But what if you are much more ambitious? What if you are the sort of trader with high expectations that the legendary fund manager Peter Lynch mocked in his book One Up on Wall Street?

I’ve heard people say they’d be satisfied with a 25 or 30 percent annual return from the stock market! Satisfied? At that rate they’d soon own half the country along with the Japanese and the Bass brothers. Even the tycoons of the twenties couldn’t guarantee themselves 30 percent forever, and Wall Street was rigged in their favor.

For returns like that, you need a different mentality, the mentality of a SailGP skipper. For those kinds of returns, you need to get on a boat that flies.

F1 on Water: SailGP

The SailGP Championship is a global racing competition that pits sailing teams from around the world against each other in a series of high-speed, high-stakes races. The New York Times aptly likened it to Formula 1 on the water. The boats are not your grandfather’s leisurely sailboats; they are F50 catamarans, feats of engineering that use hydrofoils to lift their hulls entirely out of the water.1 They fly.

To win, skippers must take enormous risks to go fast. They must accurately read the currents, the shifts in the wind, and the shape of the waves on the horizon. A misreading of these signs, a moment of lapsed concentration, and the boat’s hull will crash back into the water, killing all momentum.

Make a truly bad decision in a particularly rough patch of sea, and the boat will wipe out spectacularly, with no chance of finishing the race, let alone winning it.

SailGP requires enduring intensely volatile conditions at speeds that seem impossible for a vessel solely powered by wind.

The ocean can be vicious and merciless. It rewards good luck and skill heavily but punishes bad luck and a lack of skill just as heavily. This should all sound vaguely familiar to traders because the market is exactly the same.

The Merciless Ocean/Market

Whether one likes it or not, managing an active trading portfolio is like piloting a sailboat in the open ocean.

This seems like a ridiculous comparison on its face. Traders stare at glowing screens all day in climate-controlled rooms while SailGP skippers perform incredible feats of athleticism and bravery. But the core truth of the analogy holds.

Your portfolio is the sailboat. The market is the stormy ocean, a force fully and completely outside of your control. As traders and investors, like skippers, we have no control over the primary determinant of our returns: the market itself.2

We can only control our own actions; we can buy, hold, or sell based on our analysis of what the market is doing and what we think it might do next. This is how the best traders reckon with a force vastly larger and more powerful than themselves. They cannot command the waves, only ride them expertly.

The stakes in trading are arguably even higher than SailGP. It is not just about victory or defeat. It is about the stewardship of all your assets under management. A wipeout doesn’t just mean a DNF next to your name; it can mean total financial ruin for yourself and your clients.

Sailing Faster Than and Against the Wind

Here is where the analogy gets particularly good. These SailGP sailboats can move up to four times faster than the actual speed of the wind. They can do this while moving both with the wind and, counterintuitively, against the wind’s direction.

Yes, you read that right. By using their massive vertical wingsail and carefully angled hydrofoils, they generate their own apparent wind, allowing them to achieve speeds and move in directions that defy simple logic.

This is a perfect model for how smart, agile traders operate.

1. Sailing against the wind is like short selling. An F50 catamaran can sail upwind, making progress against the prevailing force. A sophisticated trader can short the market, generating returns even as the broad market indices are falling. Even with the wind blowing south (a bear market), they can angle their sails to travel north (make money).

2. Moving faster than the wind is leverage. The wind is blowing at 10 knots, but the boat is traveling at 30. How? Physics, mostly, but it is a form of amplification. Traders use leverage to magnify their returns relative to the market’s movement.3 A 2% market move can become a 4%+ gain in the portfolio. Of course, this cuts both ways, and a 2% move against you can just as easily become a 4%+ loss. Leverage, like hydrofoiling, is powerful but unstable.4

3. Reading ocean conditions is market analysis. The team of skippers on the sailboat is in constant motion. They steer the boat, they adjust the foils to keep the hull airborne, they trim the wingsail to optimize power. They are constantly monitoring signals: the water texture, the wind speed and direction, their competitors. Likewise, traders constantly monitor signals in the market; they watch order flows, economic data releases, sentiment indicators, and chart patterns. They adjust their positions accordingly, trimming their proverbial sails for the financial weather.

