AI emergence has created market hysteria and broad software sell-offs despite limited real-world automation success. The manager believes software incumbents with domain expertise and proprietary data are well-positioned to integrate AI capabilities and defend against AI-native startups. Current AI adoption remains slow across corporate world with meaningful efficiency gains still limited. Software sector faces significant overweight headwinds despite being cheaper than traditional value industrials. Market treating software as monolithic despite meaningful differences between companies. Incumbents possess structural advantages through engineering talent, proprietary data, and customer relationships that position them to successfully integrate AI capabilities. Choice Hotels represents asset-light, high-margin hotel franchisor trading at distressed multiples due to cyclical headwinds. Company shifting portfolio toward higher-revenue segments including Extended Stay and international expansion. Significant cash unlock potential from balance sheet optimization could enable opportunistic share buybacks at historically low valuations.

AI emergence has created market hysteria and broad software sell-offs despite limited real-world automation success. Software companies are actually the fastest AI adopters and possess structural advantages through engineering talent, proprietary data, and mission-critical systems. Dominant vertical software platforms that successfully integrate AI can thrive by fending off AI-native startups. Market treating software as monolithic despite meaningful differentiation between companies. Incumbents with domain expertise, proprietary data, and embedded workflows maintain competitive advantages. AI adoption accelerating among software firms while broader corporate adoption remains slow, creating opportunities for established players. Choice Hotels trading at distressed multiples due to cyclical headwinds but shifting portfolio toward higher-margin segments like Extended Stay and international markets. Company positioned to unlock significant balance sheet cash for share buybacks at historically low valuations with multiple re-rating catalysts.

AI is viewed as a technology enabler that will accelerate product development and create tailwinds for existing businesses rather than replace human judgment. The manager believes AI will never replace human judgment and sees it as enhancing rather than disrupting core investment strategies. Planet's satellite constellation and daily Earth imaging capability represents a unique infrastructure play. The manager believes Planet is building the default system of record for monitoring Earth, with the daily scan providing infinitely scalable data distribution at zero marginal cost. Remitly's digital remittance platform is taking market share from legacy players like Western Union. The business model relies on acquiring customers via digital channels and earning fees on repeat transactions, with scale benefits improving economics over time. Thryv represents a business model transition from legacy marketing services to SaaS, targeting small businesses moving up-market. The strategy focuses on converting legacy customers to the SaaS platform and expanding functionality for larger businesses with more complex needs.

The entire world is rapidly rearming off an extremely low base of defense spending. This exposure focuses on companies that make armaments for nation state security and materially outperformed for the year. Gold is positioned as a superior store of value with reliable scarcity and the highest stock-to-flow ratio of any physical commodity. The manager created a magnified gold exposure called Gresham's Wrath that generates income while providing 1.5X exposure to gold prices. Exchanges operate as essential high-margin toll roads for the economy with immense operating leverage. They benefit from trading volume flowing directly to profits with minimal extra cost and have natural inflation hedging through transaction values. High Quality US Large Companies exposure filters out junk companies by avoiding high external financing, wealth destroyers, and value traps. This approach seeks superior long-term returns with lower downside risk. Precious metal royalty and streaming companies provide diversified exposure to precious metals by benefiting from both price appreciation and production growth without operational mining risks. They offer asymmetric optionality and inflation protection.

The portfolio trades at 10x earnings with projected 20% annual earnings growth over five years, compared to S&P 500 at 22x earnings at the top of its historical range. The manager emphasizes attractive valuations relative to historical ranges and growth expectations.

Steak n Shake achieved industry-leading 10.2% same-store sales growth in 2025, marking the best performance since 1992. The company is transforming through premium quality ingredients including 100% beef tallow fries, cane sugar Coca-Cola, and plans for 100% grass-fed Steakburgers. The franchise partner program has converted 179 company-operated units to single-unit franchise partnerships, with franchise partners generating about 70% of store-level cash flows. The insurance operations produced $7.2 million in underwriting profits in 2025 with a combined ratio of 89.7%. First Guard maintained its exceptional record with 114 consecutive quarters of underwriting profit, while Southern Pioneer achieved a 96.4% combined ratio. The creation of Biglari Reinsurance enhanced the group's A rating from AM Best and provides a foundation for acquiring additional insurance companies. Oil and gas operations earned $12.9 million in pre-tax earnings, with $11.9 million from farmout transactions. The strategy focuses on extracting cash from existing assets rather than reinvestment, with cumulative cash distributions of $172.6 million since acquisitions. Farmout arrangements allow sharing in new well performance without drilling, operational, or financial risks. The holding company structure allows flexible capital deployment across industries without arbitrary constraints. Total investments grew to $1.1 billion, with $225 million in dry powder from Steak n Shake debt financing. The company maintains a decentralized operating model while centralizing capital allocation decisions at the parent level.

Breakthroughs in artificial intelligence have helped drive notably strong performance in a handful of mega cap stocks. The concentration in tech and AI-related companies has contributed to the current market dynamics where the ten largest S&P 500 constituents account for more than 40% of the index's weight. The document extensively analyzes how market concentration affects portfolio risk characteristics and active management strategies. It discusses the implications for risk models, beta distributions, and the challenges concentration poses for traditional risk management approaches in equity portfolios. The analysis focuses on how equity market concentration impacts the fundamental law of active management, transfer coefficients, and breadth of investment opportunities. It examines the structural changes in capital markets that affect managers' ability to generate alpha and express investment views effectively.

