Excess Returns

In this inaugural episode of our new show, The Intangible Economy with Kai Wu, we explore how AI, intangible assets, and unprecedented capital investment are reshaping the future of markets. Michael Mauboussin joins Kai to break down why today’s AI expectations may be historically unmatched—and what that means for investors trying to assess risk, returns, and who ultimately captures value.

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The conversation moves from base rates and AI growth expectations to competitive dynamics, capital cycles, and the fundamental shift toward intangible-driven business models that are changing how we think about valuation, moats, and market structure.

Papers and Resources Discussed:

Bayes and Base Rates: How History Can Guide Our Assessment of the Future
https://www.morganstanley.com/im/en-us/institutional-investor/insights/consilient-observer/bayes-and-base-rates.html

The Impact of Intangibles on Base Rates
https://www.morganstanley.com/im/publication/insights/articles/article_theimpactofintangiblesonbaserates.pdf

Measuring the Moat: Assessing the Magnitude and Sustainability of Value Creation
https://www.morganstanley.com/im/publication/insights/articles/article_measuringthemoat.pdf

One Job: Expectations and the Role of Intangible Investments
https://www.morganstanley.com/im/publication/insights/articles/article_onejob.pdf

Capitalism Without Capital: The Rise of the Intangible Economy
https://books.google.com/books/about/Capitalism_without_Capital.html?id=J3SYDwAAQBAJ

A Better Estimate of Internally Generated Intangible Capital
https://pubsonline.informs.org/doi/10.1287/mnsc.2022.01703

Underestimating the Red Queen: Measuring Growth and Maintenance Investments
https://www.morganstanley.com/im/publication/insights/articles/article_underestimatingtheredqueen.pdf

Explaining the Recent Failure of Value Investing
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3442539

Guest Links:

Michael Mauboussin Twitter

Topics Covered:

• Why OpenAI’s projected growth would be unprecedented in market history

• How base rates provide a reality check on AI expectations

• The role of diffusion models and adoption curves in forecasting technology

• Why massive capital investment in AI may follow past boom-bust cycles

• Lessons from large-scale infrastructure projects and why timelines break

• How intangible assets change the distribution of business outcomes

• The rise of “fat tails” and why more companies now massively win or fail

• Who captures value in AI across the stack from chips to applications

• Why competition may drive AI profits toward consumers, not producers

• How accounting distorts intangible investment and misleads investors

Timestamps:

00:00 Intro and OpenAI growth expectations vs historical base rates
04:32 Why no company has ever achieved 100%+ sustained growth at scale
08:47 Lessons from megaprojects and AI infrastructure buildouts
13:18 Intangible assets and why outcomes now have fatter tails
18:36 Why big tech is growing faster than historical precedents
23:52 Where value accrues in AI and why consumers may benefit most
28:21 Barriers to entry in AI including capital, talent, and scale
32:47 The risk of overinvestment and historical parallels to past bubbles
37:26 Game theory and competitive signaling in AI capital spending
41:58 Why investment returns—not “asset light” narratives—drive value
46:12 How accounting fails to capture intangible investment properly
50:44 Breaking down SG&A into maintenance vs investment spending
55:03 Why understanding reinvestment and ROI is the core investing skill
59:18 Final thoughts on uncertainty, expectations, and base rates in AI

This episode of Excess Returns features Aahan Menon of Prometheus Research breaking down the growing risk of an inflation shock driven by energy markets and what it means for investors. The discussion explores how a potential shift toward stagflation could challenge traditional stock and bond portfolios and why commodities, trend following, and systematic frameworks may be better suited for the current environment.

