December 3, 2025 • 24 mins
In this episode of Lead-Lag Live, I sit down with Seth Cogswell, Managing Partner at Running Oak Capital, to break down Michael Burry’s warnings about depreciation manipulation, inflated AI earnings, and the concentration risk dominating today’s market.
From the speed of chip innovation to the widening gap between revenue and AI CapEx, Cogswell explains why valuations at the top of the S&P 500 may be far more stretched than investors realize — and why diversified, valuation-discipline strategies could be the antidote to extreme concentration.
In this episode:
– Why extending depreciation cycles may be inflating mega-cap earnings
– How today’s top 10 S&P names are valued above the peak of the tech bubble
– What investors misunderstand about investing in AI
– Why Running Oak has reduced tech exposure despite an AI revolution
– How passive flows have hollowed out the core of the U.S. equity market
Lead-Lag Live brings you inside conversations with the financial thinkers who shape markets. Subscribe for interviews that go deeper than the noise.
#RunningOak #Markets #TechValuations #AIBubble #PassiveInvesting #RiskManagement #Equities #Investing
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
SPEAKER_01 (01:12):
The valuations are higher.
That means that you have furtherto fall if things don't go
perfectly.
If you do a cap weightedcalculation of the top 10
holdings in the SP 500, it isroughly 39.
According to Apollo, the forwardP of the top 10 holdings during
the tech bubble at the peak was25.
So that means that the forward Pright now of the top 10 holdings
(01:35):
in the SP is 50% higher, roughly50% higher than at the peak of
the tech bubble.
SPEAKER_00 (01:56):
Big tech is under fresh scrutiny after Michael
Burry warned that major AI andcloud computer companies may be
manipulating depreciationschedules, extending the useful
life of data center hardware toartificially boost earnings.
And at the same time, marketsare wrestling with what AI
investing really means now thatthe hype cycle is colliding with
(02:16):
rising capex and margin pressureacross the megacaps.
My guest today is Seth Cogswell,managing partner of Running Out.
So, Seth, the last time you werehere, we talked about quality
growth versus what you call uhthemes, memes, and dreams.
Burry's now accusing big tech ofgaming depreciation to inflate
profitability.
What's your reaction to thatclaim?
SPEAKER_01 (02:39):
First, I would say that this really matters in that
one, these companies that thatBury is somewhat accusing, he
actually used the word fraud,but that he's you're at least
kind of pointing out that theymight be somewhat gaming their
earnings.
That's problematic because theyare the biggest companies in the
(03:03):
index.
Uh they're a massive, you know,they might be the biggest
percentage ever.
And everyone, and I mean, otherthan maybe myself, but almost
everyone has a massive amount ofthem, right?
Whether it's uh passiveportfolios, large cap growth, or
as individual holders of stocks,almost everyone has a massive
(03:28):
percentage of these companies.
So this really matters.
Um now one of the mostinteresting aspects of what he
pointed out is how clear it is.
It's one thing for any anythingcan be said on Twitter or
(03:49):
whatever.
And we all have a tendency tokind of lean toward believing it
because we're like, why wouldanybody lie on on Twitter?
Um but what he has pointed outreally resonates for me, but
also just if you just simplylook at the numbers.
Um, NVIDIA's chip cycle used tobe two years, right?
(04:11):
So they'd come out with like anew uh a new state-of-the-art
chip every two years.
Now it's down to a year or less.
I think it's actually less thana year.
Um, these data centers areevolving quickly.
Uh, I recently heard a coolstory about how one of the data
centers kind of figured out howto use water in a way to really
(04:34):
cool off the chip so it actuallymakes water usage and energy
usage more efficient.
But that means that you'rehaving to basically reinvest a
whole bunch of money into datacenters again to improve them.
And so the progress and thespeed of change and the speed of
innovation right now is crazy.
(04:55):
Meanwhile, these tech companiesare extending their depreciation
cycle, right?
So, which means that they'rebasically saying that the speed
of change is getting slower.
That's what extending thedepreciation cycle means.
Um, and so they're doing theexact opposite of what any
(05:17):
person who observes what at allwhat's going on, they're doing
the exact opposite.
So it's worth paying attentionto.
It's it's really concerning.
I'm not going to use the wordfraud because I'm not, or
certainly I'm not going toaccuse it.
I did use the word.
I'll let Michael Burry throwthat word around.
But it's it's really concerning.
(05:38):
And um, and one of the reasonswhy it's so concerning again is
because these companies are sowidely held, right?