Artificial intelligence occupies a central role in shaping market expectations and has become a macroeconomic assumption embedded in capital expenditure plans and valuation models. The manager draws parallels between today's AI environment and the 2014-15 oil collapse, noting that AI infrastructure is profoundly energy-intensive and faces physical constraints including rising electricity prices and grid capacity challenges. Energy plays a critical role in AI infrastructure economics, with data centers becoming major electricity consumers. Rising power costs compress margins while grid constraints and regulatory scrutiny influence deployment timelines. The manager emphasizes that unlike software-driven growth, AI compute cannot be scaled independently of physical energy reality. Many AI-exposed companies trade at multiples assuming near-flawless execution, creating valuation risk despite current profitability. The manager notes that when confidence is high, markets forgive delays and cost overruns, but when confidence wanes, these factors can catalyze abrupt repricing. Late-cycle environments show conviction persisting even as marginal buyers grow cautious.

Manager draws extensive parallels between today's AI-driven market environment and the 2014-15 oil collapse, warning that AI has become a macroeconomic assumption embedded in capital expenditure plans and valuation models. AI infrastructure faces energy constraints with data centers becoming massive electricity consumers, while rising power costs and grid limitations challenge assumptions of frictionless scalability. Markets may be conflating transformational potential with near-term certainty, creating valuation risk similar to past cycles. Energy plays a central role in the manager's analysis, both as a historical lesson from 2014-15 oil collapse and as a current constraint on AI infrastructure. Data centers have become massive electricity consumers with economics highly sensitive to power pricing and grid reliability. Rising electricity prices in data-center-heavy regions and utility challenges in expanding capacity create physical constraints that complicate AI scalability assumptions. The portfolio focuses on small-cap businesses that are performing well fundamentally with strong balance sheets, resilient cash flows, and improved competitive positions. The manager emphasizes owning businesses that can compound value over time rather than speculation, though acknowledges markets don't always reward fundamentals on a linear schedule. Portfolio positioning reflects discipline in finding mispriced companies relative to long-term intrinsic value.

The letter emphasizes disciplined value investing amid extreme narrative-driven markets, warning that concentrated enthusiasm around artificial intelligence mirrors past episodes like the 2014–15 oil collapse where capital overextended beyond fundamentals. While AI represents genuine technological progress, rising energy costs, grid constraints, and capital intensity introduce economic and regulatory frictions that challenge assumptions of frictionless scalability. The strategy prioritizes intrinsic value, balance sheet strength, and resilience, seeking to avoid overpaying for certainty embedded in elevated multiples.

AI represents a general-purpose technological revolution with multi-decade second-order effects across industries, labor markets, and national competitiveness. The manager views AI as creating opportunities through enabling constraints and compounding downstream optionality, while complexity causes market participants to misprice assets. The AI epoch remains transformational and has dominated US equity markets in both size and mindshare. Upstream supply-chain participants are increasingly signaling that 2028 and beyond capex could be materially higher, not lower, contradicting the widely held digestion narrative. TSMC lifted capex expectations, ASML's bookings re-accelerated, and Intel found itself unexpectedly capacity-constrained in data-centre CPUs. The semiconductor supply chain is signaling acceleration rather than the expected digestion phase. The market is being asked to underwrite multiple Stargate-scale campuses every year for several years, with analyst forecasts implying roughly 10 GW in FY27E, 12 GW in FY28E, 13 GW in FY29E, and 16 GW in FY30E-FY31E. A 1 GW data centre costs roughly $50-60 billion, with NVIDIA capturing around $35 billion of that via its share of the stack. Software multiples have compressed as if AI disruption is inevitable, while hyperscalers and enterprises still struggle to demonstrate clear AI ROI. The traditional SaaS playbook faces challenges from AI eating into margins, attacking the pricing unit, and creating cannibalization problems. The software total addressable market is likely to grow 2-3x as AI replaces some work and the gap between software spend and headcount narrows.

AI monetization is a key driver across multiple holdings, with Alphabet benefiting from AI training and inference services in Google Cloud, and the fund maintaining significant exposure to AI/Cloud Computing at 16.9% of the long portfolio. The manager views AI as creating substantial growth opportunities for companies with scale and data advantages. Netflix remains the dominant global streaming platform despite near-term headwinds from subscriber growth concerns and rising content spending. The manager believes Netflix's unmatched content library, scalable technology infrastructure, and growing advertising business provide multiple monetization pillars for long-term growth. E-commerce represents 7.5% of the long portfolio themes, with the fund maintaining exposure to companies benefiting from secular shifts toward on-demand commerce and digital platforms. This includes positions in companies like Uber that benefit from local commerce expansion. Eli Lilly represents a high-quality growth franchise in global healthcare, with leadership in diabetes, obesity, and neuroscience providing durable competitive advantages. The company's GLP-1 treatments continue to see demand outpace supply with additional indications on the horizon. Semiconductors represent 5.0% of the long portfolio themes, with the fund maintaining exposure to companies positioned to benefit from AI infrastructure demand and next-generation computing requirements. This includes holdings in companies with differentiated semiconductor architectures.