Prometheus Research
https://www.prometheus-research.com

Aahan Menon Twitter
https://x.com/@AahanPrometheus

• Why the current inflation shock may be one of the most significant in recent history

• How oil prices and geopolitical conflict are reshaping macro expectations

• The growing risk of a stagflationary environment and what it means for portfolios

• Why traditional 60/40 portfolios may struggle in sustained inflation regimes

• How expected returns differ across equities, bonds, commodities, and FX

• Why commodities and energy markets offer the most attractive opportunities today

• The role of backwardation and supply shocks in driving commodity returns

• Why consensus earnings expectations may be too optimistic relative to macro reality

• How inflation flows through the economy from energy to consumer demand

• The Fed’s dilemma between inflation control and economic slowdown

• A simple rule for when to own treasuries based on inflation trends

• Why correlations across asset classes are breaking down in crisis environments

• How systematic investors manage risk when markets are driven by news and geopolitics

• The case for trend following as a core portfolio strategy

• How Aahan’s free trend system works across stocks, bonds, gold, and Bitcoin

• The behavioral advantages of systematic investing during volatile markets

• Risks of trend following including whipsaws and false signals

• How portfolio construction is evolving to include crisis protection and energy overlays

00:00 Inflation shock and why equities and bonds may struggle
01:03 Setting up the macro backdrop before the oil shock
03:12 Labor market slowdown vs strong GDP divergence
04:45 Consumer spending driven by de-saving
05:35 Oil-driven inflation shock as a recession catalyst
07:32 Preparing for stagflation vs disinflationary growth
09:18 Why commodities outperform in inflation regimes
10:45 Expected returns framework across asset classes
12:05 Why commodities and FX offer the best opportunities
14:05 How commodity carry and backwardation work
16:42 Trend following and commodities as pro-cyclical exposures
17:43 Ranking expected returns: energy, FX, bonds, equities
18:51 Challenges of systematic investing in news-driven markets
20:15 Extreme correlations and oil dominating asset pricing
23:47 Earnings expectations vs macro reality gap
28:30 Why the Fed faces an impossible policy tradeoff
30:00 Real-time CPI estimates and inflation pressure
32:00 A rule for when to own treasuries based on CPI
37:30 Stock-bond correlation regime shifts
39:34 How the trend following system works
45:10 Benefits and limitations of trend strategies

This episode explores Harris “Kuppy” Kupperman’s framework for “inflection investing” and how he identifies asymmetric opportunities across global markets. The conversation dives into why he believes U.S. equities are structurally challenged, where he sees better opportunities globally, and how macro, politics, and capital flows drive major investing inflections.

Inflection investing and identifying asymmetric opportunities
How macro and politics create winners and losers in markets
The Argentina case study and why the stock exchange may outperform the country
How to structure trades with limited downside and multi-bagger upside
Time horizon advantages versus short-term Wall Street thinking
Portfolio construction, capital allocation, and when to sell positions
Managing risk, leverage, and liquidity during crises and wars
Building a “shopping list” during market dislocations
Country ETFs vs individual securities in global investing
Why Kuppy prefers international markets over the U.S.
The structural imbalances in the U.S. economy and stock market
Why AI may lead to profitless growth and economic disruption
The impact of AI on jobs, margins, and economic demand
How inflation distorts economic data and investor perception
Finding opportunities in “left for dead” markets like Brazil
The role of elections and policy shifts in market inflections
How to think probabilistically about investments
Avoiding unforced errors and emotional decision-making
The importance of long-term thinking in volatile markets
Psychology and discipline in global macro investing

Harris Kupperman Twitter
https://twitter.com/HedgeyeKuppy

Praetorian Capital Website
https://praetorian-capital.com

Timestamps
00:00 Why the U.S. stock market is structurally overvalued
01:14 What “inflection investing” means
02:54 Top-down vs bottom-up investing framework
04:31 Using politics to identify winning trades
05:00 Argentina trade setup and execution
06:20 Why the Argentine stock exchange is the best play
08:00 Earnings inflection and multiple expansion potential
10:37 Time horizon and holding period strategy
13:00 When to exit positions and recycle capital
18:41 How and when to raise cash
19:41 De-grossing the portfolio during crises
23:14 Real-time decision making during war scenarios
27:00 Building a shopping list during dislocations
29:32 ETF vs individual stock decision process
33:22 Why the U.S. is less attractive than global markets
38:17 The problem with AI-driven “growth”
43:31 Monitoring vs acting across global opportunities
48:14 The psychology of long-term investing and edge

This episode of our new market wrap show Last Call breaks down the biggest market drivers right now through three distinct lenses: macro, narrative, and flows. With an oil shock driven by geopolitical conflict, rising volatility, and conflicting economic signals, the discussion focuses on what actually matters beneath the surface and how investors should think about positioning in an environment where nothing is clearly priced in.

