to you, not the people buying. Patience costs you almost nothing on the companies that turn out to be great long-term investments, and it saves you on the ones that don’t.

Let me show you why.

How an IPO Actually Works

People picture an IPO as a moment when shares simply become available to the public. That’s not quite what happens.

When a company goes public, the underwriting bank allocates most of the shares to institutional clients — pension funds, mutual funds, hedge funds — at what’s called the “offer price.” That’s the number you see in the headlines, like “SpaceX priced at $X per share.” Retail investors generally cannot buy at that price. We can only buy in the open market after trading begins.

Trading usually opens at a substantial pop. Decades of academic research has tracked this pattern — IPOs are systematically underpriced on average, which means the institutions that received offer-price allocations have an immediate same-day gain available to them. They sell. Retail investors buy. The “pop” you’re cheering on the news is the institutions flipping shares to you.

That’s the first piece. The next one is the lockup period. Insiders — founders, executives, employees, venture capital firms, and pre-IPO investors — sign agreements with the underwriting bank promising not to sell their shares for a fixed window after the IPO. The standard is 90 to 180 days. The stated purpose of this agreement is “to ensure share-price stability and prevent a potential stock price drop resulting from a sudden influx of shares.”

In other words, the lockup exists because everyone involved — the bankers, the company, the insiders — knows that if insiders could sell immediately, the stock would crater. So they pre-commit to not tank the stock until the date the lockup expires. Then, on that date, the supply of sellable shares can multiply many times over.

The third piece, the one that ties the first two together, is what happens when the lockup expires. Researchers in 2001 found stocks consistently drop when lockups expire. The effect is strongest for venture-capital backed firms and technology firms, exactly the categories we’re discussing this year. The clearest example was when Twitter’s lockup expired in May 2014, the stock dropped roughly 18% in a single day, despite major shareholders having publicly promised they would not sell.

The IPO is engineered, at every step, to favor the insiders who are selling to you. None of this is illegal or even unethical. It’s the structural design of the product.

The Data on What Happens Next

If the mechanics of an IPO weren’t enough, the long-term data should be.

Finance professor Jay Ritter’s 1991 paper studied 1,526 IPOs from 1975 through 1984. Over the three years after going public, the average IPO returned 34.5%. A matched control sample of comparable already-public stocks returned 61.9%. Roughly 27 percentage points of underperformance over three years.

The pattern has been replicated and confirmed across decades, markets, and methodologies. And it’s gotten worse, not better, in the modern era.

Take the Renaissance IPO ETF which tracks the largest US IPOs over their first three years as public companies. From 2020 through 2022, the ETF returned a cumulative -20% while the S&P 500 returned +25%. That’s a 45-percentage-point gap over three years. The 2021 cohort specifically — over a thousand companies that went public in the biggest IPO year since the dot-com bubble — returned roughly 1.6% on a weighted-average basis in 2021 while the S&P returned nearly 29%. By mid-2022, the top ten 2021 IPOs by deal size were down 40-73% from their offer prices.

The familiar names from that cohort tell the story of what happens in the first year or two. Rivian priced at $78 in November 2021, peaked at $179 a week later, and was trading below $20 within 18 months. Robinhood priced at $38 in July 2021, briefly hit around $85 in November, then bottomed at $7 by June 2022 — a 82% decline from the IPO price in less than a year. DiDi delisted from the NYSE within months. Bright Health collapsed and was eventually taken private at a fraction of its IPO value. Oscar Health, Beyond Meat, Peloton — each fell 70-90% from their IPO highs by 2022. Some of these names eventually recovered. Robinhood now trades well above its IPO price after riding the AI and crypto rally. Most didn’t recover. The pattern that holds is the brutal first 12-24 months, not the eventual long-run outcome. A patient investor who waited for the wreckage would have been able to buy almost every one of these names at 50-90% off the IPO price and could also have avoided the ones that never came back.

That’s the recent record. Worth keeping in mind when you’re being told that this time will be different.

When the Money Was Made

Plenty of IPOs did work. The question is when the money was actually made.

Amazon went public in May 1997 at $18 per share. By December 1999, it had climbed to $113. Then the dot-com bust took it down by more than 95%, all the way to about $6 in October 2001. The investor who bought at the IPO and held watched two years of gains evaporate. The investor who waited five years and bought during the bust got Amazon at a fraction of the IPO price. From there, the stock compounded into one of the great wealth-creation stories of modern markets.

Apple debuted on the public markets in December 1980. The stock then spent more than a decade going essentially nowhere, hitting its IPO-day price again and again before the real run began in the late 1990s. Buying Apple at the IPO meant holding through long periods of dead money. Buying Apple at almost any point in its first 15 years as a public company would have produced extraordinary returns from there.

NVIDIA’s IPO was in 1999, and the stock then spent the next several years trading in a wide range as the dot-com bust and financial crisis played out. The investor who bought the IPO did not see consistent appreciation for years. The investor who bought later — it wasn’t until 2016 before the stock started to move appreciably — captured staggering returns.

The pattern is clear. The companies that turn out to be great long-term compounders give you years of opportunity to buy after the IPO. You almost never need day one. In many cases, day one is the worst day of the first decade to buy.

On the IPOs that fail, day one is the most expensive day to buy. On the IPOs that succeed, day one is rarely the cheapest. Patience costs you almost nothing on the winners and saves you a fortune on the losers.

What Waiting Actually Looks Like

The view I’m taking has four steps.

First, wait for the lockup to expire. That’s 90 to 180 days after the IPO. This is when insiders can finally sell, and when the market starts pricing the stock based on supply-and-demand realities rather than carefully managed scarcity. Often the price drops in the days around lockup expiration as anticipated insider selling hits. That drop is information.

Second, wait for at least two quarterly reports as a public company. Companies tell one kind of story in their S-1 prospectus, where the disclosures are designed to support the offering. Companies tell a different kind of story in their quarterly reports, where they have to face investors and analysts every ninety days. Two quarters gives you a starting picture of whether the growth, margins, and unit economics the company described pre-IPO are holding up under public scrutiny.

Third, compare the post-lockup valuation to peers. A pre-IPO valuation is a negotiation between the company, its bankers, and a small group of institutional buyers. A post-lockup valuation is a market-clearing price after the insiders have had a chance to sell. The two numbers can be dramatically different, and the second one is much more useful.

Fourth, only then consider a position — sized appropriately. Use half what you would for a stable large cap position and follow all the same rules you’d apply to any other stock investment: determine a fair value with a risk buffer, establish a stop loss and use disciplined selling tools.

What you give up with this approach is the possibility of being in on a stock that runs straight up from day one with no pullback. That does happen, and when it does, you’ll miss it. What you get in exchange is a dramatically lower chance of being in on a stock that craters in its first year while the people who sold to you cash their checks.

So how does this apply to the current IPO names?

SpaceX recently filed its S-1 with the SEC ahead of a June listing under ticker SPCX. Revenue for 2025 was $18.7 billion, up 33% from the year before. Earnings tell a different story. The company swung from a $791 million profit in 2024 to a $4.94 billion loss in 2025. Q1 2026 alone showed a $4.28 billion loss, almost matching the full prior year in a single quarter. Most of the losses come from the xAI segment, which SpaceX absorbed in a February 2026 merger. The legacy Starlink business is profitable on its own. At the targeted $1.75 trillion valuation, the company trades at roughly 94 times revenue — not earnings. Musk retains 85% of the voting power and hand selected the board, so public shareholders will have very little say. Retail investors are reportedly being allocated about 30% of the offering — roughly three times the standard — and the data shows retail-heavy IPOs tend to perform worse over time, not better.

OpenAI has not filed publicly but is reportedly preparing for a debut at up to $1 trillion. A less than encouraging data point: OpenAI’s Q1 2026 adjusted operating margin was reportedly negative 122%, meaning the company loses about $1.22 for every $1 of revenue it generates. The company’s own CFO has publicly questioned whether OpenAI is ready to be public.

Anthropic is reportedly considering an October 2026 IPO at a valuation around $900 billion. Revenue is reported in the $44-47 billion annualized range. The company is also reportedly projecting its first operating profit in Q2 2026, with gross margins almost doubling in a year.

Of the three, Anthropic appears to have the strongest financial story on paper, though all of this is reporting on private numbers that won’t be subject to public disclosure standards until — and unless — the company actually files. SpaceX’s losses are real and large but cushioned by a profitable legacy business. OpenAI’s losses are the most extreme and the least cushioned.

I’m not making a value judgment on these companies. The point is that even the strongest of them is going to face the same structural dynamic as every other IPO. Hype-priced offer. First-day pop. 90 to 180-day lockup. Then insiders get to sell. Then quarterly reports start to show whether the pre-IPO numbers hold up under public scrutiny. Then the price finds whatever level reflects the underlying business after all the selling pressure clears.

That’s the moment to take an actual look. Not day one.

The Deeper Point

The part of the IPO mythology that’s hardest to shake is the story we tell ourselves: “If I miss the IPO, I miss the gains.” The data tells the opposite story. Almost every great long-term winner gave investors year after year of opportunities to buy in. Almost every great long-term loser took investors’ money in the first six to twelve months and never gave it back.

The IPO happens once. The market opens again tomorrow, and the day after that, for decades. You don’t need to catch every wave. In reality, you won’t. That’s ok. You need to avoid getting caught in the riptide.

The hype is highest when the data is lowest. By the time the data exists, the hype has cooled. That’s when you want to be looking.

If you’re thinking about positioning around the 2026 IPO wave, the most valuable thing you can do may be nothing. For 90 days. Then 90 more. Then review the first two quarterly results. Then look at the price. Then decide.

The market will still be there.

Cheers,

Andrew

If you're trying to think through how to actually approach the 2026 IPO wave — or any major investing decision you're sitting on — that's exactly what the Davem Investor Audit is for. It's a 90-minute one-on-one session where we look at your portfolio, your goals, and the specific decisions in front of you. Whether that's the IPO question, position sizing, when to sell, or what to do with a concentrated holding, we work through it together.

Learn more about The Davem Investor Audit here.

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The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.

A friend of mine emailed me last week asking about a stock he’d been holding for two years. It was down 60%. I asked what he thought the best move would be. His response: “I still have conviction in the thesis…I think it will rebound.”

I hear some version of this often. And every time I read it, I think about how successfully the financial industry has trained people to use the word “conviction” as a shield against one of the most expensive mistakes in investing — holding a loser long after the price has told you to leave.

Conviction is one of those words that sounds like wisdom.

Have conviction in your ideas.

Size up your highest-conviction positions.

Don’t sell what you have conviction in.

The word echoes through every podcast, every CNBC segment, every fund manager interview. It’s become the unquestioned virtue of serious investing.

Let’s explore what it really means and what it costs.

One Word, Two Meanings

The first problem with how conviction gets used is that it actually means two different things in industry usage, and the two meanings get blurred together.

The first meaning is about portfolio construction. A “high conviction” fund holds a concentrated portfolio with the biggest positions being the manager’s strongest ideas. That’s a sizing decision. It has a real benefit in the form of more upside when the analysis is right. It’s a coherent strategy.

The second meaning is about pain tolerance. A high-conviction investment is one that an investor believes will ultimately be highly profitable and is worth holding even at the cost of enduring losses along the way. That’s not a portfolio construction principle. That’s an emotional posture.

When you hear “have conviction,” nine times out of ten the speaker means the second thing while leaning on the respectability of the first. The implication is that good investors hold through pain because that’s what conviction means. The structure of the language quietly substitutes a behavior — refusing to sell losers — for a virtue.

And that substitution is where the damage starts.

The Heroes

The reason conviction-as-pain-tolerance feels so unquestionable is that we’ve all heard the same story. Michael Burry shorting the housing market in 2007 while his own investors threatened to pull their money out. He held a contrarian position through ridicule, doubt, and pain. He made history.

It’s a great story and a misleading one — and not just because of survivorship bias. Look at what Burry did after the Big Short.

He pivoted his fund toward water and farmland investments. He’s spent the years since making bearish public calls on the market with predictions of crashes in 2015, 2017, 2019, 2020, 2022, and 2023. A few were correct but most weren’t. In January 2023 he posted a one-word tweet to his followers: “Sell.” Two months later, after the market rallied, he posted again: “I was wrong to say sell.” Later in 2023 he shorted semiconductors, which then went on to hit all-time highs. One analysis of his major public calls between 2017 and 2023 found that roughly 71% were wrong.

The conviction that made Burry famous didn’t reliably help him again. The legend gets told as if the holding itself was the source of the return, when in fact the analysis was right and the holding gave the analysis time to play out. Strip away the analysis and the holding is just stubbornness.

Two more recent cases.

Bill Ackman and Valeant Pharmaceuticals. Ackman’s Pershing Square bought Valeant at an average price of around $166 per share. The position was reportedly more than 20% of the fund’s assets. A textbook high-conviction position. As the price fell, Ackman publicly defended the stock, took a board seat, and added to the position. He told his investors and the media that the market was wrong about Valeant. He had conviction in the thesis.

He liquidated the entire position at about $11 per share. Total loss: approximately $4 billion or 93%. In his 2017 annual letter, Ackman wrote: “Clearly, our investment in Valeant was a huge mistake.”

Cathie Wood and ARK Invest. Her ARK Innovation ETF (ARKK) returned about 153% in 2020 and Wood became the public face of high-conviction investing for an entire generation of retail investors. Then ARKK fell 24% in 2021, 67% in 2022, and roughly 78% peak-to-trough from its February 2021 high. Through all of it, Wood defended her positions, called the drawdowns buying opportunities, and reminded investors of her five-year horizon. ARK’s total assets under management fell from a peak of around $59 billion to about $11 billion. Morningstar estimated ARK’s funds destroyed roughly $14 billion in shareholder wealth over the decade, with ARKK alone accounting for about $7.1 billion.

Three of the most public, most respected, most credentialed conviction investors of the modern era. Each had a thesis, defended it through the pain, and was wrong long enough to inflict damage on the people who were trusting them.