4. Enduring the ride is accumulating time in the market. Piloting a foiling catamaran is a bumpy, intense experience. The same is true of managing a leveraged portfolio in a volatile market. It requires a strong stomach, the discipline not to panic at every lurch and spray of water, and the fortitude to keep calm and carry on amid market chaos.

This is how ambitious traders consistently beat the market. They are not passive participants, content to be pushed along by the breeze. They are actively harvesting the proverbial wind and ocean currents, using advanced tools and techniques to move faster than the market and at times, in the complete opposite direction of it. This is why SailGP serves as the perfect analogy for the agile trader attempting to generate outsized returns amid the rough and tumble of the market.

About

Inverteum Limited (HK) is a trading firm that specializes in long-short algorithmic strategies to generate returns in both bull and bear markets.

We have generated 50%+ annualized returns since inception.

How We Invest

1. Minimize allocation to individual stocks due to their unpredictability

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In July 2025, we published this article arguing that China won’t invade Taiwan. Nine months later, Washington arrived at the same conclusion.

“Chinese leaders do not currently plan to execute an invasion of Taiwan in 2027, nor do they have a fixed timeline for achieving unification.”​

It turned out US intelligence reads the situation much the same way we do.

• We wrote that Xi himself put on record: China is not looking to invade Taiwan. US intelligence found that Beijing “prefers to achieve unification without the use of force, if possible.”​

• We wrote about investor fear and capital flight making Chinese securities un-investable. Washington warned of “tech supply chains disrupted and investor fear across markets.”​

• We wrote about the devastating economic cost of a war drawing in the United States. Washington warned of “unprecedented economic costs to the US, Chinese, and global economies.”​

• We wrote that Beijing’s leadership are realists who “cannot afford the aftermath” of an invasion. Washington concluded there are simply “still too many risks” for Chinese leadership.​

Happy reading!

The Curious Case of the Contented Taiwanese

, known for his ridiculously bad takes on China, wrote this in January 2025:

"On New Year’s Eve in Taipei, it’s hard for me not to think about the future that might be coming. It’s hard not to see the streets filled with merrymakers strewn with bodies instead, the shopping malls lying shattered in chunks of rubble, the young people searching in vain for their parents. It’s hard not to look at the towering spectacle of Taipei 101 and imagine it toppled and broken.

It’s hard for me. But it doesn’t seem to be hard for most of the Taiwanese people, who go cheerfully about their partying and their jobs and the quotidian routines of daily life with as little apparent terror as my rabbit munching hay. [...]

There is an easy, laid-back tranquility to this culture like nothing I’ve ever seen, not even in Amsterdam or a California beach town."

Now, this is where it gets interesting. These "rabbits" happen to constitute one of the most well educated and wealthiest populations on the planet. We're talking about a place where half the adult population boasts a college degree. Their median wealth per adult? A cool $115k, the richest in Asia outside Hong Kong ($222k)—including Singapore ($114k). The Taiwanese are not uninformed lemmings munching hay, oblivious to geopolitical winds.

Add to this the fact that these prosperous, highly educated Taiwanese share the same language (Mandarin) with their much larger neighbor, Mainland China. This leads to a rather obvious question: What exactly do these ostensibly calm, well off, and smart Taiwanese understand about their situation that perhaps escapes the more catastrophically minded observer? Do they know something about the unlikelihood of those streets being strewn with bodies anytime soon? Perhaps.

Xi Says "No War"

It's not just the Taiwanese who seem less than convinced of imminent doom. Official pronouncements from Beijing reflect a similar sentiment. President Xi Jinping himself has put it on record: China is not looking to invade Taiwan. His rationale is one of straightforward self interest.

A war over Taiwan, particularly one drawing in the United States, would, according to Xi, "destroy many of China’s achievements and undermine his goal of achieving a 'great rejuvenation' by 2049."

As an ardent student of history, Xi is well aware of the potential for war with established powers to ruin the trajectory of rising powers, as it did with Germany and Japan in World War II, and he will be careful to ensure China does not repeat their mistakes.

Of course, there will be skeptics towards Beijing’s official statements. Hawks in Washington will say this is merely rhetoric for an international audience while invasion plans are being secretly drawn up, but there are some compelling reasons underpinning this stated aversion to armed conflict.

