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Now Salesforce trades around 13–14x free cash flow. The S&P 500 is closer to 21x. Coca-Cola is around 22x and grows slower. That gap tells you expectations have flipped, the market isn’t paying for the best case anymore. At 14x, Salesforce doesn’t need to prove it can grow at 20% to make sense; it just needs to stay stable, keep customers, and keep converting revenue into cash.

They’re managing costs better

Stock-based comp is now around 8% of revenue, down from over 10%. They also stopped hiring as many people. When costs slow down and revenue stays the same, profits go up.

This is the first time in a while the company seems to care about shareholders.

Customers don’t leave easily

About 90% of the Fortune 500 use Salesforce. It’s not just software. It holds years of customer data, workflows, integrations, and reports. You can’t just turn it off. Replacing it takes years and comes with risk.

So even if growth slows, the customer base stays.

It’s an Ecosystem, Not an App

If Salesforce were just a place to store phone numbers, you could export a file and switch to a competitor in an afternoon. But for the Fortune 500, Salesforce is more like an operating system.

Companies build custom applications on top of Salesforce using proprietary languages like Apex and tools like Flows. These custom apps do not translate to other systems. To leave, you have to rebuild them from scratch.

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A typical enterprise has Salesforce connected to their ERP system, their marketing tools, their customer support lines, and their email. Unplugging Salesforce breaks the data flow across the entire company.

Data Gravity

As a dataset grows, it becomes harder to move.

Years of customer interactions, purchase history, and support tickets are stored there. Migrating this data to a new structure is a large project with a high risk of corruption or loss.

Most companies have messy data. Moving requires cleaning it first—a project that can take months on its own.

The “Rip and Replace” Risk

Replacing a core system like Salesforce is often compared to changing the engine of a plane while it is flying.

If the new system fails or has bugs during the switch, sales stop, support tickets get lost, and revenue takes a direct hit.

You have thousands of employees who know exactly where to click to do their jobs. Moving to a new interface causes a large dip in productivity for 6–12 months as users relearn how to work.

What could go wrong

The stock is cheap for a reason.

1. If teams start working through AI agents, they might not log into Salesforce anymore. The AI just talks to Salesforce in the background. If Salesforce becomes invisible, they lose pricing power.

2. Salesforce charges per user. If AI makes teams more efficient, companies need fewer people. Fewer people means fewer licenses. The question is whether they can replace that revenue fast enough with usage-based pricing.

Why I’m looking at it now

At $175–$190, Salesforce isn’t priced like it has to keep growing fast.

If it becomes like Oracle with customer data, that’s not exciting, but it can generate cash for years. And at ~13x free cash flow, the market already treats it that way.

That’s the point and that’s why it’s worth watching.

Disclaimer: This article is for informational purposes only. It is not financial advice. I am not a financial advisor. I may buy or sell these stocks at any time. You must do your own research before investing

By reading this email, you agree to the full disclaimer found here: https://www.thevaluethesis.com/p/disclamier

What surprised me was the lack of real coverage that explained what actually happened. Most posts just repeated the headline: “Gartner missed” or “guidance”.

Adjusted EPS was $3.94. Revenue grew 2% to $1.8 billion. Free cash flow was $271 million in the quarter.

They bought back $500 million of stock in Q4 and $2.0 billion for the full year.

The stock still fell because the market fixated on one metric: contract value growth.

In Q4, global contract value reached $5.2 billion but grew only 1% year over year. Ex-U.S. Federal, growth was 4%. That number alone was enough to change perception. Not because it is a collapse, but because it is far from what investors were used to paying for.

This was not driven by client losses.

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Clients are renewing. In Global Business Sales (GBS), client retention was 86% and wallet retention was 99%. The issue was expansion. Companies are keeping Gartner but delaying decisions to add seats, expand usage, or increase scope.

Management described the pattern as budgets are under pressure, approval levels are higher, and buying cycles are longer. When spending decisions move from CIOs to CFOs, expansion slows first. Renewals hold, but growth inside the account gets harder.

Government was a clear headwind.

U.S. Federal clients faced efficiency initiatives and funding changes, and management said this reduced contract value. They also said that at year-end they had only $126 million of U.S. Federal contract value remaining. Ex-federal growth was roughly 330 basis points higher, which helps isolate the impact.

But it was not only government.

In the core Global Technology Sales (GTS) segment, which is roughly $3.9 billion of the total business, contract value was flat year over year. That matters because it shows the behaviour across private enterprise too. This was not a single customer problem. It was broad budget behaviour.

Some investors pointed to AI as the cause. Management pushed back on that.

They said they track whether clients raise AI as a substitute during sales and renewal conversations, and they do not see it as meaningful. They also said AI is the biggest topic clients ask about. Gartner said it produced over 6,000 AI-related documents and had about 200,000 in-depth client conversations on AI in 2025. The message was simple: clients are not replacing Gartner with AI tools. They are using Gartner to make AI decisions.

The seat model is still the pressure point.

Gartner’s model works best when organisations are hiring. Hiring has been flat. When employees leave and roles are not refilled, seats get removed. That hurts expansion even when the relationship is stable.

Management is responding by trying to increase engagement and speed so the value stays clear even when headcount does not grow. They gave an example: they reduced creation time for some high-value research outputs (like Magic Quadrants) by 75%.

Why does that matter?

Because Gartner compounds through renewals. More engagement now can show up as higher contract value later, often 12 to 24 months later when contracts come up for renewal. The company is investing now to affect that later outcome.

Management guided for 2026 revenue of at least $6.455 billion and adjusted EPS of at least $12.30. The market did what it always does: it discounted uncertainty immediately.

Why the market listened, and why other software names moved

Gartner is a read-through on enterprise budgets.

When Gartner says expansion is slower because approvals are tighter and buying cycles are longer, the market applies that logic across other companies that rely on seat growth, upsells, and budget confidence.

That’s why names like $CRM, $NOW, $SAP, and $TTD moved with it. Different products, same behaviour: expansion is the first thing customers delay.

The Nasdaq was down about 2% on the day. In that kind of market, any confirmation of slower demand leads to multiple compression. This was not “bad news.” It was “less certainty.”

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Valuation reset

When a stock drops hard, investors assume the business is in trouble. Sometimes that is true. But sometimes the business is fine and the market is repricing the stock because the growth story changed.

The cash flows can still be there. Retention can still be there. Margins can still be there. What changes is the expected pace of expansion, and the multiple investors will pay while they wait.

That is what this felt like.

Gartner did not show stress in the core subscription model. Renewals held, margins held, and buybacks continued. The market reaction was about contract value growth slowing, which reduces confidence in the next 12–24 months.

When confidence drops, the multiple compresses first. The income statement follows later, if the slowdown persists.

Valuation

Disclaimer: This article is for informational purposes only. It is not financial advice. I am not a financial advisor. I may buy or sell these stocks at any time. You must do your own research before investing

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​Charlie Munger didn’t succeed just because he was smart. He succeeded because he understood the math of reality better than most. He knew that algebra is a filter for making decisions.

The first thing I had to unlearn was how I valued potential. If a deal had a 40% chance of making $1 million, my brain went straight to the $1 million. I started with the upside.

​But that was wrong.

​If I have a 40% chance of winning $100, I do not have $100. I have a ticket worth $40.

​$100 x 0.40 = $40.