The takeaway isn’t that they’re bad investors. They’re not. Every good investor is wrong some of the time. The takeaway is that conviction, by itself, doesn’t protect you from anything. It only feels like it does until it doesn’t.

What the Research Actually Shows

The behavioral finance researchers Brad Barber and Terrance Odean published a paper in 1999 called The Courage of Misguided Convictions. The closing line: “Overconfidence provides the will to act on these biases. It gives us the courage of our misguided convictions.”

Odean’s related research on the disposition effect — the tendency to sell winners too early and hold losers too long — estimates this single behavioral pattern costs retail investors roughly 4.4% annually. Investors are about 60% more likely to sell a winning position than a losing one. The reason they hold the losers, when you ask them, is almost always some version of “I still believe in the thesis.”

That phrase is doing damage to portfolios. Most of the people saying it aren’t holding for any analytical reason. They’re holding because selling means admitting they were wrong, and the human mind will do almost anything to avoid that admission. Conviction is the word we use to make that easier.

Psychologists call this the sunk cost fallacy. Once you’ve put money, time, or public statements into a decision, you become resistant to evidence that the decision was wrong. The more you’ve committed, the more resistant you become.

Investing is a perfect environment for this bias to operate. You take a position. The position moves against you. Now you have two pieces of information that point in opposite directions — your original analysis, and the new price action. A rational actor would weigh both. A human actor weighs the original analysis more heavily because they’ve already paid for it.

What makes investing uniquely difficult is that the financial industry has given you a culturally approved word — conviction — that lets you frame the bias as a virtue. You’re not being stubborn. You’re not refusing to admit you were wrong. You’re a conviction investor. The vocabulary itself is doing the work of the bias.

Most investing virtues have a corresponding vice everyone can name. Confidence becomes arrogance. Patience becomes paralysis. Skepticism becomes cynicism. Conviction has no opposite that anyone uses. The word itself gives you no signal about which version you’re holding. That’s the trap underneath the trap.

I’ve learned this the painful way more than once. Companies I rode down because I had a thesis and conviction that they’d rebound. The lesson was that no analysis is good enough to justify holding through that kind of price action without an exit plan. You can’t reason your way out of a 60% drawdown. You can only get out of it long before it gets there.

What’s Actually Worth Having Conviction In

So is conviction useless? No.

The trick is using it for what it should be used for.

Conviction in a single position is dangerous because it conflates two things — your belief about the company and your belief about the price. Those move independently. A great company is not a great investment at the wrong price. A great company that drops 40% might be a buying opportunity, or it might be telling you something you don’t yet know. The price is information. Conviction in the company makes you ignore information.

Conviction in a process is different. That’s worth having.

For me, that means trusting the Davem Method analysis when it identifies a quality company at a fair price. It means cutting losses at 12% without negotiating with myself for another week to see if the stock recovers. It means letting trailing stops do their job even when a position is up 50% in a month and every instinct in my body wants to lock in the gain. And it means not second-guessing a sell when the stock keeps climbing afterward, or a buy when the stop triggers right before a bounce.

The process accounts for the times I’m going to be wrong. It accounts for the times I’m going to be right but not as right as I could have been with a longer hold period. It removes those decisions from the moment of the investment and pre-decides them based on rules I made when I wasn’t emotionally invested in any particular outcome.

That’s the only kind of conviction worth carrying around. Not faith in any one company, or “marrying the stock”, but faith in the system that lets you keep playing the game without one wrong bet sending you back to square one.

Many investors have it backwards. They have weak processes and strong opinions about individual stocks. The result is that they ride conviction in single names down the drain. Strong processes and held-loosely opinions about individual names is what actually compounds wealth over decades.

The Test

Every time you hear “have conviction in your thesis,” try translating it into what’s actually being recommended. Most of the time, it’s “ignore the price action and stay in the trade.” That’s the cognitive bias the research has been measuring for thirty years, made to sound more flattering.

The investors who got famous for conviction did so because they were right once. The far larger group of investors who had identical conviction and were wrong don’t have books written about them. They have smaller portfolios and a mantra they keep repeating to themselves.

I still have conviction in the thesis.

The next time you catch yourself about to say that, try saying the literal version instead: I’m holding because I don’t want to admit I was wrong.

If both sentences feel true at the same time, the conviction isn’t doing what you think it’s doing. And the longer you wait to act on that, the more it’s going to cost you.

The market doesn’t care what you or I believe. It doesn’t read our investor letters. It rewards companies that are growing and exceeding expectations and it punishes companies that don’t. Your conviction has no vote.

Cheers,

Andrew

The hardest part of investing is recognizing which of your own behaviors are quitely costing you returns. I built a free 3-minute assessment to help you figure out which patterns might be holding you back — including the conviction trap.

Take the “Can I Really Beat the Market?” assessment here.

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The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.

Everyone wants to find the next NVIDIA .

The next under-the-radar tech company that goes to the moon. The next beaten-down turnaround that triples. The next small-cap nobody’s heard of that quietly becomes a household name.

The hunt for the multibagger is the most popular activity in investing, and it’s easy to see why. One life-changing winner and you’re set.

Meanwhile, the largest, most established companies in the market — the ones hiding in plain sight — keep handing out opportunities. And most investors walk right past them.

There are two beliefs doing the damage here. The first is that the real money is in finding the obscure rocket ship. The second is that large caps are a dead end — everyone follows them, all the information is known, so there’s no edge.

Both beliefs are misguided, and together they push people toward exactly the risk they should be avoiding. These beliefs assume the edge in investing is informational — that the game is about knowing something other people don’t. One belief says go where information is scarce and the other says avoid where information is abundant, but the edge was never informational and once you see that, both beliefs collapse at the same time.

The Lottery Ticket Problem

Let’s start with why the “next NVIDIA” hunt is so seductive.

Researchers who study investor behavior call these lottery stocks. Low-priced, highly volatile companies with a small chance of an enormous payoff. They attract investor money the same way a Powerball jackpot attracts ticket buyers. The outcome is improbable, but the prize is big enough that people don’t pay attention to the math.

The same researchers have also measured how lottery stocks perform as a group. They underperform. There’s actually a documented “lottery premium” — a penalty, despite the name — because investor demand bids these stocks above what they’re worth. The very thing people buy for the chance at outsized returns delivers below-average returns on average.

You’re taking more risk for less return. That’s the opposite of how risk is supposed to work. You’re not being compensated for the risk you’re taking. In fact, you’re being penalized for it, because you’re buying the same dream everyone else is buying, at the same inflated price.

That doesn’t mean nobody ever hits one. People win the lottery too. It means building a strategy around it is, mathematically, building a strategy around losing slowly while you wait to win big.

Nobody Knew

The other half of the trap is the belief that you can’t make money in large caps because there’s no edge.

Let’s use NVIDIA itself, since it’s the stock everyone points to.

If you bought NVIDIA in 2015 and held through today, you’d be sitting on returns north of 23,000%. Generational wealth from a single position. That’s the story that gets told. And it’s true. But look at what it leaves out.

In 2015, NVIDIA was the fourth best-performing stock in the entire S&P 500, up +67% on the year. It was a solid GPU company that made chips for gamers and data centers. Nobody — not the analysts, not the fund managers, not the financial media — knew it would become the backbone of the AI revolution. That knowledge wasn’t available. It hadn’t happened yet.

What breaks the whole “find the next one” project is that it’s a phrase that can only exist in the past tense. NVIDIA wasn’t “the next” anything in 2015. It was just a good company having a strong year. It became NVIDIA-the-legend through ten years of events nobody could see coming. You can only ever buy a present tense company. “The next NVIDIA” is a pattern you can recognize looking backward, projected onto a future you can’t read. You’re being told to go find something that, by definition, doesn’t exist yet at the moment you’d need to act on it.

So the 23,000% story isn’t a story about analysis. It’s survivorship bias. NVIDIA is one of the rare few — research shows only about 4% of stocks account for nearly all of the market’s wealth creation over the long run. For every NVIDIA, there were dozens of stocks that looked just as promising in 2015 and went nowhere. And that’s within the S&P 500 — already the 500 strongest companies in the market, not the speculative fringe.

Of the top ten performing S&P 500 stocks of 2015, only three — Amazon , Netflix and NVIDIA — turned out to be genuine long-term buy and hold winners a decade later. The rest were acquired, stagnated, or collapsed. That’s a 30% success rate on a list that was already cherry-picked to include only the year’s biggest winners.

So when someone says “nobody knew NVIDIA would do this” — they’re right. And that’s exactly the point. The people telling you to find the next one are asking you to do something they’ve just admitted is impossible.

Efficient Doesn’t Mean Priced Correctly

Here’s the belief I really want to take apart, because it’s the one that keeps people away from the best risk-adjusted opportunities in the market.

“Large caps are too efficient. Microsoft has 66 analysts covering it. Everyone has the same information. There’s no edge.”

This confuses two completely different things.

Yes, large-cap companies are informationally efficient. When news breaks about Microsoft, it gets priced in within minutes. You’re not going to out-research a company with 66 analysts watching its every move, and you shouldn’t try.

But informational efficiency doesn’t mean the price is correct. It means the price reflects the current narrative quickly. Those are not the same thing. If they were, those 66 analysts wouldn’t be publishing price targets ranging from $400 to $870 on the same stock — which is exactly what they do.

Your edge in large caps was never going to be informational. It’s the same edge it’s always been: structural and behavioral. You don’t have an investment committee. You don’t have redemption pressure. You don’t have career risk for being early. And you can sit patiently and do nothing while a high-quality company you’ve already analyzed gets temporarily mispriced by a narrative.

That’s what actually happens. Quality large caps don’t get mispriced because the information is wrong. They get mispriced because the story turns. I wrote about this last issue — the SaaSpocalypse drove Salesforce down over 30%. Not because Salesforce stopped making money, but because the AI-replacement narrative took over. The information was efficient. The price was still wrong.

Efficiency compresses the information gap. It does nothing to the behavior gap. And the behavior gap is where you make your money.

Why the Edge Survives

If this behavioral edge is real, and it’s available to everyone watching the most-covered stocks on earth, why doesn’t everyone take it?

Because the edge isn’t knowing. It’s doing.

The crowd watching Microsoft has the exact same information you have. What they don’t have is the temperament to do the analysis ahead of time, decide what the company is worth, and then sit on their hands for six months while they wait for the price to come to them. When the narrative finally turns and the stock drops 30%, that same crowd isn’t buying. They’re panicking, because the story scared them out right when the math got good.

That’s why the edge persists. It was never hidden. It just requires you to behave differently than everyone else, looking at the identical screen.

The Opportunities Are Already in Front of You

Here’s what this looks like in practice. Not hypotheticals — my actual investments.

NVIDIA at $100, and again at $170. Eli Lilly at $645, and again at $926. Microsoft at $359. Arista Networks at $122. Every one of these is a company everyone follows, with no informational secret to uncover. And every one of them, at some point in the last couple of years, pulled back to a price where the math worked.

That’s the whole game. It’s not predictions. It’s pattern recognition. Filter for quality companies — real earnings, sales growth, and free cash flow. Calculate a fair value. Then wait for the price to pull back to a support level where you can earn your required return. It happens far more often than people think, because narratives are always turning, and every narrative turn drags a quality company’s price somewhere it doesn’t belong.

You don’t have to find a company nobody knows. You have to know what a company everybody knows is actually worth and then have the patience to wait for the market to disagree with itself.

Why Buy and Hold Isn’t the Answer Either

At this point someone always says, well fine, if large caps are the answer, just buy the great ones and hold forever.

But that’s a different mistake, and I’ve devoted whole issues to it. Good companies don’t stay good forever. UnitedHealth , Chipotle , and Lululemon were all considered quality compounders three years ago. Anyone who bought and held them through the last three years has the scars to show for it. UnitedHealth down -20%, Chipotle down -21%, Lululemon down -68%. Meanwhile the S&P 500 has returned +82%.

The answer isn’t “hold forever.” It’s “hold until the price tells you otherwise.” Buy quality at a discount, let the winner run, and use systematic selling tools to protect the position. It’s a recurring opportunity — the same quality companies can cycle in and out of attractive prices, year after year.

The Reframe

The hunt for the next NVIDIA is a hunt for a lottery ticket. And the belief that large caps are a dead end is the same lottery mindset inverted. Both are looking for an information edge that was never the point.

Meanwhile the real opportunities — quality companies, temporarily mispriced by a turning narrative — are sitting in the most-watched corner of the entire market. People skip them because they’ve been told there’s no edge there. But “everyone has the information” was never the same as “everyone has the discipline.”

You don’t need to find what nobody knows.

You need to act correctly on what everybody already knows and that’s a far rarer skill than it sounds.

Cheers,

Andrew

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Thanks for reading The Davem Dish! If you enjoyed this issue, feel free to LIKE, subscribe and share it with other awesome people like you.

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The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.

In theory, a stock price reflects current earnings and future expected earnings. That’s the model every textbook says.

In reality, it’s more complicated.

Prices reflect what people think will happen. What they hope will happen. What they fear might happen. They reflect narrative, attention, momentum, and the willingness of the next person to pay more than the last one. Sometimes that lines up with fundamentals but often it doesn’t.

The fundamentals give a stock a floor. The story is what makes it move and the story has no floor or ceiling.

A Sneaker Turned AI Company

A few weeks ago the share price of Allbirds — yes, the wool sneaker company — went from $2.49 to $24 in a single trading session. A 600% gain in a few hours.

What happened? Did they announce record earnings? A revolutionary new shoe? An acquisition by Nike?

None of the above.

They announced they were no longer a shoe company. They had sold their footwear business in March for $39 million (less than 1% of their 2021 peak valuation), and now the shell of the company would pivot to AI infrastructure with a new name (NewBird AI), a new plan (buy GPUs and lease them out) and new financing ($50 million from an unnamed investor).

That’s it. That’s the news.

No customers. No experience running data centers. No revenue projections.

The market didn’t care. The story was enough.