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Jack and Matt bring together Andy Constan, Ben Hunt, Brent Kochuba, and Eric Pachman to analyze the ripple effects of higher oil prices, the “common knowledge” shift in markets, the role of options flows in driving short-term moves, and why traditional economic indicators like unemployment may be telling a misleading story.

Andy Constan Twitter
https://x.com/dampedspring

Ben Hunt Twitter
https://x.com/EpsilonTheory

Brent Kochuba Twitter
https://x.com/spotgamma

Eric Pachman Twitter
https://x.com/epachman

Topics covered:

• How oil supply shocks impact GDP, inflation, and consumer spending

• Why higher oil prices act as a tax on the economy and shift growth dynamics

• The difference between supply shocks and demand shocks in energy markets

• Why central banks may be unable to respond to an oil-driven slowdown

• The “common knowledge” framework and how narratives reshape markets

• Why the Strait of Hormuz has become the key global economic bottleneck

• Oil exporters vs importers and how that divide is driving asset performance

• Why energy equities may outperform in a prolonged geopolitical conflict

• How volatility is being driven by oil prices and geopolitical risk

• The relationship between VIX and oil during crisis periods

• Why $100 oil could trigger a major volatility spike and equity selloff

• The JP Morgan collar trade and how options positioning can pin markets

• How dealer hedging flows influence short-term price action

• Why markets may appear disconnected from negative news

• The limits of predicting what is “priced in” during uncertain environments

• Why diversification matters more when macro visibility is low

• How unemployment data can mislead by excluding people leaving the workforce

• The difference between unemployment rate and labor force participation

• Structural decline in rural economies and the migration to urban centers

• How labor force trends explain the divergence in economic experiences across the US

Timestamps:
00:00 Oil shock as a GDP tax on consumers
00:16 Strait of Hormuz as global economic chokepoint
00:29 Why $100 oil could send VIX to 50
00:39 Why unemployment rate may be misleading
01:07 What Last Call is and how the episode is structured
02:28 Macro, narrative, and flows framework for markets
03:44 How oil supply shocks impact growth and inflation
06:00 Why higher oil prices reduce discretionary spending
07:00 Oil’s impact on inflation and central bank policy
09:39 Scenario analysis for oil prices and market outcomes
12:28 Is the oil shock priced into markets?
16:00 Why oil vs assets may be mispriced
20:00 Ben Hunt on the “common knowledge” market shift
25:00 Why the Strait of Hormuz changes everything
29:00 Portfolio implications: long energy vs global equities
33:00 Brent Kochuba on oil, VIX, and market volatility linkage
36:00 Why $100 oil is the key risk threshold for equities
40:00 JP Morgan collar trade and market pinning dynamics
44:00 Why options flows can override macro narratives short term
52:00 Eric Pachman on unemployment vs labor force reality
59:00 Structural decline in labor force across US counties

In this episode of Excess Returns, we sit down with Larry Swedroe to break down one of the most debated topics in markets today: private credit. Larry walks through what private credit actually is, why it has grown so rapidly since 2008, and where he believes the biggest misconceptions and risks are for investors.

We dig into the structure of the market, how liquidity and credit risk really work beneath the surface, and why the media narrative around private credit may be overstating systemic risks. We also explore how investors should think about diversification, illiquidity premiums, and the potential impact of AI on credit markets and software lending.

