By Samantha McLemore
“When we think about the future of the world, we always have in mind its being where it would be if it continued to move as we see it moving now. We do not realize that it moves not in a straight line and that its direction changes constantly.”
-Ludwig Wittgenstein
“A gem cannot be polished without friction, nor a man perfected without trials.”
-Seneca
The Wittgenstein quote above is one of Bill Miller’s favorites. It starred in nearly all of Bill’s speeches over the years. People tend to think linearly, while the future is anything but. Rarely does a matter of months demonstrate the point so clearly though.
The markets entered the year strongly, only to mount one of the quickest, most precipitous declines in history as fear about the economic damage of Trump’s tariff policies ballooned. From Feb 19th to Apr 7th, the S&P 500 dropped 21% on an intraday basis. Trump then backed off his most extreme threats and markets rallied hard. From the Apr 7th lows through the Jul 3rd highs, stocks rallied 30% to new highs.
Seldom does the economic damage of linear extrapolation manifest so quickly.
For the second quarter, the S&P 500 gained 10.9%, the Nasdaq 18.0% and the Dow 5.5%. Opportunity Equity Strategy rose 15.3% net of fees. For the year-to-date period through Jun 30, the S&P 500 and Opportunity/Patient climbed 6.2% and 4.2%, respectively. The fund’s year-to-date performance surpassed the market’s early in the third quarter.
To start the third quarter, some signs of enthusiasm again emerged. Citigroup’s fear-greed index poked its head into the greed zone again. Ark Innovation Fund had its best relative quarter since the second quarter of 2020. Google searches for YOLO (“You only live once” meme stock term) reached levels not seen since the early 2021 heights of the Innovative Disruption Bubble. The market screens as overbought on a short-term basis.
Trump also resumed threats of higher tariffs on several countries where negotiations are slower than desired. The more things change, the more they stay the same.
The Seneca quote is another favorite of mine. “A gem cannot be polished without friction, nor a man perfected without trials.” In investing and life, pain and loss create the opportunity for growth and gain.
As a contrarian value investor, I’ve long felt more comfortable deploying capital into weakness than strength. Capitalizing on market turmoil comes naturally. The second quarter crash gave us the chance to buy certain stocks, like Norwegian Cruise Lines (NCLH), at significant discounts to what we think they are worth.
I didn’t realize until much later in life that hardship creates the opportunity for growth outside markets too. My children tell me I have two interests: business/markets and spirituality. They see two separate and distinct arenas. It’s true that business and markets primarily enhance material prosperity, while spirituality deals with inner and ethereal wealth. The similarities, though, dwarf the differences in my opinion.
In both, dedication to learning and executing best practices can materially improve one’s life. Journaling and meditation help. Temperament, discipline, and emotional awareness are more important than IQ.
Everyone knows to buy low and sell high but maintaining that discipline amidst fear and greed is challenging. We recognize that negativity towards family members isn’t optimal, but exercising control isn’t easy. Enlightened Buddhist leader, a former oracle to the Dalai Lama, Khandro-la preaches the importance of “taming the mind.” The benefits of doing so are far-reaching.
Equities have historically provided the highest return amongst asset classes, primarily as compensation for higher volatility and drawdowns. Since the Financial Crisis, most strategies that offer the benefit of lower volatility chiefly do so at the cost of returns. Hedge funds and classic endowment model portfolios offered higher returns than the market leading up to the Financial Crisis. Since then, returns have been lower.
To earn differentiated returns, you must behave differently and be right.
When I began viewing challenges and problems as opportunities for growth, it transformed my life. I tend to have a type-A personality. I approached the world with a “conquer and prevail” mindset, which tended to bring plenty of stress. I could never seem to get to the other side of all the problems.
My most significant period of suffering was when my mom passed away suddenly in my twenties (during the Financial Crisis nonetheless). She was my biggest fan, and I was gutted. One book I read advised “walking through the pain.” I wasn’t yet interested in mindfulness or spirituality, but the advice resonated.
It made a few things clear. There’s power in being in the moment despite how difficult that can be. It also suggested a beginning and an end to my extreme pain. This aligns with the classic Buddhist principle of impermanence (the state of lasting for only a limited time period). That felt encouraging.