​That is the reality. Once I accepted this, I stopped chasing “potential”.

​The Standard of Misery

​Most people try to maximize happiness. I have learned it is mathematically more efficient to minimize misery.

​In algebra, you can have a string of great numbers: 10 x 10 x 10. You are doing great. But if you multiply that string by Zero, the answer is Zero.

​In life, “Zero” isn’t just nothing. It is ruin, disaster.

​I assign values to these outcomes:

• ​Success: +100

• ​Misery: -1,000

​If I look at a decision and there is even a 2% chance of Misery, the math breaks.

​2% of -1,000 is -20.

​That penalty is so heavy it destroys the value of the decision. I don’t care what the upside is. You cannot average out a ruined life.

​We often judge our success by our current results.

​It looks different depending on the game you are playing.

If you are a value investor, you don’t need to be right every time. You might only have a 60% win rate on individual stocks. You will have losing years.

​But your Overall Success Probability is 75%.

Why? Because you have removed the “Zero.” You don’t use leverage. You don’t buy scams. Even if a stock drops 40%, you don’t panic sell. Because your downside is capped at “temporary pain” rather than “total ruin,” the math guarantees that if you just keep playing, the 60% win rate will eventually compound you into a millionaire.

The gap between your current value and your real value is the value of your discipline. You are richer than your bank account says. You just have to wait for time to print the receipt.

If you are an entrepreneur, the math flips. You are like Jeff Bezos. You accept that your success probability on any single idea is naturally low, maybe 10%. But your upside is 100x. (Asymmetric Upside)

​Most people look at a founder with three failed launches and see a loser. If you have ten ideas, and each has a 10% chance of a 100x return, your Expected Value is massive. You don’t need to be right often; you just need to be right once.

Imagine you have to decide whether to launch a new product line.

• ​Cost to Launch: $50,000 (Capped Loss).

• ​Probability of Failure: 80%.

• ​Probability of Success: 20%.

• ​Upside if Successful: $1,000,000.

​Most managers say “No” because there is an 80% chance of failure. They are scared of looking bad.

But run the algebra:

(0.20 x $1,000,000) - (0.80 x $50,000)

$200,000 - $40,000 = +$160,000.

​The decision has a positive value of $160,000 the moment you say “Yes.” Even if it fails, it was the right mathematical move.

​Jeff Bezos says if you have a 10% chance of a 100x return, you take the bet every time. He is right.

​The goal isn’t to be a genius.

​If you survive the downturns, avoid the -1,000 zeros, and let the probabilities play out, the math takes care of itself.

Disclaimer: This article is for informational purposes only. It is not financial advice. I am not a financial advisor. I may buy or sell these stocks at any time. You must do your own research before investing

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Since that post, the sector volatility increased.

The software sector sold off this week. Gartner stock followed the trend. It closed yesterday at $209.61.

1. The Numbers: EBT and Cash

I do not use EBITDA. I focus on Earnings Before Taxes (EBT) and Free Cash Flow. These metrics show the true purchasing power of the business.

The EBT Yield Management raised guidance for 2025. They guide for Adjusted EPS of at least $12.65. The adjusted tax rate is roughly 23%. This implies Pre-Tax Earnings (EBT) of approximately $16.42 per share.

At a price of $209, the stock trades at roughly 12.7 times EBT. Inverting this gives an EBT Yield of 7.8%. For a monopoly asset with negative working capital, a nearly 8% earnings yield is a value price.

The Cash Conversion Accounting earnings can be manipulated. Cash cannot. Management guided for $1.145 billion in Free Cash Flow for 2025. This represents a conversion rate of 165% relative to GAAP Net Income. The business generates more cash than accounting profit.

2. The Equity Bond: Gartner vs. The 10-Year Treasury

The Risk-Free Rate The U.S. 10-Year Treasury currently yields approximately 4.2%. This coupon is fixed. If inflation rises, the real value of that coupon falls.

The Gartner Yield Based on the current price ($209) and the guided Free Cash Flow ($1.145 billion), Gartner offers a Free Cash Flow Yield of 7.5%. This is a spread of roughly 330 basis points over the risk-free rate.

The Difference When you buy the bond, your 4.2% yield is static. When you buy Gartner, your 7.5% yield is dynamic. It grows in two ways:

1. Organic Growth: Even with modest revenue increases, cash flow grows.

2. Share Cannibalization: In Q3 2025 alone, management bought back $1.1 billion of stock, reducing the share count by 4%.

Every share they retire increases the Free Cash Flow per remaining share. I prefer a 7.5% yield that grows over a 4.2% yield that stagnates.

3. The Event: The Digital Markets Sale

On January 29, Gartner sold the Digital Markets division (Capterra, Software Advice) to G2.

Disclaimer: This article is for informational purposes only. It is not financial advice. I am not a financial advisor. I may buy or sell these stocks at any time. You must do your own research before investing

By reading this email, you agree to the full disclaimer found here: https://www.thevaluethesis.com/p/disclamier

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The biggest reason people lose money is simple: they buy a ticker symbol, not a business. If you cannot explain how a company makes money, you have no business owning it.

• Understand the “Why”: Does the company sell a product people need (like toothpaste) or just want right now (like a trendy gadget)?

• The 5-Year Test: If you aren’t willing to hold the stock for at least 3-5 years, don’t own it for 10 minutes. In the short term, stock prices are random and unpredictable. In the long term, they follow the business’s actual profits.

Price vs. Value: They Are Not the Same

A stock price tells you what people think a company is worth today. It does not tell you what the business is actually worth.

• Valuation Matters: You can buy a great company at a bad price and still lose money. Always ask: “If I bought the whole company at this price, would the cash it produces give me a good return?”

• Ignore “Adjusted” Earnings: Wall Street loves to pretend expenses like stock compensation aren’t real. Ignore them. Look at GAAP earnings, the real cash left over after everyone gets paid.

The Balance Sheet: Your First Line of Defense

Before you look at how much money a company makes, look at what they owe.

• Debt: Companies with heavy debt burdens are fragile. If interest rates flip or the economy slows down, debt can wipe out equity holders overnight.

• The Safety Net: A strong balance sheet gives a company the power to survive hard times and buy back their own stock when it’s cheap.

Think Like a Business Owner

Be a business owner. Warren Buffett doesn’t buy a stock hoping it goes up next week; he buys a business because he wants to own its future cash flow.

• Ignore the Headlines: The news is noise designed to make you emotional.

• Look 18-24 Months Out: As Stan Druckenmiller says, don’t buy for today. Buy for where the business will be in two years. If you can’t see that future clearly, stay away.

Betting on What Won’t Change

Predicting the next big invention is nearly impossible. It is much easier (and more profitable) to bet on what won’t change.

• The Jeff Bezos Principle: People will always want lower prices, faster shipping, and better selection.

• The Moat: Invest in companies with a competitive advantage that is hard to break, whether it’s a brand people trust (Coca-Cola) or a network effect that locks people in.

Risk, Growth, and the “Downside”

Never invest based solely on a “growth story.” Stories change quickly.

• Multiples Matter: If you pay 50x earnings for a company, everything has to go perfectly for you to make money.

• Know the Downside: Before you ask “how much can I make?”, ask “how much can I lose?” There is always risk you can’t see.

• Normalized Margins: Don’t trust a single boom year. Look at what the company earns in a “normal” year to understand its true power.