It'd be one thing if this isEnron or WorldCom or something
like that, and that's sort of aone-off.
It's another thing if it'spervasive across the largest
percentage of holdings, youknow, maybe ever, for set for
(06:01):
let's say 10 holdings.
Now, if you another reason whythis really matters is one of
the things I'm trying to reallyemphasize is risk.
And and risk at its heart isjust uncertainty, right?
It's if I like to think of riskas the risk of loss, because
that's what matters to mostpeople.
(06:21):
But many measure risk isstandard deviation, which
measures volatility, right?
Which is uncertainty.
So let the right now is anuncertain type.
The issue is with valuations, ifvaluations are higher, that
means that you have further tofall if things don't go
perfectly.
(06:43):
Right now, the if you do acap-weighted calculation of the
top 10 holdings in the SP 500,it is roughly 39 or so.
According to Apollo, the forwardP of the top 10 holdings during
the tech bubble at the peak was25.
(07:04):
So that means that the forward Pright now of the top 10 holdings
in the SP is 50% higher, roughly50% higher, than at the peak of
the tech level.
Maybe that's fine, right?
There's we've got crazyinnovation going on.
Maybe things work out.
(07:25):
But what if they don't?
And and that that's the bigthat's the big question is just
what if?
Uh because if they don't workout perfectly, it's you know,
there's a lot of downside.
Now, again, if Michael Burry'scorrect, and again, common sense
says that he's not just correct,but actually being conservative.
(07:48):
So in Michael Burry's post, hesaid uh I think two to three
year schedule.
It's probably less.
Uh these, you know, if the ifNVIDIA's cycle is now down to a
year, that's not two to threeyears.
And these companies, the way inwhich they're investing and and
and what their needs are is forcompute to be as powerful as
(08:11):
possible.
Uh and so the odds that they'renot, the odds are that they're
very close to one year and veryfar from six.
Bury's giving them a bit of a alittle bit of uh room for error,
where I'd say, I mean, by allappearances, it seems like it's
(08:32):
far worse than Bury, but let'sbe conservative and we use
Bury's numbers.
And we say that earnings arebeing overstated by roughly 20%,
which he said for Meta.
I think he believes that by2028, they'll be overstating
their earnings by 27 to 28%.
(08:52):
So let's say 20%.
We'll be a little conservative.
If that's the case, the currentforward P of the top 10 holdings
in the SP, if we kind of correctfor what Burry is pointing out,
is now 85% higher than the peakof the tech bubble.
So it it starts to become prettycrazy.
(09:16):
And yeah, that just means thatif in order to, let's say all of
this is true.
Maybe it's not, but let's say itis.
That means that if the marketwere to simply mean revert to
the peak of the tech bubble,that's almost a 50% decline in
these companies.
That's to the peak of the techbubble.
(09:37):
That's not uh anything that wasnormal.
That was one of the that wasarguably the craziest time in
the history of the stock market.
And we're talking about a 50%decline just back to the
craziest time in the history ofthe stock market.
Again, I don't I've one of thegreat things about our strategy
is it's built upon notpredicting the future.
I don't believe I can predictthe future.
Um, but I do believe in commonsense.
(09:58):
I believe in numbers, I believein trusting oneself and uh an
ability to analyze what's fairlyobvious.
And so again, this is a risk,right?
And it may not come to pass.
Um, but it's it's worth, it'sjust worth constantly
reiterating what if.
(10:19):
And the best way to uh approachthat what if is to diversify,
which so few people are haveright now, right?
So less of those companies, youcan still have plenty of it and
you're gonna have exposure indifferent ways, but just less.
And and consider investing inways that are very different
(10:42):
because what if Bury's right?
SPEAKER_00 (10:45):
Yeah, so I mean, talking um, I I guess if if
Bury's wrong, he'll delete hisuh X account eventually, right?
But but it I want to talk aboutAI specifically.
When you look at the AInarrative today and extreme
concentration in the largestnames, which you've talked about
in terms of how much of the SPYor the SP 500 is is made up of
those companies.
(11:05):
What do you think investors aremisunderstanding about how to
truly invest in AI exposurethen, if Furry is correct?
SPEAKER_01 (11:13):
We reconstitute our portfolio generally three times
a year, where we make additionsand deletions.
And the last time we did so, theresult was less tech exposure
than I ever recall seeing.
Usually we have more techexposure than the SP.
Right now we have quite a bitless than I've seen since
running the company.
