Value Investing Has Finally Died
Summary
Joseph Carlson After Hours begins by acknowledging the recent dominance of momentum investing, particularly the 'Tik Tok strategy' of buying stocks simply because they are going up. This phenomenon has led to significant underperformance among traditional stock pickers and active fund managers, with only one in four beating the market in 2026, a stark decline from historical norms. Joseph Carlson After Hours cites the example of Pulling Capital, which lost over half its assets by betting against AI stocks and instead investing in software companies like Salesforce and Adobe.
Joseph Carlson After Hours then analyzes a letter from Terry Smith of Fundsmith, a renowned growth and quality investor, who is forced to adapt his strategy due to multi-year underperformance and massive investor redemptions. Smith's fund is down 2.9% in 2026, while its benchmark is up 14%, leading to a 17% underperformance. Joseph Carlson After Hours interprets Smith's letter as a desperate, pragmatic argument for survival, where Smith admits to being more active and considering momentum factors, despite his philosophical opposition to it. Smith fears his fund might close before his long-term value investing philosophy can prove itself through the market's 'weighing machine.' Joseph Carlson After Hours highlights this as a critical disadvantage of open-ended funds without permanent capital, where managers are forced to chase short-term performance to prevent outflows.
In stark contrast, Joseph Carlson After Hours presents Warren Buffett's approach during the dot-com bubble in 1999. Despite Berkshire Hathaway being down 22% while the S&P 500 was up 19%—a far worse relative underperformance than Smith's—Buffett remained committed to value investing. Joseph Carlson After Hours emphasizes that Buffett, having permanent capital, made no excuses, took full responsibility, and refused to alter his strategy by even a 'pinch,' sticking to his conviction that intrinsic value would eventually prevail. Buffett's patience ultimately paid off, with Berkshire Hathaway significantly outperforming the S&P 500 in the following decade. Joseph Carlson After Hours concludes by asserting that value investing is not dead and that patient investors with permanent capital, focusing on quality companies with durable growing value, will do well over the long term. Joseph Carlson After Hours believes the current momentum-driven market, where money flows exaggerate returns for some stocks and impair others, is temporary.
Joseph Carlson After Hours also discusses a news item regarding Starbucks, which is experimenting with AI to develop its own in-house software, aiming to reduce reliance on vendors like Microsoft and IBM. While initially a small amount of spending, Joseph Carlson After Hours sees this as a potential long-term trend, posing a 'bear case' challenge to legacy software products from these companies, as they now must compete with internal tech teams.
Mentioned Stocks
Reasoning: Joseph Carlson After Hours uses Meta as an example of a stock they personally hold and can maintain for years, regardless of short-term price fluctuations, due to having 'permanent capital' and no external pressures. This illustrates Joseph Carlson After Hours' belief in long-term value investing and the ability to ride out volatility for quality companies.
Reasoning: Joseph Carlson After Hours highlights Salesforce as an example of a company that Pulling Capital bought while other investors were moving into AI stocks. This 'exact opposite trade' led to Pulling Capital losing $50 billion and being down 45% from its 2021 peak. Joseph Carlson After Hours implies that investing in such software companies was the 'wrong bet' in the current market, contributing to massive fund destruction.
Reasoning: Joseph Carlson After Hours discusses a 'bear case' for Microsoft stemming from Starbucks' initiative to develop its own AI-powered software to replace existing Microsoft systems. Joseph Carlson After Hours suggests this trend, where companies build in-house solutions, will put pressure on Microsoft's legacy products, implying a potential challenge to their revenue streams in the coming years.
Reasoning: Joseph Carlson After Hours identifies Adobe as another software company that Pulling Capital invested in, which was contrary to the market's shift towards AI stocks. This decision contributed significantly to Pulling Capital's devastating losses of $50 billion and its 45% decline from its 2021 peak, implying that it was an unfavorable investment in the prevailing market conditions.
Reasoning: Joseph Carlson After Hours includes IBM alongside Microsoft as a company facing challenges from Starbucks' move to develop its own AI-driven software, specifically replacing IBM's maintenance tools. Joseph Carlson After Hours views this as a 'bear case' for legacy software providers, predicting a 'continual theme' where such companies will be increasingly challenged by in-house solutions.
Reasoning: Joseph Carlson After Hours states they can hold Costco for '10, 15 years' as part of their strategy, which is underpinned by having permanent capital. This demonstrates Joseph Carlson After Hours' confidence in the long-term prospects of Costco and advocates for a patient, buy-and-hold approach for fundamentally strong companies.