The Power of Doing Nothing

Activity is the enemy of returns.

• Tax Efficiency: Every time you sell, you trigger a tax event and interrupt the compounding process.

• Decision Fatigue: The more decisions you make, the more likely you are to make a bad one. Keep your process clear and simple.

• Let Winners Run: If a great company is growing its earnings and reinvesting wisely, do not sell just to “take a profit.” You interrupt the magic of compounding.

Master Your Psychology

Investing is not a game of IQ; it’s a game of temperament.

• Think in Probabilities: Nothing is 100% certain. Ask yourself: “What is the probability of this going right vs. going wrong?”

• Detach Emotionally: The market exists to serve you, not to instruct you. When stocks crash, don’t panic, get interested. That is when the best businesses go on sale.

Final Thought: Success comes down to this: Buy great businesses with clean balance sheets and wide moats. Pay a fair price. Then, do the hardest thing of all, wait.

Disclaimer: This article is for informational purposes only. It is not financial advice. I am not a financial advisor. You must do your own research before investing

By reading this email, you agree to the full disclaimer found here: https://www.thevaluethesis.com/p/disclamier

This wasn’t about one issue. Two things hit at the same time.

First: the earnings headline.
UnitedHealth reported very low GAAP earnings and guided to lower revenue next year.

Most trading systems don’t read context. They see “lower revenue” and “no profit” and sell.

Second: the government headline.
The night before earnings, the US government proposed a 0.09% increase in Medicare Advantage rates for 2027.

With inflation running closer to 3–4%, that effectively means getting paid less in real terms.

Put together, the message the market heard was simple:

• Revenue down

• Profits under pressure

• Government pushing back

That combination spooked investors.

What Was Actually Going On in the Quarter

Disclaimer: This article is for informational purposes only. It is not financial advice. I am not a financial advisor. I may buy or sell these stocks at any time. You must do your own research before investing

By reading this email, you agree to the full disclaimer found here: https://www.thevaluethesis.com/p/disclamier

The quarter looked bad on paper, but most of the damage was intentional.

Management took a large one-time charge to deal with existing issues:

• Costs from the cyberattack

• Closing weaker parts of the business

• Cutting underperforming teams and contracts

They chose to deal with these problems now instead of letting them linger.

When you adjust for that, earnings were $2.11 per share, ahead of expectations. The business continued to generate strong cash. The headline numbers just didn’t show it.

Shrinking on Purpose

This is the part that really unsettled the market.

For the first time in years, UnitedHealth is planning to get smaller.

• 2025 revenue: about $448 billion

• 2026 guidance: about $440 billion

This is deliberate.

Management expects to lose:

• Around 1.3–1.4 million Medicare members

• Around 700,000 Medicaid members

These are members that were costing more than they were paying in.

Revenue goes down. Profitability improves.

Instead of chasing size, the company is focusing on margins and control. That usually looks uncomfortable at first.

The Government Question

The biggest unknown is still the government.

Medicare is expensive, and the US is trying to slow cost growth. The message from regulators is essentially:

“We’re not increasing payments. Become more efficient.”

If rates stay tight, insurers reduce extra benefits like dental, vision, and gym memberships. That affects real people.

UnitedHealth covers roughly 8.4 million seniors under Medicare.

Cutting benefits at that scale creates political pressure, especially going into an election year. The final decision hasn’t been made yet.

How AI Fits Into This

AI wasn’t mentioned as a buzzword. It was mentioned as a cost tool.

UnitedHealth plans to spend around $1.5 billion per year on AI, with the goal of saving roughly $1 billion per year starting in 2026.

Where that shows up:

• Call centres: AI helps staff find information faster

• Claims: more decisions handled automatically, with fewer manual steps

If revenue growth slows, lowering costs becomes the main lever. This is how they do that at scale.

Cash Tells a Different Story

While reported earnings were close to zero, cash flow was not.

UnitedHealth generated about $19.7 billion in operating cash flow over the year.

Earnings can be shaped by accounting choices. Cash reflects what the business actually produces.

Management plans to focus on paying down debt in early 2026. After that, they expect to restart share buybacks later in the year.

That matters more than short-term headlines.

Short-Term Issues vs. Long-Term Ones

It helps to separate what’s temporary from what really matters.

Short-term pressures:

• Higher medical usage

• Strong flu seasons

• Temporary cost spikes

These come and go, and are already factored into future pricing.

Long-term pressure:

• Government reimbursement levels

That’s the real debate. It may cap growth and force efficiency, but it doesn’t mean the business stops working.

Management described 2026 as a year to fix things, with expectations of returning to more normal growth in 2027 or 2028.

Looking Ahead: The Possible Paths

Everything from here depends on one thing:

The government’s final Medicare rate decision in April 2026.

From that point, the business likely follows one of three paths.

2026: A Year of Adjustment

This part is fairly clear, based on management guidance.

Revenue comes down slightly as unprofitable members are removed.
Costs improve.
Cash flow remains strong.
Buybacks return in the second half of the year.

Despite lower revenue, earnings still grow because margins improve.

Scenario A

Trigger:
The government raises Medicare Advantage rates to around +1.5% to avoid large benefit cuts for seniors.

Result:
UnitedHealth stops shrinking. Membership stabilises. Share buybacks accelerate in 2027.

Numbers:

• 2027 revenue: approximately $465 billion

• 2027 earnings per share: approximately $20.50

Stock implication:
At a normal valuation, the stock could recover to $430 or higher by 2027.

Scenario B

The government makes a small concession, around +0.5%.

Result:
UnitedHealth continues to shrink slightly for another year but protects margins through cost controls and AI efficiency.

Numbers:

• 2027 revenue: approximately $450 billion

• 2027 earnings per share: approximately $19.75, largely driven by buybacks

Stock implication:
The stock likely moves gradually higher into the $355–$375 range.

Scenario C

The government keeps rates near the original 0.09% proposal.

Result:
Benefits are reduced further, membership declines again, and revenue remains under pressure.

Protection:
Even in this case, UnitedHealth is expected to generate around $18 billion in annual cash flow.

Stock implication:
That level of cash generation should limit downside, with the stock likely trading in the $295–$315 range rather than breaking down.

Summary

The short-term outcome depends on regulation, not demand.

The downside is supported by strong cash generation. The upside depends on how quickly the government eases pressure on the system.

The market is currently focused on the worst-case outcome. The next 12–18 months will show which path becomes reality.

Disclaimer: This is not financial advice. Investing involves risk.

The Trade Desk as a marketplace where brands buy ads across the internet.

Old world: Ford wanted TV ads → call a network → negotiate → slow, inefficient.
New world: Ford’s agency logs into TTD, uploads the ad, picks the audience (“men 25–40 who like trucks”), and presses go.

Within milliseconds, TTD’s system bids on ad slots across:

• Connected TV (Disney+, Hulu, etc.)

• Spotify, podcasts

• Websites (NYT, ESPN, etc.)

What they don’t do: they don’t buy ads inside Google Search or Meta (Facebook/Instagram). Those are closed ecosystems where outsiders can’t bid freely.

They take a small fee on every ad dollar that flows through their platform.

The moat

Google both owns a lot of the ad inventory (like YouTube) and runs one of the tools used to buy ads. That’s like the referee also owning one of the teams. Even if they try to be fair, the incentives are messy.