(11:34):
We have more industrialexposure.
But to have more tech exposureduring what appears to be a
little bit of a, you know, well,maybe not a little bit, very
much a tech revolution is wasdisconcerting, uh, certainly on
its surface.
But the more I've thought aboutit, the better and better I feel
(11:55):
about it.
And our our process isrules-based.
So to have less tech exposurewas not a conscious decision.
It's not based on opinion.
It was based upon our the traitsthat we invest in, which is we
want to maximize earningsgrowth, but we're really
disciplined around valuations,very focused on avoiding
overvalue companies inparticular.
(12:17):
And that is what led to ushaving less tech exposure than
any time I recall.
So I've I've thought about thisa great deal and why our process
would take us this route.
And it led me to someinteresting conclusions.
So, right now, and this isgonna, these are gonna be broad
strokes, but they're pretty easyto verify.
(12:39):
So that AI is estimated, we'llsay a trillion dollars is
estimated to be invested in AICapEx within, let's say, over
the next year or so.
AI native companies, so, ornative AI companies, uh, such as
um OpenAI and a number of theyou know, the big names,
(13:04):
currently have about 20 billionin revenue.
So we've got a trillion dollarsin capex, 20 billion in revenue.
So that's that's 2%.
It's hard to see how thesecompanies have a path to
profitability given theircurrent cost and revenue
structure.
But one of the interestingthings about AI is it can be
(13:26):
applied to any technology.
It can make almost anythingeither a little or a lot better.
And that includes, again,anything is anything, right?
So that includes industrials,financials, healthcare.
I mean, there's some amazingpotential in those areas, real
estate, utilities.
(13:46):
And right now, investors arepiling into tech.
So not just big tech.
They're piling into tech acrossthe board, anything that even
remotely, you know, rhymes withAI, people are piling into,
regardless of valuations,regardless of whether they're
profitable or not.
(14:07):
And that means that that moneyisn't going into other things.
And our strategy is designed tolead us where money, at least
according to our numbers, shouldbe going, but isn't, and it
creates this relative valuation.
And so all this money is pilinginto tech, and therefore our
strategy has led us elsewhere.
And again, the the interestingthing about that is that AI can
(14:29):
be applied not just to tech.
It's AI is not a tech-specificthing, it can be applied to
anything to make it better.
Um, and so you know, if youreally think about that trillion
dollars of CapEx,$20 billion inrevenue.
This doesn't even account forthe fact that that to provide
that$20 billion in revenue has alot of costs associated with
(14:50):
energy and compute and whateverelse.
Regardless, that$20 billion inrevenue has an associated$20
billion in cost, right?
So some other people arespending$20 billion in order for
these companies to have$20billion in revenue.
So other companies are gettingthis$20 billion worth of
(15:15):
products that's costing atrillion dollars plus to
provide.
And so other companies, nottech, the the clients of these
tech or these AI companies aregetting potentially something of
great value at a massivediscount, right?
We're talking basically at a 98%discount.
(15:35):
And so that's one of the thingsthat I again, we we did talk, we
talked about Michael Burry andand the exposure to big tech and
the risks there.
And so few people are investingelsewhere, and there's so much
more opportunity there.
There's profitable companiesthat are in a position to
immediately apply AI and maketheir companies better, and
(16:00):
people aren't investing in this.
So I'm slightly talking to mybook, but certainly with regard
to diversification, there aresome amazing opportunities
outside of tech.
It is not an AI-specific thing.
Uh and again, it's a hell of adeal that these companies are
getting.
SPEAKER_00 (16:19):
Yeah, Seth and I mean, I I think this is what you
mean by the term hollowing outof core.
But for our listeners, can youexplain what that means in
practical terms and why you'reconcerned about the foundation
of the whole market beneath themegacaps, um, even as we've seen
the SP hit new highs?
SPEAKER_01 (16:35):
Uh so I'm reading right now the Bogle effect,
which is the most recentbiography on Jack Bogle.
And and one of the commentsthat's made on pretty regularly
throughout the book is thehollowing out of core.
Now, they don't mean it as anegative per se.
It's more an observation of howpassive is impacting uh say
(17:00):
equity management or managers,right?
So um the popularity of passiveinvesting, which is now roughly
55 to 60 percent of all moneyinvested in stocks or US stocks
especially, is estimated to bein passive investing or
(17:21):
cap-weighted portfolios.
Now, there is an assumption or aview that those passive
portfolios, let's say again, theSP, the Russell 3000, there's a
view that those are a coreholding, right?
