Value investing in Vail… Getting up to speed on AI… The relentless bid… Mr. Market vs. the zombie bid… Markets work (maybe better than I think)…

Live from Vail, Colorado…

I (Dan Ferris) am in beautiful Vail this week at the annual Intellectual Investor Conference.

Formerly called VALUEx Vail, it’s an invitation-only conference hosted by my friend and Investment Management Associates CEO, Vitaliy Katsenelson.

Every year, Vitaliy invites about 40 value investors to meet up, have some fun, and present their best investing ideas over a three-day period. It’s a must-attend event with investors from all over the world, including folks from London, Paris, Tokyo, and Belgium, to name a few.

The presentations tend to be deeply researched and highly detailed. The sheer amount of information you get in three days is overwhelming… but you’re guaranteed to hear some great ideas. The stocks presented were from a wide variety of industries, including clothing retail, gaming equipment, semiconductors, sports franchises, coal mining, banking, payments, and industrial manufacturing.

I always expect to hear great insights on individual companies, and I’m never disappointed. This year, I came away with at least three stocks I’m much more interested in after hearing excellent presentations about them.

That’s the main reason to attend. It’s what we value investors do every day. We learn about businesses, work to understand their competitive advantages (if any), and study their financial statements to figure out if they’re worth owning.

One of the most powerful presentations was on artificial intelligence (‘AI’)…

The presentation characterized AI as “an unstoppable shift,” but made clear that AI doesn’t think like humans – and maybe never will.

While I can’t share all the details of the presentation out of fairness to the attendees, I can tell you this presentation left me feeling like I need to stop whatever else I’m doing and learn a lot more about where AI is today and where it’s likely headed tomorrow.

Now, Mike Barrett and I have recommended some great businesses that are making excellent use of the new technology in the pages of Extreme Value, including a one-of-a-kind health care technology dominator this month.

Still, I need to dig much deeper to understand what individual companies are doing with AI and how the various models work.

And it turns out, everybody at the conference is using AI, some of them in very sophisticated ways, to generate investment ideas, get company overviews, synthesize documents, and much more.

That put a fire under me to not just learn about AI’s implications for investors, but to start using it to become more productive at work each day (yes, using AI to study AI).

AI promises great leaps in productivity, but it also has a darker side…

Billionaire investor Paul Tudor Jones highlighted that darker side in a Bloomberg TV interview on Wednesday, by recalling one of the most memorable episodes of the old Twilight Zone TV series.

Titled “To Serve Man,” the episode begins with a world in crisis… with energy and food shortages and the threat of international war.

Earth is then visited by a nine-foot-tall alien race called the Kanamits. One Kanamit addresses a group of United Nations delegates and reporters, saying the aliens have come to share their technology, which will help end energy and food shortages and prevent international warfare.

The aliens leave a book behind, which is promptly given to cryptographers to translate into English.

In the meantime, the aliens gain humans’ trust by employing their technology, making Earth a peaceful place of abundant food and energy. They turn barren deserts into productive farmland and create an impenetrable force field, which makes the world’s armies disband.

The title of their book is translated as To Serve Man, further convincing humans of the Kanamits’ benevolence. Humans are invited to visit the Kanamits’ home planet and describe it as a utopia like the one created on Earth.

This gains the Kanamits even more trust… just as one cryptographer learns that the book isn’t about humanitarian aid for Earth. It’s a book with recipes for cooking and eating humans.

It reminds me of the quote from tech entrepreneur and venture capitalist Marc Andreesen. In 2011, he famously wrote that “software is eating the world.” Maybe AI will take a cue from the Kanamits and eat the world with a béarnaise sauce.

Jones laughed when he mentioned the episode, but maybe he shouldn’t have been smiling.

Elon Musk had a similar thought…

In a February appearance on Joe Rogan’s podcast, Musk said he thought AI would exceed human intelligence within two years. He also said:

The probability of a good outcome is like 80%… only 20% chance of annihilation.

Yes, he means the annihilation of the human race.

In a similar – though slightly less sinister – vein, AI developer Anthropic CEO Dario Amodei said in an interview last month that in one to five years, AI will eliminate half of entry-level white-collar jobs, and that there will be as much as 20% unemployment among those workers due to AI.