Portfolio maintains significant exposure to AI infrastructure and monetization opportunities across cloud computing, semiconductors, and enterprise applications. Companies like Microsoft, Alphabet, and Applied Materials are benefiting from accelerating AI adoption and infrastructure buildout. The fund views AI as a multi-year secular growth driver with expanding monetization across the technology stack. Cloud computing remains a core portfolio theme with strong positioning in hyperscale providers and infrastructure companies. Microsoft Azure showed 39% growth while Google Cloud exceeded 30% growth, both supported by AI workload adoption. The fund sees continued multi-year demand for cloud infrastructure and services as enterprises accelerate digital transformation. The portfolio maintains exposure to e-commerce platforms and enablement technologies through holdings like Amazon and Shopify. The fund views e-commerce as benefiting from secular shifts in consumer behavior and continued digital commerce adoption across retail categories. Eli Lilly represents the fund's exposure to the GLP-1 obesity and diabetes treatment market, which continues to show exceptional growth. Mounjaro and Zepbound sales more than doubled year-over-year, with demand continuing to outpace supply. The fund sees this as a multi-decade growth opportunity with expanding indications and sustained competitive advantages. The fund maintains exposure to semiconductor equipment and chip companies benefiting from AI infrastructure buildout. Applied Materials saw strength in AI-related capacity orders, particularly for advanced logic and high-bandwidth memory. The portfolio views semiconductors as benefiting from structural increases in semiconductor intensity and AI infrastructure demand. Netflix represents the fund's exposure to global streaming entertainment, despite near-term headwinds from subscriber growth concerns and content spending. The fund continues to view Netflix as the dominant global streaming platform with durable competitive advantages through its content library, technology infrastructure, and growing advertising business.

River Oaks Capital focuses exclusively on small, underfollowed public companies with market caps typically under $500M. The manager believes these companies are increasingly ignored and undervalued, creating opportunities to buy wonderful businesses at extremely discounted valuations. The fund employs a value investing approach, seeking companies trading at significant discounts to fair value - often 50 cents on the dollar or less. The manager emphasizes buying wonderful businesses with strong fundamentals at excessive discounts. Share buybacks are a central theme, with the manager actively encouraging portfolio companies to repurchase shares aggressively using free cash flow, balance sheet cash, and proceeds from asset sales. This strategy allows adequate compensation until companies become properly valued. Ascent Industries represents a significant position focused on specialty chemical manufacturing. The company is transforming into a 'Chemicals-as-a-Service' model, providing customized solutions for small to mid-size customers neglected by larger players. BuildDirect operates as a physical and online professional flooring company with a long-term plan to consolidate the professional flooring industry through acquiring 75+ professional flooring centers across the U.S.

Commodity prices surged in January, led by energy, while positive momentum in precious metals was supported by dollar weakness and ongoing macroeconomic uncertainty. The portfolio benefited from commodities-related holdings within quoted equities. Gold contributed positively to performance through uncorrelated strategies, supported by dollar weakness and ongoing macroeconomic uncertainty.

Manager discusses AI's disruptive impact on software companies and capital-light business models, while positioning portfolio companies as durable due to their intersection of physical and digital infrastructure. Companies like Carvana and Royal Caribbean use AI for pricing optimization, logistics, and customer experience enhancement. Carvana represents a major portfolio holding that has grown 100x from 2022 lows, demonstrating the power of digitally native auto dealing with proprietary technology for pricing, logistics, inspections, and reconditioning workflows. Royal Caribbean exemplifies the portfolio's focus on companies combining physical assets with technology innovation, using AI and technology for pricing optimization, packaging, promotions, and onboard customer experience delivery.

AI has been the defining theme of market leadership in 2025, driving surge in data center capex and benefiting AI-adjacent industries like semiconductors, electrical equipment, and tech hardware. AI data centers require enormous amounts of power, creating demand for solutions like Bloom Energy's fuel cells. The theme reasserted dominance after NVIDIA's strong earnings in late November. Portfolio maintains largest absolute and relative exposure to Industrials sector representing conviction in Electrification theme. This includes companies like Bloom Energy providing power solutions for AI data centers and First Solar manufacturing solar panels. The theme benefits from energy transition and infrastructure needs. Portfolio maintains significant conviction in Aerospace theme alongside Electrification within Industrials sector exposure. Rocket Lab operates as end-to-end space company developing rocket launch and control systems, with strong earnings results and growing backlog during the quarter. Biotech delivered its best quarter in five years driven by improving rate environment, easing regulation enabling more M&A, and excitement around AI's promise in drug discovery efficiency. Corcept Therapeutics represents exposure to this theme with drugs modulating cortisol activity and expanding pipeline in oncology.

AI is viewed as economically consequential and transformative, improving product quality and expanding monetizable surfaces across platforms like Alphabet's ecosystem. However, adoption is constrained by computing economics, implementation friction, and infrastructure limits. The manager emphasizes that profits will accrue where unit economics are defensible and workflow integration is structural. Google Cloud is highlighted as scaling into enterprise infrastructure with improving profitability and durable growth potential. The manager tracks Cloud for margin expansion and conversion of contracted demand into revenue, viewing it as a key component of Alphabet's multi-platform compounding story. Share repurchases are emphasized as a key capital allocation tool across multiple holdings. Alibaba returned $12 billion in buybacks reducing share count by 5%, while Naspers' buyback program has reduced free float by 28% and driven NAV accretion. The manager evaluates buybacks based on accretion to per-share intrinsic value. Alibaba is positioned as a structural toll bridge inside digital commerce where merchant supply, consumer demand, and logistics throughput reinforce each other. The manager focuses on scale-based unit economics and market share stability in core commerce platforms.

