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Are We There Yet?

Samantha McLemore

Short answer: *Not yet—but we’re getting closer.***Since March 2009, the S&P 500 has been a 10-bagger (~17% CAGR). Valuations are higher and speculation is louder, but institutions remain under-positioned, caution is pervasive, and the AI story is still unfolding—powerfully, but unevenly.**Key Takeaways:

• **The real risk is over-caution. **The past decade made this plain: HFRI ~4.3% vs. S&P 500 13.5% (2010 to 2019); endowments 6.8% vs. market 13.0% (2014 to 2024). Constant protection against drawdowns often sacrificed compounding.
• Later innings ≠ last inning. We’re deep into a secular bull market that began at 12× forward earnings and now sits near ~23×. Sentiment remains skeptical (light institutional positioning; caution-heavy headlines), which is not typical of final peaks.
• AI is transformative—and messy. Headlines warn of bubbles and capex risk; full interviews reveal nuanced optimism (Solomon, Bezos, Huang). Expect winners and losers, not a single narrative.
• Category 1 vs. Category 2 errors. Investors obsess over being wrong (Type I) and underestimate the cost of inaction (Type II). Over time, missing big winners has been far costlier than enduring volatility.
• Our stance. Patient, opportunistic, focused on avoiding permanent impairment, not volatility. We’ve owned what compounds (e.g., NVIDIA) and avoided capital-hungry “neo-clouds” where cash burn and valuation do not yet reconcile.

Why read on: to see how we square rising valuations with persistent skepticism, what we’re owning (and avoiding) in AI, and how we’re positioning for the end of the ride—whenever it arrives—without surrendering the power of compounding today.

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Are We There Yet?

As a child, we rarely took vacations. Too expensive. A few times we drove 16 hours from Vermont to our grandparents’ house in South Carolina, a long and painful drive. We must have asked our parents a million times, “Are we there yet?” No wonder dad threatened to “cut a switch1.” Now I’m on the parent side of that classic question. Fortunately, air travel and Apple iPads have cut down the frequency!

The secular bull market that began in March 2009 has been characterized by a nearly constant fear that the end is nigh. “Are we there yet?”

The secular bull market gains have been stunning. In Peter Lynch parlance, from the 2009 lows to today, the S&P 500 produced a 10-bagger, compounding at 17.0% per year. It started with pure panic and depressed valuations. The S&P 500 traded at 12x forward 12-month earnings. Now, there’s significantly more optimism and valuations are almost double (23x forward 12-month earnings).

Unfortunately, most investors have failed to fully participate in the gains. Financial crisis trauma led to a costly, myopic focus on risk protection. Hedge funds, as measured by the HFRI Index, gained 4.3% per year on average in the 2010s, woefully lagging the S&P 500’s 13.5% annual return. A stark contrast to the outperformance they notched prior to the financial crisis.

To be sure, there are more signs of speculation now. AI deals announced for exorbitant sums with structures harkening back to disastrous Tech Bubble “vendor financing”. Young retail investors making bank on crypto and AI….YOLO.2 I even saw a recent X post claiming everyone in a room was trading on their brokerage sites.

Patient Capital has an annual employee stock picking contest where we pick 10 stocks for the year. Our non-investment team’s portfolios are up 41% on average for the year – nearly triple the S&P 500’s return. Every single administrative professional is beating the market. It’s not usually so easy to crush the market. We are in a bull market indeed.

Does that mean we’re “there”?

Institutional risk tolerance continues to be muted. University endowment returns have substantially lagged the market. Through the end of 2024, the NACUBO Commonfund Study of Endowments reported that endowments returned 6.8% per year over the preceding decade, a little over half the S&P 500’s 13.0% annual return.

Goldman Sachs (GS) recently reported light institutional fund positioning. Its sentiment indicator clocked its 30th consecutive negative reading, the third longest streak since 2015 (the two longer ones were both 32 weeks). Concerns, from tariffs and government shutdowns to AI capital spend and geopolitics, keep caution elevated.

At the Italian Tech Week in early October, Goldman Sachs CEO David Solomon said, “I see complacency around risk-taking… I wouldn’t be surprised if in the next 12 to 24 months we see a drawdown.” He predicted there would be winners and losers.