Larry Swedroe Twitter
https://twitter.com/larryswedroe

Larry Swedroe Substack
https://larryswedroe.substack.com

Topics covered

• What private credit is and how it evolved after the 2008 financial crisis

• Why private credit is not a single asset class and how risk varies across structures

• The three key risks in private credit: credit risk, liquidity risk, and concentration risk

• How illiquidity premiums work and why they can be a major source of return

• Differences between private credit funds, BDCs, and open architecture platforms

• Why diversification is critical and how concentration risk can be hidden

• How rising interest rates are impacting defaults and underwriting standards

• Media misconceptions around defaults, losses, and valuation marks in private credit

• The real systemic risk of private credit vs the banking system

• How liquidity actually works in interval funds and stress scenarios

• What happens in a recession and how private credit compares to equities and high yield bonds

• The role of software lending and how AI disruption could impact credit portfolios

• How to evaluate private credit managers including scale, underwriting, and leverage

• The importance of credit culture and avoiding “reach for yield” behavior

• Whether private credit should be accessible to retail investors and the risks involved

• The concept of earning “beta” in private credit vs trying to pick winning managers

• AI’s growing role in investment research and the risks of overfitting and false signals

Timestamps
00:00 Why private credit is less risky than banks for systemic stability
01:12 Introduction and episode overview
03:00 What private credit is and how it grew after 2008
05:21 Who provides capital to private credit funds
07:11 Why private credit is not a monolithic asset class
08:00 The three key risks in private credit
09:00 Illiquidity premium and why it can be a “near free lunch”
12:00 Credit risk and importance of senior secured lending
16:00 Concentration risk and why diversification matters
18:11 Are defaults rising and what the data actually shows
21:00 Media narratives vs actual credit losses
23:50 Could private credit cause a financial crisis
25:50 How to analyze portfolios and why most investors can’t
28:44 Should investors think about indexing private credit
30:12 Can private credit work for retail investors
32:26 Mass redemption risk and liquidity stress scenarios
36:00 Sources of liquidity inside private credit funds
41:37 Software lending and AI disruption risk
47:00 Private equity valuations and spillover into credit risk
49:43 Key checklist for evaluating private credit investments
56:30 How AI is changing financial research and investing

This episode of Excess Returns features Bob Elliott discussing the growing fragility in the global economy as an oil shock collides with a shift from an income-driven to a savings-driven system.

The conversation explores why markets may be mispricing the economic impact of higher oil prices, how inflation and growth dynamics could unfold, and what this means for investors navigating an increasingly volatile macro environment.

Bob also breaks down how to think about global macro investing today, including why traditional portfolios may be poorly positioned for a wider range of outcomes, how macro managers are adapting to shifting conditions, and how AI-driven productivity gains could impact economic growth, labor, and markets.

Bob Elliott on Twitter
https://twitter.com/BobEUnlimited

Unlimited Funds website
https://www.unlimitedfunds.com

Topics covered

• The shift from an income-driven economy to a savings-driven economy and why it creates fragility

• Why an oil shock acts as both an inflation driver and a tax on real consumer spending

• How higher gas prices mechanically reduce discretionary spending and economic growth

• Why markets may be underpricing the economic impact of the current oil shock

• The link between oil prices, inflation expectations, and real demand destruction

• How global markets respond to shocks through deleveraging and volatility spikes

• Why gold and other winning trades can fall during risk-off environments

• The sequencing of inflation first and growth slowdown later in shock-driven cycles

• How central banks are likely to respond to a stagflationary shock

• Lessons from 2022 and 2008 for understanding today’s macro environment

• Why stocks and bonds may both be mispriced in the current regime

• The difference between consumer surplus and true productivity gains from AI

• Why AI-driven job losses and economic growth cannot coexist without major dissaving

• The most likely path for AI as a productivity enhancer rather than a job destroyer

• How to think about measuring productivity in a technology-driven economy

• The role of second- and third-order effects in macro investing

• How global macro strategies identify mispricings across asset classes

• The concept of using the “wisdom of the crowd” from hedge fund positioning

• Why macro strategies can perform in both rising and falling markets

• How macro fits into a portfolio as a diversifier versus long-only assets

• Why the future investment environment may require broader strategy diversification