TTD is different:

Disclaimer: This article is for informational purposes only. It is not financial advice. I am not a financial advisor. I may buy or sell these stocks at any time. You must do your own research before investing

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As I write this, markets are taking the headlines badly.

But this is exactly when you pay attention. The best chances are rare. They don’t show up often. When they do, you need to be ready.

Charlie Munger said opportunities come to a prepared mind. That’s the point: you do the work early.

Investing is mostly study, not action. Most of the time, the right move is to do nothing.

Right now, many good companies still look expensive. The prices leave no room for mistakes. So I’m building my watchlist, deciding what I’m willing to pay, and then waiting.

In late 2025, I shared Watchlist #1.

Here are 5 more businesses I’m watching, and the prices I’m waiting for in 2026

What they all have in common:

1. High Switching Costs — once you’re in, it’s hard to leave. These businesses become part of how customers operate.

2. Disconnected Narratives — the story around them is worse than the reality. Headlines and sentiment are driving the price more than the actual business performance.

3. Real Free Cash Flow — they generate cash after paying for what the business needs. That gives them options: reinvest, buy back shares, or strengthen the balance sheet.

4. A Moat I Trust — I believe they have real protection around the business. Something that makes it hard for competitors to take customers and profits.

All five are currently hated or ignored for reasons that are likely temporary or exaggerated.

And because sentiment has already pushed them closer to what I think is fair value, I’m watching these names more closely than the rest, to see if the price drops to where I’d actually want to buy.

My prices might surprise you. But my job isn’t to be optimistic. It’s to avoid big mistakes. I want a price that gives me breathing room.

That’s what a margin of safety is.

Disclaimer: This article is for informational purposes only. It is not financial advice. I am not a financial advisor. I may buy or sell these stocks at any time. You must do your own research before investing

By reading this email, you agree to the full disclaimer found here: https://www.thevaluethesis.com/p/disclamier

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Happy Holidays to you and your families. It is the most beautiful time of the year to be with loved ones.

As we end 2025, I want to share my learnings, experiences, and a reflection on how the year went for the portfolio.

I have been in the investing world long enough to know that the downside matters the most. If you do not respect it, hard lessons will be learned.

As a result, the first principle of my investment approach is shaped by Warren Buffett’s two rules: never lose money, and never forget rule number one.

I believe this concept is not well understood by many. These rules are the foundation of everything I do because, in investing, the downside matters more than the upside. If you lose 50% of your capital, you need a 100% gain just to recover your initial investment. That is why I focus on what can go wrong before I look at what can go right. For this reason, I view my job primarily as risk management, rather than just investing.

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Performance

As of today, the portfolio has appreciated 39.5% in 2025. By comparison, the S&P 500 has returned 17%. This marks the third consecutive year of outperformance against the index.

Annual Returns vs. S&P 500:

• 2023: Portfolio +33% (Index: +21%)

• 2024: Portfolio +36% (Index: +23%)

• 2025: Portfolio +39.5% (Index: +17%)

Cumulative Return (3-Year Total):

• My Portfolio: 150%

• S&P 500: 75%

Portfolio Changes

I sold my positions in Alibaba and Tencent.

Tencent is, in my opinion, the best business in China. It is one of the few companies in the world that can grow revenue while also increasing profit margins at that scale. Its ecosystem is unique and powerful. However, I read everything through English translations. I believe that to truly understand a business, you must understand the local life and culture around it. Since I lack that direct insight, I require a massive margin of safety to own Chinese stocks.

Alibaba faces a different problem. E-commerce is a tough business. Competitors like Pinduoduo and JD are fighting for market share and reducing every bit of margin. To keep their market share, Alibaba has to lower prices. As a result, their profit margins have been dropping for the last few years. They are also spending more money just to earn the same amount of revenue.

I bought Alibaba because it was very cheap; the company traded at a very low earnings multiple and had generated strong free cash flow for many years. However, the stock price has gone up about 100% since then, while free cash flow has dropped significantly, even turning negative due to high CapEx. Although they might win in cloud computing and AI, or stabilize their e-commerce margins in the long term, the setup has changed. With the price substantially higher and the business economics getting tougher, there was not enough margin of safety left to justify holding it. I decided to sell and move this capital into 4 high-conviction US-based businesses

UnitedHealth & Molina

UnitedHealth is now my largest holding. It provides massive scale and predictable earnings. Molina is different. It focuses mainly on Medicaid and operates with a very low-cost structure, which makes it highly efficient at managing government contracts.

I saw the recent drop in their share prices as a chance to buy.

Lululemon is my second-largest holding. The stock dropped earlier this year because sales growth slowed in North America. I think it is a good business. They sell premium products and earn high returns on their capital. They also have huge room to grow internationally, especially in China and Europe. We bought a premium brand for the price of an average retailer.

Gartner

In December, I initiated a position in Gartner, which is now a top-3 holding.

Gartner provides essential research and advisory services to executives. I view their service as “risk mitigation” for corporate decision-makers. Before a CTO commits significant capital to software, they require independent validation.

The stock sold off on fears that Artificial Intelligence would displace human analysts. I disagree. AI generates more data, more vendors, and more noise. In a complex environment, trusted, independent judgment becomes more scarce and valuable, not less.

Lessons from 2025

These are not brand-new lessons; they are principles I already knew, but the market has a way of reminding you of them.

1. Catching the absolute bottom is impossible. The most important reminder this year came from my decision to buy into the healthcare sector. I bought these companies after they had already fallen significantly. I believed they were cheap. However, shortly after I bought them, they went down aggressively again.

It was a reminder that you can never perfectly time the bottom. In the short term, there is no floor to a stock price, even if the valuation makes sense.

2. Temperament matters more than intellect. In investing, mistakes are part of the game. You can learn from them and improve your process, but avoiding them completely is impossible. That is why temperament and risk management are the two most important tools we have.

Prices can stay disconnected from value for a long time, even if your thesis is right. Since I never short stocks and I never use options, my only job is to own pieces of great businesses and wait. Attempting to time the market is a fool’s game; having the patience to sit through the volatility is the real skill.

Macroeconomic Outlook

I do not make decisions based on headlines, but I stay aware of the economic environment. When new tariffs were announced, the impact was immediate, especially for companies that rely heavily on specific supply chains. Their stock prices dropped because these changes have a long-lasting impact on their profits.

Rules can change, and the world will not stay the same, so companies that hold debt can be vulnerable. That is why I prefer companies that have strong balance sheets and generate free cash flow. Currently, the S&P 500 pays you back about 2.74% a year in free cash flow. That barely keeps up with inflation. I stick to the basics: Price is what you pay. Value is what you get.

Investment Philosophy

As we look to the future, it is important to repeat the core principles

My goal is to beat the S&P 500 by ten percentage points over the long run.

I believe owning productive businesses is the best way to build wealth over time.

1. Owning great businesses.

2. Buying them for less than they are worth (Margin of Safety).

3. Having the right attitude.

To show the power of business ownership: $100 invested in the S&P 500 in 1957 would have grown to about $77,626 by the end of 2025. That is the power of time. My job is to avoid interrupting that growth.

I prefer a focused portfolio. As Charlie Munger said, “If a thing is not worth doing at all, it’s not worth doing well.”