This isn’t unique. During the dot-com days, companies added “.com” to their name and watched their stock pop. During the crypto boom, Long Island Iced Tea Corp. — yes, the beverage company — renamed itself “Long Blockchain” and the stock jumped 380% before eventually being delisted by the SEC. The pattern is older than the internet.

The Math Doesn’t Apply

Quality companies have an anchor. A business with $1B in earnings, growing at 15%, generating free cash flow — there’s a math problem you can solve. You can estimate future earnings, apply a reasonable multiple, and calculate a fair value. The price might overshoot or undershoot, but it will eventually be pulled back toward something rational.

A company with no earnings has no anchor. There is no fair value calculation because there are no fundamentals to plug into the formula. Whatever someone is willing to pay is the price. Whatever the next person is willing to pay becomes the new price.

This is why these stocks can rocket higher and why they can collapse just as fast.

Look at any number of speculative names that have run up hundreds of percent on the AI narrative without ever generating meaningful revenue. They’re not investments in the traditional sense. They’re bets on whether the story holds long enough for someone else to buy your shares at a higher price.

Short Squeezes Make It Worse

Compounding the chaos in story stocks is short interest.

Quick refresher. When people want to bet against a stock they “short” it, meaning they borrow shares and sell them, planning to buy them back cheaper later. Shorting is risky. If you’re long a position the worst case is it goes to zero. If you’re short, the loss is theoretically unlimited because a stock price can rise to infinity. So If the stock goes up instead of down and you want to cap your loss, you have to buy shares to cover your position. That buying pushes the price even higher, which forces more shorts to cover, which pushes the price higher still.

This is a “short squeeze.” It’s how GameStop went from $10 to $483 in a few months in early 2021. It’s part of why these tiny, speculative names can move 600% in a session. There often aren’t many shares available, and any forced buying overwhelms the market.

Then it works in reverse on the way down. When the story breaks down, holders rush to sell, but there’s no fundamental floor to catch the price.

The Selling Tools Don’t Save You

Part of the Davem Method is using stop-loss and trailing stop orders to manage risk. These tools work well for liquid, quality companies. They fail with story stocks.

A trailing stop only triggers when the price reaches your level. But story stocks often don’t trade through prices smoothly — they gap. A stock can close at $20 today and open at $8 tomorrow on bad news. Your stop at $17 doesn’t protect you. It triggers, but it executes at $8 because there’s no buyer at $17.

You wake up to a 60% loss instead of the 15% one you planned for.

The structure of these stocks — thin liquidity, narrative-driven pricing, gap risk — defeats the systems designed for predictable, fundamentally-anchored businesses.

There’s no way to safely invest in story stocks. Either you treat it as gambling money, or you stay out. Trying to manage the risk with conventional tools is a trap.

The Opposite Problem

The narrative effect cuts both ways.

Look at what’s happened to software stocks over the past few months with the so-called “SaaSpocalypse.” Salesforce down over 30% for the year. Workday down over 40%. The software sector ETF down over 20%. Roughly $2 trillion in market cap wiped out.

Why? Did these companies stop growing? Did their earnings collapse?

No. Most of them are still posting solid results. The narrative changed.

When Anthropic released its Cowork AI tools in early 2026, investors started pricing in the worst-case scenario that AI will replace traditional software entirely. Why pay for software when AI can do the same work for a fraction of the cost?

Maybe that fear plays out over time. Maybe established software companies get disrupted. Or maybe AI ends up running on top of existing software platforms rather than replacing them. Maybe the moats — long-term contracts, deep integration, mission-critical data — protect these businesses.

The honest answer is nobody knows yet.

But the market doesn’t wait for honest answers. It prices the fear immediately. Quality companies with real earnings and real businesses get hammered just as hard as story stocks get pumped because the narrative is the same force in both cases. People aren’t buying or selling earnings. They’re buying or selling stories about earnings.

This creates a different kind of opportunity. When a quality company gets caught in narrative-driven selling, you sometimes get a chance to buy excellent businesses at significant discounts. But it requires a process. You have to know what the company is actually worth, which means doing the analysis instead of just reacting to the headlines.

The Number One Job

The most important job of an investor isn’t picking winners. It’s managing risk.

Picking winners is what financial media trains you to focus on. Hot tips, breakout stocks, the next NVIDIA. But anyone who’s been in the market long enough knows that one big loss erases years of gains. A 50% loss requires a 100% gain just to break even. A 70% loss requires 233%.

Quality companies aren’t immune to drawdowns. The SaaSpocalypse proves that. But they have something story stocks don’t — a track record. Real earnings and free cash flow. When the price disconnects from those fundamentals, you have something to anchor your decision-making to.

With story stocks, there’s only the price. And the price is whatever the next person is willing to pay.

The Two Games

There are really two different games being played in the stock market.

In one game, you’re buying ownership in real businesses. Companies that grow earnings, generate cash, and compound value over time. Your job is to find quality companies and buy them at reasonable prices. The game is math, patience, and behavior management.

In the other game, you’re trading narratives. What matters is the story, the momentum, and the timing of your exit. Your job is to be ahead of the next person.

Both games can make money. But they’re not the same game, and the skills don’t transfer. People who succeed at the first game often blow themselves up in the second one because the rules are completely different.

I play the first game. Not because I’m morally opposed to the second one — speculation has been around since markets existed — but because I’ve seen what happens when people confuse the two. They take quality-company-sized positions in story stocks. They build wealth slowly and lose it quickly.

There’s a place for speculation if you know what you’re doing and you’ve sized it appropriately. But don’t confuse it with investing. And don’t expect the tools that protect you in one game to protect you in the other.

The first question to ask before any position isn’t “How much could I make?”

It’s “What is actually anchoring this price?”

If the answer is “earnings, cash flow, and a track record,” you’re investing.

If the answer is “a story,” you’re gambling.

Both can work. Just know which one you’re doing.

Cheers,

Andrew

Thanks for reading The Davem Dish! If you enjoyed this issue, feel free to LIKE, subscribe and share it with other awesome people like you.

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The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.

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THE DAVEM CUT: Signal from the Noise

April 2026 Edition — Arista Networks (ANET)

Prices quoted as of April 22, 2026

ANET Closing Price $177.30 | Fair Value: $177 | Margin of Safety: $133 | Valuation Status: Overvalued — Patience

The Setup

I have history with this stock.

Last year, dropped to a buy level at $85 during a broader selloff. I didn’t pull the trigger. From there it jumped to a high of $162 — up 90% from that $85 level. I wrote about this in a previous newsletter as a missed opportunity and the lesson I took from it was simple: if your edge is tracking patterns, watching prices closely and being able to spot opportunities, you don’t make money overthinking from the sidelines.

So when another pullback hit last month and ANET dropped to $122, I executed. Davem Investors Club members received the opportunity alert in real time and can see this position in my portfolio — up 45% as of today.

Now here’s the interesting part. I ran ANET through my AI analyst prompt this week.

A quick note on what I mean by “AI analyst.” Anyone with access to ChatGPT, Claude, Gemini or Perplexity can now produce what used to take a team of Wall Street equity research analysts weeks to assemble — a full institutional-grade investment case with management profiles, moat analysis, risk rankings, valuation models, bull/bear scenarios, the works. These AI-generated reports look professional. They sound authoritative. And they still don’t tell you what you actually need to know to make a good investment decision. That gap between what the AI analyst produces and what actually matters is the entire point of The Davem Cut.

The AI analyst came back with roughly 2,600 words. The full Wall Street production.

But none of that analysis is what told me to buy at $122. The data did.

Let me show you the difference.

The Wall of Noise

I’m pulling three sections from the AI analyst output that look impressive but didn’t improve my investment decision.

Noise #1: The Management Profile

The AI analyst produced a detailed overview of CEO Jayshree Ullal — her tenure since 2008, her background at Cisco, her leadership style, how she’s built a culture of innovation. It called her “one of the most respected executives in the networking industry.”

I skipped it.

Not because Ullal isn’t impressive. But what am I supposed to do with that information? “Respected CEO” doesn’t tell me whether to buy at $177 or wait for $133. I can’t put “leadership style” into a valuation model. What I can measure is what the company has delivered under her leadership and that shows up in the financial data, which is where I’ll be spending my time instead.

Noise #2: The Moat Analysis

The AI analyst identified ANET’s competitive advantages as “technology leadership in high-speed switching, strong customer lock-in through EOS, and network effects within hyperscaler environments.” It categorized these as “durable advantages with a 5-10 year horizon.”

This is the kind of analysis that makes investors feel confident without giving them anything actionable. “Strong customer lock-in” — measured how? “Network effects” — quantified where? The AI analyst is labeling things, not analyzing them.

If ANET’s moat is real, it’ll show up in the margins. If customer switching costs are genuinely high, you’ll see it in revenue retention and pricing power. I don’t need the label. I need the data — and the data is in the next section.

Noise #3: The Bull/Bear Case

The AI analyst wrote a bull case centered on AI networking demand driving revenue to $15 billion by 2028, and a bear case around hyperscaler customers building their own networking solutions in-house. Both sounded plausible but neither was useful.

The problem with bull/bear cases is they’re stories. The bull case makes you feel excited. The bear case makes you feel cautious. Neither one tells you what to do at $177. You read both, nod along, and then make your decision based on whichever story resonated with your existing bias.

The Davem Method doesn’t do stories. Rather, we look at conditions. What specific, measurable conditions would make ANET attractive? What conditions would make me pass? That’s the question no bull/bear narrative is going to answer.

The Signal

Here’s what the data actually says about ANET.

Revenue: Five-year trajectory is $2.95B → $4.38B → $5.86B → $7.00B → $9.01B. Annual revenue growth has been consistently well above my 10% minimum. No negative quarters and no sustained dips below target. That’s what I’m looking for. Not whether growth is 19% or 28% in a given year — that distinction doesn’t change my decision. Consistent growth above the threshold is the signal. The rate of that growth is noise.

Earnings: EPS has grown from $0.66 in 2021 to $2.75 in 2025 — roughly 33% annual growth over five years. Quarterly earnings growth is running at 28% year over year as of Q4 2025. More importantly, the growth has been consistent. No negative earnings years and no erratic swings. This is the kind of consistency we look for and it allows us to make reasonable assumptions about future earnings, which is the foundation of the valuation process.

Margin trends: Gross margins have been stable at 64% for two consecutive years. Operating margins climbed to 47.5% non-GAAP in Q4 2025. Net margins running at 39%. For a hardware-adjacent networking company, these are software-like margins. Margin stability during a period of rapid revenue growth suggests real pricing power and operating leverage. If the moat is real, this is the proof.

Free cash flow: $4.25B in 2025, up from $3.7B in 2024. FCF conversion from net income is strong — the company is generating real cash, not just reporting earnings. No accounting creativity needed to make these numbers work. Consistently growing free cash flow is a core quality signal and it feeds directly into the second step of the Davem valuation process.

Capital efficiency: Return on equity is running above 31% and return on invested capital above 30%. Both have been consistently strong for years. These are the numbers that tell you whether management is deploying capital effectively and ANET’s returns are among the highest in the technology sector. This is the data the AI analyst’s management profile was trying to capture with words like “respected” and “effective leadership.” The returns say it with numbers instead.

Valuation: ANET is trading at roughly 64x earnings. Its 10-year average P/E is around 43x. So you’re paying a 40-50% premium to its historical valuation. The forward P/E is around 50x based on 2026 estimates — still well above the historical average.

At $177, ANET is priced at my fair value estimate. The margin of safety level sits at $133. That’s a 25% decline from here before conditions start aligning for an entry.

Technical Support: ANET found support around $120 during last month’s pullback, which is where I entered my position. Below that, the next significant level sits around $85 where the stock bounced last year. Support levels matter because they’re part of the Davem Method — once we have a fair value price, we look at how the stock has traded to identify pullbacks to support as entry points.

The conditions (not a prediction):

For ANET to look attractive for a new position, I’d need one of two things. Either the price drops — a pullback to the $130-140 range where valuation compresses toward historical norms and the margin of safety is within reach. Or the earnings grow into the price — if 2026 revenue guidance of $11.25B materializes and margins hold, the stock could grow into its current valuation over the next 12 months without the price moving at all.

Right now, neither condition is met. The stock recently hit an all-time high. Exactly one year ago it was trading at $67. That’s a 164% move in twelve months. The data says this is a quality company. The data also says the price is fully reflecting that quality.

Valuation status: Overvalued — Patience.

The Behavioral Check

This edition’s bias: The gap between knowing and doing.

I can talk about this one personally because I lived it with this exact stock.

When ANET hit $85 last year, the data supported an entry. My process said buy. And I hesitated — overthought it, waited for “more confirmation,” and watched it jump 90% without me.

That’s not an analytical failure — my analysis was right. It’s a behavioral failure. I let the discomfort of acting in a volatile moment override a process I’ve spent 20 years building. The pattern was there. I just didn’t execute.

When it came back to $122 during last month’s pullback, I didn’t make the same mistake twice. The conditions aligned and I bought. Club members got the alert.

Here’s the lesson I had to remind myself: if your edge is tracking patterns, watching prices closely and being able to spot opportunities, you don’t make money overthinking from the sidelines. You have to act. Not some of the time but every time.

That doesn’t mean acting impulsively. It means trusting a process you’ve tested and following it when the conditions are met — even when the market feels scary, even when headlines are screaming, even when your gut says wait.

The irony is that at $177, the behavioral trap flips. Now the danger isn’t hesitation — it’s overconfidence. The stock is up 45% from my entry. The temptation is to believe the position is “easy” and let the gain anchor my expectations. But the data says ANET is now at fair value, well above my margin of safety level, and the same discipline I applied on the way in has to hold now that I’m in.

Process doesn’t only govern when to buy. It governs how you manage what you own. Both require the same discipline and both require ignoring the emotional pull of the moment.

Club Challenge

Here’s your exercise for this edition:

Pick one stock in your portfolio that’s had a big run over the past year. Pull up its current P/E ratio and compare it to its own 5-year average. Is the market paying a premium for growth that’s already happened or growth that still needs to materialize? Write one sentence defining the specific condition under which you’d add to your position. Post what you found in the chat.