I’m reminded of the Luddites in the 19th century. They were a group of textile workers in England who saw various technologies as a threat to their livelihood. Workers were known to attack and destroy new, automated textile machinery.

Maybe we’ll see a similar uprising against AI, which politicians will be only too happy to exploit. I don’t know. Like I said, I need to do more homework on AI. But would it surprise anybody if the fear turns out to be overblown and the benefits overhyped?

That was one of my big takeaways from the conference. The other one was how hard it has been to be a value investor over the past decade – and more importantly, why…

Value has become less and less important to investors…

In 2017, I began noticing how expensive U.S. stocks were and how much speculative “animal spirits” were taking over the market.

When stocks are consistently expensive, it’s tough for value investors to find bargains. But we’ve soldiered on year after year in Vail, with many of us casting our nets beyond U.S. borders. I heard presentations this week on companies from Kazakhstan, the country Georgia, and Japan.

Since mid-2017, the S&P 500 Index has often traded at 30 or more times cyclically adjusted earnings. The cyclically adjusted price-to-earnings ratio is at 37 today. That’s bubble territory, but eight years is a long time for the entire stock market to remain unattractively priced… and to still keep going up.

The S&P 500 is up roughly 150% since mid-2017, when I first started getting concerned about market valuations and rampant speculation. And even now, with President Donald Trump trying to reorder global trade, it’s within 3% of making a new all-time high.

Clearly, there’s a force in the market that’s keeping U.S. equities expensive regardless of what’s going on in the world. It’s a force I’ve mentioned before.

I’m talking about ‘the relentless bid’…

The term refers to the unending flow of funds from Americans’ paychecks into their 401(k) accounts every time they get paid.

This is also referred to as passive investing, where investors don’t actively research the stocks they buy. Instead, they passively own index funds, without regard for their attractiveness based on fundamentals like valuation or quality. Investors simply buy the same stocks every paycheck without any research whatsoever.

At the other end of the spectrum, active investors – like Stansberry Research analysts and the folks here in Vail this week – search through the stock market to find stocks (and sometimes bonds) they believe offer investors a superior opportunity to the rest of the market. Passive versus active investing boils down to mindless buyers versus bottom-up stock pickers.

The constant flow of investment dollars regardless of any fundamental financial or economic analysis is a major force – perhaps even the defining force – of the U.S. stock market today. Depending on who you ask, passive investing overtook active investing at some point in the past two years.

So now more money is going into passive investments every week, month, and year than into actively sourced stocks.

My colleague Corey McLaughlin and I recently spoke with Stansberry Research senior analyst Bryan Beach about the relentless bid.

You’ll hear our interview with Bryan on an upcoming episode of the Stansberry Investor Hour podcast.

Bryan gave us a useful way to think about how the relentless bid has transformed markets by asking me to relate the parable of Mr. Market from Benjamin Graham’s classic book The Intelligent Investor.

Graham said to think about the stock market as “Mr. Market,” your partner in a private business. He’s a manic depressive. When he’s happy, he’s willing to buy your interest for any price. When he’s depressed, he’s willing to sell his interest to you at any price.

Your job as an investor is to buy from him when he offers to sell at a cheap price and to sell to him when he offers you an exorbitant price.

Of course, this assumes that you understand the value of the business well enough to be able to identify whether the price is cheap or expensive. That is the province of the active investor and, by definition, something the average 401(k) buyer does not do.

Bryan says there’s no longer just you and me (active investors) and Mr. Market anymore. Now, there is a third player, and he’s doing more buying on any given week than any other player in the market. Bryan likened the passive 401(k) contributor to a zombie standing at a fence relentlessly chanting, “Buy, buy, buy.”

Bryan’s ‘zombie bid’ is an excellent way to understand what’s happening in the market…

And what will likely continue to happen until some greater force derails it.

Bryan and I both offered ideas about what force that could be. He said perhaps it will be when more folks retire and switch from contributing to their 401(k) accounts to living on them. That will transform these folks from relentless buyers to relentless sellers… and the passive tidal wave will go into reverse.

I took a different and more complicated route (which I’ve mentioned in previous Digests). I suggested that perhaps the endless flow of U.S. dollars to other countries (mostly China) in exchange for cheap goods has had a profound impact on U.S. markets, causing those dollars to come back to the U.S. and bid up all kinds of U.S. securities, mostly stocks. In other words, I’m not suggesting a reversal of the zombie bid, but that there might soon be a very large force offsetting it.

