Topics Covered
Introduction
The risk is being in the wrong place
The index is no longer a neutral decision
From a valuation bubble to an earnings question
Liquidity matters more than it used to
Gold, and the leverage inside the miners
Crypto is resetting
I am not investing for a black swan
What matters is already in the price
Let’s go.
Introduction
For most of my investing life, falling interest rates were simply part of the background.
For most investors, they were even more than that.
From the early 1980s through 2021, the world experienced one of the great secular declines in interest rates.
The exact causes changed over time, but the direction was remarkably persistent. Lower inflation, globalization, demographics, central-bank credibility, technology, and eventually quantitative easing all contributed to a world where capital became progressively cheaper.
That cycle broke in 2022.
I don’t know if we are at the beginning of a forty-year cycle in the opposite direction.
Nobody does.
But I think it would be a mistake to build a portfolio that requires the old world to return.
When the risk-free real return available to investors rises, everything else has to compete with it.
Long-duration assets become more sensitive to assumptions.
Weak businesses have to refinance at higher costs.
Growth financed by cheap money becomes harder to justify.
Most importantly, the hurdle rate for investing goes up.
The risk is being in the wrong place
I don’t think the most useful question today is whether the market is going up or down.
The better question is:
What happens to each asset I own if capital remains expensive?
That leads to a very different portfolio
The biggest risk, in my view, is not necessarily a broad market crash.
It is owning the wrong businesses, sectors, or assets in a regime where the cost of capital is structurally higher, inflation remains less predictable, and performance becomes increasingly dispersed.
That last point is important.
After years in which owning the index was enough, I think the payoff from selection is becoming more interesting again.
George Noble recently made a similar observation: dispersion is increasing and corrections are appearing underneath the surface of the market. His conclusion is considerably more bearish than mine, particularly toward consumer equities, but the underlying observation is useful.
I am not bearish on equities. I am becoming more selective about which equities deserve capital.
The index is no longer a neutral decision
Passive investing is one of the greatest financial innovations ever created.
I don’t think indexing is dead.
I do think there are periods when the expected payoff from simply buying the index becomes less attractive relative to doing the work underneath it.
This may be one of them.
As of today, the ten largest companies represent roughly 38% of the S&P 500. The largest constituent alone — NVDA 0.00%↑— represents almost 8%.
That does not make the index bad.
It means buying the index today is making a larger implicit bet on a relatively small group of companies than many investors realize.
And some of those companies are undergoing a fundamental change.
Technology companies are increasingly starting to look like industrial companies.
Not because software is disappearing, but because AI is incredibly capital intensive.
The AI revolution is creating enormous physical infrastructure requirements. Recent reporting suggests the financing needs are becoming large enough that even corporate bond investors are starting to differentiate between traditional issuers and AI-related borrowers.
This changes the question I want to ask.
The question is not: “Will AI change the world?”
I think it probably will.
The question for an investor is: “Will the return on the capital invested in AI justify the amount of capital required?”
Those are very different questions.
A technology can transform society and still produce disappointing returns for some of the investors financing it.
From a valuation bubble to an earnings question
This is where I think the debate around AI becomes more interesting.
Everyone talks about valuation.
I am increasingly interested in the possibility of an earnings bubble.
Not necessarily because current earnings are fake, but because today’s earnings expectations may implicitly assume that extraordinary capital spending will generate extraordinary future economic returns.
That assumption deserves to be tested.
Growth creates value when the return on incremental invested capital exceeds the cost of that capital. When ROIC falls below the cost of capital, more investment can actually destroy value. That principle is simple, but it becomes much more important when both the amount of investment and the cost of financing it increase.
Free cash flow matters for the same reason. Growth capex can be extremely valuable, but only if the investments ultimately create economic value. Spending more is not the same thing as becoming more valuable.
Who captures the economics: model providers, chip companies, hyperscalers, utilities, data centers, software companies, or ultimately the customer?
I don’t know the answers yet.
That uncertainty is exactly the point.
If the market price assumes a very favorable answer, the burden of proof becomes higher.
Graham understood this decades ago: the more growth a valuation requires, the more sensitive the investment becomes to small errors in the growth assumption.
Price is not separate from quality.
Price determines the odds.
Liquidity matters more than it used to
There is another variable I am spending more time studying: liquidity.
Modern financial markets depend not only on the level of rates, but on the availability and movement of balance-sheet capacity.
Michael Howell’s Capital Wars framework looks at the relationship between the stock of debt and global liquidity. His argument is that a heavily indebted financial system continuously needs liquidity because so much existing debt must be refinanced.