I would never choose the calamity of losing a loved one. I would reverse it in a second if I could. But I did learn and grow from the experience. My heart opened. I learned to appreciate my loved ones more, and to cherish precious moments with them.
Now, when I confront challenges, I ask myself, “what am I meant to learn from this?” I try to accept what is (which is still an effortful practice for me) rather than battling for something different. I always look for learnings and growth opportunities.
This mindset helps navigate challenging markets, too. I find the practice of stepping back from the noise to focus on core principles essential.
At our core, we are contrarian, long-term value investors. We understand the best values are companies that can grow and compound earnings for long periods of time. Those companies are few and far between, but we try to identify them. We are a rare breed of value investors who look for the biggest gainers.
We carefully analyze both company fundamentals and market expectations. We look for gaps between the two. We aim to let our winners run and to identify mistakes early.
We also know:
1.) It’s impossible to predict the future. Most great investors don’t try. We do try to understand the current environment.
2.) Markets rise 73% of the time1. Odds favor being bullish.
As for the current environment, we believe there are two important observations. First, the economy continues to grow and has been far more resilient than expected. Second, disinflationary forces have been mostly continually underestimated.
Neither truth guarantees anything about the future, but it does help us understand the present.
Since the Fed began raising rates in early 2022, recession fears have been elevated. Cyclical stocks finally saw improved performance late last year when the Fed started cutting rates (only to plummet on the tariff tantrum). Even as tariffs weigh on sentiment and growth, the overall economy seems robust. The Atlanta Fed predicts 2.6% GDP growth in the second quarter.
The job market remains robust, albeit weakening on the margin. The consumer remains strong, possibly supported by an aging demographic that has experienced strong wealth growth. Corporate profits continue to grow.
Inflation has also been better than expected. For the decade after the financial crisis, inflation fell below the Fed’s target in all but two quarters. After the pandemic spike, inflation normalized more quickly and easily than most expected.
Core PCE, the Fed’s favored metric, sat at 2.7% in May. While that’s above the Fed’s 2% target, historical market valuations suggest a range of 2-3% is optimal. The five-year inflation breakeven rate is 2.4%.
Tariffs and immigration policy both pose growth and inflation risks. The market’s rally suggests both are manageable. It’s a fluid environment, though, that changes by the hour.
Since the March 2009 Financial Crisis lows, we’ve experienced one of the strongest secular bull markets in history. The S&P 500 has gained 1155%, or 16.7% per year since then2. That’s well above the long-term average of 9.7% per year.3
How much further might the bull market go? No one really knows. Peter Lynch famously said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” We agree.
Secular bull markets tend to end with significant euphoria. We only see small pockets of it. Consumer sentiment remains moribund.
A few other factors tend to accompany peaks: recession, significant overvaluation and a hostile Fed. None of those conditions exist today.
To be sure, with the S&P 500 at 23.6x 2025 estimated earnings and 21.0x 2026 earnings, we are in rarified valuation territory, only experienced in the Tech Bubble and in 2021/2022.
Valuations, though, are poor predictors of tops and bottoms. Alan Greenspan first mentioned “irrational exuberance” in 1996. The market continued up for ~4 more years, then suffered one of the worst bear markets in history. It still never made it back to that 1996 level.
Jeremy Grantham at GMO has believed the market has been overvalued since late 2009, at which point he declared it was 25% overvalued and predicted 2.7% real returns. The S&P 500 has gained a whopping 687% (14% a year) since then.
If the S&P 500 peaked at the Tech Bubble peak multiple (24.9x) on next year’s earnings estimates ($297/share), it could rise another ~19% in the next year alone. If earnings continue to grow beyond that, it implies more potential upside.
There are legitimate reasons for a higher market valuation. The market’s higher profit margins, free cash generation and returns on capital and equity justify a higher multiple. We are experiencing a technological revolution with AI. If AI is as transformative as many think, the economic benefits support higher valuations.
We analyzed previous secular bull market peaks in 1972 and 2000 to help us better understand secular market peaks. Overall, valuations aren’t quite as extreme as those peaks. Sentiment is more contained. Cyclical sectors aren’t as extended. The Fed was tightening prior to those market peaks, while it’s expected to cut rates two more times this year.