Price discipline and margin of safety are central to investment decisions. The firm emphasizes that price synthesizes expectations, risks, and narratives, with low entry prices providing protection against adverse scenarios. They monitor implied real IRR as a key metric for prospective returns. Focus on Brazilian equity market opportunities amid political uncertainty and electoral cycles. The firm views Brazil as experiencing cyclical pessimism that creates valuation opportunities, while maintaining that institutional changes are less dramatic than headlines suggest.

Manager expresses significant concerns about AI bubble conditions, citing excessive debt accumulation and CAPEX spending by major tech companies. Believes AI fears are being realized as software stocks decline and valuations become problematic. Questions sustainability of current AI investment levels and competitive dynamics. Manager initiated position in Occidental Petroleum, viewing energy sector as underperforming since dot-com bubble. Believes oil prices are currently depressed and energy represents contrarian opportunity given poor relative performance versus S&P 500.

Markel Insurance underwent significant reorganization in 2025 with Simon Wilson promoted to CEO, implementing individual P&L accountability for each operation. The company achieved strong international results with 83% combined ratio and 14% premium growth, while continuing conservative reserving practices with $484 million in reserve redundancies. The company maintained disciplined capital allocation through share repurchases of 223,000 shares at $1,894 average cost, reducing share count from 14 million to 12.6 million since 2016. They redeemed $600 million in preferred stock and made $1.4 billion in net fixed income purchases while generating strong cash flows from operating businesses. Markel's four-part investment test focuses on businesses with good returns on capital using minimal debt, talented management with integrity, reinvestment opportunities or capital discipline, and fair prices. This long-term value approach has generated $8.9 billion in unrealized gains on equity investments, creating a significant deferred tax advantage.

AI has evolved from speculative mania into hardened infrastructure investment, with hyperscalers spending over $600 billion ahead. Five AI companies are already worth more than every venture-backed IPO of the dot-com era combined. AI will flatten alpha to beta in public markets, eroding analytical edge while behavioral edge persists. Total U.S. venture investments in aerospace and defense hit $21.4 billion in 2025 across over 300 deals, nearly doubling its prior peak. Domestic defense spending may climb to 5% of GDP by next year. Lux has invested over $100 million in several Israeli defense companies covering air, land, subterranean, long-range power projection and cyber. The XBI was up over 35% last year, M&A has reawakened, and an IPO window appears to be opening amid the thaw of another cyclical biotech winter. Biotech companies produced more than 70% of newly approved drugs in recent years, yet biotech investment as a share of overall private funding hit a 20-year low. The zeitgeist is shifting from people who code bits to people who extract atoms, from equity investment to debt financing, from cap tables to mineral rights. The next decade of wealth creation will look more like Landman than The Social Network: capital-intensive, physically constrained, and far more dependent on legal permitting and infrastructure access. Five companies now represent roughly 30% of the S&P 500's market cap. The top 10 exceed 40%—the highest concentration in 50 years. Nearly $340 billion flowed into U.S. deals, yet it was packed into the fewest deals of the decade, with nearly half the capital concentrated in a few dozen deals over $500 million.

Generative artificial intelligence continues to provide markets an additional tailwind through productivity gains. Innovation is flourishing in pioneering Gen AI companies in semiconductors and software, as well as industrial companies enabling datacenter expansion and power infrastructure to support it. AI is also playing a role in the emerging defense and space technology sector. The defense and space technology sector is experiencing a positive inflection as a historically low growth area sees advancement in autonomous software and hardware systems. AI's role is particularly exciting in this emerging sector. Industrial companies are enabling datacenter expansion and power infrastructure to support the growing artificial intelligence infrastructure needs. Health Care sector contributed to relative performance, with significant allocations to precision oncology companies and pharmaceutical companies focused on specialized treatments.

AI remained a significant driver throughout 2025, with AI-related stocks recovering after initial volatility from Chinese competitor DeepSeek and becoming the dominant theme again in late 2025. The market saw broadening beyond AI with materials performing well, but AI continues to be a desired area driving investment decisions. Biotech companies rallied over 25% in the fourth quarter, driven by a series of high-profile biotech acquisitions by large pharma buyers. The managers generally avoid biotech stocks due to their highly binary nature, though they participate through investments in companies that sell products and services to biotech customers. Defense spending themes emerged through specific investments like Antimony Corporation, which won a $245 million five-year sole source contract to rebuild the U.S. antimony supply for military use, taking advantage of export restrictions from China. RBC Bearings' Aerospace and Defense business was particularly strong.

CVR Energy operates petroleum refining, renewables, and nitrogen fertilizer manufacturing businesses. Refining margins remained stable at $8.35 per barrel in Q4 2025. Renewable diesel margins compressed to $0.25 per gallon from $0.79 in Q4 2024. The automotive services business faced revenue decline and margin compression. Successfully completed transfer of owned real estate properties to the Real Estate segment and entered into fair market value operating leases. Real Estate segment benefited from property transfers from the Automotive segment, including assumption of tenant operating leases. The segment includes investment properties with land, retail, office and industrial properties leased to corporate tenants.