Timestamps

00:00 Oil shock meets a savings-driven economy
01:00 Framing the macro environment: oil, inflation, and growth
02:12 What a savings-driven economy means for market fragility
04:46 Why household income vs spending divergence matters
07:00 First principles of an oil shock and demand inelasticity
08:00 How oil price spikes flow through to inflation
13:00 Global market reactions and emerging market dynamics
14:00 Deleveraging and volatility driving asset price reversals
15:44 Why gold declines during macro stress events
17:17 Institutional positioning and ETF flows in gold
17:34 Inflation first, growth slowdown later: sequencing the impact
19:24 Is the economic damage already done
22:00 How macro investors operate in low-conviction environments
29:19 What the Fed should do versus what it will do
31:00 Comparing today’s environment to 2022 inflation dynamics
33:00 Why markets are pricing in almost nothing
34:00 AI and the link between labor, income, and spending
37:11 Productivity vs consumer surplus in AI adoption
40:00 Why better tools don’t necessarily mean higher productivity
s
46:00 How global macro strategies are constructed
48:00 Using hedge fund positioning as a signal
56:00 Why the opportunity set for macro may be expanding

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In this episode of our new show, 100 Year Thinkers, Robert Hagstrom and Chris Mayer explore how investors should think about base rates, extreme outcomes, and the realities of long-term wealth creation in markets. Applying the work of Michael Mauboussin, the conversation challenges conventional ideas like mean reversion and highlights why a small number of companies drive most stock market returns—and what that means for portfolio construction.

This episode brings together Robert Hagstrom and Chris Mayer to explore how investors should think about base rates, extreme outcomes, and the realities of long-term wealth creation in markets. The conversation challenges conventional ideas like mean reversion and highlights why a small number of companies drive most stock market returns—and what that means for portfolio construction.

Topics covered
• Why markets are driven by extreme outcomes and power laws, not averages
• The Best & Bessembinder research showing a handful of stocks create most wealth
• Base rates vs outliers and when to trust historical probabilities
• Why the 100 bagger framework focuses on studying winners, not predicting them
• Portfolio construction as a way to capture asymmetric upside
• Buffett’s approach to consistency, durability, and long-term operating history
• Inside view vs outside view and how narratives distort investing decisions
• Why AI may be breaking traditional base rate assumptions in software and tech
• The limits of mean reversion and why it can lead investors astray
• Return on invested capital and how competition erodes excess returns over time
• Identifying durable moats and why most advantages eventually get attacked
• Winner-take-all dynamics and how they shape long-term investing outcomes
• The twin engines of returns: earnings growth and multiple expansion
• Return on incremental capital as a key driver of long-term compounding
• Intangible assets and why accounting understates true business value
• Amazon as a case study in misunderstood profitability and reinvestment
• AI CapEx cycle and why current spending may not be sustainable long term
• Why great businesses matter more than great management in long-term investing

Timestamps
00:00 Why extreme outcomes drive stock market returns
01:00 Base rates vs studying 100 baggers
03:00 Power laws and why markets are a game of outliers
05:00 Just 46 companies created half of all market wealth
07:00 Buffett on consistency and long-term operating history
10:00 How to think about base rates in AI, energy, and macro cycles
12:00 Does AI invalidate historical base rates?
15:00 Inside view vs outside view in investment decision making
19:00 Buffett’s “certainty at a discount” framework
23:00 How often investors should evaluate businesses vs prices
29:00 Mean reversion myths and where it breaks down
33:00 Return on invested capital and competitive pressure
36:00 Moats, winner-take-all markets, and long-term dominance
41:00 Twin engines of compounding: growth plus multiple expansion
43:00 Return on incremental capital and forecasting future returns
47:00 Intangibles and why accounting distorts real business value
50:00 Amazon, CapEx cycles, and hidden profitability
53:00 AI infrastructure buildout and the future of returns

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This episode breaks down the growing tension beneath the surface of today’s markets, where volatility signals, options positioning, and macro risks like war and inflation are increasingly misaligned. Brent Kochuba and Jack Forehand explain why markets appear calm despite heavy hedging, and what that disconnect could mean for a potential volatility spike and downside move ahead.