Perhaps Trump will change those flows to some degree by tariffs and other means… And perhaps that will send investment flows that would have been destined for the U.S. market into other markets.

But let’s face it, investors aren’t really zombies. If a global trade reset disrupts U.S. financial markets, folks could panic and stop putting their 401(k) contributions into S&P 500 funds. They could shift into gold and silver, foreign stocks, bonds, Treasury bills, or money-market funds. They have plenty of options. And regular Digest readers know I’m a fan of diversifying into some of those options.

However you look at the situation, the relentless bid into U.S. stocks can’t be ignored. And we can’t predict when – or if – the relentless bid will reverse, fade, or change in a major way. So we’re not using it as a justification to be bullish or bearish, though being bearish certainly has its risks with the zombie-buying millions of folks do week in and week out.

But there might be more sanity than I thought…

Brick-and-mortar video-game retailer GameStop (GME) announced Wednesday evening that it would offer $1.75 billion in noninterest-paying convertible debt. The company’s press release said nothing about it using the proceeds to buy bitcoin, but that’s clearly an option given what it did say:

GameStop intends to use the net proceeds from the offering for general corporate purposes, including making investments in a manner consistent with GameStop’s Investment Policy and potential acquisitions.

We know the company’s policy includes buying bitcoin, and I suspect the market was keenly aware of that on Thursday when the stock opened around 17% below the previous day’s close and closed down 22.5% for the day.

I don’t wish the company’s shareholders ill. But I would like to think that the market was expressing disapproval of an apparent scheme to imitate Strategy (MSTR), which has borrowed billions to buy a massive trove of more than 580,000 bitcoins.

I have nothing against bitcoin, but using leverage to buy a highly volatile asset that produces no cash flow seems downright foolish to me. So far, things have been rosy for Strategy and GameStop, but sooner or later, the price of bitcoin will likely go through one of its typical steep down cycles. Leverage will amplify the volatility, and the companies’ share prices will likely fall more than bitcoin. I’d hate to be holding either stock when that day arrives.

I know it doesn’t sound like it, but this is an optimistic viewpoint. I believe the market is expressing disapproval of a fundamentally unsound business decision. That’s the way it’s supposed to work. That’s the way it mostly does work when there’s no zombie bid distorting market valuations to the upside.

This is just a single data point, but maybe it’s a sign that there’s more sanity in the market than I’m giving it credit for lately.

Also, when Israel was attacking Iran last night, bonds weren’t falling like they did in early April. They were going up, which is what you’d expect as stock futures plunged on the news. It’s another sign that investors are reacting as you’d expect and not panicking as much as they did a couple months ago.

I’m still bearish on U.S. equities, but I have to acknowledge how often that idea has been plain wrong in the past eight years, as stocks kept providing good returns, even though they remained stubbornly expensive.

Finally, I’ll point out that it’s possible to be bearish on equity returns without thinking there must be a market crash, though a crash wouldn’t surprise me. Still, if it never arrives, that doesn’t mean U.S. equities will perform as well in the coming decade or more, as they did in the past few decades. Investors need to be prepared for that.

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In today’s mailbag, feedback on our founder Porter Stansberry’s free presentation (which went offline last night) and our discussion in yesterday’s edition about a potential new Federal Reserve chair… Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

“I just read Porter’s presentation on TradeStops and thank you. One thing that stood out were the 10-year returns of the three billionaires Soros, Icahn, and Dalio. Really? That’s, like, 3% per year. Why are they so famous? I’d fire me if that were my result.” – Subscriber N.B.

“[Kevin] Warsh [a possible replacement for Jerome Powell as Fed chair] said that when the Fed jumps into action, the size and scope of fiscal mismanagement is magnified. It’s obvious to me that the more the Fed prints, and charges the USA interest for that money, the more power the Fed has. Why would they stop when it’s in their ‘interest’ to make bank? It will all work until the Treasury debt is defaulted on… just as Porter says.” – Subscriber Rob C.

With a head full of conflicting thoughts,

Dan Ferris
Vail, Colorado
June 13, 2025