The Fund concentrates at least 80% of assets in technology companies and selects approximately 60 equally weighted stocks exhibiting sector-leading cash flows, returns above cost of capital, attractive relative valuation, and strong balance sheets. The portfolio is re-screened and rebalanced at least quarterly, resulting in high turnover and active positioning within subsectors such as semiconductors, software, and communications equipment. This disciplined quality-growth approach seeks long-term capital appreciation while managing valuation and profitability risk within a concentrated sector allocation.

The Fund seeks long-term capital growth and current income by allocating up to 70% to equities and the remainder to fixed income, emphasizing downside protection and reduced volatility. The equity sleeve follows a fundamental, value-oriented approach focused on high-quality, shareholder-aligned companies, while the fixed income allocation targets higher-quality intermediate-term bonds with active duration management. As of January 31, 2026, the fixed income portfolio had a dollar-weighted average effective maturity of 4.42 years, underscoring its intermediate duration profile.

The Fund employs a rules-based Cornerstone Growth Strategy that selects 50 U.S.-listed stocks with strong one-year price appreciation, improving earnings, and price-to-sales ratios below 1.5, weighting each position equally at 2%. The portfolio is rebalanced annually, resulting in high turnover, and may tilt toward sectors such as Financials depending on screening outcomes. This quantitative momentum approach seeks to systematically capture earnings acceleration and relative strength while maintaining valuation discipline.

The fund employs the Dogs of the Dow strategy, investing approximately 50% of assets in the 10 highest dividend-yielding Dow Jones Industrial Average stocks. This systematic approach focuses on dividend yield as the primary selection criterion for equity investments.

AI infrastructure plays dominated market returns in 2025, with 65% of Russell 2000 returns coming from AI infrastructure. The market concentration is tied to AI infrastructure spending by five major companies. The sustainability of the AI trade is debatable as it represents a singular bet on data center CAPEX spending. Small cap performance was dominated by AI infrastructure plays and speculative unprofitable companies in 2025. The Russell 2000 index has become increasingly concentrated in these themes, creating both opportunities and risks for small cap investors. Quality businesses today trade at historically cheap multiples due to extreme valuation disparities between winners and losers. The bifurcation between unprofitable stocks and quality stocks has reached historic extremes, creating opportunities for quality-focused investors.

The AI cycle is shifting from building core infrastructure to attacking real-world applications, creating uncertainty about which legacy firms will benefit versus face disruption. Software companies are experiencing a valuation reset as investors question the fundamental value of code when AI can commoditize engineering work. The manager sees opportunities in incumbent companies that can successfully leverage AI to amplify their business models. Ecommerce platforms like Sea Ltd are protected by physical logistics infrastructure and network effects that AI cannot easily replicate. The manager argues that TikTok Shop's growth is decelerating based on alternative data, and that Shopee's margin compression is discretionary investment to strengthen competitive positioning. The core value remains in the network and distribution capabilities. Gaming platforms benefit from network effects where millions of players create instant matchmaking and attract user-generated content creators. As games become easier to make with AI, profit pools will shift toward distribution and monetization platforms rather than game creation itself. The bottleneck remains in attracting users and monetizing games, not creating them.

Oil markets disrupted by closure of Straits of Hormuz affecting 20% of global production. Prices surged from $70 to $119.50 before retreating to $90. Market may be tighter than commonly believed despite IEA projections of surplus. Oil represents cheapest major asset class globally, trading at near-record lows relative to gold. Gold reached record highs above $5,000 per ounce but silver's dramatic rally has triggered a sell signal. Historical pattern suggests both metals may enter 2-3 year correction period. Central bank demand remained strong at 863 tonnes for 2025, though China purchases slowed significantly. Silver surged 220% since April 2024, generating powerful sell signal for precious metals. Performance mirrors 1979 parabolic blow-off that marked end of gold bull market. Retail demand peaked with reports of long lines at dealers globally before recent 40% decline from highs. Market shifted from deficit to surplus as Chinese demand stalled for first time in 25 years while supply expanded by 3 million tonnes since 2021. Exchange inventories reached 1.2 million tonnes, highest since 2003. Bearish outlook as China transitions from under-consuming to over-consuming copper. Demand surging from nuclear restarts and new construction while supply faces operational challenges. Google, Meta partnerships signal corporate adoption of nuclear power. Sprott Physical Uranium Trust resumed buying 10 million pounds since June, helping drive 45% price increase. North American gas showed strength on cold weather despite bearish sentiment. Production growth concentrated in Permian Basin while other shales declined. Supply growth expected to plateau as Permian oil production slows, setting stage for higher prices as LNG demand expands. Coal consumption rose 7-8% in 2025, first increase in years, driven by data center demand and higher gas prices. Multiple plant closures delayed or cancelled as grid reliability concerns mount. Asia continues expanding coal capacity despite transition promises. Bull market may be in early stages with most commodities 46% below nominal peaks and 73% below inflation-adjusted highs. Commodity-to-equity ratio near historic lows suggests capital starvation. Current cycle appears only one-third complete compared to historical precedent.