Brent Kochuba on Twitter
https://twitter.com/SpotGamma

SpotGamma Website
https://spotgamma.com

Topics covered in this episode

• Why volatility looks elevated beneath the surface even as markets remain relatively calm
• The growing gap between implied volatility VIX and realized volatility and what it signals
• How options expiration OPEX can create turning points in both price and volatility
• Why current positioning is unusually put-heavy and what that means for downside risk
• The role of market makers and hedging flows in driving market moves
• How geopolitical risks like the Iran conflict are changing options behavior and hedging demand
• Why correlation is spiking and what it says about investors moving from stock picking to asset allocation
• The breakdown of traditional diversification including the 60/40 portfolio
• How credit markets and liquidity risks could amplify equity volatility
• The impact of zero DTE options and why traders are shifting to longer-duration hedges
• The significance of the JP Morgan collar trade and key levels to watch into month-end
• Why volatility spikes often follow periods of suppressed market movement
• The potential for a sharp upside rally if geopolitical risks suddenly resolve
• How options positioning can help both traders and long-term investors with timing decisions

Timestamps

00:00 Volatility premium vs low market movement disconnect
01:00 Why markets feel calm despite rising risks
05:20 Explosion in options volume and impact of Monday Wednesday Friday expirations
07:00 How market maker hedging flows drive price movements
08:40 Dynamic hedging and why options impact evolves over time
09:20 Why OPEX can trigger market turning points
10:30 VIX expiration effects and short-term volatility suppression
13:00 Negative gamma and how it amplifies market volatility
14:10 Why hedging demand remains high despite OPEX clearing
16:00 Jump risk scenario and potential VIX spike to 40
17:10 Shift from zero DTE trading to longer-term hedging
18:00 Put-heavy positioning across equities and indices
20:40 Size and significance of the current OPEX event
22:20 VIX spike dynamics around expiration
23:40 JP Morgan collar trade and key SPX levels
25:00 Why OPEX often marks short-term market lows or highs
28:30 Review of prior OPEX signals and market setup
30:00 Rising correlation and shift to asset allocation mindset
32:00 Dispersion breakdown and implications for equities
34:00 Software sector volatility and AI disruption narrative
36:30 Using options signals for better timing decisions
39:00 Correlation spike and risk-off behavior across markets
41:30 Why investors are avoiding calls and piling into puts
44:30 Cross-asset correlation breakdown and bond hedge failure
48:00 Credit market risks and spillover into equities
49:00 Extreme VIX vs realized volatility spread
50:50 Why realized volatility remains unusually low
52:30 Oil, inflation, and macro feedback loops

In this episode, Jared Dillian joins Excess Returns to break down why markets consistently misprice major regime shifts, geopolitical risks, and inflation shocks—and what that means for investors today. The conversation explores how changing correlations, Fed policy constraints, commodities, and portfolio construction are reshaping the investing playbook in 2026.

Jared Dillian Twitter
https://twitter.com/DailyDirtNap

Daily Dirt Nap
https://www.dailydirtnap.com

Topics Covered

• Why markets fail to price low-frequency, high-impact events like war and geopolitical shocks

• The concept of regime change and why investors struggle to adapt to new market environments

• The breakdown of the 60/40 portfolio and stock-bond correlation in an inflationary regime

• Commodities bull market dynamics and why energy, agriculture, and hard assets may outperform

• The role of options and “long gamma” positioning in uncertain macro environments

• Bitcoin as a liquidity trade vs. store of value and how sentiment drives crypto cycles

• Fed policy, oil prices, and why central banks follow the “path of least embarrassment”

• Inflation psychology, consumer behavior, and risks of 1970s-style market conditions

• Political bias in investing and how ideology shapes portfolio decisions

• Risks in private equity and private credit, including valuation marks and liquidity issues

• The Awesome Portfolio framework and why diversification across asset classes reduces drawdowns

• AI, productivity shifts, and how technological change impacts markets and labor trends