They're viewed as beingdiversified.
They're viewed as providingbroad exposure to the market in
(17:43):
general.
But the problem is those thingsare moving around, right?
I mean, 41% of the SP now is in10 companies, and let's say
eight of those companies arevery much tech and large cap
growth.
That's not a diversifiedexposure.
That's not a core holding,right?
So there's this misconceptionthat passive is core.
(18:04):
It's not.
It is not the central,diversified, risk-focused,
whatever.
It's not balancing all thethings, right?
Core should be the centralfoundational holding that
balances all things.
That is not what passive is.
Passive right now is wildlylarge kept growth.
(18:25):
Um and again, going back to thatcomment, the hollowing out of
core, as passive has gained inpopularity, it is just it has
killed most managers or manymanagers that are in that core
space, that are in that sort of,you know, walk the line between
growth and value, let's say Garpor mid-large, it's really it's
(18:45):
hollowed it out, right?
It's it's destroyed thosemanagers, just put them out of
business.
And as the uh investmentmanagement industry has evolved
around the um the popularity ofpassive, as you mentioned
themes, memes, and dreamsbefore, um, you know, a lot of
the active managers have turnedto the periphery, right?
(19:08):
Because if passive is viewed ascore and central, then the
opportunity is around theperiphery to provide
differentiated exposure.
So you've got a lot of thematic,you know, active ETFs.
And and those can be reallycool.
They can provide kind oftargeted, concentrated exposure
to interesting themes.
(19:29):
But one thing I'm focused on alot is there's no buy, low, sell
high component to themes.
There's also no buy, low, sellcomponent to passive.
It's it's actually buy high.
And if the price appreciates,they buy more because it becomes
a higher percentage.
And so it's it's buy high, buyhigher, buy more higher, never
(19:50):
sell.
So whether it's the themes,whether it's the dreams, I call
it dreams on um passive becauseit's a momentum construction.
And so it's a dream that it justgoes up forever.
Because if it doesn't, you seethe uh you know, you see things
reverse.
All that's to say that thecentral holdings or the central
(20:13):
managers that balance growth andvalue mid and large that are
meant to be that core, to bethat foundation of a client's
portfolio are gone.
Except for us.
Now there's some others too.
Uh, but running oak, that's whatwe provide.
We walk the line between growthand value, mid and large.
(20:33):
It's focused on very focused onrisk and valuations.
It's common sense, it'srules-based, which means we're
very disciplined.
And so we are consistently kindof like a rock, delivering
precisely what our clientsexpect because we do the same
thing over and over.
Um, and so I see this hollowingout of core as an incredible
(20:58):
opportunity for us.
I I if I'm gonna make a wildlyoutlandish claim, it's that five
years from now, uh many passiveinvestors will realize will
realize that they were investingin portfolios with the wrong
assumptions and that we are thesolution that they've actually
(21:21):
been looking for.
So uh it's an interesting time,but it's uh I'm excited to see
how it all plays out.
And I believe that we can addsignificant value and
diversification where needed.
Going back to Michael Burry'syou know tweet, the last thing
that people need is moreexposure to a small number of
(21:44):
big tech companies that areburning cash like nothing ever
seen before, that are atvaluations that are
conservatively 50% higher thanthe peak of the tech bubble.
If Michael Burry's correct,they're actually 85% higher than
the peak of the tech bubble.
And and we can help clients oradvisors really somewhat hedge
(22:08):
that bet or diversify away fromit.
SPEAKER_00 (22:09):
Seth, you did an amazing job of uh sort of
wrapping up our conversation fortoday.
Um, before you go, can you letpeople know for and for anyone
who's watching who wants tolearn more about your work, uh
your research, or how to followrunning Oak Capital?
Where sh where can they findyou?
SPEAKER_01 (22:25):
I have very begrudgingly, it's hence this
video, begrudgingly been muchmore active as far as interviews
go and content.
So you definitely look me up onLinkedIn.
There's a lot of content there,and a lot of it's a little more
targeted, so you can kind offocus on different aspects that
you that might be of interest.
Um, feel free to email me, Sethat runningoak.com.
(22:48):
And then please keep an eye out.
I'm starting a new kind of shortvideo series called Not So
Passively Aggressive, which fitsmy personality really well.
Uh, but the goal is to serve asmany investors as possible, help
educate, help them see themarket in a through a lens of
(23:13):
critical thought, um, seepassive as it is, which is not
bad.
