1/ top companies are cash rich and don’t rely on debt – interest rate doesn’t directly affect interest expenses. And these companies have bigger weight in the index.
2/ top companies have huge pricing power – when real yield doesn’t change and nominal yield mostly reflects inflation, top companies will have higher earnings if inflation is high. So higher nominal yield or discount rate is offset by higher free cash flow.
Look for the “contexture” – unquantifiable traits.
You don’t want to compete with AI on quantifiable data. Same as news, AI should be able to record and analyze data at amazing speed.
In order to know what’s unquantifiable, you need to be on the AI side first. AI would want to make more info quantifiable. If you are on the AI side, you will know what kind of traits is hard to quantify.
Don’t trade on news.
Human won’t be able to compete with AI on speed (of reading news) and breath – AI can consume a lot of news in a second.
What should human investors do?
Look for any discrepancies vs reality – a) some are just fake news, b) some are partially made up based on leads, c) some are true but not important, etc.
And it probably should be down.
Top weighted companies within $IBB are Gilead, Vertex, Amgen and Regeneron.
Gilead 1q 2022 revenue was $6,590 million and 1q 2025 revenue was $6,667 million – no growth for 3 years.
Vertex 1q 2022 revenue was $2,097.5 million and 1q 2025 revenue was $2,770.2 million (but 1q 2024 revenue was $2,690.6, so revenue growth slowed significantly). Additionally, Vertex shows no growth in non-gaap operating income.
Amgen is better – 1q 2022 revenue was $6,238 million and 1q 2025 revenue was $8,149 million. But growth is smaller in operating income vs 3 years ago – non-gaap operating income grew to $3,599 million in 1q 2025 vs $3,140 million in 1q 2022, or ~15% growth in 3 years.
Regeneron 1q 2022 revenue was $2,965 million and 1q 2025 revenue was $3,029 million – no growth vs. 3 years ago and 1q25 vs 1q24 declined 4%.
Gilead and Vertex stock performance is not bad actually.
In the past 3 years, Gilead stock is up 75% and Vertex stock is up 50%.
However, the index is pressured – only those companies with promising new “story” to tell are up meaningfully. Existing business lines are not sexy as shown above.
No rising tide that could lift all boats post covid – only dangerous ones like rising interest rate.
See my previous posts on Baijiu here (Jun 2024) and here (Sep 2024) – concerns on volume growth and the ability to further increase profitability.
While premium Baijiu company like Moutai can still do ok, as key product’s market price is still higher than its ex-factory price, the price gap is narrowing, which means Moutai’s distributors are having a bad time.
The end demand is additionally weak after Chinese gov’s recent liquor ban.
Moutai’s stock price has declined by ~15% since mid-May (1645 -> 1401). Currently, Jun 16 is one of the lowest closing price in 2025, worse than Apr 7 when tariff hit.
However, this represent a buying opportunity I believe.
Besides Moutai, other Baijiu brands stock also declined. Wuliangye has declined about 15% from its peak this year. In fact, it’s more than 10% lower than end of 2019 level (~rmb 133 per share)!
Luzhou Laojiao has declined about 25% from its peak this year.
They are trading at 20x (5% earnings yield, Moutai) and 14x (7% earnings yield, Wuliangye), and 12x (8% earnings yield, Laojiao) LTM earnings, compared with ~1.6% China’s gov bond yield.
I have worked in both industries, venture capital and hedge fund.
I found that sometimes they can be exactly the opposite in how to make money.
While in venture capital, the deals that are more successful are those that are consensus. Capital pile in, and those with capital runs faster, adding to the moat.
While in hedge fund, the stocks that work better are those that are considered un-investable. When other holders cut loss / exit, it creates better risk reward profile and the perfect buying opportunity.
If you hear a piece of “news” from China’s mainstream media, that’s not the news anymore. Normally, this “news” can be seen from multiple official outlets in China in similar or even the same words.
Therefore, you can trade on the news anyway; you should assume market has already priced this information.
The reason is that nowadays information transmits super efficiently in China, so little people would be left behind without the exposure to those mainstream “news”. Thus, there is no one you can have information edge over, especially in the market.
Then where/how to get information edge?
1/ by double checking the news with resourceful people. Context will matter a lot and they can help you understand for example whether a change is big / serious or superficial / repetitive.
2/ read the full documents; gather any information that is shortened or simplified in the news
3/ focus on news that is not repeated in other mainstream medias
4/ compare with previously similar events – look for anything that is more or less than before; in other words, result is not important, the difference matters.
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See others posts
Netflix was out, Microsoft, Nvidia and Tesla are in.
When FAANG was first coined, it was 2013. Netflix provided significant return in that mobile Internet and cloud era.
ChatGPT was out in Nov 2022 and swept the world in 2023.
Netflix doesn’t touch hardware and AI.
Nvidia was neglected as it’s not close to consumers except for the gaming PC. Later people may know it as a crypto mining machine, but not the backbone of an entire era.
Tesla was neglected as people can easily live without an electric vehicle. Now it seems that autonomous driving will eventually serve many people and be deployed in more use cases in the form of robots.
Microsoft was neglected because it was mature and old? Not sexy.
Reading Buffet’s early investments in Union Street Railway in the 1950s.
Company’s business is not going well, and its stock is cheap – $30–$35 per share despite roughly $60 per share in cash and bonds.
Simply by distributing dividends, the company can give $50 per share to shareholders.
While the company being cheap is important, the management’s willingness to give shareholder return is even more crucial.
A distant $50 is different from a near-term $50; not to mention other ways to destroy equity value.
Oh btw, Union Street Railway also needed local regulator’s approval to distribute it seems – so ultimately it’s also up to the change of thoughts from regulators.
Why not bond risk premium?
Bonds typically have fixed payments but inflation is uncertain. One dollar 10 years from now is very hard to value.
Instead, you can trust credible companies more. They shall hold their position in the economy and take their fair share.
Isn’t that more “certain” in some way?
Thus, why we have equity risk premium.. there should bond risk premium over high quality companies.