At the same conference, Jeff Bezos called the AI boom, “an industrial bubble.” He said markets struggle to differentiate between winners and losers during excitement, citing the unusual circumstance of 6-person startups being funded at $20B valuations.

Those cautionary headlines spread rapidly.

If you listen to the entire interviews, they sounded far more positive than suggested. Solomon said he wants to spend much more on AI but is constrained by earnings considerations.

Bezos said it’s hard to fathom how transformative AI is. He said the horizontal enabling layer will improve quality and productivity for literally every company. He said it’s the most exciting time to be alive because of three concurrent Golden Ages: space travel, AI and robotics.

Jensen Huang, CEO of Nvidia (NVDA), recently spoke on the B-squared podcast with Brad Gerstner. Jensen said he’s not concerned about an overbuild of AI in the near-term. “Until we fully convert all general purpose computing to accelerated computing and AI…I think the chances [of a glut] are low.”

OpenAI (OPENAI) and AMD (AMD) announced another large deal, spurred by what OpenAI said is a shortage of compute.

We’ve compared this period to the late 90s or Nifty Fifty periods, both of which entailed spectacular gains and ended with secular bull market peaks. However, many people got defensive way too early and missed out. Greenspan’s famous “irrational exuberance” line in late 1996 was followed by 116% market gains! Even after the crash, the market didn’t fall to the levels where he uttered that line.

Paul Tudor Jones, one of the greatest traders of our times, recently told CNBC, “It’s like 1999...the ingredients are in place for some kind of blow off” top…“If anything, now is so much more potentially explosive than 1999. You need to position yourself like it’s October 1999. The Nasdaq doubled from October 1999 to March 2000.”

Everyone seems to agree we are in a bubble. However, the magnitude, scope, and even existence of a bubble is only ever clear in hindsight. A few things seem clear at present:

1. AI is transformative with broad usefulness and impact. It’s attracting significant attention and capital.
2. It’s costly to build AI infrastructure, increasing the risk of subpar returns.
3. Judging from valuations and sentiment, we are in the later stages of the secular bull market. Whether that occurs in months or many years, no one knows.
4. Speculative activity is growing. Bezos cited startup funding. OpenAI’s recent $500B valuation is 25x its 2021 GPT-3 post releases $20B valuation. OpenAI is reported to have committed to orders for over $1T in infrastructure spend.
5. Significant skepticism still exists. Cautionary headlines fill the news. Nvidia, arguably the main economic beneficiary of the boom, trades for 33x next 12 months earnings, a far cry from Cisco’s peak above 100x. Markets are complex, adaptive systems, and people have learned from past bubbles.

So where does that leave us? Howard Marks’ Jan 2025 piece, “On Bubble Watch,” brilliantly explained bubbles and summed up the pros and cons of the current environment well. The key point, “For me, it’s psychological extremeness that marks a bubble.”

Bubbles don’t typically peak with the world on high alert. At peaks, even the most bearish have usually thrown in the towel on their skepticism. But who knows? We approach markets with a huge dose of humility. There’s far more we don’t know than we know. Vigilance and agility are paramount.

Over the past decade and a half, people have cost themselves much more by being too cautious. People are much more sensitive to Category 1 investing errors (acting when you shouldn’t), than Category 2 ones (failing to act). See ChatGPT’s Summary below. Given losses are twice as painful as gains are pleasurable, investors aren’t as sensitive to missing money-making opportunities as they should be.

Those endowments that earned 6.8% per year over the past decade turned $10,000 into $19,307. If they’d invested in an S&P index fund instead, their 13.0% (or close to it with minor fees) returns would have resulted in $33,946 instead, 1.8x as much.

The Tech Bubble crash was one of the worst in history, entailing a 49% peak-to-trough decline. It was a secular market peak that coincided with a bubble.

If a comparable crash occurred today, the ~$34K index fund balance would fall to $17,312. Endowments should fare better. If their market capture rate is proportional (52.3% of the market’s upside and downside), their losses would be 25.6%, yielding a final balance of $14,358.

The index fund would still produce a balance 20% higher, despite being exposed to bigger losses. Markets rise over time, and compounding is powerful. You’re financially better off capturing the volatility on both sides. Psychologically, though, you’re exposed.

Market crashes like the Tech Bubble have happened only 5 times in the past century, a rate of roughly once every 20 years. The former analysis actually understates the benefits of downside volatility tolerance. Using a compounding period of 20 years before a crash, the index investor winds up with more than twice as much as the endowment investor (detailed in table).