Uh, just simply it's it's it'sneither good nor bad, right?
It's it's a momentumconstruction.
And and so really helping peopleto uh learn in any way I can.
Uh so again, that's not sopassively aggressive.
(23:34):
Please keep an eye out for it.
Um, but hit me up anytime.
I I I love having thesediscussions.
I love helping in any way I can.
SPEAKER_00 (23:43):
That sounds extremely exciting.
And Seth, it's always great tohave you on.
And thanks to everyone forwatching.
Be sure to like, share, andsubscribe for more episodes of
Lead Leg Live.
The valuations are higher.
That means that you have furtherto fall if things don't go
perfectly.
If you do a cap weightedcalculation of the top 10
holdings in the SP 500, it isroughly 39.
According to Apollo, the forwardP of the top 10 holdings during
the tech bubble at the peak was25.
So that means that the forward Pright now of the top 10 holdings
(01:35):
in the SP is 50% higher, roughly50% higher than at the peak of
the tech bubble.
SPEAKER_00 (01:56):
Big tech is under fresh scrutiny after Michael
Burry warned that major AI andcloud computer companies may be
manipulating depreciationschedules, extending the useful
life of data center hardware toartificially boost earnings.
And at the same time, marketsare wrestling with what AI
investing really means now thatthe hype cycle is colliding with
(02:16):
rising capex and margin pressureacross the megacaps.
My guest today is Seth Cogswell,managing partner of Running Out.
So, Seth, the last time you werehere, we talked about quality
growth versus what you call uhthemes, memes, and dreams.
Burry's now accusing big tech ofgaming depreciation to inflate
profitability.
What's your reaction to thatclaim?
SPEAKER_01 (02:39):
First, I would say that this really matters in that
one, these companies that thatBury is somewhat accusing, he
actually used the word fraud,but that he's you're at least
kind of pointing out that theymight be somewhat gaming their
earnings.
That's problematic because theyare the biggest companies in the
(03:03):
index.
Uh they're a massive, you know,they might be the biggest
percentage ever.
And everyone, and I mean, otherthan maybe myself, but almost
everyone has a massive amount ofthem, right?
Whether it's uh passiveportfolios, large cap growth, or
as individual holders of stocks,almost everyone has a massive
(03:28):
percentage of these companies.
So this really matters.
Um now one of the mostinteresting aspects of what he
pointed out is how clear it is.
It's one thing for any anythingcan be said on Twitter or
(03:49):
whatever.
And we all have a tendency tokind of lean toward believing it
because we're like, why wouldanybody lie on on Twitter?
Um but what he has pointed outreally resonates for me, but
also just if you just simplylook at the numbers.
Um, NVIDIA's chip cycle used tobe two years, right?
(04:11):
So they'd come out with like anew uh a new state-of-the-art
chip every two years.
Now it's down to a year or less.
I think it's actually less thana year.
Um, these data centers areevolving quickly.
Uh, I recently heard a coolstory about how one of the data
centers kind of figured out howto use water in a way to really
(04:34):
cool off the chip so it actuallymakes water usage and energy
usage more efficient.
But that means that you'rehaving to basically reinvest a
whole bunch of money into datacenters again to improve them.
And so the progress and thespeed of change and the speed of
innovation right now is crazy.
(04:55):
Meanwhile, these tech companiesare extending their depreciation
cycle, right?
So, which means that they'rebasically saying that the speed
of change is getting slower.
That's what extending thedepreciation cycle means.
Um, and so they're doing theexact opposite of what any
(05:17):
person who observes what at allwhat's going on, they're doing
the exact opposite.
So it's worth paying attentionto.
It's it's really concerning.
I'm not going to use the wordfraud because I'm not, or
certainly I'm not going toaccuse it.
I did use the word.
I'll let Michael Burry throwthat word around.
But it's it's really concerning.
(05:38):
And um, and one of the reasonswhy it's so concerning again is
because these companies are sowidely held, right?
It'd be one thing if this isEnron or WorldCom or something
like that, and that's sort of aone-off.
It's another thing if it'spervasive across the largest
percentage of holdings, youknow, maybe ever, for set for
(06:01):
let's say 10 holdings.
Now, if you another reason whythis really matters is one of
the things I'm trying to reallyemphasize is risk.
And and risk at its heart isjust uncertainty, right?
It's if I like to think of riskas the risk of loss, because
that's what matters to mostpeople.
(06:21):
But many measure risk isstandard deviation, which
measures volatility, right?