No narratives or stories. Just the data and your conditions.

Talk Soon,

Andrew

To read the comprehensive AI analyst report click here.

Thanks for reading The Davem Cut! If you enjoyed this free preview, share it with other awesome people like you and consider subscribing to the Davem Investors Club.

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The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.

Most people hear “paycheck to paycheck” and assume it means something is broken. Not enough income, too many bills, no future. And sometimes that’s true. But there’s another version of paycheck to paycheck that looks identical from the outside and means the exact opposite thing on the inside.

Two people can have the same balance in their checking account at the end of the month. One of them spent the month funding a lifestyle. The other spent the month funding a future. The only difference is where the money went before it ever showed up.

I spent seventeen years in that second category, and almost nobody knew.

A few months before I took a buyout and left my 17-year corporate career, a senior manager named Darren set up a call with me out of the blue. He wasn’t my boss and I hadn’t asked him for anything, but he’d heard through the grapevine that I was leaving and he wanted to help. He had connections in the industry and he was genuinely trying to do me a favor. I remember him saying something like, “Take a few weeks off, clear your head, but I’m sure you want to bank the buyout and get back to work soon.” He was just trying to be nice and assumed he was reading the situation correctly. I nodded, said something noncommittal, and let the conversation move on.

What I didn’t tell Darren was that I wasn’t planning to bank the buyout. I was planning to build a coaching and consulting business and figure out what came next without a corporate safety net. I also didn’t tell him that I could have walked away from the company a year earlier if I’d wanted to, or that the decision to leave wasn’t really about the buyout at all. It was about something I’d started doing in 2006 that he had no idea about, because I barely ever talked about it.

The part that most personal finance writers never admit is willpower doesn’t scale. Any time money sat in my checking account, I spent it. Any time I moved it to a savings account that I could still get to in two clicks, I spent that too — usually on a trip or something I’d convinced myself I needed. A new bike, another pair of skis, football tickets. Things I didn’t in fact need at all. If I’d tried to build wealth through sheer discipline, I would have failed the same way almost everyone else fails — quietly, gradually, and without ever really noticing.

The only reason I’m writing this instead of still sitting in a windowless office, creating reports that nobody reads is that I took the decision away from myself in 2006 and then spent the next seventeen years not touching it.

I started contributing to my investment accounts at around 10% of my pre-tax income. It came out before the money ever hit my checking account, which meant I never saw it, never had to decide about it, and never got to feel the small emotional pull of “I could use this for something else this month.” The contribution was invisible to me by design. I lived on what was left, and what was left was always less than I wanted it to be. The last week of the month was often tight. Sometimes I carried a credit card balance for an unexpected expense or a trip I wanted to take. I was not living some monastic life of deprivation — I was living a pretty normal young adult life, just with a smaller paycheck than my pay stub said I had.

The debt got handled differently than most people would expect, and I think this is where a lot of the traditional advice gets the sequencing wrong.

I didn’t try to kill credit card balances with my bi-weekly paychecks, because my paychecks already had a job. Their job was to fund the automation and cover living expenses. The debt got paid down with my annual bonus.

Lump sum bonuses feel like windfalls, and most people blow windfalls because they feel like free money. I used mine to clear whatever had accumulated on the card over the year. The system was simple: recurring income funds the automation, lump-sum income kills the debt. Trying to do both with the same dollars is how most people end up doing neither.

If you don’t have a bonus, find the lump sum somewhere else. A side job, a tax refund, selling something, an extra shift — whatever recurring-plus-lump-sum structure you can build. The key is treating them as psychologically different kinds of money, because they are.

Around 2009, I ramped my savings rate up from 10% toward 20%. I could tell a story about how smart I was for timing the market but that would be a lie. I wasn’t being greedy while others were fearful. I wasn’t backing up the truck because I saw an opportunity. My rent was low at the time, I’d gotten a promotion, and I suddenly had more room in my monthly budget. I bumped the contribution because I could.

In retrospect I was dollar-cost-averaging into the bottom of one of the worst markets in a generation and then riding the long bull market that followed, but none of that was strategy. That was the system catching the bottom while I was just trying to stash a little more because my life had gotten slightly cheaper. The automation didn’t need my market instincts. It just needed me to not turn it off.

Everyone frames “pay yourself first” as a productivity hack or a budgeting trick, something you do because it’s a little more efficient than the alternative. That’s not what it is.

It’s a recognition that willpower is a finite and unreliable resource, and that the version of you who makes good decisions on a Sunday morning while reading an investing article is not the same version of you who’s tired on a Thursday night and wants to book a trip or go out with friends. The system exists to protect the first version of you from the second version of you. That’s the whole game.

Once you see it that way, the question stops being “am I disciplined enough to invest?” and becomes “have I built a structure that doesn’t require me to be disciplined in the first place?”

By the time the buyout conversation came around, I was forty-one years old and had enough money to technically retire. None of my colleagues had a clue. I wasn’t a high earner. I was an individual contributor at a stodgy utility company. I didn’t talk about investing at work. I didn’t brag about winning trades or my growing account balance. From the outside I looked exactly like the person Darren thought I was — a mid-career employee who was about to need help landing softly.

From the inside I was already free and I just hadn’t told anyone yet.

The buyout didn’t make me free. Automated savings and investing did.

What the freedom actually bought me wasn’t sitting on a beach somewhere. It was the ability to say no to the next corporate job, to take time off without panicking, to help build a business from nothing, and eventually to launch Davem Advisors and start teaching this stuff to other people. That’s what was actually compounding underneath the portfolio the whole time. Not just money — optionality. The ability, at some future date I couldn’t have predicted, to make a decision based on what I wanted instead of what I needed.

If you take one thing from this story, don’t take the savings mechanics or the contribution percentages or the bonus rule. This isn’t a tactics guide.

Build something that doesn’t need the Thursday-night version of you to show up. Pay yourself first in an account that’s hard to raid, and then go live your life on what’s left. It will feel tight. That’s the point.

And one day, maybe a decade or two from now, someone at your job is going to pull you aside and try to help you land your next gig. You’re going to realize in the middle of the conversation that you don’t actually need their help.

You just don’t have to tell them yet.

Cheers,

Andrew

What's the biggest obstacle between you and automating your financial future? Drop a comment and let me know!

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The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.

Invest in What You Know

The phrase “invest in what you know” was made famous by the legendary investor Peter Lynch.

He didn’t mean just buy companies whose products you understand as a consumer. He meant using your familiarity as a starting point before performing diligent research on a company’s financials.

Just because you love shopping at Costco and it’s always packed doesn’t mean you should blindly buy the stock.

Simple advice but also incomplete.

I want to expand on what “investing in what you know” actually means, and why the typical interpretation misses the point.

The Bad Stockbrocker

I was recently talking to an older guy, Troy, at my local gym. As we chatted, he started telling me about his professional life. Turns out he was a stockbroker until the 2008 financial crisis. He ended up selling all his stocks at the bottom but somehow managed to walk away with $2 million.

“I was never a very good stockbroker,” he admitted. “I hated selling products and I had a knack for buying high and selling low.”

I wondered how someone who was a bad stockbroker ended up with $2 million in his early forties. But anyway.

He then took that money and invested in distressed real estate. Ranch houses he could remodel on the cheap and rent, as he put it. The timing was perfect. The housing market had just collapsed and deals were plentiful. He ended up buying about a dozen rental properties.

I asked how he managed his property empire. Did he have a management company? A network of contractors and realtors?

“I manage all the properties myself,” he said. “Nobody has ownership like I do.”

He had contractors he used regularly, but if he didn’t like the prices quoted for repairs and remodels, he’d just do the work himself. I asked about tenant calls.

“Number one call by far is plumbing problems. I have a relationship with a local plumber. They send someone out and usually the bill is minimal. If I don’t like the quote, I call the owner. I’ve been working with him so long he usually cuts me a deal.”

Troy is now in his sixties with a nice nest egg. He doesn’t see any reason to invest in the stock market.

"Why would I take the risk? I was never very good with stocks. I've done much better in real estate."

The Long Running Debate

What’s the better investment — stocks or real estate?

This debate has been going on forever. Everyone has an opinion — usually depending on what they are trying to sell, with cherry picked information.

Let’s look at what the data actually says.

For stocks, the S&P 500 has returned approximately 10-11% annually over the past 50 years (with dividends reinvested). Adjusted for inflation, that’s roughly 7%.

For real estate, the numbers are harder to pin down because returns depend heavily on rental income, leverage, location, and property type. Studies on residential real estate with typical mortgage leverage show returns in the 10-12% range.

A comprehensive study that analyzed data from 16 advanced economies over 145 years found residential real estate and equities both returned approximately 7% annually when adjusted for inflation.

Essentially equivalent.

However, real estate had a better risk-adjusted return, meaning real estate delivered similar returns with far less turbulence.

So why doesn’t everyone just invest in real estate?

Because returns aren’t the whole story.

What Troy Actually Knew

Troy wasn’t a successful real estate investor because he was an overnight expert. When he started, he knew nothing about property management or negotiating with contractors. He learned over time and he enjoyed the process.

What Troy actually knew — even if he couldn’t articulate it — was himself.

He knew he had the classic investor psychology problems: buying high, selling low, making emotional decisions when the market moved against him. As a stockbroker, he watched portfolios and tracked the numbers every day. He felt the fear when prices dropped and the greed when prices rose. And he consistently made the wrong call.

Real estate was different. Not because the asset class was inherently better, but because its structure protected him from his worst impulses.

You can’t panic-sell a rental property at midnight because a talking head on CNBC scared you. There’s no ticker scrolling across the bottom of your screen telling you that your ranch just lost 3% of its value.

For Troy, the illiquidity that most people see as a disadvantage was actually an advantage. It was a behavioral circuit breaker.

And when problems did arise — a busted pipe, a difficult tenant, a roof that needed replacing — Troy could actually do something about it. He could drive over, assess the situation, negotiate with contractors, and fix the problem himself if needed. He had control.

Compare that to watching your portfolio crater and having no ability to influence the outcome except to sell at a loss or white-knuckle your way through it.

Real estate worked for Troy because it matched his psychology. The same asset class that works for him might be a disaster for someone else.

Why I Invest in Stocks

I don’t have any interest in spending a Saturday remodeling a bathroom. I don’t want to field tenant calls about plumbing problems and I don’t want to build a contractor network from scratch.

But I do enjoy spending my time researching companies and running valuation models. I like watching patterns in price movements. I’m fascinated by human psychology and how it shows up in market behavior.

More importantly, I’ve built systems that protect me from myself.

I’ve written previously about the psychological forces that destroy individual investors — loss aversion, the disposition effect, the endowment effect. I know these biases are hardwired into my brain. I can’t eliminate them through willpower. So instead, I’ve built processes that remove ego, emotion, and bias from my decisions.

A systematic selling process. Clear criteria for what qualifies as a quality company. Entry points based on valuation and support levels, not hunches or hot tips.

I don’t have to rely on anyone else and I have complete control.

With free access to financial data, online brokerages and zero commissions I don’t even have to call anyone (or pay) to buy or sell a stock. It’s all at my fingertips. I can monitor my watchlist in minutes a day and execute trades in seconds.

This works for me because it matches how I think and how I’m wired. The same approach might not work for someone with a different temperament.

The Gym Investment Club

Apparently I get all my investment wisdom from the silver sneaker crowd at the gym.

You may remember the Speedo Guy. The chatty fellow nearing retirement age who’s still grinding paycheck to paycheck just to survive. When I asked how much longer he wanted to keep working, he said “till the day I die, can’t afford not to.”

Troy is the opposite story. Same demographic and modest upbringing but completely different outcome.

The difference wasn’t intelligence or luck. It was that Troy actually invested in something. He found a vehicle that matched his psychology, developed real skills around it, and let compounding do its work.

Speedo Guy spent his working years hoping his pension and employer would take care of him. They didn’t.

The specific vehicle matters less than people think. Stocks, real estate, a business, vintage watches, whatever. You can build wealth through almost any asset class if you develop genuine expertise and stay consistent.

What doesn’t work is just showing up to a 9-5, collecting a paycheck, and hoping everything works out. That’s just a fantasy.

The Only Investment That Matters

What I know after nearly two decades of investing, working a 9-5 and building businesses:

The only investment that truly matters is investing in yourself.

Whatever vehicle you choose — stocks, real estate, a business, your corporate career — the returns will be determined by the skills and mindset you bring to it.

You can make money in almost any pursuit. But the only way it’s going to be sustainable is if you’re willing to do the work. You have to enjoy the process and can stay consistent through the inevitable setbacks.

Troy’s $2 million, hypothetically compounded at 7% annually over the past 15 years, would be worth roughly $5.5 million today. If he’d “retired” and left it in a money market account — the safe choice — he’d have roughly $2.3 million today. Sounds like modest growth until you realize inflation ate more than that. In real purchasing power, he’d actually be poorer than when he started.

That $3.2 million difference came from pursuing an interest, developing real skills, applying them consistently and taking advantage of opportunistic timing.

The math works the same for stocks but only if you can actually execute without sabotaging yourself.

So instead of asking “stocks or real estate?” ask a different series of questions:

What am I actually willing to learn? What process can I follow consistently? What vehicle matches my skills, strengths and psychology?

Then invest in yourself first. Develop the knowledge and build the systems. Find a mentor or community. Continuously learn and iterate.

The vehicle matters less than most people think. What matters is whether you’ll actually drive it.

Cheers,

Andrew

Not sure which vehicle fits you — or how to stop sabotaging your own returns?

I offer a 90-minute strategy session called The Davem Investor Audit. We’ll dig into your current approach, identify what’s actually holding you back, and build a plan that matches how you’re wired.

Learn more about The Davem Investor Audit here.

Thanks for reading The Davem Dish! If you enjoyed this issue, feel free to LIKE, subscribe and share it with other awesome people like you.

