“There are 26.6 quatturodecillion (!) 15 stock portfolios I could construct from 8,000 equities, and, definitionally, roughly half of those will outperform the index” in fact far fewer than 50% will outperform the index, which is what makes active management so difficult
I have been of the view that the exact opposite will happen.
@pmje73 recently tweeted a view that he believes concentration will tick back up, and I couldn’t agree more.
Experienced fundamental investors will know the degree to which your tier 2 and tier 3 ideas act as a tax on your best 10-15 best ideas. How good is your 67th idea? Generally pretty crappy. Yet the idio-based risk models have demanded breadth for risk management purposes, so many stock pickers have been forced to play that game. I lived this personally going from a seat where I ran 6x12 (and consistently generated double-digit spread) to seats where I had to run 30x70 to make the risk model happy (and could never figure out how to scale research depth needed to have alpha in my 67th best idea).
Strip out a talented stock picker and just have them focus on one thing: give me your 15 best ideas. I can’t logic through how that approach to portfolio construction doesn’t get meaningfully more compelling given the evolution of tool set and current state of equity markets:
1) the ability to build scaled research systems distilling then tracking the 15 best ideas from 8,000 stocks has been transformed with AI…a single stock picker / PM can truly now have close to institutional-grade research intelligence, which was never the case before
2) historical periods of index concentration have been compelling starting points for bottom’s up stock picking / and with more asset classes facing high valuations and low forward return prospects, the ability to find 15 great equity ideas that can CAGR 15%+ for 15 years is a more compelling value proposition to LPs on a relative basis. There are 26.6 quatturodecillion (!) 15 stock portfolios I could construct from 8,000 underlying global equities, and, definitionally, roughly half of those will outperform a broad global index. AI can’t and won’t change this fundamental reality of dispersion (will probably make overshoots and factor/thematic violence worse, a benefit to the longer duration investor). People will do this in regional banks, Nordic small caps and thousands of other approaches that aren’t necessarily owning AI winners. There’s always a bull market somewhere.
3) Agree with @0xFaust12 point on risk systems, but the friction to onboard a tool like Arcana and build an automated AI factor hedging system is now fairly trivial and with relatively little effort can take that 15 stock portfolio that probably looks like a giant factor bet into a tapered idio-primary portfolio. The bottleneck is more awareness than technology.
There are lots of reasons there hasn’t been this explosion of talented stock pickers starting $100-$350m 15 stock concentrated long biased funds (coming from a guy who thought about building one in 2018, i can list all the reasons in detail). Specifically, many of the most talented stock pickers have had a durable bid from the multi-complex with compelling guarantee terms.
To me, what the Jane Streets (and many others) will be able to do is to start industrialize the broad alpha of the discretionary multi-manager. The same way that quant firms compressed alpha signal in alternative data, quant firms will compress alpha signal currently harvested by swarms of pod teams. Except for the fact that the large multi-managers are run by the sharpest, most adaptive people in our economy, to me the “peak pod” argument becomes more real over the next 3-10 years. And, multi-teams will be able to do with 8 investors what they historically did with 12. What do the 4 who attrit do?
@chamath had this idea a few years back where he gave small portfolios to single analysts/PMs. It was a super intriguing idea but the time and tooling wasn’t ripe. I think it’s ripe now.
Probably some centralization makes sense (build the AI and data pipelines centrally), whether it’s sponsored by a quant firm with a buy-side or by an LP directly. Absorb the displaced multi-manager talent and just ask them for 15 best ideas
New AI bull case for Docusign: mass white collar layoffs
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Oracle Leadership.
If only we had companies who could handle these problems for you. Almost like a service, you might say.
I resigned from Citadel today. I spent the last three years parsing alt data and gaming bogeys at both Surveyor and Baly. Neither company is acting responsibly. They are racing straight to uncorrelated super-alpha and gambling with our lives. More thoughts below.
The easiest money was made by buying software when people thought it was dead.
The second easiest money is made by holding it while people are still debating the moat.
there are no more moats anymore. moats are dead.
was talking to a friend of mine who's a CEO of a rapidly growing startup (~$1B revenue). we're small investors. He told me that he has only taken one one-week vacation in the last eight years of his startup.