I do not believe in buying our 20th best idea just to have “variety.” That just lowers our returns. Like the Walton family with Walmart, I believe in holding fewer positions where I am very confident. When the odds are in our favor, we bet big.

I realized that people are what turn a good company into a great one, whether it is the culture at Berkshire Hathaway or the drive at Amazon and Apple. To succeed, I need to find management teams that can handle change over decades, and then let them do their job.

My process is simple. I do not start with the economy. Instead, I start with the company itself. I look at the balance sheet to estimate how much money they will make in three, five, or ten years. I also check who their competitors are and if their product will last. Because the future is hard to predict, I only buy when the price is much lower than the value.

I stay away from most AI stocks right now. In the early 1900s, cars changed the world, yet hundreds of car companies went bankrupt. Similarly, in 2000, the internet changed the world, but for every Amazon, there was a Pets.com that went to zero.

I prefer to buy the winner after they have won. For example, during the internet crash, Amazon stock fell 90% and was risky. Today, it is safe and dominant. Warren Buffett followed a similar path with Apple. He did not buy it early. He bought it in 2016, after everyone already owned an iPhone. I am not looking for the next Amazon. I am looking for the businesses that have already proven they are built to last.

Thank you

Arda Solmaz

Disclaimer: I am not a financial advisor. This letter is for informational purposes only and represents my own opinions and portfolio moves. It is not investment advice. Please conduct your own due diligence.

I’m sharing this not to celebrate a short-term move, but because it’s a good example of one of the hardest parts of investing: buying when most people disagree with you.

I’ve followed Lululemon for years. The product is strong, the brand loyalty is real, and the balance sheet is clean, no debt.

But earlier this year, sentiment turned sharply negative. North America slowed, and the market quickly decided the brand was losing its edge. The stock fell nearly 60% from its highs.

The North America slowdown didn’t change how I saw the business, and international growth still looked like it was in the early stages, and the clearest way to see that was to put Lululemon next to Nike. Even in the most recent reports, the gap is still clear:

• China growth: Nike -17% vs Lululemon +46%

• Gross margin: Nike 40.6% vs Lululemon 55.6%

• P/E: Nike 30x+ vs Lululemon ~15x

Lululemon was delivering stronger growth and better profitability, yet the valuation was still far lower.

And this is where Buffett’s reminder matters: “Be fearful when others are greedy, and be greedy when others are fearful.” It’s simple advice, but it’s difficult to act on when sentiment is ugly and the stock is falling.

That’s why I’m unlocking the original research note today.

I want you to see the work exactly as it was written at the time, the valuation model, the data, and the reasoning. I think it’s more useful to see the process than just the outcome.

You can read the full, unlocked analysis here

If you enjoy this style of research and want access to new notes when they’re published (plus the full library), you’re welcome to join as a paid subscriber below:

Subscribe now

Best,
Arda

Disclaimer: The content of this email and the associated research notes are for educational and informational purposes only and do not constitute financial advice. I am not a financial advisor, and the ideas presented here represent my personal opinions and analysis. All investments carry risk, including the potential loss of principal. Past performance is not indicative of future results. I currently hold a long position in Lululemon (LULU). Please perform your own due diligence or consult with a certified financial professional before making any investment decisions.

By reading this email, you agree to the full disclaimer found here: https://www.thevaluethesis.com/p/disclamier

But while he nails the philosophy, and I highly recommend reading it, there’s another part of the story worth adding. One that often gets missed.

To truly understand the arithmetic of Berkshire Hathaway’s returns, how a dying textile mill transformed into an $800,000-per-share fortress, you cannot view Buffett’s career as a single continuum. You have to split it into three distinct operating systems.

Most people study the first two. Almost everyone misses the third.

Era 1: Pre-Munger

The first era was the “Partnership Era,” defined entirely by the Benjamin Graham philosophy.

During this phase, Buffett wasn’t a business owner; he was a mechanic looking for broken cars he could strip for parts. He hunted for “Cigar Butts”, mediocre companies trading below their liquidation value. The math was simple: buy a dollar for 50 cents, wait for the gap to close (mean reversion), sell, and repeat.

While this approach produced the highest percentage returns of his career, it had a fatal flaw: It wasn’t scalable.

The Cigar Butt strategy requires constant friction. You are always entering and exiting and most importantly, you are always subject to “reinvestment risk.” Once you sell the net-net for a profit, you have to find another mispriced asset immediately.

As Buffett later realized, “Time is the enemy of the mediocre business.” You can date a textile mill for a quick profit, but you can’t marry it.

Era 2: The Compounder

The second era is the one most value investors obsess over. This was the “Post-Munger” pivot, where Charlie convinced Warren to stop buying fair businesses at wonderful prices and start buying “wonderful businesses at fair prices.”

This shifted the engine from Liquidation Value to Earnings Power.

Buffett began acquiring high-ROIC engines with immense pricing power, brands like See’s Candies, Coca-Cola, and eventually Apple.

The structural genius here wasn’t just “buying quality.” It was that he stopped looking for a price exit and started looking for earnings retention.

When you own a compounder like See’s Candies, you don’t need to sell to realize your gain. The business realizes the gain for you, internally, by producing cash flow. See’s had incredible pricing power and brand-loyal customers. They kept increasing the price, and customers kept coming. It was more than just assets, it was pure earning power, and it taught them a lot about business.

But the catch was that See’s wasn’t able to reinvest that cash into itself, it couldn’t just keep opening stores forever. Instead, it sent that cash to Buffett to invest elsewhere. On the other hand, Coca-Cola was a brand that could travel across the globe and keep scaling. Both models eliminated the friction of taxes and the pressure of constantly finding new ideas. This era is the real lesson behind the ‘Berkshire Phenomenon

But even this era had a limit. Great businesses generate too much cash. Eventually, you run out of “wonderful businesses” to buy.

Era 3: The Legacy Builder (Post-2008)

This is the third, critical era that emerged largely after the 2008 Financial Crisis. This is the era that Wall Street often misunderstands as “Buffett losing his fast ball.”

He didn’t lose his fast ball; he changed the game.

Buffett realized that to make Berkshire last another 100 years, he couldn’t just own light-capital compounders. He needed to own the very arteries of the global economy. He needed Capital Sponges, businesses that could absorb billions of dollars of reinvestment at decent rates forever.

He moved aggressively into capital-heavy, critical infrastructure:

• BNSF Railway: He bought the physical tracks that move the American economy.

• Berkshire Hathaway Energy: He built a utility giant that demands massive CAPEX but guarantees a regulated return.

These aren’t just stocks; they are the physical backbone of the United States.

He extended this logic globally with his recent wager on the five Japanese Trading Houses (Sogo Shosha). He wasn’t just buying cash flow; he was buying recognized stability and essential services, energy, food, materials, that no competitor can disrupt.

The Capital Architect

This is the key lesson of the third era. Each era taught Buffett something important, and he adjusted every time. But after the 2008 financial crisis, he took one big lesson to heart: the financial system was more fragile than most people assumed.

If he wanted Berkshire to last a century, he couldn’t rely only on stock picking or asset-light businesses. He needed to own the hard, essential infrastructure itself.

He wasn’t just trying to get rich anymore; he was designing a fortress that could survive any storm.

Berkshire going from $15 to $750k+ per share didn’t happen because Buffett was a good stock picker. It happened because he treated Berkshire itself as the ultimate Capital Allocator.