It's an Export Story, Mostly

Consider the nuts and bolts of the Chinese economic machine. China is, to put it mildly, an export powerhouse. It's the world's largest exporter by a considerable margin.

China is responsible for 14% of everything shipped across borders globally.

Manufacturing isn't just a point of pride1 for the Chinese; exporting manufactured goods is the lifeblood of their economy.

And where do these exports predominantly go? Well, the European Union and the United States are China's number two and three trading partners, respectively.

An invasion of Taiwan would trigger Western decoupling and sanctions on China faster than you can say "geopolitical fallout." Such sanctions would slow the recovering Chinese economy, which is grappling with a 15% youth unemployment rate. The prospect of mass unemployment, fueled by a Western economic boycott, leading to social unrest and potentially destabilizing the Communist Party's hold on power, is not something Beijing would lightly entertain.

Even China Can’t Escape the Greenback

China’s reliance on exports naturally bleeds into a profound dependence on the global financial system, a system still very much dominated by the U.S. dollar. For a stark illustration, look no further than Hong Kong, China's premier international financial gateway.

Despite all the geopolitical chest thumping, the Hong Kong dollar remains pegged to the U.S. dollar. This isn't an oversight. It's a necessity, a nod to the greenback's currently irreplaceable role in global trade and finance, even when that greenback belongs to China’s primary geopolitical rival.

Consider the Hong Kong Exchange Fund, one of the world's largest sovereign wealth funds. It's swimming in dollar and euro denominated assets. Foreign currency assets make up a whopping 95% of its total holdings, with U.S. dollar denominated backing assets alone accounting for 55% of the total.

While the Hong Kong Monetary Authority doesn’t disclose the precise breakdown of the remaining 40% in foreign currency, it's a safe bet that a substantial chunk could be frozen by Western nations in the event of a military conflict in the Taiwan Strait. The prospect of having those vast reserves instantly immobilized is a powerful disincentive.

The fear of losing U.S. dollar access is palpable. Even Chinese state-owned banks have shied away from doing business with Hong Kong officials sanctioned by the U.S., lest they too find themselves on the wrong side of the American financial system.

Beijing may grumble about U.S. dollar dominance, even accuse Washington of abusing it, but complaints don't change reality. While the U.S. dollar remains the world's most trusted currency, China, for all its efforts to de-dollarize, must ultimately operate within the dollar’s sphere of influence. An invasion of Taiwan would put its access to that sphere in severe jeopardy.

The Invisible Hand of Investor Fear

A more current and pressing concern than sanctions for Beijing is Chinese companies' access to capital. In 2024, President Xi asked a group of Chinese entrepreneurs why the number of new unicorns in the country had been falling.

On its face, the question is a bit of a head-scratcher. By purchasing power parity, a measure of economic output that adjusts for price differences, China’s GDP is already almost 30% larger than that of the United States. It's a giant.

Yet, if you look at the total value of all the stocks in the U.S., that market capitalization is almost four times bigger than China's.

China’s economy is bigger on paper, but US publicly traded companies are collectively worth four times as much to investors. What gives?

This isn't just a fun fact for finance nerds. This is the "China discount"2 in action, and it has real-world consequences. A lower valuation for Chinese companies means it's harder and more expensive for them to raise the capital they need to grow, innovate, and compete. It directly kneecaps their competitiveness and slows down broader economic development. It is, in short, a direct threat to Xi's grand goal of "great rejuvenation." It’s far more difficult to rejuvenate your nation if your best and brightest companies are perpetually trading at a discount to their global peers, starved of the capital that fuels growth.

This is where the Taiwan situation gets particularly sticky, in a way that goes beyond formal sanctions or asset freezes. Sanctions are a policy tool announced in reaction to certain events. Capital, on the other hand, is a coward. It doesn't wait for a presidential decree or a UN resolution to get scared. It can and does move in or out of a country based on nothing more than the collective gut feeling of thousands of investors assessing risk at any given moment.

Chinese stocks are beginning to crawl out of a three-year-long crater that started back in early 2021. A fragile recovery began to take hold in late 2024, with the Hang Seng Index up 35% since September 2024. Investors are dipping their toes back in the water, thinking the worst is over.

