Patient Capital Management Q3 2025 Commentary

Core Insights - The S&P 500 has experienced significant growth since March 2009, achieving a 10-bagger with a compound annual growth rate (CAGR) of approximately 17% [3][4] - Current market valuations are high, with the S&P 500 trading at 23 times forward 12-month earnings, nearly double the 12 times seen at the market's lows [3][9] - Despite rising valuations, institutional investors remain under-positioned, indicating a pervasive caution in the market [7][9] Market Sentiment and Speculation - There are increasing signs of speculation, particularly in AI investments, with some deals reminiscent of the Tech Bubble [5][16] - Hedge funds have underperformed the S&P 500 significantly, averaging a 4.3% annual return in the 2010s compared to the S&P 500's 13.5% [4][9] - Institutional risk tolerance is muted, as evidenced by Goldman Sachs' sentiment indicator showing 30 consecutive negative readings [7][9] AI and Investment Opportunities - AI is viewed as transformative, attracting substantial capital, but building AI infrastructure is costly, raising the risk of subpar returns [16][29] - Nvidia is highlighted as a key player in the AI boom, with expectations of significant growth and demand for its products [31][32] - The market is characterized by a disconnect between high valuations and strong business fundamentals, particularly in the AI sector [32] Historical Context and Comparisons - The current market environment is compared to the late 1990s and the Nifty Fifty periods, both of which saw spectacular gains followed by market peaks [13][14] - Historical performance data shows that overly cautious investors have missed out on substantial gains, emphasizing the importance of balancing risk and opportunity [15][20] Investment Strategy - The company adopts a patient and opportunistic investment approach, focusing on avoiding permanent capital impairment rather than merely managing volatility [26][27] - There is a clear distinction between Type I errors (acting when one shouldn't) and Type II errors (failing to act when one should), with the latter often leading to greater long-term costs [17][15] - The strategy includes investing in companies like Nvidia while avoiding capital-intensive "neo-cloud" firms that may not justify their current valuations [33][34]