The Stock Market Panic Explained

Key Concepts

• AI Disruption: The primary driver of market volatility, specifically Anthropic’s advancements in B2B AI tools.
• Sticky Businesses: Software companies with high customer retention due to integration into workflows.
• Moat Companies: Businesses with significant competitive advantages, traditionally considered unassailable (e.g., S&P Global, Moody’s).
• Duration: The ability to hold investments through market fluctuations, contingent on the underlying business model’s viability.
• Sunken Cost Fallacy: The tendency to continue investing in a failing venture due to prior investment, rather than rational assessment.
• Total Addressable Market (TAM): The overall market demand for a product or service.
• Free Cash Flow Yield: A financial ratio indicating the cash flow a company generates relative to its market capitalization.

Market Crash & Anthropic’s Impact

Yesterday witnessed a significant market sell-off, particularly impacting software companies and even established financial firms like S&P Global and Moody’s. The catalyst was Anthropic, an AI company diverging from consumer-focused models (OpenAI, Gemini, XAI) to concentrate on business-to-business (B2B) applications. Anthropic recently released an AI plugin for Microsoft Excel capable of performing complex financial analysis, surpassing Microsoft’s Copilot, signaling a threat to traditional financial analyst roles. More significantly, they announced an AI automation tool targeting professional analysis, financial compliance, and legal work – essentially automating tasks currently performed by high-cost professionals.

The Wall Street Journal reported that AI, specifically Anthropic, threatens the “cash cow” of Wall Street – financial and legal data. The market is pricing in the possibility that Anthropic can scrape, synthesize, and provide this data for free, diminishing the pricing power and growth potential of companies like S&P Global and Moody’s, traditionally considered “duopolies” with unshakeable moats. This exposed a perceived vulnerability in these companies, triggering a broader sell-off as investors scrutinized all companies potentially susceptible to AI disruption.

Portfolio Impact & Specific Stock Movements

Over the past five days, several stocks experienced substantial declines:

• Equifax: Down 14% (portfolio position sold prior to the selloff).
• S&P Global: Down 13% (position maintained).
• Duolingo: Down 13% (disagreement with market assessment).
• Intuit: Down 12% (concern about being treated like other SaaS companies).
• FDS (FactSet): Down 12%.
• FICO: Down 12%.
• Spotify: Down 11% (questioning AI disruption potential).
• Moody’s: Down 10%.
• Uber: Down 7%.
• MCI: Down 7%.

The speaker’s portfolio experienced a roughly 5% loss, equating to approximately $60,000 in a single day, with the financial sector being the hardest hit.

Investment Strategy & Portfolio Adjustments

Despite the market downturn, the speaker maintains confidence in long-term holdings.

• Google: Held despite a 3% decline, citing strong underlying assets (Google Cloud, YouTube, Gemini) and a belief that AI won’t disrupt its core business. However, acknowledges a higher risk of a post-earnings sell-off due to a high forward P/E ratio (30x).
• Meta: Aggressively building a position ($118,000 and adding another $10,000), believing it’s insulated from AI risks due to its control over its model, infrastructure, and supercomputing capabilities. Also highlights Meta’s strong growth and low valuation.
• Salesforce: Sold, with proceeds reinvested into Meta. The speaker views Meta as a superior asset, even excluding AI concerns, based on valuation, moat, and growth potential.
• ASML: Selling down with the market, despite not making logical sense.
• Microsoft: Approaching a potential buying opportunity, believing it’s trading at good value.
• Intuit: Remains a concern, potentially being evaluated like other SaaS companies.

Story Fund Performance

The “Story Fund” (currently $390,123,000 in gains) has been less affected. Amazon, Netflix, and Google have held up well. S&P Global and Duolingo have experienced declines. Duolingo, trading at a $4.5 billion market cap (net of $1 billion in cash) with a 6.45% free cash flow yield, is considered undervalued despite high short interest (over 20%). The speaker intends to hold and potentially add to their Duolingo position.

The Pitfalls of Reactive Investing & Importance of Business Model Analysis

The speaker cautions against simply buying stocks that are selling off the most. He emphasizes the importance of “duration” – the ability to hold investments through market fluctuations – but stresses that duration is only beneficial if the underlying business model is sound and capable of surviving and thriving. He warns against falling into “denial” by holding onto companies with decaying business models due to the sunken cost fallacy.

He contrasts the fate of cable TV (disrupted by streaming) with companies he believes are more resilient to AI:

• Resilient: Amazon (physical infrastructure), ASML (complex manufacturing), Costco (unique business model), GE, Google, Mastercard (network effect), Meta (AI control & infrastructure), Netflix (content creation challenges for AI), Visa, Spotify.
• Vulnerable: SAS companies reliant on seat-based licensing.

Earnings Reports & Fail of the Week

Uber: Reported earnings, down 4% on the day. The speaker notes the challenging market conditions for earnings releases and highlights Uber’s large total addressable market and ability to compete effectively.

Fail of the Week: Netflix co-CEO Ted Sarandos’s appearance before Congress. The questioning was largely unproductive and focused on irrelevant political issues. Senator Ted Cruz’s question about whether the US is “on stolen land” was highlighted as an example of the absurdity of the proceedings. Senator Josh Hawley’s attempts to dictate business practices to Netflix were also criticized.

Conclusion

The market sell-off was triggered by Anthropic’s advancements in B2B AI, exposing vulnerabilities in traditionally “moat” companies. The speaker has adjusted his portfolio, increasing exposure to Meta and reducing Salesforce, while emphasizing the importance of focusing on companies with resilient business models that can withstand AI disruption. He cautions against reactive investing and urges investors to prioritize long-term fundamentals over short-term market fluctuations. The key takeaway is that while AI presents a significant threat, careful analysis and a focus on durable business models are crucial for navigating the evolving market landscape.