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The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.

Your March Madness bracket is busted. So is mine. Iowa knocking off Florida in the second round — c’mon, really.

But here’s your shot at redemption, and this one doesn’t depend on a 12-seed pulling off a miracle in overtime.

I’m running a Stock Picking Challenge starting March 31st. The premise is simple — because that’s how we do things around here.

You get $100k in hypothetical capital. Pick your five best opportunities from your watchlist, and we lock everything in at market close on March 31. No trades for 90 days. Highest average return wins.

The timing isn’t an accident. Major indexes are down more than 5% from their highs and some of the biggest names from 2025 are down more than 50%. The easy money crowd has gone quiet. Everyone was a genius when stocks only went up. Now we find out who actually knows what they’re looking at.

The winner gets bragging rights and a free 90-minute strategy session with me. But every participant gets access to the Davem Investors Club for the full duration of the challenge. This includes benefits like The Davem Cut, Opportunity Alerts, and a private participant-only chat where we’ll talk strategy, react to moves, and I’ll walk through how I’d manage these positions if real money were on the line.

I’m putting my five picks on the board too. Wouldn’t be much of a challenge if I just watched from the sideline.

Five picks. 90 days. Let’s see what you’ve got.

LOCK IN MY PICKS

Cheers,

Andrew

Spread the wealth and share the challenge with other awesome people like you.

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What Does “Overvalued” Even Mean?

A subscriber recently asked me:

“I often hear the market or XYZ company is overvalued. What does this mean and does it even matter?”

Turn on financial media for five minutes and you’ll hear the chorus of valuation speak.

“The market is overvalued.”

“Stocks are trading at historically elevated levels.”

“The Shiller PE is flashing warning signs.”

This has been the background noise for most of my investing journey — since the dot-com bubble days. It sounds serious and something you should pay attention to.

But people have been saying this for over two decades. And they’ve been wrong most of the time.

A Quick Primer

Let’s start with the basics. There are many ways to value a company or the market.

The easiest and most common way is the Price-to-Earnings ratio, or P/E.

It’s simple math. Take the price of a stock (or index) and divide it by its earnings per share. A P/E of 30 means investors are paying $30 for every $1 of earnings. A P/E of 10 means they’re paying $10. Lower is supposedly “cheaper” and higher is supposedly “expensive.”

(Side note: Stocks with no earnings and negative P/Es can still rise, sometimes dramatically. A stock price reflects current earnings and future expected earnings — in theory. Prices also reflect hype and fear, which I’ll dig into in another post.)

The average P/E for the S&P 500 over the past 50 years is around 20. Right now, it’s trading at roughly 28. By this measure, the market is “expensive.”

And some stocks are extraordinarily expensive. The current P/E of is 246. It was double that last summer. The stock was also up +150% in 2025. Hype outweighed valuation concerns.

Enter the Shiller CAPE

There’s a more “sophisticated” version for measuring market valuation.

Nobel laureate Robert Shiller, a former professor of finance at Yale, developed the Cyclically Adjusted Price-to-Earnings ratio, or CAPE. Instead of using one year of earnings, it uses ten years of inflation-adjusted earnings. The idea is to smooth out the boom-and-bust cycles that can distort a single year’s numbers.

The historical average CAPE is around 17. But right now, it’s sitting at 38 — more than double the historical average.

The only other times the CAPE has been this high were 1929 (before the Great Depression) and 2000 (before the dot-com crash).

Seems concerning, right? A crash is coming — or is it?

Yes, CAPE was elevated before both crashes, but CAPE has also been elevated for most of the past 15 years with no crash. High CAPE doesn’t mean a crash will happen next week. Rather, and more likely, returns over the next decade may be lower than historical averages.

That’s a very different statement and one that still doesn’t tell you what to do today.

And Then There’s the PEG

Some investors looked at the P/E and said “but what about growth?” Enter the PEG ratio — the P/E divided by expected earnings growth rate. Popularized by Peter Lynch in the 1980s, a PEG of 1 supposedly means a company is fairly valued. Below 1 is cheap and above 1 is expensive.

Sounds simple but it’s also mathematically flawed.

Problems include:

• The PEG assumes a linear relationship between growth and valuation (it isn’t).

• It ignores the time value of money.

• It depends entirely on growth estimates that are essentially guesses.

So we’ve got a market level valuation tool (CAPE), a company-level tool (PEG) and a tool that applies to both the market and individual companies (PE). Not one of them answers an important question — when does overvaluation matter?

The Timing Problem

In December 1996, Federal Reserve Chairman Alan Greenspan warned about “irrational exuberance” in the stock market. The CAPE at the time was around 28 — elevated by historical standards.

Greenspan was right. The market was overvalued and a crash did come.

But not before the market doubled over the following three years before it crashed.

If you sold in 1996 because the market was “overvalued,” you missed one of the greatest short-term bull runs in history. And when the crash finally came in 2000, stocks never fell as low as they were on the day Greenspan issued his warning.

Being right about valuation and being right about timing are two completely different things.

Here’s what should change how you think about this.

From 1954 to 1970, the U.S. stock market stayed continuously “overvalued” by historical standards. That’s 16 years.

From 2010 to today, the market has been “overvalued” by CAPE standards for almost the entire period. That’s 15+ years of people warning about elevated valuations while stocks marched higher.

The pattern is clear.

Markets can stay “overvalued” far longer than anyone predicts. And waiting for an index “fair value” has an enormous opportunity cost.

Every year you sit on the sidelines waiting for valuations to normalize is a year of compounding you’ll never get back.

Why the Old Rules Don’t Apply

The CAPE obsessed crowd also misses that the market they’re comparing to doesn’t exist anymore.

The S&P 500 of 1970 was dominated by industrial conglomerates, oil companies, and manufacturers. Profit margins were thin and capital requirements were enormous. Growth was slow.

Today’s S&P 500 is dominated by technology companies with 30-40% profit margins and global scale. Apple alone is worth more than the entire energy sector.

When Microsoft can generate $100 billion in annual profit with limited physical infrastructure, comparing its valuation to U.S. Steel in 1965 is meaningless. The composition of the market has fundamentally changed.

Higher-margin, higher-growth, capital-light businesses deserve higher multiples. A P/E of 25 for a company growing earnings at 15% annually is very different from a P/E of 25 for a company growing at 3%.

The historical averages that everyone cites include decades of a completely different market structure. Treating them as eternal benchmarks is an error.

Another factor that gets conveniently ignored is where else are you supposed to put your money?

In the 1970s and 1980s, the yield on 10-year Treasury bonds was as high as 15%. You could park your money in government bonds and earn a real return. Stocks had to compete with that.

For most of the 2010s and early 2020s, rates were near zero. Bonds paid nothing. Savings accounts paid nothing. The stock market became the only game in town for wealth creation.

When there’s no alternative, money flows into equities. When money flows into equities, prices rise. When prices rise, P/E ratios expand.

This isn’t irrational exuberance, it’s math.

Yes, interest rates have risen recently. But they’re still nowhere near the levels that made bonds a legitimate competitor to stocks for long-term wealth building. And for most investors — especially younger ones — equities remain the only realistic path to financial independence.

The Question That Actually Matters

“Is the market overvalued?” is a debate designed for cable news panels and financial podcasts. It generates views and gives people something to argue about.

But it has almost no practical application for individual investors who are buying individual stocks.

The S&P 500 is an aggregate of 500 companies with wildly different characteristics. Some are growing earnings at 30% annually while some are shrinking. Many have formidable balance sheets while others are drowning in debt. Some trade at P/Es of 10 and some at P/Es of 50.

Saying “the market is overvalued” tells you nothing about whether the specific stock you’re considering is a good investment at its current price.

A high-PE market can still contain attractively valued individual stocks. A low-PE market can still contain overpriced crap.

Instead, ask this:

Can this specific company, at this specific price, generate my minimum required return?

That’s a question you can actually answer, with again, some simple math. You estimate future earnings growth and calculate a fair value. You compare it to the current price. You look for entry points at technical support levels.

If the math works, you buy. If it doesn’t, you wait or move on.

This is exactly what I do with the Davem Method. I’m not trying to time the market or predict when valuations will “normalize.” I’m finding quality companies that can generate at least 15% annually — regardless of what the aggregate market is doing.

Some of the best investments I’ve made have been during periods when everyone was screaming about overvaluation. Because I wasn’t buying “the market.” I was buying specific businesses at specific prices that met my criteria.

What “Overvalued” Really Means

“The market is overvalued” is a socially acceptable way of saying “I’m scared to invest.” It sounds smarter than “I don’t know what to do.” It gives you permission to stay on the sidelines while feeling intellectually superior.

But paralysis isn’t a strategy and the market doesn’t care about your feelings.

The truth is that nobody — not Shiller, not Greenspan, or the talking heads on CNBC — can tell you when the market will correct. Valuations can stay elevated for years, even decades. And while you wait for the perfect entry point, the wealth-creation engine keeps running without you.

So what does “overvalued” mean?

It means the aggregate price of 500 companies is higher than historical averages suggest it should be — based on metrics that were developed for a completely different market structure, in a completely different interest rate environment, using backward-looking data that tells you nothing about timing.

Does it matter?

For market timers and macro pundits, maybe.

For individual investors focused on finding quality companies at attractive prices? Not really.

“Overvalued” is a description, not a strategy.

Your job isn’t to predict when the market will correct. Your job is to find investments that can generate your required return — and to have a process for buying and selling them systematically.

The valuation debate is a distraction. It’s noise designed to keep you anxious and paralyzed.

Tune it out and focus on what you can actually control. That’s what builds wealth.

Cheers,

Andrew

What's the biggest investing distraction you've learned to tune out? Leave a comment and let me know!

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Thanks for reading The Davem Dish! If you enjoyed this issue, feel free to LIKE, subscribe and share it with other awesome people like you.

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The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.

Part V of my Investor Deprogramming Series explores the question of whether the stock market is rigged. In this five part series I dove into “common wisdom” that may be sabotaging your wealth.

The Narrative That Won’t Die

Over the past four parts of this series, I’ve tackled the myths that keep people from investing successfully. The idea that nobody can beat the market, that the game is too complicated, that you should just buy and hold forever, and that you might as well hire a professional.

But there’s one belief that sits beneath all of them.

The stock market is a casino rigged by wealthy institutions and wealthy individuals. People like me can’t win.

And honestly, I get it.

In a recent Bankrate survey, more than 50% of investors said they believe the stock market is rigged against individual investors. That’s people actually invested in the market not fringe conspiracy theorists.

And for most of recent history, they were right.

The Era When It Actually Was Rigged

Let’s go back to where the narrative started and then a timeline of how it continued.

The 1980s: Greed Is Good (And Illegal)

“Blue horseshoe loves Anacott Steel.” Everyone remembers the cult classic Wall Street where Charlie Sheen’s character Bud Fox was feeding inside information to Gordon Gekko and living the high life with the ill-gotten gains. The movie wasn’t fiction though, it was based on real life.

The real Gordon Gekko was Ivan Boesky, who made $200 million betting on corporate takeovers. He seemed to know exactly when acquisitions were coming before anyone else did.

That’s because he was getting illegal tips.

In 1986, Boesky pleaded guilty to insider trading, paid a $100 million fine, and served 20 months in prison.

Boesky cooperated with prosecutors and helped take down Michael Milken — the junk bond king — who had supplied Boesky with billions in leverage to fuel his schemes.

This wasn’t an isolated scandal. Dennis Levine built a $12 million insider trading ring. His arrest led to Boesky and Boesky led to Milken. The whole thing eventually unraveled. Rudy Giuliani made a name for himself prosecuting the offenders and everyone went to jail — for a time.

The entire era was chronicled in James Stewart’s book, Den of Thieves. The title tells you everything and I highly recommend it if you haven’t read it.

The 2000s: Even Celebrities Cheat

In December 2001, Martha Stewart sold a few thousand shares of a small biotech company called ImClone.

One day later, the FDA announced it was rejecting ImClone’s cancer drug and the stock collapsed.

Stewart’s well-timed sale saved her a “whopping” $45,000. The scandal that followed cost her her reputation and her business empire hundreds of millions.

She wasn’t convicted of insider trading itself. She was convicted of lying about it and served five months in federal prison.

Martha Stewart wasn’t a Wall Street titan. She was a celebrity entrepreneur and a household name. And even she had special access regular people didn’t.

The narrative deepened.

2009: The Wiretaps

If the 1980s scandals felt like Wall Street cowboys playing fast and loose, Raj Rajaratnam’s fall felt like watching a criminal empire exposed.

Rajaratnam ran the Galleon Group, a hedge fund managing over $7 billion at its peak. His fund posted returns of 25-30% annually, the kind of numbers that are too good to be true for a hedge fund the size of Galleon.

The FBI decided to find out. For the first time in history, they used wiretaps to investigate insider trading and what they found was an extensive network. Rajaratnam had cultivated sources everywhere; IBM executives, McKinsey consultants, Goldman Sachs board members. He wasn’t exceptionally skilled at stock picking or even getting lucky. He was getting inside information.

In October 2009, Rajaratnam was arrested and eventually convicted of 14 counts of conspiracy and securities fraud. His sentence of 11 years in prison was the longest insider trading sentence in history at the time.

The judge said his crimes “reflect a virus in our business culture that needs to be eradicated.”

Twenty-five other defendants were charged and twenty-one pleaded guilty.

2013: The One They Couldn’t Catch

If you’ve watched the TV show Billions, you know Bobby Axelrod, the hedge fund titan who always seems one step ahead of the law and his nemesis, District Attorney Chuck Rhoades.

Bobby Axelrod is based on Steven Cohen.

Cohen ran SAC Capital, a hedge fund that posted returns of 25-30% annually for over two decades. (See the similarity with Galleon’s returns?)

At its peak, SAC’s trades accounted for 2% of all stock market activity. Cohen charged investors fees of 3% of assets and 50% of profits — far above the industry standard of 2% of assets and 20% of profits —and they paid happily because the returns were so good.