Which is uncertainty.
So let the right now is anuncertain type.
The issue is with valuations, ifvaluations are higher, that
means that you have further tofall if things don't go
perfectly.
(06:43):
Right now, the if you do acap-weighted calculation of the
top 10 holdings in the SP 500,it is roughly 39 or so.
According to Apollo, the forwardP of the top 10 holdings during
the tech bubble at the peak was25.
(07:04):
So that means that the forward Pright now of the top 10 holdings
in the SP is 50% higher, roughly50% higher, than at the peak of
the tech level.
Maybe that's fine, right?
There's we've got crazyinnovation going on.
Maybe things work out.
(07:25):
But what if they don't?
And and that that's the bigthat's the big question is just
what if?
Uh because if they don't workout perfectly, it's you know,
there's a lot of downside.
Now, again, if Michael Burry'scorrect, and again, common sense
says that he's not just correct,but actually being conservative.
(07:48):
So in Michael Burry's post, hesaid uh I think two to three
year schedule.
It's probably less.
Uh these, you know, if the ifNVIDIA's cycle is now down to a
year, that's not two to threeyears.
And these companies, the way inwhich they're investing and and
and what their needs are is forcompute to be as powerful as
(08:11):
possible.
Uh and so the odds that they'renot, the odds are that they're
very close to one year and veryfar from six.
Bury's giving them a bit of a alittle bit of uh room for error,
where I'd say, I mean, by allappearances, it seems like it's
(08:32):
far worse than Bury, but let'sbe conservative and we use
Bury's numbers.
And we say that earnings arebeing overstated by roughly 20%,
which he said for Meta.
I think he believes that by2028, they'll be overstating
their earnings by 27 to 28%.
(08:52):
So let's say 20%.
We'll be a little conservative.
If that's the case, the currentforward P of the top 10 holdings
in the SP, if we kind of correctfor what Burry is pointing out,
is now 85% higher than the peakof the tech bubble.
So it it starts to become prettycrazy.
(09:16):
And yeah, that just means thatif in order to, let's say all of
this is true.
Maybe it's not, but let's say itis.
That means that if the marketwere to simply mean revert to
the peak of the tech bubble,that's almost a 50% decline in
these companies.
That's to the peak of the techbubble.
(09:37):
That's not uh anything that wasnormal.
That was one of the that wasarguably the craziest time in
the history of the stock market.
And we're talking about a 50%decline just back to the
craziest time in the history ofthe stock market.
Again, I don't I've one of thegreat things about our strategy
is it's built upon notpredicting the future.
I don't believe I can predictthe future.
Um, but I do believe in commonsense.
(09:58):
I believe in numbers, I believein trusting oneself and uh an
ability to analyze what's fairlyobvious.
And so again, this is a risk,right?
And it may not come to pass.
Um, but it's it's worth, it'sjust worth constantly
reiterating what if.
(10:19):
And the best way to uh approachthat what if is to diversify,
which so few people are haveright now, right?
So less of those companies, youcan still have plenty of it and
you're gonna have exposure indifferent ways, but just less.
And and consider investing inways that are very different
(10:42):
because what if Bury's right?
SPEAKER_00 (10:45):
Yeah, so I mean, talking um, I I guess if if
Bury's wrong, he'll delete hisuh X account eventually, right?
But but it I want to talk aboutAI specifically.
When you look at the AInarrative today and extreme
concentration in the largestnames, which you've talked about
in terms of how much of the SPYor the SP 500 is is made up of
those companies.
(11:05):
What do you think investors aremisunderstanding about how to
truly invest in AI exposurethen, if Furry is correct?
SPEAKER_01 (11:13):
We reconstitute our portfolio generally three times
a year, where we make additionsand deletions.
And the last time we did so, theresult was less tech exposure
than I ever recall seeing.
Usually we have more techexposure than the SP.
Right now we have quite a bitless than I've seen since
running the company.
(11:34):
We have more industrialexposure.
But to have more tech exposureduring what appears to be a
little bit of a, you know, well,maybe not a little bit, very
much a tech revolution is wasdisconcerting, uh, certainly on
its surface.
But the more I've thought aboutit, the better and better I feel
(11:55):
about it.
And our our process isrules-based.
So to have less tech exposurewas not a conscious decision.
It's not based on opinion.
It was based upon our the traitsthat we invest in, which is we
want to maximize earningsgrowth, but we're really
disciplined around valuations,very focused on avoiding
overvalue companies inparticular.