He took the cash flows from a dying textile mill and systematically redeployed them into high-ROIC assets.

Most CEOs cling to dying businesses for too long. Buffett didn’t, he pulled the cash out of the loser and put it into the winners.

If you only view him as a “Stock Picker,” you miss the genius. He was a Capital Architect who built a machine designed to cure reinvestment risk. That is the blueprint for the most durable company in history.

North America: Selling More, Earning Less

Nike’s biggest market, is a mix of good and bad news.

The good news is that sales are finally growing again. This is a huge signal that the brand is healthy. The bad news is that they made less profit on those sales. There are two main reasons for this. First, they had to discount old inventory to clear it out. Second, and more importantly, tariffs hit them.

Management said these tariffs took a massive bite out of their profits. In fact, if you removed the cost of those tariffs, their profit margins would have actually gone up, not down. This tells me that the business operations are improving, but government fees are eating up the gains.

Greater China

While North America is showing signs of life, China remains a major weakness. Sales there dropped 17%. The company is struggling with intense local competition and mismanagement in the region.

To understand how serious this is, just look at Lululemon. While Nike’s sales are shrinking double-digits in China, Lululemon is growing about 25% in the same market. Nike stock is priced like a fast-growing company, but right now, competitors are the ones actually delivering that growth overseas. This difference is the main reason I currently prefer Lululemon’s position.

The Numbers at a Glance

• Revenue: Sales were essentially flat at $12.4 billion.

• Profit Margins: Dropped significantly, mostly due to the tariffs I mentioned.

• Inventory: They have successfully lowered their stockpile of unsold goods, which is a good sign.

• Cash: Their cash pile shrank by about $1.4 billion because they spent money on dividends and buying back their own shares.

The Outlook: More Pain Ahead

Nike warned that the next few months will still be tough. They expect sales to drop slightly in the upcoming quarter. They also expect profit margins to fall again, almost entirely because of the tariff costs. Without those taxes, they would be making money, but as it stands, their profits will be squeezed. On top of that, they plan to spend more money on marketing to try and boost demand.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. The views expressed here are my own and should not be taken as a recommendation to buy or sell any security. I do not currently hold a position in the stock mentioned in this report. Please conduct your own due diligence or consult a certified financial advisor before making any investment decisions.

My Take

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I wanted to share a quick update on a meaningful validation of the research process here at The Value Thesis.

Yesterday, Michael Burry (The Big Short) liked a note I posted regarding the Molina Healthcare thesis.

I’m sharing this because it reinforces the framework I use. With over 50,000 stocks globally, the real challenge isn’t finding stocks to analyze, it’s knowing which ones to ignore. I apply four criteria to every analysis: I look for a simple and durable business, an efficient management team, a structural competitive advantage, and a valuation that offers a margin of safety.

This mindset is closer to investors like Charlie Munger, Li Lu, Seth Klarman, and Nick Sleep. They didn’t build great records by chasing whatever was hot. They did it by looking for businesses where the value was structural, but the market was either fearful or simply missing the real issue.

Burry has a similar instinct, he tends to look where sentiment is already broken. And right now, Managed Care is hated because medical costs have spiked, so most people stop at the headline and move on.

But if you look at the structure, government-sponsored healthcare is effectively a commodity. You can’t easily raise prices, and the product is largely the same across competitors. In a commodity business, the edge is being the low-cost producer — and Molina runs one of the most efficient operations in the sector.

Because the sector is so disliked, the valuation can offer a margin of safety relative to long-term earnings power.

I believe the market is efficient most of the time. The challenge is doing the work to understand the bear case and the actual problem, rather than just chasing the upside.

Just to be clear on my mindset: I lean buy-and-hold. I spend time analyzing businesses I’d be comfortable owning for years, the kind that can generate real profits and reinvest at good returns so the business can compound.

If you want to see the full thesis and how I applied my framework, you can read the deep dive here: Full Molina Healthcare Deep Dive

This deep dive is exclusive to premium subscribers. If you are currently a free reader, you can upgrade below to unlock the full thesis and my complete archive:

Upgrade to Full Access

Thanks for reading,

Arda

Disclaimer: I am not a financial adviser. I am not a registered investment advisor (RIA). This content is for educational and entertainment purposes only and should not be construed as investment advice. I am currently long $MOH.

By reading this email, you agree to the full disclaimer found here: https://www.thevaluethesis.com/p/disclamier

The economy is strong. Ireland has a high concentration of multinational activity in tech, pharma, medical devices, and aircraft leasing, supported by a young workforce and strong export growth. Employment levels are high, wages have grown, and net migration continues to add demand.

Housing supply remains tight.

Any decent rental listing is gone instantly. Same with buying. Supply is not keeping up, and everyone feels it.

That’s the backdrop for $IRES, the largest residential landlord / residential platform in Ireland, with 3,652 homes, mostly in Dublin.

Occupancy is basically full: 99.5%.

It’s a simple model: own apartments in the most supply-constrained part of the country and collect rent.

The business has

• 3,652 units (mostly Dublin)

• 99.5% occupancy

• 99%+ rent collection

• Average monthly rent around €1,823 across the portfolio

• Net rental income margin: 78% (up 150bps)

The stock is down from €1.73 at the 2022 peak to around €0.93 today, as we head into the end of December 2025.

1) Interest rates repriced property values

When rates rise, property yields expand, and values fall. IRES even shows that Dublin PRS yields expanded 115 bps since Dec 2021, implying roughly a 32% decline in capital values.

So even if rents stay strong, your asset value can get marked down.

2) Rent controls and regulatory uncertainty

Ireland’s rent control framework has been a big overhang. IRES directly says restrictive rent regulations disproportionately impacted valuations.

You can feel this on the ground too:

• Private landlords are leaving.

• Costs are up.

• And the market assumes rental regulation will remain restrictive.

What’s changed

Two things are starting to tilt the setup.

1) Rate cuts = less pressure on valuations

IRES notes that the ECB has already cut rates multiple times since peak inflation (they reference eight cuts between June 2024 and June 2025).

Lower rates help in two ways:

• cheaper funding over time

• less pressure on property yields / capital values

  

2) The regulatory tone is shifting

In June 2025, the government announced reforms aimed at more “clarity and certainty”.

And the big practical point is this: from 1 March 2026, rents can reset to market for new tenancies (in the situations covered).

That matters because IRES believes the portfolio is under-rented vs market, they show 19% reversion.

Rent gap math

IRES currently generates approximately €86.6m in annualised rent.

Management estimates around 19% rent reversion across the portfolio as rents reset to market levels over time. This implies a potential rent gap of roughly €19–20m once turnover and resets occur.

That gives:

• Current annual rent: €86.6m

• Estimated rent reversion: €19.9m

• Implied annual rent: €103–106m

Assuming no additional asset sales, this represents the rental income capacity of the existing portfolio.

Against the current equity market capitalisation of €488m, this implies a gross rental yield in the low-20% range, before operating costs, interest, or reinvestment.

The Investment Thesis

When inflation reached close to 9% and maintenance costs increased sharply, IRES could only increase rents by about 2%. In real terms, earnings declined.

I generally prefer businesses with pricing power against inflation and competition. IRES does not fully meet that criterion, it operates within a regulated framework.