Now, imagine what the mere prospect of a war over Taiwan does to that delicate sentiment, let alone the actual outbreak of one. It wouldn't just erase those recent gains. It would vaporize them and then some. It wouldn’t just cause a bigger China discount; it would risk making Chinese securities fundamentally un-investable for a generation.

Why The Great Illusion Doesn’t Apply

All of the above arguments point to economic disincentives discouraging war. This all sounds very familiar, and not in a good way. If you were a certain kind of European intellectual in 1909, you might have been reading a book called "The Great Illusion" by Norman Angell. His big idea was that the economies of European nations were so intertwined, so deeply integrated, that a major war between them would be commercially ruinous for everyone, victors included. Therefore, war was irrational, and thus, it wouldn't happen.

Of course, four years later, everyone went to war. The Great Illusion became a great historical punchline. So when people say that economic interdependence will prevent a war over Taiwan, a skeptical observer is right to bring up Angell and World War I. Is this just the same flawed logic all over again? No.

While Angell's core premise that war was indeed economically catastrophic was directionally correct, he missed a few things. The context of pre-WWI Europe is fundamentally different from the 21st-century Pacific.

For one thing, 1914 Europe was a web of interlocking alliances. The whole structure was a tinderbox waiting for a spark. An assassination in Bosnia could and did trigger a cascade of treaty obligations that pulled everyone into the fight, whether it was in their immediate economic interest or not. China, on the other hand, famously avoids formal alliances for this very reason. It does not want to be dragged into anyone else's conflicts. This is a feature, not a bug, of its foreign policy.

Then there's the rather large matter of nuclear weapons. In 1914, the worst-case scenario was a really, really bad conventional war. Today, the worst-case scenario between nuclear-armed powers like China and the United States is the end of human civilization. The concept of Mutually Assured Destruction adds a level of deterrence that Norman Angell could not have imagined.

But perhaps the most important difference is the explicit nature of the ruling bargain in China. For the European monarchs of 1914, legitimacy was based on tradition, nationalism, and divine right. For the Chinese Communist Party, legitimacy is heavily transactional and explicitly tied to delivering economic prosperity. This isn't just subtext; it's the main text. It's written down.

Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, the country's guiding ideology, codifies this promise. It makes clear that a core task is to solve the problem of "unbalanced and inadequate development holding back the people's ever-growing desire for a better life." The official doctrine emphasizes a "commitment to our people-centered philosophy of development and work to promote well-rounded human development and common prosperity for everyone", as well as "ensuring and improving living standards through development."

A war that triggers sanctions, capital flight, and economic collapse wouldn’t just a bad policy choice; it would be a direct violation of the Party's promise to its people. It breaks the social contract in a way that would be far more destabilizing for the CCP than the economic fallout of WWI was for the German Kaiser. This time, the economic argument isn't just a matter of rational calculation; it's about political survival.

War as Economic Stimulus? Let's Check the Tape

Okay, but what if the economic disincentives all go away? What if China's economy tanks, youth unemployment gets worse, and Beijing decides it has "nothing to lose" by starting a conflict? This is the "wag the dog" theory.

In an interview with Harvard political science professor and US national security expert Graham Allison at the All-In Summit 2023, asked this exact question:

"You have massive youth unemployment in China and waning growth, so the simplest and most reductive way for China to basically grow and to appease 25% of young people, mostly men, from not uprising is to essentially create demand. The best way to create demand is to essentially create a war machine, and that is why they go to war."

The fundamental premise here is that the Chinese people are so unsophisticated that they will happily trade their standard of living and economic security for a burst of patriotic fervor while their sons and daughters are sent off to die in a brutal war.

This is not true. In fact, the opposite is the case. Due to the massive economic growth of the past few decades, the Chinese people have come to expect a certain, rising standard of living from their government, which has explicitly promised this.

Xi Jinping Thought specifically states a "commitment to our people-centered philosophy of development" and "ensuring and improving living standards through development."

The CCP absolutely must deliver a functioning, growing economy to avoid social unrest. A war that torpedoes the economy breaks the foundational promise that keeps them in power.