(12:17):
And that is what led to ushaving less tech exposure than
any time I recall.
So I've I've thought about thisa great deal and why our process
would take us this route.
And it led me to someinteresting conclusions.
So, right now, and this isgonna, these are gonna be broad
strokes, but they're pretty easyto verify.
(12:39):
So that AI is estimated, we'llsay a trillion dollars is
estimated to be invested in AICapEx within, let's say, over
the next year or so.
AI native companies, so, ornative AI companies, uh, such as
um OpenAI and a number of theyou know, the big names,
(13:04):
currently have about 20 billionin revenue.
So we've got a trillion dollarsin capex, 20 billion in revenue.
So that's that's 2%.
It's hard to see how thesecompanies have a path to
profitability given theircurrent cost and revenue
structure.
But one of the interestingthings about AI is it can be
(13:26):
applied to any technology.
It can make almost anythingeither a little or a lot better.
And that includes, again,anything is anything, right?
So that includes industrials,financials, healthcare.
I mean, there's some amazingpotential in those areas, real
estate, utilities.
(13:46):
And right now, investors arepiling into tech.
So not just big tech.
They're piling into tech acrossthe board, anything that even
remotely, you know, rhymes withAI, people are piling into,
regardless of valuations,regardless of whether they're
profitable or not.
(14:07):
And that means that that moneyisn't going into other things.
And our strategy is designed tolead us where money, at least
according to our numbers, shouldbe going, but isn't, and it
creates this relative valuation.
And so all this money is pilinginto tech, and therefore our
strategy has led us elsewhere.
And again, the the interestingthing about that is that AI can
(14:29):
be applied not just to tech.
It's AI is not a tech-specificthing, it can be applied to
anything to make it better.
Um, and so you know, if youreally think about that trillion
dollars of CapEx,$20 billion inrevenue.
This doesn't even account forthe fact that that to provide
that$20 billion in revenue has alot of costs associated with
(14:50):
energy and compute and whateverelse.
Regardless, that$20 billion inrevenue has an associated$20
billion in cost, right?
So some other people arespending$20 billion in order for
these companies to have$20billion in revenue.
So other companies are gettingthis$20 billion worth of
(15:15):
products that's costing atrillion dollars plus to
provide.
And so other companies, nottech, the the clients of these
tech or these AI companies aregetting potentially something of
great value at a massivediscount, right?
We're talking basically at a 98%discount.
(15:35):
And so that's one of the thingsthat I again, we we did talk, we
talked about Michael Burry andand the exposure to big tech and
the risks there.
And so few people are investingelsewhere, and there's so much
more opportunity there.
There's profitable companiesthat are in a position to
immediately apply AI and maketheir companies better, and
(16:00):
people aren't investing in this.
So I'm slightly talking to mybook, but certainly with regard
to diversification, there aresome amazing opportunities
outside of tech.
It is not an AI-specific thing.
Uh and again, it's a hell of adeal that these companies are
getting.
SPEAKER_00 (16:19):
Yeah, Seth and I mean, I I think this is what you
mean by the term hollowing outof core.
But for our listeners, can youexplain what that means in
practical terms and why you'reconcerned about the foundation
of the whole market beneath themegacaps, um, even as we've seen
the SP hit new highs?
SPEAKER_01 (16:35):
Uh so I'm reading right now the Bogle effect,
which is the most recentbiography on Jack Bogle.
And and one of the commentsthat's made on pretty regularly
throughout the book is thehollowing out of core.
Now, they don't mean it as anegative per se.
It's more an observation of howpassive is impacting uh say
(17:00):
equity management or managers,right?
So um the popularity of passiveinvesting, which is now roughly
55 to 60 percent of all moneyinvested in stocks or US stocks
especially, is estimated to bein passive investing or
(17:21):
cap-weighted portfolios.
Now, there is an assumption or aview that those passive
portfolios, let's say again, theSP, the Russell 3000, there's a
view that those are a coreholding, right?
They're viewed as beingdiversified.
They're viewed as providingbroad exposure to the market in
(17:43):
general.
But the problem is those thingsare moving around, right?
I mean, 41% of the SP now is in10 companies, and let's say
eight of those companies arevery much tech and large cap
growth.
That's not a diversifiedexposure.
That's not a core holding,right?
So there's this misconceptionthat passive is core.
(18:04):
It's not.
It is not the central,diversified, risk-focused,
whatever.
It's not balancing all thethings, right?
Core should be the centralfoundational holding that
balances all things.