Over the long term, higher valuations do correspond to lower returns. I’d say the odds are close to zero we get another decade of mid-teens market returns.
Our best protection against the end of a secular bull market, whenever that comes to pass, and lower potential returns is our contrarian value approach.
Value investing has lagged for nearly the entirety of this bull market. We have confidence that this won’t always be the case. Historically, technological revolutions have favored growth.
After previous market peaks that accompanied elevated valuations, value led. We’ve recently seen market breadth broaden. Value and small-cap performance have improved as the market anticipates Fed rate cuts.
In this environment, we try to balance letting our winners run with redeploying capital into out-of-favor areas we deem mispriced. We are typically early when we buy, which essentially means trading current performance for future gains. We invest in delayed outperformance.
Just this week, I instructed my kids on the importance of delayed gratification. It’s another one of those behaviors that enhances both material and inner wealth.
As active equity managers, we don’t invest in the “market”. We invest in a portfolio of securities. We analyze the risk-return of each individually.
We pared back some of our cyclical value stocks (airlines, cruise lines, banks) as markets rose late last year and early this year. We then added back some exposure during the tariff tantrum as some names were hit hard.
The market is currently discounting a continued economic expansion, which makes sense. Risks (tariffs/immigration/geopolitics) remain, however. Fortunately, there are still areas of the market we believe are significantly undervalued.
Healthcare and small caps now represent nearly half (46.2%) the portfolio. Both areas have lagged and trade at significant discounts to their historical valuations.
Healthcare trades at the lowest relative valuation to the market in the past 50 years. It also tends to be less economically sensitive, which helps diversify the fund and protect against cyclical downside volatility. Our healthcare weight (21.3%) is significantly above the market’s (~9.3%).
UnitedHealth Group (UNH $302.91) represents exactly the kind of opportunity we like. It fell from a high of $630 late last year to a low of $249 in the second quarter giving us the chance to enter. A long-time darling known for consistently beating earnings, investors reacted poorly to a barrage of bad news (earnings disappointment, guidance pull, CEO change, DoJ investigation).
There are several challenges pressuring United’s earnings. We believe it’s a classic underwriting cycle that can be remedied over time. United is a great company with high returns on capital. The new CEO Steve Hemsley did an excellent job running the company during his previous tenure.
We see earnings power of $40-45 per share in 3-5 years. The company historically traded at 16-17x earnings. Using the low ends of these ranges implies UNH will trade back to $640, upside of 111%. If that takes 5 years, it will compound at 16% per year, which should nicely outperform the market.
Small cap value is the only equity style box that still trades at a discount to its historical valuation. This group4 now represents 28.6% of the portfolio. Our largest investments are Norwegian Cruise Lines (NCLH $21.96) and IAC ($39.94).
NCLH got hit hard during the selloff this year due to concerns about cyclicality and debt. We believe NCLH can grow earnings power double digits for the next decade or more. The other large cruise lines have already made it back to post-pandemic record prices, we believe NCLH will too.
IAC trades at a significant discount to the businesses it owns. Its stake in publicly traded MGM and its cash are worth more than the entire market cap. Dotdash Meredith is its most significant fully owned asset. The advertising business owns premium properties such as People, Allrecipes, Better Homes and Gardens and Investopedia and is well positioned in the current environment. IAC also owns Care.com and a piece of Turo.
Barry Diller who has an excellent track record recently took the reigns as CEO and resumed share repurchases. We think IAC’s underlying businesses are worth more than twice the current stock price.
QXO ($22.03), a company we invested in as a PIPE5 a year ago, ended the quarter as our largest holding. CEO Brad Jacobs has an impressive track record of creating shareholder value at his previous companies. He plans to roll up the building products distribution industry using technology to improve operations.
QXO closed on its first acquisition, Beacon Roofing, in the quarter. Roofing is mostly nondiscretionary, providing some stability to earnings. While the valuation is elevated on near-term earnings, we see a path to significant earnings growth. QXO plans to improve margins and pursue more acquisitions. If QXO is successful in its goals, we believe the stock is worth significantly more and can compound in the mid-to-high teens.