That said, it owns real assets in established Dublin locations, maintains 99.5% occupancy, and generates predictable rental income. Demand for rental housing remains high, and supply remains limited.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. The views expressed here are my own and should not be taken as a recommendation to buy or sell any security. I do not currently hold a position in the stock mentioned in this report. Please conduct your own due diligence or consult a certified financial advisor before making any investment decisions.

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Lululemon shares jumped more than 10% after earnings, and while that might seem surprising given ongoing concerns about U.S. consumer demand, the reaction becomes understandable once you read the earnings call carefully.

If you want more background, I wrote about this business three months ago in Zero Returns in Six Years, and my thinking hasn’t changed much after this quarter.

Three things mattered most to the market:

• Revenue and earnings per share beat expectations

• International growth remained strong, led by China

• A CEO transition was announced, opening the door for a strategic reset

Lululemon Q3 2025 Earnings: Key Financial Results

• Revenue: $2.6 billion (+7% YoY)

• Comparable sales: +2%

• Gross profit: $1.43 billion

• Gross margin: 55.6% (down 290 basis points)

• Operating income: $436 million

• Earnings per share: $2.59 (down YoY, but above expectations)

Despite margin pressure, Lululemon delivered better-than-expected revenue and EPS, the main reason the stock moved higher.

Lululemon Beat Revenue and EPS Expectations

The earnings beat did not come from North America.
It came from international markets, especially China.

China Mainland

• Revenue growth: +46%

• Comparable sales: +25%

• Strong demand for outerwear

• Q3 benefited from timing of 11/11 e-commerce activity

Rest of the World (Europe & Asia-Pacific)

• Revenue growth: +19%

• Comparable sales: +9%

• Continued store expansion and solid execution

International growth more than offset U.S. weakness.
That stronger-than-expected top line also helped reduce the impact of tariffs and supported earnings per share.

North America Remains the Key Weakness

Management was unusually clear about this.

• Americas revenue: –2%

• Comparable sales: –5%

• U.S. revenue down 3%, Canada roughly flat

Importantly, management does not believe this is a brand problem.

They are still:

• growing total and retained guests,

• acquiring new customers across age groups.

The issue is lower visit frequency and spend, particularly among high-value customers.

They also admitted the product mix in North America is not right. Some core franchises stayed on shelves too long without enough newness. In a more promotional retail environment, consumers are trading down and waiting for value.

This looks like a product-cycle and macro issue, not a deterioration of brand equity.

How Management Plans to Fix the U.S. Business

Management outlined a clear three-pillar turnaround plan.

1. Product Creation

• Increase new style penetration to 35% by next spring

• Shorten product cycles from 18–24 months to 12–14 months

• Build “chase” capabilities to quickly reorder winning products

2. Product Activation

• De-clutter stores so newness stands out

• Improve local store curation

• Upgrade in-store storytelling and website experience

• Use membership initiatives to re-engage high-value customers

3. Enterprise Efficiency

• Offset tariffs through vendor negotiations and supply-chain efficiency

• Selective pricing actions

• Tight cost discipline during the reset

This is not a quick fix.

Margins: Short-Term Pressure

Gross margins declined due to:

• higher tariffs,

• increased markdowns,

• a more promotional consumer environment.

However, margins were better than management originally guided, helped by higher revenue and disciplined expense control.

Profit dollars increased even as efficiency declined.

CEO Transition: Why the Market Liked It

After seven years, the CEO will step down early next year. Interim leadership will run the business while a permanent successor is selected.

From an owner’s perspective, the timing makes sense.

This transition comes:

• at the end of a multi-year plan cycle,

• at a moment when the U.S. business needs renewal,

• while international momentum remains strong.

Markets often welcome leadership change when execution needs improvement but the underlying brand remains intact.

Lululemon 2025 Outlook and Guidance

Management reaffirmed full-year guidance:

• 2025 revenue: approximately $11 billion

• 2025 EPS: $12.92–$13.02

They also flagged a meaningful headwind:

roughly $210 million reduction in operating income from tariffs and the removal of the de minimis exemption (net of mitigation).

Margins will remain under pressure in the near term, particularly in Q4.

My Take as a Shareholder

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• Price/Book Ratio = 0.74x.

• P/E Ratio (TTM) = 7.5x

• 3.7% dividend yield.

Total assets sit at $345.7 million. While the bank slightly shrank overall, the loan book increased to $275.5 million, and deposits rose to $280.7 million. Crucially, they lowered their interest expense, meaning they paid less to fund the bank than they did last year. With total equity hitting $40.7 million, the book value is now $40.64 per share. Directors have over $27 million of their own cash sitting in the bank’s deposits.

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Gartner ticks all those boxes. a strong competitive advantage, excellent cash flow, and a price that offers a margin of safety.

Here is a look at how the business actually makes money, and why I think it is currently selling for less than it is worth

1. The Business Model: High Margins and Upfront Cash

Gartner sells research and advice to corporate executives.

• Operating Leverage: They produce intellectual property (reports and data). Once a report is written, the cost to sell it to one client or one million clients is the same. This allows for very high profit margins on every new subscriber.

• Recurring Revenue: Most of their revenue comes from multi-year subscriptions, making the business predictable and stable.

• Negative Working Capital: Clients pay their bills upfront at the start of the contract. This means Gartner collects the cash before they deliver the service, giving them a constant “float” of money to invest or return to shareholders.

  

2. The Competitive Advantage

Their primary product (the “Magic Quadrant”) has become the industry standard for rating technology vendors.

• For Buyers: Corporate executives rely on these ratings to justify billion-dollar spending decisions to their boards. It provides them with necessary independent verification.

• For Sellers: Technology companies effectively must subscribe to Gartner to understand how to be rated. If they are not rated, they risk being invisible to buyers. This creates a self-reinforcing loop that is very difficult for competitors to break.

Imagine you’re the head of technology at a big company, and you’re facing a high-stakes, $50 million decision on what new software to buy

• if you pick the wrong software, the company loses money, and your job is at risk.

• If you pick the right software, you just did your job.

So, what do you do? You pay Gartner a subscription fee to see their report cards (the famous “Magic Quadrant”).

If Gartner says a software is a leader, and you buy it, you are safe. Even if the software fails, you can tell your boss, “I bought what the experts recommended.”

That is why managers are happy to pay Gartner’s fee: It is a small price to pay for peace of mind.

It is essentially “Career Insurance” for executives.

In summary:

• It’s a Subscription: They collect money every year, recurring like a utility bill.

• It’s Highly Profitable: They write a report once and sell that same PDF to 15,000 different clients.

• Cash Upfront: Customers pay the bill at the start of the year (negative working capital).
  

3. Why Is It On Sale?

The stock is currently trading at a discount because of two market fears:

• Cyclical Headwinds: Gartner charges per user. As the tech sector has laid off employees recently, the number of paid subscriptions has temporarily dropped.

• Structural Fear (AI): Investors worry that Artificial Intelligence will replace the need for human analysts, destroying Gartner’s pricing power.

Disclaimer: The author holds a long position in Gartner (IT). This content is for informational purposes only and should not be considered professional financial advice. All investments involve risk.

4. Why I Think The Market Is Wrong

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To succeed today, quantitative analysis based on low P/E ratios is not enough. It requires business understanding, a focus on Return on Capital, and patience for the long term. At least, this is my everyday task now.