When liquidity grows faster than refinancing needs, financial assets tend to benefit.
When liquidity becomes scarce relative to debt, stress rises.
I don’t treat any single macro indicator as a trading system.
But the framework is useful.
It helps explain why liquidity can move markets even when the fundamental story has not changed much.
It also reinforces something I increasingly believe:
Cash is not an admission that I don’t know what to buy. Cash is optionality.
Its value is not just the yield I receive while holding it.
Its real value is the ability to deploy capital when future expected value becomes materially better.
If markets become more dispersed, that option becomes more valuable.
Gold, and the leverage inside the miners
Gold plays a different role.
It doesn’t need earnings growth to perform its portfolio function. It can benefit when confidence in fiscal discipline, monetary stability, or fiat purchasing power deteriorates.
That does not mean gold only goes up.
Cathie Wood currently argues almost the opposite of my base case: it sees technology-driven productivity, lower inflation, and potentially a stronger dollar creating conditions in which gold could fall materially.
That is a scenario worth respecting.
My interest in gold is not based on certainty that currencies will be debased. It is based on the payoff if that risk becomes more important.
Gold miners are a different bet.
They introduce operational, political, management, cost, and execution risk, but they can also provide operating leverage to the gold price. In Q1 2026, the World Gold Council reported that average gold-producer margins rose far faster than the gold price as higher realized prices outpaced rising mining costs.
So I think of the two exposures differently.
Gold is the hedge. Miners are the leveraged equity expression of the thesis.
Sizing should reflect that difference.
Crypto is resetting
Crypto sits at the other end of the portfolio.
Bitcoin has recently shown renewed strength after a long cooling-off period, reaching an eight-month high in September.
I am also watching improving traction beneath Bitcoin, particularly among higher-quality protocols already on our watchlist, including NEAR, Uniswap, Raydium, and Jupiter.
I don’t interpret this as permission to chase.
Quite the opposite.
My personal view is to use periods of short-term overheating to reduce risk or, selectively, express tactical downside through small leveraged short positions, while using meaningful weakness to accumulate crypto assets where I think the long-term asymmetry remains attractive.
The word daily matters. Leveraged inverse products can behave very differently from a simple long-term short because of daily resetting, path dependency, volatility, and compounding. For me, this is a tactical instrument, not a long-term holding.
Crypto itself remains a high-volatility allocation.
That means the thesis can be right and the position can still be wrong if the sizing is wrong.
I am not investing for a black swan
It is easy to construct a portfolio around everything that could go wrong:
debt crisis;
currency crisis;
AI bubble;
war;
inflation;
recession.
There is always another disaster to prepare for.
I don’t think that is a useful way to invest.
Black swans are, by definition, difficult to forecast. Building the entire portfolio around predicting one can be just another form of market timing.
I would rather think probabilistically.
The useful exercise is not pretending we know which future will happen, but mapping several plausible futures, assigning rough probabilities, and asking how our decision behaves across them.
I remain optimistic about technology, entrepreneurship, productivity, and long-term economic progress.
But optimism is not a valuation method.
And diversification does not mean owning fifty things that all require the same macro environment.
The optimal portfolio should not require low interest rates, record margins, expanding valuations, abundant liquidity, and exceptional AI growth to all happen at the same time.
It should have several ways to work.
Quality businesses that can compound capital.
Selective equities where expectations are low enough to create asymmetric outcomes.
Cash to give optionality.
Gold to provide a different monetary return driver.
Gold miners when the payoff justifies the additional operating risk.
Crypto where the upside remains large enough to justify volatility.
And, importantly, the ability to pass.
What matters is already in the price
I don’t know where the S&P 500 will trade next year.
I don’t know whether the 10-year Treasury yield will be 3% or 6%.
I don’t know where Bitcoin will finish this cycle.
And I don’t know whether today’s enormous AI investment cycle will produce extraordinary returns on capital or merely extraordinary capital expenditures.
Fortunately, I don’t think I need to know.
The objective of this project is not to predict the future exactly.
It is to understand what future the current price already requires.
Then compare the upside if reality is better with the downside if reality is worse.
The opportunity I see today is not necessarily in predicting the next bull or bear market.
It is in the widening gap between assets that need almost everything to go right and assets where very little success is already priced in.
Dispersion is the opportunity.
And if the world really has entered a regime where capital has a meaningful cost again, I expect that distinction to matter much more than it did during the last decade.
— Luca