Timestamps

00:00 Why markets misprice geopolitical risk and regime change
02:00 Ukraine, Iran, and delayed market reactions to obvious risks
05:00 Overreaction cycles and the Peloton example
06:00 What it means to be long gamma in investing
09:00 Oil volatility and asymmetric risk opportunities
10:00 Regime change explained through stock-bond correlation breakdown
12:00 Non-stationarity and why investing rules constantly change
14:00 Why most investors fail to adapt to new regimes
17:00 Position sizing, risk management, and staying “small”
19:00 Commodities bull market and broad participation across assets
20:30 Bitcoin as a liquidity sponge and sentiment-driven asset
22:00 Fed policy, inflation, and the path of least embarrassment
25:00 Oil-driven inflation vs demand destruction dynamics
27:00 Inflation psychology and real-time indicators
29:00 Are we entering a 1970s-style macro regime
31:00 How political views shape investment strategies
35:00 Learning from past mistakes and adapting to new trends
37:00 Private equity and private credit valuation risks
40:00 Liquidity cycles and refinancing risk in credit markets
43:00 The Awesome Portfolio explained
46:00 Behavior, drawdowns, and why diversification works
49:00 Real estate allocation and portfolio construction
51:00 Labor trends, productivity, and changing work dynamics
54:00 AI productivity boom vs social media drag
57:00 The dangers of consensus thinking and unpopular views

Biotech is one of the few areas in investing where specialized knowledge may still generate persistent alpha. In this episode of Excess Returns, D.A. Wallach, venture capitalist and co-founder of Time BioVentures, joins us to explain how biotech investing works, why development-stage drug companies behave like portfolios of options, and why specialist investors play such a large role in this market. We also explore the cycles that have driven biotech performance, the impact of interest rates and capital flows, and how AI and global competition may reshape the industry in the years ahead.

D.A. Wallach – Twitter
https://x.com/DAWallach

Topics covered include

• Why biotech may be one of the last areas where specialist investors can generate persistent alpha
• The “bag of options” framework for valuing development-stage biotech companies
• How probabilities of drug success and clinical base rates drive biotech valuations
• Why rising interest rates hit biotech stocks harder than many other sectors
• How capital flows and investor narratives create boom-and-bust cycles in biotech
• What happened to biotech during the pandemic surge and the post-COVID downturn
• Why AI and tech narratives compete with biotech for investor attention
• The role of specialist biotech hedge funds in the public markets
• How large pharmaceutical companies drive returns through biotech acquisitions
• Differences between biotech venture capital and traditional tech venture investing
• How venture investors evaluate drug development programs and scientific evidence
• Portfolio construction and diversification when investing in highly uncertain biotech companies
• The emerging role of China in clinical trials and global drug development
• Whether AI can improve drug discovery, clinical trials, and pharmaceutical R&D productivity
• Why investors should avoid rigid value vs growth ideologies and stay adaptable

Timestamps

00:00 Why biotech investing requires specialized knowledge
01:40 Is biotech one of the last places for persistent active alpha?
02:45 The “bag of options” model for valuing biotech companies
05:00 Drug development phases and probabilities of success
07:00 Using base rates to estimate clinical trial success
09:20 Estimating total addressable markets for new drugs
11:10 Why rising interest rates hurt biotech valuations
13:00 Capital flows and why biotech underperformed in recent years
15:30 The biotech boom and bust around the COVID pandemic
18:00 How AI and tech compete with biotech for investor capital
22:20 The role of specialist biotech hedge funds
24:00 How pharmaceutical acquisitions drive biotech returns
25:20 How biotech venture capital differs from tech VC
30:50 Why biotech investors must evaluate complex scientific data
34:20 Where AI may improve drug discovery and R&D productivity
42:00 Portfolio construction and diversification in biotech venture investing
44:30 Volatility, valuation marks, and private market pricing
48:00 Managing risk across different drug technologies and disease areas
49:30 Why China is becoming important for clinical trials
53:00 Why biotech investing must be viewed as a global industry
54:30 The importance of flexibility between value and growth investing
58:50 Will investing become more systematic and quantitative over time