Compounding is an important concept in investing, and it is actually quite simple to imagine.

If I am the owner of 10% of a company that earns $100 million per year, I still own the same 10% the next year, but the company earns more. The year after, it earns even more. My percentage ownership stays the same, but the earnings themselves keep getting bigger.

This is a Compounding Machine, though finding one is the hard part. The big question for an investor is: If you find such a company today, how much should you pay for those future earnings?

To answer that, we have to look at Return on Capital.

The Two Types of Businesses

There are really only two types of companies: those with high returns on capital and those without.

• High-Return Business: Puts a dollar to work and creates 15 to 20 cents (or more) of new value.

• Low-Return Business: Puts a dollar to work and struggles to create 10 cents.

Over time, the high-return business creates tremendous wealth, while the low-return business just treads water.

What Is Capital?

Capital is just the fuel the business needs to operate. It comes basically in three forms:

1. Equity: Selling a piece of ownership.

2. Debt: Borrowing money

3. Retained Earnings

Companies use this capital for Working Capital (day-to-day bills) and Capex (machinery and buildings).

Ideally, I want to own a company that doesn’t need to constantly raise outside capital.

Measuring Efficiency: Return on Capital Employed (ROCE)

I calculate return on capital simply. I want to know how much profit the business generates relative to the cash and assets tied up in it.

The formula I use is:

ROCE = EBIT ÷ (Equity + Debt - Cash)

Note: I subtract cash because idle cash isn’t “working.” I use EBIT here to see the pure operating power of the machine, but I never ignore interest expense when calculating the final valuation.

How Do Companies Grow?

To increase earnings, a company can invest in new factories, research, or buy other companies. They fund this through Retained Earnings (the net income they don’t pay out as dividends).

But, not all growth is good growth. If a company spends $1 to earn 5 cents, they are destroying value. We want companies that spend $1 to earn 20 cents.

Let me show you the math behind why a “High Return” company is worth paying up for.

Scenario 1: The “Expensive” High Quality vs. The “Cheap” Low Quality

Imagine two companies. Both have $100M of Capital Employed and they reinvest all their profits back into the business.

Company H (High Quality)

• 20% Return on Capital.

• It looks “expensive” trading at 15x Earnings.

• Price you pay: $300 Million.

Company L (Low Quality)

• 10% Return on Capital.

• It looks “cheap” trading at 10x Earnings.

• Price you pay: $100 Million.

Most value investors buy Company L because of the low P/E. But look at what happens over 5 years.

The Starting Line (Year 0)

• Company H: Earns $20M

• Company L: Earns $10M

The Finish Line (Year 5)

• Company H: Now earns $49.8M

• Company L: Now earns $16.1M

The Reality Check: Even though you paid a high price for Company H ($300M), because the earnings grew so fast, you are now effectively paying just 6x its current earnings.

Meanwhile, for Company L, you are paying 6.2x its earnings.

Even though Company H was 50% more expensive to start with, it became the cheaper stock in just 5 years because of how fast it compounded. If you focus only on a low starting P/E, you miss the magic.

The longer you hold, the more value H will create.

Scenario 2: The True Fair Fight

Now, let’s make the starting point identical. Imagine you have $100 Million to invest. You find two companies that both earn $10 Million a year (so both trade at a P/E of 10x).

Company H2

• Price you pay: $100M

• Year 0 Earnings: $10M

• ROCE: 20% (This company grows earnings at 20% per year).

Company L2

• Price you pay: $100M

• Year 0 Earnings: $10M

• ROCE: 10% (This company grows earnings at 10% per year).

Fast Forward 5 Years:

• Company H2: The earnings have compounded to $24.9M.

  • Based on your $100M investment, you are now earning a 25% yield (or a P/E of 4x).

• Company L2: The earnings have compounded to $16.1M.

  • Based on your $100M investment, you are earning a 16% yield (or a P/E of 6.2x).

The Result: Even though you paid the exact same price for the exact same earnings on Day 1, the “High Return” machine pulled ahead massively. The longer you hold, the wider this gap gets.

Final Thoughts

Just because a stock looks cheap doesn’t mean it’s a good investment.

There are many investors who bought Apple between 2012 and 2016 when it was trading like a value stock. But they sold as soon as it reached their “estimated value.”

• 2011-2017: Apple compounded at roughly 14%.

• 2017-2024: Apple compounded at 30%+.

Those who sold early missed the best years of the compounding machine. As Charlie Munger always said, “The first rule of compounding is to never interrupt it unnecessarily.”

Find the high-return businesses, pay a fair price, and let them do the work.

Right now, that comparison is getting harder. The S&P 500 is trading around 25x forward earnings, well above its historical average. Great companies at a fair price are almost nowhere to be found.

When the market gets expensive, I continue to study companies and get my watchlist ready. I demand a high margin of safety, so these stocks might never reach my price. But if they do, I would consider adding them.

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But if you zoom in to October 2025, the chart tells a different story. The stock experienced a significant contraction, shedding nearly 40% of its value following a Q3 earnings call where the new leadership team reset expectations.

The market has effectively repriced Fiserv from a “Growth Compounder” to a “Distressed Utility.” This analysis explores the mechanical reasons behind this drop, the structure of the business, and the valuation metrics that currently define the stock.

1. The Business: Two Engines

According to recent 10-K filings, Fiserv’s ~$19–$20 billion in revenue is derived essentially from two distinct business models.

Segment A: Financial Solutions

• Approx. Revenue Split: 47%

• The Function: This segment acts as the operating system for financial institutions. Products like DNA, Premier, and Signature serve as the “Core Banking” platforms. When a consumer checks their balance or transfers funds, Fiserv’s software often manages the data.

• The Structural Dynamic: High switching costs. Migrating a bank’s core ledger is operationally complex, expensive, and risky for a bank. Consequently, client retention rates in this segment have historically hovered near 99%.

Segment B: Merchant Solutions

• Approx. Revenue Split: 53%

• The Function: This segment handles payment processing for businesses.

  • Small Business: The Clover point-of-sale system (hardware + software).

  • Enterprise: The Carat platform, which manages payments for large global merchants.

• The Structural Dynamic: Revenue is driven by transaction volume and software subscriptions. Distribution is heavily aided by bank partnerships (e.g., a bank offering Clover to its business clients), providing a distinct channel compared to digital-first competitors.

2. What Happened in October?

For several years, the market priced Fiserv based on expectations of consistent “double-digit” earnings growth. To achieve these targets, the company focused heavily on margin expansion.

In October 2025, the new CEO, Mike Lyons, provided a candid assessment of the company’s infrastructure. The core message was that maintaining long-term competitiveness requires significant immediate investment.

• The Pivot: Management announced a need to increase capital expenditures to modernize legacy banking platforms.

• The Consequence: This spending is expected to compress margins in the near term. The company labeled 2026 a “transition year,” leading investors to revise their earnings models downward.

3. The Valuation Data & Expected Return

The stock is currently priced as if growth will permanently stagnate.

Valuation Snapshot (Late 2025 Context)

• Current Stock Price: $63–$65

• Forward Earnings (2025 Guidance): $8.55/share (adjusted EPS)

• P/E Ratio: 9.5x (Historic Low)

  • S&P 500 Average: 24x

  • Visa/Mastercard: 30x+

  • Fiserv 5-Year Average: 17x

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