I was like, "Hey this is crazy. You're gonna burn out. This is pretty serious."
he said, "Auren, I don't know what to do. We don't have no moat."
am like, "What are you talking about? The business is going great!"
he said, "We have incredible competitors. We sell AI products and so we're selling to the smartest people in the world. If we don't have the best product that week, they won't buy us. If we don't have the best product for two weeks, our customers will churn. We don't have a moat."
I started thinking about it: who does have a moat?
There are just no moats anymore. Nobody has a moat. Everyone will switch their software providers in a heartbeat for better product or for cheaper product or for faster product. Anyone will switch.
We looked at our 200 companies at Flex Capital and how they're buying software and AI services today. Almost all of their vendors are on month-to-month contracts or on usage-based contracts. That means they can switch immediately. The reason they have everyone on month-to-month is that they have no idea if they're going to be using those tools two months from now. They may not even be using those tools two weeks from now. Everything is changing so fast all the time.
The only moat you have in software is that you have the best product. There are just no other moats.
It used to be back in the day that you have a mediocre product and you'd be using it for years. we just dealt with all these of mediocre software systems, mediocre cloud providers, mediocre data providers, mediocre APIs. we dealt with it because the switching costs are really hard.
Nowadays it's really easy to change software. It's really easy to change APIs. it's really easy to change AI infrastructure. It's super easy. You can change it in a heartbeat and every other vendor will help you switch. Of course, your AI tools will help you switch as well. All these things that used to give very high customer lock-in just don't exist anymore and so they're just no more moats.
Moats are dead. you just need to work insane hours all the time because the only thing you have is your product. goodbye moat, goodbye predictable revenues, goodbye 2010s era.
“Building an AI scheduling app” is the example of doing something important in SF
one of the strangest things about moving from sf to new york was realizing how little new york gives a fuck about whether what you’re doing is actually important
i lived in sf for four years. people were building an ai scheduling app in rooms surrounded by people dressed like they had just lost a fight with a laundry basket
new york is almost the opposite
you can spend an entire day moving icons around in powerpoint, but if you do it forty floors above manhattan, wear the right jacket, and have dinner somewhere impossible to book, nobody really cares what the powerpoint was about
the actual economic activity may be negligible, but phenomenologically you are inside the late roman empire
the west village is full of people whose primary productive activity is having extremely specific preferences about lamps
the city is not especially interested in the distinction between substance and spectacle
i've been to parties where almost nobody had built anything used by millions of people, but everyone behaved as though they had personally resolved the crisis of modernity
in sf, someone will casually mention they built the database underlying half the internet and then ask if you want to split an uber
in new york, someone runs a substack with 3,800 subscribers and enters the room like hegels spirit has finally become conscious of itself
this is not criticism. quite the opposite
new york understands something sf does not: no one gives a fuck
importance is not an intrinsic property. it is produced through ritual, architecture, clothing, proximity, lighting, reservations, and a sufficiently difficult door policy
sf still clings to the naive enlightenment belief that value should correspond to some underlying productive reality. very protestant. very embarrassing
new york on the other hand, does not gve a fuck
a 26-year-old wearing margiela tabi boots and saying "we're thinking about doing something in media" has already achieved symbolic capital equivalent to a series b
sf still wants to know whether something is important
new york doesn’t give a fuck
it just wants to know if it’s interesting
Uh oh, looks like Ant+OAI missed the bogey by 35%
I’d guess OAI + Ant are currently run-rating at $140b in ARR adding roughly $20b per month with OAI/Ant accelerating /deceling until Ant gets to launch its new model likely around September.
Would guess together they exit 2026 at $270b as they both accel into Q4.
I think if they continue at that NNARR pace through 2027 that is enough for the compute trade to work. Implies exiting next year at a roughly $500b ARR.
This is however wrong because every new model update will unlock incremental TAM which will drive further accel.
Dwarkesh’s $1T ARR at end of year number is similar to my own. It’s also one that implies drastic job cuts. Which are coming.
Get ready for some wild shit. Leopold you will forever be in our hearts and PNL ✌️🕊️
It’s gonna be so funny when this blows up again
NEW: Situational Awareness is already receiving a fresh wave of investment interest and support from banks.
w/ @nishantkumar07, @burtonkathy @parmarhema
bloomberg.com/news/articles/…