The question everyone asked was how?

By 2013, the FBI had their answer. Eight SAC employees either pleaded guilty or were convicted of insider trading. The most prominent was Mathew Martoma, a portfolio manager who received illegal tips about Alzheimer’s drug trials. Based on those tips, SAC made or avoided losing $275 million on a single trade.

SAC Capital pleaded guilty to insider trading. The $1.8 billion penalty was one of the largest fines in Wall Street history. The firm was forced to stop managing outside money and convert to a “family office” managing only Cohen’s personal fortune.

Cohen himself, though, was never criminally charged.

Prosecutors spent nearly a decade trying to link him directly to the illegal trades. They couldn’t prove he knew. He was banned from managing outside money until 2018, but he kept his $17 billion fortune. He bought the New York Mets in 2020 from Fred Wilpon for $2.4 billion. Ironic twist, Wilpon ran into financial difficulty prior to the sale, from among other things, a heavy investment in Bernie Madoff’s ponzi scheme.

The message was even when the government wins, some people are too big to truly lose.

2016: Golf, Gambling, and Stock Tips

Billy Walters was a legendary sports gambler and entrepreneur. For years, he also had a friend named Tom Davis who was on the board of Dean Foods, a Fortune 500 dairy company.

Davis would tip Walters about earnings, acquisitions, spinoffs. Walters made $43 million trading on inside information over five years.

Walters had another friend named Phil Mickelson, who he lent money to for sports betting.

Mickelson wasn’t as successful with gambling as he was golf and owed Walters nearly $2 million. In July 2012, Walters called Mickelson and urged him to buy Dean Foods stock.

Mickelson had never purchased Dean Foods before or any large stock purchase, for that matter. He bought $2.4 million worth.

A week later, the company announced a spinoff. The stock jumped 40%. Mickelson made $931,000 in profit and used it to pay back his gambling debt to Walters.

Mickelson was never criminally charged. He invoked the Fifth Amendment to avoid testifying. He paid back his profits and walked away while Walters went to prison for five years.

Yet another tabloid story people remember.

The Flash Boys Era

By 2014, the scandals weren’t even about breaking insider trading rules anymore, they were about the rules themselves.

Michael Lewis published Flash Boys and went on 60 Minutes to declare: “The stock market is rigged.”

His target was high-frequency trading. Algorithms that could see your order milliseconds before it executed and front-run it. Computers making thousands of trades per second, skimming fractions of pennies from every transaction.

The firms doing this had spent billions on faster fiber-optic cables, closer proximity to exchange servers, anything to shave microseconds off execution time.

One trader, Brad Katsuyama from Royal Bank of Canada, figured out what was happening and built a new exchange called IEX with built-in “speed bumps” to neutralize the advantage.

He famously confronted the president of BATS, a high-frequency trading exchange, on live television. When pressed on whether the market was rigged, Katsuyama said: “I believe the markets are rigged, and I also think you’re part of the rigging.”

This was different. The cheating was legal and the game was designed to favor insiders.

The Meme Stock Twist

Then came January 2021 and what’s now known as meme stocks. The first of which was GameStop.

For once, the little guys were winning.

Retail investors on Reddit noticed that hedge funds had shorted GameStop to absurd levels, more shares shorted than actually existed. Then they started buying and an epic “short squeeze” ensued. The stock went from under $10 in October 2020 to $483 on January 28, 2021.

Hedge funds who had shorted GameStop hemorrhaged money.

Melvin Capital — a fund that had averaged 30% annual returns — lost 53% in January alone. At one point they were losing more than a billion dollars a day. They needed a $2.75 billion emergency bailout just to survive but that wasn’t enough. Melvin shut down entirely in May 2022.

Hedge funds lost nearly $20 billion in January 2021. The little guys had beaten the house.

And then everyone’s favorite brokerage, Robinhood, shut down buying.

On January 28, at the peak of the frenzy, Robinhood halted buy orders for GameStop.

You could sell but you couldn’t buy. The stock collapsed and investors cried foul. Congressional hearings followed but nothing came of it.

Even when the little guy wins, they change the rules. Just like in a casino, the “house” always wins.

What Actually Affects You

I just took a trip down memory lane and walked you through a sample of 40 years of scandals.

And every single one of these stories reinforces the narrative that the market is rigged against regular people.

But here’s the thing: None of these scandals actually affected you.

Think about it.

Ivan Boesky made $200 million trading on merger tips. Who was on the other side of those trades? Other institutional investors — not you.

Raj Rajaratnam’s network was feeding him tips about Goldman Sachs board decisions and pharmaceutical trials. The trades he made based on those tips? They were against other professional traders moving billions of dollars. Not your IRA.

Steven Cohen’s SAC Capital was front-running earnings announcements with inside information. Their counterparties were other hedge funds, mutual funds, and institutional investors. Not the “little” person buying 100 shares of Apple for their brokerage account.

Even high-frequency trading, the “rigged” system from the Flash Boys story primarily takes money from institutional traders making massive orders. When you buy 100 shares of Apple, the HFT guys might skim a fraction of a penny. Is this meaningful to your returns? Not really.

There will always be people who don’t follow the rules. That’s true in every market, industry, and human endeavor. Some of them will get caught and go to jail, some won’t, and some will get a slap on the wrist and buy a baseball team.

But their cheating isn’t what’s holding you back.

What The Old Days Looked Like

The “rigged” narrative wasn’t just about scandals. It was also about access and for most of market history, access was genuinely unequal.

Trading Costs

Before May 1, 1975, the New York Stock Exchange set fixed commissions. Everyone paid the same and it wasn’t cheap.

In 1988, Charles Schwab charged a $39 minimum plus 1.6% of the transaction for telephone orders. Buy $5,000 of stock and you’re paying $120 in commissions. Round-trip cost to get in and out was nearly 5% of your total investment.

In the 1990s, online brokers brought costs down to $40 per trade. Still expensive for small investors.

Today it’s zero.

Trading costs went from $200 per trade in the 1980s to zero (not to mention easy internet access). That’s not a small change.

Information Access

Before October 2000, companies routinely gave material information to analysts and institutional investors before the public got it. Earnings previews, strategic plan — the inside track.

If you were Peter Lynch or Warren Buffett, you could visit management in person and ask questions nobody else got to ask. That was the edge, personal relationships and access.

Regular investors got the information late or not at all.

Then came Regulation FD (Fair Disclosure). The SEC mandated that any material information disclosed to analysts had to be disclosed to everyone simultaneously.

SEC Chairman Arthur Levitt said the rule was necessary to “level the playing field.”

Today, every company filing is available for free. Everyone has access to the same information.

The World You Live In Now

Let me visually show you what's changed:

The barriers that made the market genuinely unequal are gone.

There has never been a better time in history to be an individual investor.

So why do more than 50% of investors still think it’s rigged?

The New Trap

Because a new form of “rigged” has taken its place.

It’s not Wall Street insiders or high-frequency traders. It’s the gamblifcation of everything.

For a lot of people, especially younger generations, gambling doesn’t feel reckless, it feels rational.

Look at the math.

Boomers bought homes at 4.5x their annual income. Today that number is 7.5x, higher than the peak of the 2008 housing bubble.

In 1989, when the youngest Boomer turned 25, their generation already held 20% of all U.S. household wealth. When the youngest Millennial turned 25 in 2020 it was just 5%.

The traditional paths — save diligently, buy a home, and watch your wealth compound feel blocked. Add to it the stress of student loan debt, the perception you’re behind, wages that don’t keep pace and AI threatening to eliminate the jobs that remain.

When the slow-and-steady approach your parents used looks like a fantasy, what do you do?

You swing for the fences. You look for the 100-baggers and the next NVIDIA. You gamble.

And now the casino lives in your pocket.

Sports betting used to require a trip to Vegas. Now it’s an app on your couch. Parlay bets, where you chain multiple wagers together for bigger payoffs and worse odds, are the fastest-growing segment.

Options trading used to require a broker and real money at risk. Now you can buy options with a few taps. In 2016, same-day options were 5% of S&P 500 options volume. By 2023 they were 43%. Options have a function but same-day options trading is not investing. It’s a slot machine with a stock ticker.

You can bet on elections, if it will rain today, or what country gets bombed next and when.

Everything becomes a bet.

And when everything in your financial life feels like a gamble — housing, jobs, the economy itself — then actual gambling and actual investing start to blur together.

Sports betting. Crypto. Meme stocks. Prediction markets. Options.

They all look like ways to “play the market”. Ways to (maybe) get ahead. And if you lose you just say, “It’s all rigged anyway, I wasn’t supposed to win”

But what the gamblification mindset misses is that these things are not the same.

In a casino, the house always has the edge over time. The longer you play, you’ll eventually lose.

In sports betting, you might hit a parlay here and there, but you’ll never win consistently over time.

In crypto and meme stocks, you’re betting on sentiment shifts and greater fools. There’s no real underlying value just a game of musical chairs where someone ends up without a seat.

These are all negative-sum or zero-sum games.

The One Exception

But the stock market is different.

When you buy shares of a real company, you own a piece of something that generates actual value — profits, dividends, cash. The company works for you whether or not someone else shows up to buy your shares tomorrow.

Over time, the stock market isn’t a casino. It’s a wealth-creation engine. The S&P 500 has returned roughly 10% annually over the long term. Not from speculation, but because the underlying companies grew earnings.

You can actually have an edge here.

Not because you’re smarter than Wall Street professionals or because you have inside information. But because you can do something most investors consistently fail to do:

Manage your own behavior.

You can buy shares of quality companies at reasonable prices, let your winners run, and cut your losses short — following a process instead of your emotions.

The odds, for once, can be in your favor.

This is the escape hatch. The one game where the math can work for the individual investor.

But only if you treat the market like investing instead of gambling.

What’s Actually Rigged

The system is in many ways harder than it was a generation ago. The paths that worked for your parents are narrower now.

And in that environment, gambling feels rational. Swinging for the fences feels like the only move.

But when you bring the gambling mindset to the stock market — the one place where you can actually win — you turn an edge into a coin flip. You buy randomly, sell emotionally, chase hot tips, and panic at drawdowns.

And then you conclude, with perfect logic given your behavior, that the game is rigged.

What’s actually rigged is your beliefs.

If you believe you can’t beat the market, you’ll make decisions that confirm it.

If you believe you can beat the market (and build a process to do it) you will.

You’ll take out the guesswork. You’ll know what to buy, when to buy, and when to sell.

You don’t need tips, special access, or luck.

You need a real process and there’s no better time to start than today.

In Closing

Over this five-part series, I’ve tried to deprogram the myths that keep smart people from investing successfully:

• Part I: The professionals don’t beat the market and they’re not trying to help you

• Part II: Market complexity is manufactured to keep you dependent

• Part III: “Nobody can beat the market” is a false narrative fed by the financial services industry to keep you beholden

• Part IV: “Buy and Hold” isn’t a strategy. It’s the absence of one

• Part V: The market isn’t rigged against you. Your beliefs are

The common thread? Every one of these myths keeps you passive, paying unnecessary fees, and believing you can’t do this yourself.

You can.

Not by developing a secret formula but by building a simple process. Focusing on what you can control and treating investing like a craft, not a lottery ticket.

If you're ready to find out what's actually holding you back, I built a free 3-minute assessment that might surprise you.

Take the Assessment Here!

Cheers,

Andrew

This concludes the Investor Deprogramming Series. Thanks for reading all five parts. If any of this resonated, I'd love to hear which myth hit closest to home. Leave a comment and let me know!

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The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.

Part IV of my Investor Deprogramming Series explores the question of whether Buy and Hold actually works. In this five part series I’ll dive into “common wisdom” that may be sabotaging your wealth.

“My favorite holding period is forever.”

Another Warren Buffett classic. One of the most repeated investing quotes of all time. Ask any kid what they know about investing and they’ll probably say something about Buy and Hold.

The advice sounds so simple.

Find a good company. Buy shares and check back years later when you’re rich.

And to reinforce that narrative we see examples like this all the time:

If you bought NVIDIA in 2015 and held through today, you’d be looking at returns of over 23,000%. Generational wealth from a single position.

But is it that simple? Does Buy and Hold actually work?

The Gospel of Buy and Hold

Let’s start with where this advice came from.

In 1973, Princeton economist Burton Malkiel published A Random Walk Down Wall Street. His central argument was that if markets are efficient, trying to beat them is futile. Just buy everything and hold it.

A few years later, John Bogle launched the first index mutual fund at Vanguard. The initial offering wasn’t a success — he only raised about 5% of what he hoped for — but eventually the indexing strategy eventually caught fire. Today it’s widely endorsed as the central tenet to investing success.

But neither Malkiel nor Bogle advocated Buy and Hold for individual companies. In fact, they warned against it. Somewhere along the way, the message got twisted. “You can’t beat the market, so buy the whole market” became “buy good companies and hold them forever.

The Misinterpreted Quote

Let’s go back to Buffett’s famous line. Here’s what he actually said:

“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”

The qualifier “outstanding businesses with outstanding management” is not “Buy and Hold forever”, it’s “buy exceptional companies and hold them as long as they remain exceptional.”

This is very subjective. What exactly is the criteria for “exceptional”? Buffett and Berkshire decide what works for them. That might not be what works for you.

In 2024 alone, Berkshire exited several positions in companies such as Floor & Decor, T-Mobile, and Ulta Beauty.

Ulta Beauty was a position added in 2024, only to be sold within the same year. Not exactly holding forever.

Buffett sells stocks all the time. In the three years leading up to his retirement in 2025, he was a net seller of stocks in every single quarter.

But the soundbite lives on without the context.

You’ve been told to do something the originators warned against, by someone who doesn’t do it himself.

The Historical Data

In 2017, finance professor Hendrik Bessembinder published research where he examined every U.S. stock traded on the major platforms since 1926.

The findings:

57% of individual stocks underperformed Treasury bills over their entire lifetime.

Most stocks — not some, MOST failed to beat cash over the long run.

It gets worse.