That is not what passive is.
Passive right now is wildlylarge kept growth.
(18:25):
Um and again, going back to thatcomment, the hollowing out of
core, as passive has gained inpopularity, it is just it has
killed most managers or manymanagers that are in that core
space, that are in that sort of,you know, walk the line between
growth and value, let's say Garpor mid-large, it's really it's
(18:45):
hollowed it out, right?
It's it's destroyed thosemanagers, just put them out of
business.
And as the uh investmentmanagement industry has evolved
around the um the popularity ofpassive, as you mentioned
themes, memes, and dreamsbefore, um, you know, a lot of
the active managers have turnedto the periphery, right?
(19:08):
Because if passive is viewed ascore and central, then the
opportunity is around theperiphery to provide
differentiated exposure.
So you've got a lot of thematic,you know, active ETFs.
And and those can be reallycool.
They can provide kind oftargeted, concentrated exposure
to interesting themes.
(19:29):
But one thing I'm focused on alot is there's no buy, low, sell
high component to themes.
There's also no buy, low, sellcomponent to passive.
It's it's actually buy high.
And if the price appreciates,they buy more because it becomes
a higher percentage.
And so it's it's buy high, buyhigher, buy more higher, never
(19:50):
sell.
So whether it's the themes,whether it's the dreams, I call
it dreams on um passive becauseit's a momentum construction.
And so it's a dream that it justgoes up forever.
Because if it doesn't, you seethe uh you know, you see things
reverse.
All that's to say that thecentral holdings or the central
(20:13):
managers that balance growth andvalue mid and large that are
meant to be that core, to bethat foundation of a client's
portfolio are gone.
Except for us.
Now there's some others too.
Uh, but running oak, that's whatwe provide.
We walk the line between growthand value, mid and large.
(20:33):
It's focused on very focused onrisk and valuations.
It's common sense, it'srules-based, which means we're
very disciplined.
And so we are consistently kindof like a rock, delivering
precisely what our clientsexpect because we do the same
thing over and over.
Um, and so I see this hollowingout of core as an incredible
(20:58):
opportunity for us.
I I if I'm gonna make a wildlyoutlandish claim, it's that five
years from now, uh many passiveinvestors will realize will
realize that they were investingin portfolios with the wrong
assumptions and that we are thesolution that they've actually
(21:21):
been looking for.
So uh it's an interesting time,but it's uh I'm excited to see
how it all plays out.
And I believe that we can addsignificant value and
diversification where needed.
Going back to Michael Burry'syou know tweet, the last thing
that people need is moreexposure to a small number of
(21:44):
big tech companies that areburning cash like nothing ever
seen before, that are atvaluations that are
conservatively 50% higher thanthe peak of the tech bubble.
If Michael Burry's correct,they're actually 85% higher than
the peak of the tech bubble.
And and we can help clients oradvisors really somewhat hedge
(22:08):
that bet or diversify away fromit.
SPEAKER_00 (22:09):
Seth, you did an amazing job of uh sort of
wrapping up our conversation fortoday.
Um, before you go, can you letpeople know for and for anyone
who's watching who wants tolearn more about your work, uh
your research, or how to followrunning Oak Capital?
Where sh where can they findyou?
SPEAKER_01 (22:25):
I have very begrudgingly, it's hence this
video, begrudgingly been muchmore active as far as interviews
go and content.
So you definitely look me up onLinkedIn.
There's a lot of content there,and a lot of it's a little more
targeted, so you can kind offocus on different aspects that
you that might be of interest.
Um, feel free to email me, Sethat runningoak.com.
(22:48):
And then please keep an eye out.
I'm starting a new kind of shortvideo series called Not So
Passively Aggressive, which fitsmy personality really well.
Uh, but the goal is to serve asmany investors as possible, help
educate, help them see themarket in a through a lens of
(23:13):
critical thought, um, seepassive as it is, which is not
bad.
Uh, just simply it's it's it'sneither good nor bad, right?
It's it's a momentumconstruction.
And and so really helping peopleto uh learn in any way I can.
Uh so again, that's not sopassively aggressive.
(23:34):
Please keep an eye out for it.
Um, but hit me up anytime.
I I I love having thesediscussions.
I love helping in any way I can.
SPEAKER_00 (23:43):
That sounds extremely exciting.
And Seth, it's always great tohave you on.
And thanks to everyone forwatching.
Be sure to like, share, andsubscribe for more episodes of
Lead Leg Live.
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