AI represents the most visibly impressive innovation of the last 100 years, comparable to railways in the 19th century. Current large language models suffer from hallucinations but are likely just an opening phase. If AI advances in biotechnology, materials, and energy, the future could be very interesting. The U.S. stock market has been in bubble territory for a prolonged period, defined as a two-standard deviation divergence above long-term real price trend. Unlike every bubble before it, this one has yet to fully deflate despite classic signs of a historic bubble top. Hyperscalers spent nearly $300 billion on capital expenditures in 2025, with AI investment accounting for 1.3% of U.S. GDP. Cumulative spending on U.S. data centers is estimated to reach $3-5 trillion by 2029-2030, representing massive overcommitment of capital. Nvidia is currently the world's most valuable company, exceeding the entire Japanese stock market. The AI boom has created unprecedented demand for chips, with companies stretching depreciation schedules despite ongoing technological progress that should shorten useful chip lives. There has been a surge in aggressive speculative behavior with commission-free trading, plentiful margin loans, and leveraged ETFs. Zero-day options now make up over 60% of all S&P 500 options, alongside the GameStop meme stock craze and cryptocurrency rise. By every historically effective valuation metric, U.S. equities are extremely overpriced. The CAPE of 40 is above any level seen outside the internet bubble peak, with the market cap to GDP ratio at all-time highs and record proportions trading at over 10 times sales.

Nintendo continues to demonstrate exceptional performance with Switch 2 becoming the fastest-selling console in history, selling 17.4 million units in just 7 months. The company has a historically rich first-party software pipeline and is building new recurring revenue streams through Nintendo Switch Online and its expanding cinematic universe. AST SpaceMobile has transitioned from R&D startup to scaleup, successfully deploying the largest commercial communications antenna in low-Earth orbit with BlueBird 6. The company has secured over $1 billion in pre-funded revenue commitments and won a prime position on America's Golden Dome missile defense architecture. Nebius Group operates as an AI-first cloud platform with major hyperscaler contracts including $17.4 billion with Microsoft and $3 billion with Meta. The company is building substantial AI infrastructure capacity with 2.5 GW of contracted power by end-2026. FTAI Aviation is transforming into a capital-light MRO franchise for CFM56 engines through its Strategic Capital Initiative, creating 'green time' by manufacturing proprietary PMA parts. The company is also expanding into data center power generation by repurposing jet engines into aeroderivative gas turbines.

AI represents a massive technology shift with trillion-dollar capex budgets, but the manager questions whether the multi-trillion AI landgrab will have uncertain outcomes and be wasteful. While AI is an outstanding white-collar tool that will assist good companies, it won't quickly change government, healthcare, banking, or military sectors due to switching costs, training requirements, and regulatory constraints. Over 20% of private credit funds are loans to software companies, creating potential systemic risk as institutional LPs want their money back and GPs don't like the bids on what they need to sell. The pricing of illiquid assets in a market with no bids presents challenges similar to the S&L crisis or 2008 financial crisis. The software business is not dead, but many software stocks are facing repricing as growth gets picked off by AI changes and terminal values need to come down. The manager sees opportunities in slower growth, rule of 30 companies with strong margins and free cash flow that have been less appreciated but are now changing in valuation.

Mature (Value) businesses led performance in the fourth quarter and were the strongest contributors for the full year, reflecting durable execution in companies that continued to generate healthy free cash flow and return capital.

The fund holds Carvana, a vertically integrated e-commerce platform for used cars that eliminates traditional dealerships. MercadoLibre remains a core holding despite recent weakness, with the manager enthusiastic about its e-commerce and fintech strengths. E-commerce remains an important industry theme for the portfolio. Talen Energy, a major contributor for three consecutive years, owns nuclear facilities and expanded its relationship with Amazon Web Services to provide carbon-free energy for data centers. The global energy transition remains an important industry theme, with the fund investigating energy-related companies that have struggled recently. Talen Energy expanded its relationship with Amazon Web Services to provide carbon-free energy for data centers, highlighting the growing electricity demand from this sector. The fund sees potential benefits from rising electricity demand driven by data center growth.

AI remains a primary market driver but questions emerge about whether it will be hugely deflationary to the job market and SaaS technology ecosystem. The manager notes AI will transform the world and productivity but questions its investability and who wins. The manager expects the next reflation cycle will be substantial, with liquidity flooding the system and searching for places to flow. Money needs to be absorbed and finds its way into financial assets, durable businesses, and anything with credible narratives. Core gains were led by semiconductor-related adjacencies including Micron and Camtek. The fund remains particularly focused on key critical OS platform businesses and semiconductor-related adjacencies. Materials sector exposure to the agricultural-fertilizer industry via Intrepid Potash, Nutrien, and CF Industries was a positive contributor to results. The fund maintains exposure across the fertilizer value chain. Long-standing position in gold and copper miner Barrick Mining finally moved higher as a reflection of gains in the underlying yellow metal. The fund maintains exposure to precious metals mining. Playing on the continued theme of infrastructure spending, defense and energy sustainability, positions in Industrial and Energy sectors including Oshkosh, Coterra, OSI Systems, and Herc Holdings added positively to performance.