Only 4% of stocks accounted for ALL of the stock market’s wealth creation since 1926.

The other 96% of stocks? They collectively matched Treasury bills.

When Bessembinder ran simulations of randomly selecting one stock each month from 1926 to 2016:

• 96% of these strategies underperformed the market

• 73% underperformed Treasury bills

If you’re picking individual stocks randomly and holding them forever, you’re playing a game where the odds are stacked against you 96% to 4%.

A Case Study

In 2015, NVIDIA was the #4 best-performing stock in the S&P 500, up +67%. It was a solid GPU company serving gamers and data centers.

Nobody knew it would become the backbone of the AI revolution.

But that’s survivorship bias talking. NVIDIA is one of the 4%. For every NVIDIA, there were 24 other stocks that didn’t work out.

Let’s make this concrete.

The S&P 500 returned just 1.4% in 2015, basically flat. But some stocks did well.

Here were the top 10 performers:

Imagine you bought all ten winners in 2015 and committed to holding forever.

Ten years later, here’s what actually happened:

Cablevision — Acquired by Altice in 2016. Forced out.

Reynolds American — Acquired by British American Tobacco in 2017. Forced out again.

Activision Blizzard — Acquired by Microsoft in 2023. Cashed out whether you wanted to or not.

Hormel Foods — Lost 21% over 10 years.

Starbucks — Good run, then collapsed. Currently down ~35% from 2021 high.

First Solar — Crashed after 2015. Highly volatile.

Out of 10 winners in 2015 only three were genuine Buy and Hold success stories: Amazon, Netflix and NVIDIA.

That’s a 30% success rate on a list that was ALREADY cherry-picked to include only the top performers.

Stated another way — even if you started with winners, you failed 70% of the time before psychology entered the picture.

And that assumes you could have identified those three in advance. The obvious problem is knowing which ones are the winners before they win.

Also, would you have had the discipline to hold the whole time? Psychology says no.

That 23,000% gain if you bought NVIDIA ten years ago. Would you have sold it after it was up 100%, or when dropped over 50% in 2022 before skyrocketing again in 2023?

What about when Netflix and Amazon were both down 50% in 2022?

Skewed Data

When people show you historical returns proving Buy and Hold works, they’re using data contaminated by survivorship bias.

Survivorship bias means the failures — the bankruptcies, the delistings, the acquisitions at pennies on the dollar — vanish from the dataset.

How bad is the distortion?

A 10-year historical dataset for North American stocks is missing approximately 75% of the stocks that were actually trading during that period.

Three out of four stocks just disappear from the analysis.

One study tested a momentum strategy on the Nasdaq 100:

• With survivorship bias: 46% annual returns, 41% max drawdown

• Without survivorship bias: 16.4% annual returns, 83% max drawdown

Same strategy and same time period. Different reality.

When someone says “if you had just bought [famous stock] back then...” they’re engaging in survivorship bias. They’re not showing you the 96% of stocks that didn’t work out.

The past looks rosier than it was because the losers have been erased.

The Collapse of Actually Holding

The irony is everyone says Buy and Hold and almost nobody does it.

The average stock holding period:

• 1950s: 8 years

• 1987: Under 2 years

• 2007: ~7 months

• 2020: 5.5 months

Despite decades of Buy and Hold advice, actual holding periods have collapsed by 95%.

Why?

Because human psychology, combined with easy access to trading platforms with zero online commissions, makes true long-term holding nearly impossible.

Terrance Odean, a finance professor at UC Berkeley, analyzed 10,000 brokerage accounts and discovered something interesting:

Investors are 60% more likely to sell their winning stocks than their losing stocks.

When a stock goes up, we want to “lock in the profit.” When a stock goes down, we hold on hoping it recovers.

This is the disposition effect, and it costs investors about 4.4% annually in lost returns.

We systematically sell our best performers and keep our worst ones.

The four psychological forces driving this behavior:

1. Loss aversion — The pain of a loss is felt twice as intensely as the pleasure of an equivalent gain. We become risk-averse when stocks are up (wanting to “lock in gains”) and risk-seeking when down (hoping for recovery).

2. Mental accounting — We mentally track each position against its purchase price. Selling a loser means converting a “paper loss” into a “real loss” — admitting we were wrong.

3. Regret aversion — Selling a stock that later rises creates intense regret. Holding a loser lets us pretend the loss is “only temporary.”

4. Self-control failures — Even investors who recognize these biases can’t overcome them. As one researcher stated “Individual investors do not lack prediction skills. They lack discipline.”

So even if Buy and Hold were the optimal strategy, most investors are psychologically incapable of executing it.

The advice says “hold your winners.” The psychology says “sell your winners.” These aren’t compatible, unless you build selling into the process from the start.

The Cisco Test

Let me show you how this plays out with a real example.

A high-flyer of the dot-com era was Cisco Systems. In March 2000, Cisco became the world’s most valuable company. Their routers and hardware were building the backbone of this new thing called the Internet. The stock hit an all-time high of $80.

John Chambers was a well-respected CEO who held the top job for 20 years, practically forever in CEO terms. From 2000 to 2015, the company more than doubled sales from $19 billion to $49 billion.

Good company. Good management. Checked all the boxes.

How did Buy and Hold work out?

If you bought near the peak in July 2000 at $65 and held until Chambers stepped down in July 2015, you watched the stock price shrink to $27.

Total return: -58.5% Average annual return: -5.7%

You might argue this is skewed by the dot-com crash. Fine. Let’s look at 2005 to 2015.

During this decade, Cisco mostly traded in a range from $15 to $30. That’s 100% total return, about 7% annually.

Better than losing money. But still lagging the S&P 500 historical average.

Buy and Hold with Cisco — a quality company with quality management — gave you mediocre results at best and severe losses at worst.

Just this past May Cisco finally eclipsed its dot-com peak — 25 years later.

So if “hold forever” doesn’t work, what does? Let me show you a different approach with Cisco during the same decade.

A Different Approach

Instead of Buy and Hold, what if you used a systematic process?

Identifying misalignment between price and value, following pricing patterns and selling with trailing stops to lock in profits.

If our analysis indicated that Cisco continued to meet quality criteria and was undervalued, we would look at support levels as investment opportunities.

How would that have played out?

Investment #1:

• 2/9/2009: Buy $14.50 (support level)

• 5/24/2010: Sell $22.60 (trailing stop triggered)

• 56% gain in 15 months

Investment #2:

• 8/15/2011: Buy $14.50 (support level)

• 4/30/2012: Sell $17.20 (trailing stop triggered)

• 19% gain in 8 months

Investment #3:

• 7/16/2012: Buy $15.00 (support level)

• 10/28/2013: Sell $21.30 (trailing stop triggered)

• 42% gain in 15 months

All short-term. All significantly better than the 7% annual Buy and Hold return during the same period.

Does this approach take time and effort? Yes, but probably less than the time you spend daily scrolling social media.

Is it difficult? Not really. You mostly just need to be consistent and follow patterns.

Can you do this yourself and earn above-market returns? Absolutely.

The Real Lesson

Buy and Hold works for index funds. You’re buying the entire market, which mathematically captures the 4% of stocks that drive all returns. You’re dollar cost averaging and reinvesting dividends. You don’t need to pick winners because you own all of them.

But that’s not what this newsletter is about. If you want average returns, buy an index fund and go enjoy other activities.

We believe we can beat the market. The question is how.

It isn’t “holding forever”. It’s having a process.

For individual stock investors, Buy and Hold is advice most people have rarely done themselves successfully, using data that systematically excludes all the failures, for a time period the investor will almost certainly not maintain.

The question isn’t whether Buy and Hold can work.

The questions are:

• Which stocks to Buy and Hold

• When holding becomes a mistake

• How to overcome the psychology that makes true long-term holding nearly impossible

Buy and Hold assumes you can identify the 4% — but gives you no process to do it.

A systematic approach flips the script. Find quality companies, wait for price to misalign with value, and use systematic exits to lock in gains. Not hold forever. Hold until the price tells you otherwise.

Buy and Hold isn’t a strategy for investing in individual companies. It’s the absence of one.

Cheers,

Andrew

Think you can find the 4%? Or would you rather have a process that doesn’t require you to? Take my free 3-minute assessment to find out what might be holding you back.

Let's Find Out!

Coming up in Part V: Is the stock market rigged?

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The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.

Part III of my Investor Deprogramming Series explores the question of whether investing is too complicated for regular people. In this five part series I’ll dive into “common wisdom” that may be sabotaging your wealth.

You want to learn to invest. Not passive investing — you already know to put money in low-cost index funds and let compound interest do its magic.

I mean really invest. How to pick individual companies and build wealth on your terms.

So, you do what any serious person would do. You start reading. That’s what I did.

The Intelligent Investor, One up on Wall Street, How to Make Money in Stocks, Common Stocks and Uncommon Profits. Anything said or written by Warren Buffett.

All good sources written for average investors by investing legends. And the messages are surprisingly simple and empowering:

• Think like a business owner, not a trader

• Invest in what you know

• Buy good companies at reasonable prices and hold long term

• You don’t need to be a genius, just patient and disciplined

You finish the books feeling optimistic. This doesn’t seem that hard.

Following the Instructions

Next you do what the legends say.

Warren Buffett famously read annual reports and other SEC filings 5-6 hours each day. He’s said to have made his Coca-Cola investment decision entirely from reading the annual report.

So you pull up your first annual report for a company you’re interested in.

Then an earnings call transcript.

Within a minute, you encounter something like this:

“We saw sequential margin expansion driven by favorable mix shift and operating leverage, though headwinds from FX and a normalization of channel inventory created some pressure on our run-rate. Our adjusted EBITDA came in at the high end of guidance, and we remain constructive on the forward outlook given secular tailwinds in our TAM...”

What does this even mean?

But the CEO sounds very confident. The analysts asking questions seem to understand. They’re using terms like “accretive to EPS,” “capital allocation framework,” and “normalized free cash flow yield.”

You Google some of these terms and every definition contains three more terms you don’t know.

The jargon soup includes:

Valuation speak: Multiple expansion/compression, EV/EBITDA, forward vs. trailing P/E, DCF, NAV, intrinsic value

Growth speak: Organic vs. inorganic growth, comps, run rate, YoY, QoQ, sequential growth, CAGR, accretive/dilutive

Earnings call buzzwords: “Provide some color,” guidance, beat/miss, consensus estimates, whisper number, adjusted earnings, non-GAAP, “normalized” earnings, one-time items

Market lingo: Risk-on/risk-off, flight to quality, rotation, beta, alpha, drawdown, mean reversion

Analyst ratings: Overweight, underweight, outperform, neutral, “constructive”

I could go on but I think you get the point.

Instead of gaining more clarity, you’re more confused than before you started.

Am I not smart enough for this?

Everyone else seems to understand. The analysts, the fund managers, the CNBC commentators all nodding along.

Maybe investing really is for smarter people. I’m probably better off handing my money over to the professionals.

But… you were SUPPOSED to feel lost. That’s the point.

The confusion isn’t a sign you’re not smart enough. It’s a sign the system is working exactly as designed.

Trained to Sound Unscripted

It took me a few years to understand that following the instructions perfectly leads you astray.

The books said to read annual reports so you did, but you got more confused, not less.

This isn’t a failure of effort or lack of intelligence, it’s a context mismatch.

Warren Buffett read annual reports when that was the ONLY information source. There was no CNBC and no internet. If you wanted to understand a company, your only option was to read what the company published.

The legends’ principles are timeless but their tactics were era-specific.

Don’t confuse the two.

When I started investing, I followed the instructions and I’d print annual reports and studied in my free time.

I read a lot of reports and took notes, but I didn’t feel like I was learning all that much. It was a lot of verbiage that didn’t really tell me anything.

Then I started working with my company’s Investor Relations department.

That’s when I discovered every word and graphic in those SEC filings and earnings calls is highly scripted. Executives have coaches and media training. They spend weeks preparing a story, rehearsing answers, strategizing about what questions analysts will ask.

Executive coaches help CEOs “speak conversationally and with genuine enthusiasm that helps the remarks feel unscripted.”

Read that again. Executives are trained to make scripted remarks feel unscripted.

And what really matters is the audience isn’t you.

Their job isn’t to inform regular investors — it’s to attract institutional investors while making you feel included.

Why do you think only professional analysts get to ask questions on earnings calls?

Why do companies attend invite-only meetings with banks and top shareholders — meetings you’ll never be invited to?

Jargon Exists for a Reason

The complexity serves two purposes:

First, efficiency among professionals who use these terms daily. Ok, fair enough.

Second, creating a barrier that makes outsiders feel like they need an expert to translate.

This is by design.

The financial services industry wants you to believe investing is too complicated for regular people. “You need us. Trust us and pay our fees”

The jargon, the scripted presentations, the analyst reports that are somehow longer and more complex than the documents they’re summarizing — all of it reinforces the same message. You can’t do this yourself.

Even pop culture reinforces the myth. Take the popular movie, The Big Short. While explaining the 2008 financial crisis and translating complicated financial instruments into layperson terms, it also sent a clear message — understanding finance requires genius-level intelligence. The protagonists were portrayed as brilliant outliers who could see what others couldn’t. Reinforcing the myth that regular investors can’t compete.

What the movie didn’t tell you was those complex instruments (CDOs, synthetic CDOs, credit default swaps) are NOT what regular investors need to understand. They are Wall Street products designed for institutional speculation, not individual wealth building.

You don’t need to understand synthetic CDOs to beat the market. You need to understand whether a company makes money and is priced reasonably.

The CNBC Trap

So, next you turn on financial news for “education.”

What you get instead:

• One manager says BUY, another says SELL — on the same stock, same day

• Talking heads confidently predicting the market will go up, followed immediately by someone confidently predicting it will crash

• Price targets on the same stock ranging from $400 to $600

• Urgent “breaking news” that moves markets before you can react

I’ll never forget watching CNBC during the dot-com bubble. The building electricians at my summer job loved watching their portfolios grow. “Look at these charts — this is easy money. I’m going to retire early!”