We have significant concentration in our top 10 holdings, which represent 51% of the strategy. This exposure is bar-belled between current AI leaders and alternative differentiated ideas.
21.6% is in Mag 7 AI leaders (AMZN, GOOGL, NVDA, META). We still think these companies are attractive. AI companies have delivered ~50-60% of the market’s returns over the past 2.5 years. If current trends continue, as we expect, these companies should do well.
Our other large names include QXO, NCLH and Royalty Pharma (RPRX $35.87), a very cheap healthcare royalty investor we believe can compound capital for an extended period. We also still own and like Citigroup (C $85.79). Its turnaround is progressing well, and we still see significant upside.
Given the strong moves we’ve seen in some stocks early in the third quarter, we’ve pared back some of our exposures. At the same time, there are still plenty of names we think can compound at attractive mid-teens rates, including QXO, NCLH, and UNH. Our job is to continuously seek areas where attractive fundamentals are not appropriately reflected in market expectations.
As always, but now more than ever, we approach the market with relentless optimism paired with obsessive paranoia. Markets rise most of the time justifying optimism. The best stocks do significantly better. Yet, most stocks decline. We exercise vigilance to determine where you’re adequately compensated for risk. During selloffs, we capitalize on weakness to enhance return potential.
Our approach of hunting in unloved areas and taking active bets is differentiated. We maintain high conviction in our current collection of businesses. We know challenges will come, but we seek to use those to our advantage, both financially and more broadly.
As entrepreneur and author Chip Conley said, “Our painful life lessons are often the raw material for future wisdom.”
Opportunity Equity Annualized Performance (%) as of 6/30/25
| QTD | YTD | 1-Year | 3-Year | 5-Year | 10-Year | Since Inception (12/30/1999) | |
| Opportunity Equity (gross of fees) | 15.5% | 4.8% | 20.3% | 21.6% | 12.1% | 9.0% | 8.6% |
| Opportunity Equity (net of fees) | 15.3% | 4.2% | 19.1% | 20.4% | 11.0% | 7.9% | 7.6% |
| S&P 500 Index | 10.9% | 6.2% | 15.2% | 19.7% | 16.6% | 13.6% | 7.8% |
|
Note: Individual stock prices as of 7/9/2025 ¹The S&P 500 has risen 73% of calendar years from 1950 to 2024. ²3/9/2009 to7/7/2025 ³Since the end of 1927 4Market caps below $10B 5Private investment in public equity FOR INSTITUTIONAL INVESTORS ONLY The views expressed in this commentary reflect those of Patient Capital Management portfolio managers and analysts as of the date of the commentary. Any views are subject to change at any time based on market or other conditions, and Patient Capital Management disclaims any responsibility to update such views. These views are not intended to be a forecast of future events, a guarantee of future results or investment advice. Because investment decisions are based on numerous factors, these views may not be relied upon as an indication of trading intent on behalf of any portfolio. Any data cited herein is from sources believed to be reliable but is not guaranteed as to accuracy or completeness. The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. References to specific securities are for illustrative purposes only. Portfolio composition is shown as of a point in time and is subject to change without notice. All historical financial information is unaudited and shall not be construed as a representation or warranty by us. References to indices and their respective performance data are not intended to imply that the Strategy’s objectives, strategies or investments were comparable to those of the indices in technique, composition or element of risk nor are they intended to imply that the fees or expense structures relating to the Strategy or its affiliates, were comparable to those of the indices; since the indices are unmanaged and cannot be invested in directly. Portfolio holdings and portfolio discussion are for a representative Opportunity Equity account. Holdings discussed may or may not be included in all portfolios subject to account guidelines. Returns for periods greater than one year are annualized. The performance information depicted herein is not indicative of future results. There can be no assurance that Opportunity Equity’s investment objectives will be achieved and a return realized. Investors should carefully review and consider the additional disclosures, investor notices, and other information contained elsewhere in this document as well as the Offering Documents prior to making a decision to invest. Click for the Opportunity Equity Strategy Composite Performance Disclosure. Past performance is no guarantee of future results. ©2025 Patient Capital Management, LLC |
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