US equity valuations are at perilous highs with S&P 500 forward P/E at 23x and CAPE near 40x, while international markets offer significant discounts. European and Japanese equities trade around 15x forward earnings, roughly 30% discount to US multiples. Latin America trades at mere 10x forward earnings with 5%+ dividend yield. Artificial intelligence investments show artificial profit today due to massive capex creating revenue for picks-and-shovels companies while depreciation lags cash expenses. The AI complex is moving toward commoditization with intense competition evident across cloud providers, compute, and models themselves. Circular investments within the AI ecosystem are reminiscent of dotcom-era vendor financing. American institutional excellence is under unprecedented attack including rule of law, independent judiciary, competent bureaucracy, and fiscal prudence. The current administration has conducted mass purges of government watchdogs, attacked Federal Reserve independence, and systematically undermined the norms that define proper federal government role. Markets are experiencing extreme speculation with vibe investing replacing fundamental analysis. Assets are priced on fantastical stories rather than cash flows, with leveraged ETFs, retail options trading, and story stocks reaching bubble-like levels. This madness can only end in disaster. High-quality international businesses trade at fractions of US multiples, with the manager positioning clients to take advantage of this divergence. Despite US equity market dominating investor mindshare, the rest of the world returned 32.6% in dollar terms in 2025 versus SPY's 17.7%.

Berkshire's insurance operations generated pre-tax underwriting gains and grew float to $176 billion. The combined ratio of 87.1% across property and casualty businesses was exceptional. However, increased competition and rising claim cost trends may pressure future earnings. BNSF improved operating margin to 34.5% from 32.0% through operational improvements and efficiency gains. The railroad generated $8.1 billion in net operating cash flows and returned $4.4 billion in dividends to Berkshire. BHE operates regulated utilities serving 5.4 million customers and natural gas pipelines. The business faces significant investment needs driven by AI computing demand and wildfire risk mitigation, particularly in the Western U.S. Berkshire maintains its disciplined approach to capital allocation, seeking businesses with durable advantages and long-term economic prospects. The company holds over $370 billion in cash and U.S. Treasury holdings as dry powder for opportunities. The company emphasizes investing in businesses with excellent economics, durable competitive advantages, and high-integrity management. This quality focus is evident in concentrated equity holdings and operating business acquisitions.

SOL Group operates one of Europe's leading industrial gas franchises serving 50k customers across 32 countries, with a network of 39 air-separation units and 50+ filling plants that took almost a century to assemble. The business creates regional oligopolies due to expensive logistics of moving gases, with high switching costs from buried pipelines and bulk tanks installed at customer sites. Vivisol has grown from 140k patients in 2010 to 750k by 2024, representing 13% compound annual growth driven by Europe's aging population and healthcare systems moving chronic care from hospitals to patients' homes. The business provides home respiratory therapy, ventilation support, and infusion treatments with 80% recurring revenues and renewal rates above 95%. The fund focuses on super-durable, quality businesses with sustainable competitive advantages, excellent management with aligned interests, and reasonable entry valuations. The manager emphasizes businesses designed to last like Roman aqueducts, with high barriers to entry and exceptionally resilient business models that can compound for decades. The manager acknowledges AI as a main risk requiring early spotting to avoid losing money, particularly challenging for software investments. The strategy tilts towards businesses unlikely to see their daily unit economics negatively affected by AI over the next decades, favoring infrastructure and business services players over software.

The fund experienced significant underperformance due to market concerns about AI disruption affecting portfolio companies like Gartner, CoStar, Clearwater Analytics, FactSet, MSCI, and Guidewire. These AI-impacted stocks declined 15% despite 10% revenue growth and 15% EPS growth, representing 42% of the portfolio. The manager believes the market's assessment of AI risk differs from their own and expects valuations to recover as AI concerns moderate. The fund focuses exclusively on high-quality businesses with superior characteristics including competitive advantages, sustainable growth, and strong financial metrics. This quality-focused strategy was out of favor in 2025 as investors sold higher-quality investments to buy riskier stocks. The Earnings Quality factor performance was in the 100th percentile, demonstrating the fund's quality bias during a period when quality was penalized. The fund invests in a portfolio of competitively advantaged small and medium-sized businesses, which remained out of favor for most of the quarter. The strategy of owning leading small-cap businesses has been the foundation since inception, delivering 354 basis points of annual outperformance over the benchmark since inception despite recent headwinds.

AI represents the dominant investment theme with companies adapting to disruptive change. The pace of innovation is unprecedented with LLMs becoming more intelligent, costs declining 10x per year, and agentic AI task duration doubling every 6-7 months. Portfolio companies are categorized as AI infrastructure builders, providers, early adopters, and beneficiaries of productivity gains. E-commerce platforms benefit from AI adoption in recommendation engines, advertising algorithms, and customer support optimization. Companies like Amazon, MercadoLibre, Coupang, and Shopify are leveraging AI to improve conversion rates and reduce service costs while expanding into new markets and verticals. Semiconductor companies, particularly TSMC and NVIDIA, are benefiting from AI demand with TSMC raising revenue guidance to mid-30s% growth. NVIDIA continues evolving from graphics cards to leading AI infrastructure company, while TSMC maintains 90% market share in leading-edge manufacturing with ability to raise prices. Cybersecurity companies are using AI in core algorithms to better identify anomalies and block malicious traffic. CrowdStrike is seeing reacceleration in growth with new Falcon Flex offering, while Netskope continues gaining SASE market share with strong competitive win rates. Biotechnology investments focus on companies with differentiated technologies and expanding addressable markets. Argenx continues strong performance with Vyvgart sales exceeding expectations, while BillionToOne disrupts prenatal and oncology diagnostics with innovative QCT technology achieving superior accuracy. Cloud infrastructure companies are positioned to benefit from AI buildout with AWS aggressively investing in capacity and offering full-stack AI solutions. The data gravity of existing customers provides competitive advantages while companies expand AI inference and development platforms.