Then the bubble burst. Everyone who was a genius went back to their day jobs with a much smaller portfolio and a feeling of “what could have been.”

I just wanted answers to basic questions: How do you know what a company is worth? When should you buy and when should you sell?

The “answers” depended on which CNBC expert you believed that day. But those aren’t real answers — just promoted opinions.

The financial media business model isn’t to make you a better investor. It’s to keep you watching. Conflict, urgency, and complexity drive engagement.

Confidence and boldness sells, even when it’s baseless.

What Now?

At this point, most people reach one of two conclusions:

1. The game is rigged. I can’t compete so I’ll just buy index funds and forget about

   it — or worse, I’ll do nothing.

2. This is too complicated. I’ll hire a professional.

Both conclusions benefit the financial services industry. You hand over your money — and pay fees that cost you 17% of your final wealth over 20 years (as I covered in Part II of this series).

But here’s what the data actually shows:

• 65% of large-cap fund managers underperformed the S&P 500 in 2024

• Over 15 years, not a single category saw a majority of active managers beat their benchmarks

• The average hedge fund returned 6.9% annually from 2009-2019 versus 13.6% for the S&P 500

The smartest people on Wall Street — delivered half the returns of doing nothing except buying an index fund.

So if the professionals can’t beat the market with all their complexity...

Maybe complexity isn’t the advantage?

The Conflation Problem

There’s another common pitfall for new investors. People tend to lump different kinds of investing and different kinds of companies together.

Watching CNBC, scrolling social media, talking to neighbors — you’ll hear about:

• Meme stocks

• Options plays

• Day trading

• Early-stage companies

• Turnarounds

• Quality compounders

These are different investment strategies and different kinds of companies. They are treated as variations of the same activity but they’re not.

Specific to companies, here’s an analogy. Say you graduate from a top business school. You’re a “hot prospect” but you have debt and no job yet. You’re an early-stage company. There’s a chance — maybe even a good chance — you do well. But right now, you’re speculative. Investing in you is a bet on potential, not consistent performance.

Whereas if you’ve been moving up the corporate ladder for 20 years and now are a senior executive — you’re a quality company. A consistent track record of performance and a consistent earner. You may pivot and change careers but you’re a “known commodity”. Investing in you presents less risk.

These distinctions matter because the strategies are completely different.

Notice something?

Investing in quality companies is the ONLY low-risk option.

Most of what people call “investing” is actually speculation.

The entire financial media ecosystem is built around high-risk activities because they’re more dramatic and more engaging. Nobody makes viral TikToks about patiently holding quality compounders.

But that’s exactly what builds wealth over the long-term.

What Actually Matters

Strip away the jargon, the scripted presentations, the noise and what’s left?

Something simple.

Stock prices for mature, quality companies reflect current earnings and future expected earnings.

Which means the most important thing to track is… earnings growth.

But earnings can’t consistently grow without sales growth.

When sales are generated, quality companies do what you should with your personal finances — control spending to retain as much cash as possible.

The cash retained needs to be invested to create value.

That’s where metrics like Return on Equity (ROE) and Return on Invested Capital (ROIC) come in.

Make money → Keep money → Invest money → Make more money

That’s basically it. That’s the entire framework.

You don’t need to decode “sequential margin expansion driven by favorable mix shift.”

You need to know are earnings growing? Are sales growing? Is the company making smart investments with its cash?

This information is freely available and no jargon translation is required.

A company’s historical track record also tells you whether management delivers. Not puff pieces about visionary CEOs, not scripted earnings calls, not analyst reports with made-up price targets.

You just need to follow the numbers. Did they grow or didn’t they?

And the math isn’t hard. It’s percentages.

The Real Edge

Your edge as an investor isn’t analytical. It’s structural and behavioral.

Structural advantages over professionals:

• No SEC rules forcing diversification

• No career risk for taking contrarian positions

• No redemption pressure forcing you to sell at the wrong time

• No quarterly performance reporting

• No committees or bureaucracy

Behavioral edge (if you develop it):

• Ability to be patient when others panic

• Willingness to buy when prices drop

• Discipline to cut losses short

• Systems that remove ego, emotion, and bias

The classic books were right all along. Investing isn’t too complicated.

What’s complicated is the theatre built around it — the jargon, the scripted performances, the conflicting predictions, the conflation of investing with speculation.

That complexity exists to benefit the financial industry, not you.

Strip away the performance and you’re left with what all the legends taught:

1. Understand what you own

2. Buy quality companies at reasonable prices

3. Think in years, not days

4. Have a process

5. Ignore the noise

It’s not that individuals CAN’T beat the market — it’s that most WON’T.

With the right framework and mindset, you can be the exception.

Cheers,

Andrew

Do you have what it takes to beat the market? Take my free 3-minute assessment to find out what might be holding you back.

Let's Find Out!

Coming up in Part IV: Does “Buy and Hold” actually work?

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The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.

Part II of my Investor Deprogramming Series explores whether you need a financial advisor. In this five part series I’ll dive into “common wisdom” that may be sabotaging your wealth.

Happy New Year!

I was talking to a family member over the holidays who was praising their new financial advisor.

“Ron has made us a lot of money.”

Oh really? What are you invested in?

“I don’t know — here’s a statement, but there’s a lot of information here and I don’t really know what I’m looking at.”

This is by design, I thought but said nothing.

The stock holdings looked like a basket of S&P 500 companies. I asked what’s the strategy?

“Holding winners and selling underperformers. They’ve been doing this a long time and it always works.”

What does “always works” mean? Do you have evidence?

“I don’t know.”

I continued, is your performance better than just holding a S&P 500 index fund? Is Ron actually making you money or are you making money because the market has been up?

“I don’t know.”

Have you calculated how much you’ve paid Ron and your previous advisor over the years?

“No, but I think it’s been a lot.”

I could sense she was getting irritated with my questions, so I changed the subject.

What struck me later was this person is a semi-retired accountant and business owner. She looks at her portfolio regularly and has more financial literacy than most people. In fact, on multiple previous occasions she lamented how much she was paying in fees and how her previous advisor missed opportunities by selling Apple and Amazon too early. And yet she’s been programmed to believe she can’t manage her own money.

“It’s a lot of work and I don’t want to mess with it.”

That final comment says it all. It’s not that people are lazy or unintelligent. It’s learned helplessness and an entire industry profits from it.

This isn’t a post bashing financial advisors. Some advisors provide general value — tax planning, estate coordination, and coaching in addition to portfolio management.

If you have a complex financial situation, trust your advisor, and feel the work justifies the fees, this post isn’t telling you to fire anyone.

But here’s the question you should be able to answer: Is your advisor actually making you money, or is the market making you money while your advisor takes credit?

Most people can’t tell the difference.

The 1% Fee That Costs You 17%

The Assets Under Management (AUM) dominates the industry with more than 85% of advisors using it as their primary pricing model. AUM fees vary depending on the size of your portfolio, but for simplicity we’ll use 1%.

This may not seem like much but let’s run the math on a $500,000 portfolio over 20 years assuming 8% annual returns.

Without the 1% fee: $2,330,479

With the 1% fee: $1,934,842

The difference: $395,637

Your advisor will collect roughly $186,000 in fees over those 20 years. You didn’t just lose $186,000 though. You lost $395,637 — because every dollar paid in fees is a dollar that can’t compound. The magic of compounding working against you.

That 1% annual fee costs you 17% of your final wealth.

The industry hopes you never do this math.

The 3% Myth

The industry claims advisors add roughly 3% annually through behavioral coaching, tax optimization, and rebalancing. If true, a 1% AUM fee may be justified.

But here’s the issue:

• The 3% “alpha” is theoretical and highly variable by individual. It assumes you would make catastrophic behavioral mistakes without guidance — panic-selling in crashes, chasing performance, trying to time the market. Disciplined investors who follow a simple plan don’t make $400,000 worth of behavioral mistakes.

• Tax-loss harvesting doesn’t apply to tax advantage retirement accounts. Tax-loss harvesting — selling losers to offset gains — is marketed as a value-add service. But it provides zero benefit in IRAs, 401(k)s, and other tax-advantaged accounts where most Americans hold their retirement savings.

The Robo-Advisor Mirage

Perhaps you’re skeptical of traditional financial advisors but still want some guidance. Robo-advisors may be an option. These are automated investment platforms that build and manage portfolios for around 0.25% annually compared to 1% for a traditional human advisor.

Strip away the marketing and ask what your actually paying for:

• Portfolio construction based on a risk questionnaire.

• Automatic rebalancing when allocations drift.

• Tax-loss harvesting (which, again, doesn’t apply to retirement accounts).

For a $500,000 porfolio, you’re paying $1,250 per year for automatic rebalancing and a preset ETF allocation.

A Vanguard Target Retirement Fund does essentially the same thing for 0.08% — that’s $400 per year.

Over 20 years, even the “low-cost” robo-advisor fee costs you $114,180 in lost wealth.

Is that worth it for a service you could replicate with a single fund and 15 minutes of annual attention?

The Neighborhood Advisor

Let’s move on from licensed financial advisors to what I’ll call “neighborhood advisors”. A bit surprisingly, a 2025 Gallup survey found almost 45% of Americans still turn to friends and family for financial guidance and 20% turn to social media.

At first glance, this is alarming. You might think the last people you should take advice from is your Uncle Frank or some finfluencer’s hot takes on social media.

However, in an era of unprecedented (and mostly free) access to information, education tools, and real-time market data, I believe there are neighborhood advisors who are worth listening to. People in your life or on social media who have built real wealth through disciplined investing.

But, with key qualifiers:

• A long track record of actual performance. Not just opinions and what-ifs.

• A documented, repeatable process you can understand and verify.

• Transparency about both wins and losses.

A friend who’s beaten the S&P 500 for a decade with a simple, explainable strategy may be more valuable than a credentialed advisor who can’t answer basic questions about your portfolio.

Hunches aren’t a process, but neither are credentials without results.

The Real Question

Whether you hire a financial advisor, use a robo-advisor, listen to a neighborhood advisor, or manage your own money, one thing is clear:

You must develop financial literacy.

Understanding how compounding works. What actually moves markets and stocks. What information actually matters and how to value a company. When to buy and when to sell. How to limit emotion and biases.

This isn’t optional knowledge you can outsource forever. Because even if you hire someone else to manage your money, you’re still responsible for managing them and making sure you’re receiving the value you’re paying for.

My relative couldn’t answer a single question about her own portfolio. She didn’t know the strategy, her performance relative to benchmarks, or her total fees paid. She outsourced not just the work but the thinking. It worked in recent years, but will it work forever?

You don’t have to manage your own investments but you do need to understand them.

And you don’t have to become a market expert. But you should know enough to recognize when you’re paying 17% for peace of mind you could build yourself.

Isn’t your financial future important enough to find out?

2025 Davem Watchlist Recap

In Parts I and II of this Investor Deprogramming Series I’ve questioned whether professional money managers can beat the market.

Fair question to ask — can I?

Here’s the data:

We ended 2025 with 37 companies on the Davem Watchlist. All quality businesses meeting my financial strength criteria. Companies I’d invest in at the right price.

If you created an index and bought equal positions in every watchlist company on January 1, 2025, here’s how you would have done:

The watchlist outperformed in every category.

For context: 65% of professional large-cap fund managers failed to beat the S&P 500 in 2024. Over 15 years, not a single category (large, mid, small-cap, domestic, or international) shows majority outperformance by the professionals.

A focused watchlist of quality companies built with simple criteria anyone can understand beats them all.

But We Don’t Buy the Watchlist

The watchlist identifies what to own. The Davem Method determines when to buy.

The goal isn’t to create another index. It’s to own a few superior companies when conditions warrant. Quality businesses at attractive prices.

So let’s look at actual positions.

2025 Top Positions:

Average return across all positions: +20.4%

My long-term objective targets a minimum 15% annual return — 5 percentage points above the S&P 500’s 30-year historical average of 10%. The last five years, the S&P averaged closer to 16%, pushing the target to 21%.

I hit the target.

What the Losses Tell You

Notice something about the losers — not more than 13%.

That’s not coincidence, that’s the system.

Early in my investing journey, I took the occasional big loss. The fundamentals remained strong, I had conviction in my thesis. I held on, hoping for a recovery.

But the market doesn’t care about your ideas or conviction.

Those big losses cost me money and confidence. The math to recover is unforgiving. A 50% loss requires a 100% gain just to break even. A 75% loss would take a 300% gain.

So I made a rule that I don’t break: use stop loss orders to never lose big.

Three losing positions this past year all at roughly the same level and no single loss capable of derailing my portfolio gains.

Missed Chances

Each year there are not only wins and losses but also missed opportunities:

at $85

at $300

at $80

I missed these entry points because I hesitated and didn’t trust my own analysis. Different companies, the same “what-ifs” every year.

These behavioral mistakes wouldn’t be solved by paying a financial advisor. They’re only solved by trusting the process every time. That’s not something I can outsource, just work I have to do myself.

I try not to beat myself up over these “what-ifs”, though. I’m in the market long-term and new opportunities always come along. I document the missed chances to learn and because pretending I don’t make mistakes would make me no different than those who only talk about their wins.

The Plan for 2026

The plan for this year? Same as every year.

• Identify quality businesses with a track record of financial strength

• Wait for attractive prices

• Let winners run and cut losses short

I don’t predict where the market is headed. The market will do what it’s going to do.

What I can control is refining my approach and being ready when opportunities present.

Looking forward to what’s ahead in 2026!

What are you excited about this year? Leave a comment and let me know!

Leave a comment

Cheers,

Andrew

Coming up in Part III: Is investing too complicated?

Thanks for reading The Davem Dish! If you enjoyed this issue, feel free to LIKE, subscribe and share it with other awesome people like you.

Paid subscribers receive:

• 24/7 access to my watchlist and portfolio

• Real-time opportunity alerts as conditions present

• Access to community chat and monthly live calls

Subscribe now

Share

The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.