We don't need to speculate about this in a vacuum. We have a real-world test case running right now. Since property prices peaked in 2021, China has been navigating a real estate downturn worse than what the U.S. faced in 2008. For a generation, Chinese families poured their life savings into property, believing it was the one investment that could only go up. Now, a huge number of them are underwater on their mortgages and facing foreclosure. This isn't a small sector of the economy; real estate was the engine, accounting for almost 30% of GDP at its peak.

So, faced with a genuine, potentially destabilizing economic crisis, what did Beijing do? It focused on fixing the economy by opening up further to the world. For example, it has taken two very telling steps:

1. It removed all restrictions on foreign investment in its manufacturing sector, a clear signal that it needs and wants outside capital.

2. It opened up visa-free entry to 74 countries, the highest number in its history, in a bid to boost its tourism and service industries.

These are not the actions of a regime that has "nothing to lose" and is about to roll the dice on a cataclysmic war. These are the actions of a government that understands its survival depends on economic stability and growth and is willing to become more open and integrated with the world to achieve it. When the chips are down, Beijing's instinct is to save the economy, not to start a war that would surely destroy it.

China-Taiwan is not Russia-Ukraine

A valid, persistent concern among geopolitics observers is the seeming similarity between the Russia-Ukraine and China-Taiwan situations. If Russia invaded its smaller, weaker neighbor, why wouldn’t China? The comparison feels intuitive, but it falls apart when you look at the root causes of the Ukraine war.

Root Cause Analysis: Russia-Ukraine Conflict

In his phenomenal piece Who Caused the Ukraine War?, geopolitics expert thoroughly explains how Western underestimation of Russia’s military over the past few decades led to the confirmation in 2021 that Ukraine would join NATO, an unacceptable red line for Moscow.

“Probably the best evidence that Putin was not seen as a serious threat during his first fourteen years in office is that he was an invited guest at the April 2008 NATO summit in Bucharest, which is where the alliance announced that Ukraine and Georgia would eventually become members. Putin, of course, was enraged by that decision and made his anger known. But his opposition to that announcement had hardly any effect on Washington because Russia’s military was judged to be too weak to stop further NATO enlargement, just as it had been too weak to stop the 1999 and 2004 waves of expansion. The West thought it could once again shove NATO expansion down Russia’s throat.”

Given the weakness of Russia’s conventional military forces, the West thought it could simply ignore Russia’s objections. The West consistently repeated this miscalculation, up until the beginning of the Russian invasion of Ukraine in early 2022.

President Biden, who moved into the White House in January 2021, had long been committed to bringing Ukraine into NATO and was a super-hawk toward Russia. Unsurprisingly, on 14 June 2021, NATO issued a communiqué at its annual summit in Brussels, which said: “We reiterate the decision made at the 2008 Bucharest Summit that Ukraine will become a member of the Alliance.”

Then on 10 November 2021, Secretary of State Antony Blinken, and his Ukrainian counterpart, Dmytro Kuleba, signed an important document – the “US-Ukraine Charter on Strategic Partnership.” […] It also explicitly reaffirms the U.S. commitment to the “2008 Bucharest Summit Declaration.”

As recently as late 2021, Putin attempted to avoid invading Ukraine by using diplomacy to prevent the West from accepting it into NATO.

“On 17 December 2021, Putin sent a letter to both President Joe Biden and NATO chief Stoltenberg proposing a solution to the crisis based on a written guarantee that: 1) Ukraine would not join NATO, 2) no offensive weapons would be stationed near Russia’s borders, and 3) NATO troops and equipment moved into eastern Europe since 1997 would be moved back to western Europe. Whatever one thinks of the feasibility of reaching a bargain based on Putin’s opening demands, which the United States refused to negotiate over, it shows that he was trying to avoid war.”

Days after Russian tanks had entered Ukraine in early 2022, both sides began negotiations to end the war, only to be thwarted by the West.

“Russia reached out to Ukraine to start negotiations to end the war and work out a modus vivendi between the two countries. [...] All the available evidence indicates that the Russia was negotiating seriously and was not interested in absorbing Ukrainian territory, save for Crimea, which they had annexed in 2014, and possibly the Donbass. The negotiations ended when the Ukrainians, with prodding from Britain and the United States, walked away from the negotiations, which were making good progress when they ended.”

