How to Invest in an AI-Disrupted Market | Ask Me Anything with Jonathan Wellum

Key Concepts

• AI Disruption: The impact of Artificial Intelligence on business models, valuations, and economic moats.
• Economic Moat: Sustainable competitive advantages protecting a company’s long-term profitability.
• Value Investing: An investment strategy focused on identifying undervalued companies with strong fundamentals.
• Tariff Risk: The potential impact of tariffs on company profitability and investment strategies.
• Precious Metals (Gold): A hedge against inflation, geopolitical risk, and economic uncertainty.
• Schiller CAPE Ratio & Buffett Indicator: Valuation metrics used to assess overall market expensiveness.
• Balance Sheet Strength: The importance of a strong financial position for companies navigating disruption.
• Playing Field vs. Scoreboard: Focusing on underlying business fundamentals rather than short-term market fluctuations.

AI and the Redefinition of Economic Moats

The discussion centered heavily on the disruptive potential of Artificial Intelligence (AI) and its impact on traditional business valuations, particularly for value investors. Jonathan Wellm emphasized the difficulty in accurately assessing the full extent of AI’s damage, acknowledging both its benefits (increased productivity, data analysis) and threats to existing business models.

He outlined key characteristics to look for in companies likely to withstand AI disruption: high switching costs, strong network effects, brand trust, regulatory barriers, capital intensity (requiring significant investment that newcomers can’t easily replicate), and specialized, patent-protected data. Companies lacking these protections are considered vulnerable.

Examples were provided: Adobe was cited as facing increased pressure, while accounting firms and litigation finance companies (like Berford Capital) were seen as more resilient due to the need for fiduciary responsibility, specialized expertise, and substantial capital reserves. ServiceNow was highlighted as a potentially undervalued company with strong protective characteristics, with insiders recently purchasing stock. Wellm cautioned against indiscriminate selling and emphasized the need for careful reassessment of business models in light of AI. He stressed the importance of revisiting models and ensuring the “moat” (sustainable competitive advantage) remains intact before investing.

Patience and the Value Investing Process

A core theme was the importance of patience and discipline in value investing, particularly in volatile markets. Wellm illustrated this with two case studies:

• Tura Insurance: A spin-off from Brookfield, Tura experienced a 20-25% stock drop after an $81 million write-down related to a reinsurance recoverable. Despite the initial setback, Rocklink began accumulating shares, recognizing the underlying strength of the business. After two years of volatility, the stock rebounded 12-13% following strong quarterly results, rewarding patient investors.
• Sandstorm Royalty: This gold royalty company faced challenges related to counterparties and royalty agreements, leading to significant price fluctuations (from $14 down to $3 and back up). Through consistent analysis and a belief in the company’s long-term potential, Rocklink held the position, ultimately benefiting from its sale to Royal Gold, resulting in a substantial return (equivalent to a $20 stock from an initial $3 investment).

Wellm repeatedly emphasized the distinction between the “playing field” (the underlying business fundamentals) and the “scoreboard” (market price). He quoted Warren Buffett’s advice to avoid investing in a stock unless prepared for a 50% drop, highlighting the inherent volatility of the market. He stressed that a disciplined approach, focused on business fundamentals, will ultimately be rewarded.

Navigating Macroeconomic Risks: Tariffs, Inflation, and Geopolitics

The conversation addressed broader macroeconomic risks, including tariffs, inflation, and geopolitical tensions.

• Tariffs: Wellm suggested that much of the tariff-related repricing has already occurred in the market. He advocated for investing in companies positioned to benefit from the reshoring of capital to the US, driven by tax incentives and lower capital costs. He noted that companies with US-based production facilities are less vulnerable to tariff impacts.
• Inflation & Precious Metals: The discussion highlighted gold as a hedge against inflation and economic uncertainty. JP Morgan’s raised gold target to $6,300/oz was mentioned. Wellm acknowledged the significant run-up in gold prices and advised trimming positions when they become a substantial portion of a portfolio (over 30%), reallocating capital to other areas or personal use. He emphasized the importance of disciplined portfolio management and taking profits. He believes the structural factors driving gold prices (high debt levels, deglobalization, aging demographics) are likely to persist.
• Valuation Concerns: The Schiller CAPE ratio exceeding 40 and the Buffett indicator reaching 220% of US GDP were cited as indicators of an expensive market. Wellm cautioned against simply buying the S&P 500 and recommended a more selective, value-oriented approach.

Investment Strategies & Sector Specifics

Specific investment areas discussed included:

• Energy: Favoring unregulated utilities with strong balance sheets and capital allocation skills (e.g., Brookfield Renewable, Brookfield Infrastructure). Also, a positive outlook on uranium due to increasing demand from data centers and the need for reliable energy sources.
• Data Centers & Electrification: Identifying companies benefiting from the buildout of data center infrastructure (e.g., Prologis, Eaton, Schneider Electric).
• Litigation Finance: Recognizing the specialized nature and capital intensity of litigation finance as a protective moat (e.g., Berford Capital).
• Precious Metals: Maintaining a position in gold and silver as a hedge against macroeconomic risks.
• Copper: A small position in Power Metallic, a Canadian copper mining company, to capitalize on anticipated demand.

Conclusion

The discussion underscored the importance of a disciplined, value-oriented investment approach in a volatile and rapidly changing market. Key takeaways include: focusing on underlying business fundamentals, identifying companies with strong economic moats, exercising patience, managing risk through diversification and position sizing, and remaining aware of broader macroeconomic trends. The speakers emphasized that while AI presents significant disruption, opportunities exist for investors who can identify companies well-positioned to navigate the changing landscape. Prudence, careful analysis, and a long-term perspective are crucial for success.