AI infrastructure remained a pillar of market leadership despite some consolidation in December. The market continued to distinguish between AI-enablers where demand remained strong and more cyclical parts of the chip complex, reinforcing the durability of the infrastructure buildout theme. Semiconductors exposed to AI maintained strength as semiconductor capital spending remained supported by AI-driven demand for advanced chips. Defense spending stayed elevated amid ongoing geopolitical uncertainty, supporting backlog strength and long-cycle earnings durability for aerospace and defense companies. RTX and Howmet extended gains as commercial aerospace demand remained strong and defense spending supported long-cycle revenue visibility through backlogs. Precious metals experienced renewed volatility during the quarter, with gold and silver weakening sharply into the end of October after an extended run higher. The pullback created opportunity as the manager re-engaged at lower levels when the market stabilized and the broader macro backdrop remained supportive for hard assets. Gold miners delivered strong returns throughout the year despite some weakness in final days of December. Copper prices surged into year-end amid rising demand tied to electrification, infrastructure, and data-center buildouts, alongside persistent supply constraints. This supported miners levered to the copper theme, with materials exposure contributing positively through companies like Hudbay Minerals and Rio Tinto benefiting from strength in copper and base metals. The portfolio benefited from exposure to global power demand themes, with Caterpillar continuing to benefit from robust demand in its energy & transportation business increasingly tied to expanding global power needs, particularly the build-out of AI data centers requiring reliable on-site generation capacity. Nuclear energy remained supported by structural tailwinds including rising global demand for reliable baseload power. Financials added to returns with banks demonstrating strong earnings power and shareholder return capacity. Morgan Stanley benefited from a supportive backdrop for capital markets activity and wealth management momentum, while Canadian banks continued to demonstrate resilient profitability and capital strength supporting shareholder return expectations.

The AI infrastructure cycle has mirrored cloud computing build-out with hyperscalers aggressively financing GPU and data center deployments. The focus is shifting from building computational backbone to realizing value through software and application layers. AI agents are creating concerns about disrupting legacy software applications, but incumbents can embed agents into existing systems to leverage proprietary data and customer relationships. The AI build-out is causing extremely tight supply for memory chips, benefiting companies like Micron that supply memory chips and equipment manufacturers like Lam Research and KLA that manufacture wafer equipment needed to expand the supply chain. The semiconductor complex is expected to remain fundamentally strong with potential for further acceleration in specific verticals. Software sector demonstrated resilient but normalizing revenue growth with highly bifurcated results. High-growth leaders maintained 25-30% growth while enterprise stalwarts sustained low-20% growth. Software valuations faced pressure due to fears that AI agents might disrupt legacy feature-heavy applications, creating a selective opportunity to own high-quality firms at a discount. Hyperscalers have aggressively financed massive deployments of GPUs and data center capacity using robust internal cash flows. Energy availability is becoming the constraining factor on datacenter growth, and the nature of AI investment is evolving toward more complex financing structures including alternative financing and circular financing arrangements.

The fund operates a concentrated Micro and Small-Cap strategy that naturally diverges from market indexes. Approximately 60% of the portfolio consists of businesses with market caps below $500M, with the top five positions accounting for ~60% of the portfolio. The manager has pivoted the portfolio more towards quality names, a shift first called out in the Q1-2025 letter. This represents an evolution in the investment approach while maintaining the core small-cap focus.

Artificial intelligence continued to be a major theme with more than 300 S&P 500 companies mentioning AI on their earnings calls during the fall. This enthusiasm helped propel mega-cap tech stocks higher and drive market gains. However, scrutiny increased around AI-related revenue circularity, massive scale of AI-related capital spending, and durability of longer-term returns on investment.

AI developments from major companies are causing rapid market changes and stock price volatility. AI is reshaping the investment landscape with massive capital being deployed for infrastructure, while creating uncertainty about whether it will enhance productivity or cause more disruptive economic impacts. The manager remains open-minded about AI's various potential development paths. Software companies are experiencing significant declines as the market reassesses AI impacts. Concerns include reduced seat-based revenue from efficiency gains, lower pricing power from AI-first competitors, and decreased new customer bookings. However, some software solutions may be less easily replaced by AI, particularly those requiring high security and user interconnectedness. The manager sold Novo Nordisk after brief ownership due to competitive disadvantages versus Eli Lilly. While NVO was attractive from a valuation perspective and first to market with oral GLP-1, LLY has a superior product and NVO's competitive position may weaken when LLY brings similar options to market. Floor & Decor represents an attractive long-term opportunity following the Home Depot disruption model in flooring retail. The company offers superior inventory selection and lower prices, taking market share consistently. Current margins are depressed but should recover as store base builds out and same-store sales normalize from post-COVID and interest rate headwinds.