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In markets, as in life, enthusiasm is not inherently dangerous. But when enthusiasm becomes unmoored from discipline-when it begins to masquerade as inevitability-it invites risk. My experience tells me that the factors are present, and we may be approaching such a period. It's crucial to stay focused and clear-minded, avoiding the allure of hype.

This commentary is not a call for alarm. It is a quiet nod to incremental caution and thoughtful risk management. This kind of quiet discipline has served me well over nearly 30 years as a steward of other people's hard-earned money. By being informed and prepared, we can navigate these potential challenges with confidence. 

There is nothing new about the equity markets strongly advancing on a central thesis, such as Artificial Intelligence (AI). This has happened many times throughout history, whether it be railroads and the industrial revolution they enabled, the automobile and the transportation revolution it enabled, the space race and all the consumer and industrial innovations that followed, or the internet and network computing. Today, markets are fixated on AI and the race to generate more electricity to meet very ambitious growth projections.  There is no denying the transformative potential of Artificial Intelligence (AI). The capital flows into AI infrastructure, the applications, and the potential productivity enhancements are staggering. But, as always, what concerns me is not the innovation itself-it's the market's reaction to it.

Back in February 2024, I wrote: "The market's newfound obsession with AI is not unlike the early days of the dot-com era-there is truth in the trend, but also danger in the extrapolation." That observation feels even more relevant today.

As someone who served as an equity analyst and portfolio manager during the build-up to the dot-com bubble in the late 1990s, I've seen firsthand how narrative can overwhelm fundamentals. The narrative at that time was about the potential of the internet to revolutionize business. The investor enthusiasm for that narrative led to companies with no revenues, let alone earnings, trading at valuations that defied logic-simply because they had '.com' in their name. The lesson was clear: when capital chases story over substance, experience and discipline become increasingly important.

We are seeing valuations not in absolute terms, but built upon extremely optimistic forecasts, which create a fragility that requires heightened attention. Companies at the center of the AI buildout have become so large that many investors see them as infallible. Smaller AI enabler companies are being rapidly bid up in price, and valuations have gone parabolic simply based upon proximity to the so-called hyper-scalers and their seemingly inexhaustible spending.  Lately, we have seen a concerning trend in circular funding arrangements. Technology suppliers like Nvidia (NVDA) are investing in enablers such as OpenAI, which then recycles this investment capital to contract with entities like Coreweave (CRWV), a major customer of Nvidia and a company in which Nvidia is an equity investor. Coreweave purchases Nvidia GPU chips for the data centers that will then be leased to OpenAI. For those of us old enough to remember comedian and talk show host Asenio Hall, his famous comedy bit, which included the tagline "things that make you go hmm," comes to mind.

As fiduciaries, we must ask: what is priced in? What margin of safety remains? And are we underwriting future cash flows or future headlines? It is not a stretch to understand that when a new headline hits that refers to 10s of billions of dollars being spent by a hyperscaler company for a data center or investment in another AI company resulting in an immediate stock price run-up of 10% the same day, that such a bid up in price cannot possibly incorporate a rigorous analysis of a return on investment of such spending. Our approach involves analyzing the addressable potential cash flows and returns on invested capital over a period of five years or more, rather than just focusing on the possible immediate market reaction to new flow.

It is indeed beginning to feel like market momentum has become self-reinforcing. Passive flows, options activity, and algorithmic strategies are amplifying reactionary moves in both directions. This creates the illusion that the markets know something most investors cannot understand, leading many investors to throw caution to the wind and simply adopt a Fear of Missing Out (FOMO) approach to investing.

In August 2023, I noted: "Momentum-driven markets often reward speed over scrutiny, but when the tide turns, it's the thoughtful allocator who survives." That remains our posture.

We've seen this movie before. Momentum and exuberance can mask fragility. It can suspend fundamental price discovery. And, in the end, it has shown that markets will ultimately punish those who mistake velocity for durability.

Our approach remains unchanged: we do not chase. We do not extrapolate.  This is not to say that we will not invest. We have always been willing to take early positions in companies developing products and services that can be disruptive and capture a significant share of a large, future, total addressable market. Our most recent example of this is our meaningful exposure in many portfolios to the nascent, but transformational, quantum computing industry. Our quantum computing investment began in late 2023, before these companies were gaining any meaningful investor attention.

Another area attracting a lot of investor attention recently is cryptocurrency. Cryptocurrencies have been around for well over ten years since Bitcoin was first introduced. Significant cryptocurrencies such as Bitcoin, Ethereum, and Solano have gone from being advocated for by a small number of "evangelical" early crypto-adopters, to now being treated as a legitimate and mainstream asset class and foundational technology. Over the years, crypto-token prices have ebbed and flowed, primarily due to regulatory concerns; however, the speculative fervor is back, fueled by ETF approvals, supportive federal legislation, and a new wave of companies built around the expected broad adoption of stablecoins. 

We believe that blockchain technology will have long-term utility; however, we remain wary of speculation in crypto-token prices. The most significant risk of speculative investing in crypto-tokens is the complexity of their use cases, which involve numerous profit-seeking intermediaries and difficult-to-understand financial leverage. That being said, we have utilized ETFs to add exposure in some client portfolios to Ethereum, the backbone of blockchain technology that enables stablecoins. 

In March 2024, I cautioned: "Crypto is not immune to the laws of gravity. When speculation outpaces utility, the reckoning is only a matter of time."

Our aversion to getting caught up in hype and linear thinking when it comes to speculative investments is also applied to macroeconomics. Outside of AI-related spending, the economic picture is more nuanced. We are seeing signs of consumer fatigue, a continuation of the widening wealth and income gap, rising loan delinquencies, and softening demand in key sectors. Small businesses are feeling the pinch of tariffs. Credit conditions are tightening. And geopolitical tensions remain a persistent undertow.

The bifurcation is striking: AI is booming, but many other areas are blinking yellow. This divergence is not sustainable indefinitely.

In September 2024, I wrote: "The economy is not a monolith. Underneath the surface of headline strength lies a patchwork of stress signals." That patchwork is now more visible.

We are continually questioning what we see in the markets, what is reported about the economy, and even our own assumptions. We do not always get it right, but we try to avoid getting fooled again. The Who told us in the song "Won't Get Fooled Again" that, as much as we celebrate change, history shows us that the more things change, the more they stay the same, as expressed in the lyric, "meet the new boss, the same as the old boss."

Our posture is not bearish-it is persistently cautiously optimistic. We remain invested, but we are tilting toward caution. We are trimming where valuations look unsustainably frothy. We are adding where dislocation creates opportunity. This means that we are adding to investments where we are less concerned about downside risk as we incrementally increase the probability of a meaningful correction or worse.

In times like these, the temptation is to chase. To match the market's mood. But our job is not to mirror sentiment-it is to manage risk. To preserve capital appreciation. To leverage compound growth.

The lessons I learned as an analyst and portfolio manager during the dot-com era are etched into my approach: enthusiasm is not a substitute for cash flow, and momentum is not a moat. We honor innovation, but we invest with discipline.

As always, I welcome your questions, your reflections, and any concerns that you might have. Thank you for trusting us to navigate this moment with clarity, conviction, and care.

Curt R. Stauffer