We did suffer two whopper ~50% crashes within a decade in the 2000s. First, the Tech Bubble, then the Financial Crisis. This experience colored a generation of investors. It’s an important origin of the heightened risk awareness we see today.

My longtime colleague, Bill Miller, often pointed out that when people think of risk they only think of the risk of loss if things go wrong, but risk is two-sided and asymmetrical. You can only lose 100% of what you have at risk, but if things go right, you have the possibility of making many hundreds or even thousands of times what you are risking.

People only tend to think about this risk of missing out on gains during the later stages of a bull market. Does that mean people should get more aggressive today? Not at all.

A cardinal sin in investing is doing today what you should have done many years ago. Unfortunately, this happens all the time. It’s easy to see what you should have done differently. The incentive to do something to fix performance problems is significant.

With valuations near historical highs and pockets of euphoria, more caution is warranted. Long-term return prospects are lower than the past decade given the starting point.

Another great line from The Money Game states, “The only real protection against all the vagaries…is to have an identity so firm it is not influenced by all the brouhaha in the marketplace.” It goes on, “The end object of investment is serenity, and serenity can only be achieved by the avoidance of anxiety, and to avoid anxiety you have to know who you are and what you’re doing.”

As for us, we aim to deliver strong, market-beating returns. We are patient, opportunistic, and behaviorally aware. We seek to prevent permanent impairments of capital, not volatility.

Impairment means you don’t make back losses. This usually results from deteriorating business fundamentals or overpaying for an asset. We seek to mitigate both risks. Further, we seek to mitigate the risk we underperform our benchmark.

To deliver on our objective of high, market beating returns, we will need to protect against impairments associated with secular bull market tops. Fortunately, value investing has proved protective after similar past peaks. Our identity is long-term, value investors. We compare market expectations to business fundamentals and intrinsic values. We seek to capitalize on disconnections between the two when we have a variant perception.

We believe AI is transformative. Not all transformations lead to excellent investment opportunities. Air travel changed the world, but airlines have been the poster children of terrible investments (we think some airlines are attractive currently).

We invested in Nvidia early last year because we believed the market miscategorized Nvidia as a hardware company with imminent earnings risk. We thought Nvidia’s software, networking and innovation cycle created a broader competitive advantage, and the opportunity was huge.

We still believe Nvidia is earning the bulk of AI economic returns (so far). It’s a fantastic company with great returns and growth at the center of an economic boom. In our view, it’s not expensive at 29x FY 2027 (calendar 2026) earnings, which are expected to grow at 40%+. Their products are still in high demand with shortages.

The enduring fear has been that demand will roll over at some point, creating an air pocket in earnings and the stock. It’s possible. We aren’t smart enough to predict when that might happen. But we aren’t there yet. Market expectations are clouded by that fear, while business fundamentals remain stellar – a disconnect we are happy to continue to exploit.

On the other hand, we’ve avoided the neoclouds. Demand growth has been astounding, but they are burning significant cash given the elevated capital intensity. JP Morgan (JPM) recently initiated on CoreWeave, the leader, with an overweight.

It projected 2029 free cash flow of $3-4B. With a $79B enterprise value, one needs to believe in significantly brighter prospects over some time horizon to justify the current price.

As Peter Lynch said during the height of the Tech Bubble, “That’s not to say there’s no such thing as an overvalued market, but there’s no point in worrying about it.”

“Mommy, are we there yet?” No dear, not yet. But we’re getting closer.

Stay tuned for more about our positioning and individual holdings in our Q3 portfolio recap.

Opportunity Equity Annualized Performance (%) as of 9/30/25

	QTD	YTD	1-Year	3-Year	5-Year	10-Year	Since Inception (12/30/1999)
Opportunity Equity (gross of fees)	14.4%	19.8%	29.9%	29.1%	12.3%	11.6%	9.1%
Opportunity Equity (net of fees)	14.1%	18.9%	28.7%	27.8%	11.2%	10.5%	8.0%
S&P 500 Index	8.1%	14.8%	17.6%	24.9%	16.5%	15.3%	8.1%

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1An old expression meaning to cut a tree branch for a spanking

2An expression meaning “You Only Live Once” encouraging risk taking

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.