Given that Putin strongly preferred preventing Ukraine from joining NATO over going to war, then what powerful national leader at the time thought war with Russia was a worthwhile cost to pay for Ukraine to join NATO and pushed the Ukrainians to fight Russia by arming them with weapons and cash?

In March 2022, President Biden said the quiet part out loud, implying that he hoped to use Ukraine to achieve regime change in Moscow.

“This battle will not be won in days or months [...] we need to steel ourselves for the long fight ahead.”

“Ukraine will never be a victory for Russia, for free people refuse to live in a world of hopelessness and darkness. We will have a different future, a brighter future rooted in democracy and principle, hope and light, of decency and dignity, of freedom and possibilities. For God’s sake, this man [Putin] cannot remain in power.”

Although the White House later downplayed the remark, under Biden, the US government allocated $183b and spent $83b on aid to Ukraine. Biden engaged in what he described in 2022 as a “long fight ahead” despite likely knowing it could cost Democrats the presidency in 20243, indicating just how high of a priority defeating Putin was to President Biden.

How China-Taiwan is Different

While the West consistently underestimated the Russian military before the start of the Ukraine war in 2022, to devastating effect for Ukraine, no Western leader is going to underestimate Beijing.

In retrospect, what Russia most lacked was a conventional military deterrent strong enough to prevent the West from considering NATO expansion into Ukraine. With the PLA’s military buildup, the message from China to the West is clear4:

The West is listening. During trade talks with China, Trump blocked Taiwan President Lai from briefly stopping in the US, undoubtedly as a concession to Beijing.

China clearly has forms of leverage over the West (e.g. strong military, exclusive supplier of key inputs like rare earths) that Russia lacked. As evidenced by Russia’s inability to use diplomacy to prevent Ukraine from joining NATO and Russia’s need to invade to stop this, the stronger China’s military is, the less likely it will need to be used on the battlefield.

Consistently building up the PLA’s military capabilities over the past few decades while having not fought any war in 46 years, the Chinese know the highest and best use of a strong military is not to deploy it on the battlefield.

Why Taiwan Also Isn’t Hong Kong

There's a common, almost reflexive, assumption in some circles that Taiwan is just waiting to become Hong Kong 2.0. It’s not. Here are a few key distinctions.

1. End of New Territories lease in 1997

In 1898, the UK signed a deal with Qing China to lease the New Territories, the entire light purple part of this map, for 99 years.

Fast forward to 1982, with the 1997 expiration date looming just 15 years out, Beijing made it abundantly clear: there would be no renewal.

The New Territories comprised a whopping 86% of Hong Kong's land, 60% of the population5, and much of the city’s critical infrastructure. It was "economically and logistically infeasible" to just hand back New Territories and keep the remaining, much smaller portion of HK. The UK, facing a ticking clock and a determined landlord in Beijing, had precious little leverage. The whole thing went back to China.

Taiwan, of course, has no such expiring lease hanging over its head. Rather, its existence stems from the result of an unresolved conflict with the mainland from more than 70 years ago.

This means Beijing's ability to achieve reunification doesn't come with a convenient contractual deadline. It hinges, instead, largely on the threat of military action, which is a rather more complicated proposition.

2. Defensibility

Hong Kong's proximity to mainland China, and its geography, made any serious military defense a non-starter. Margaret Thatcher herself recounted Deng Xiaoping's rather blunt assessment: "I could walk in and take the whole lot this afternoon." Her reply was basically, "Well, yes, but think of the PR." Not exactly a robust defense posture.

Hong Kong is basically the anti-Switzerland: no mountains to speak of for defense, no vast ocean moat, and no highly trained army. Taking it, for a power controlling Mainland China, is relatively straightforward. Imperial Japan managed it in under three weeks back in December 1941 while it was simultaneously fighting in China, the Pacific, and Southeast Asia.

Taiwan, however, is a different kettle of fish. Or, to use John Mearsheimer's framing in a Lex Fridman interview, it's about a "big body of water called the Taiwan Strait." Mearsheimer's point is simple but profound: invading across water is hard. Really hard.

"If you're a country and I'm a country and there's land between us, I can take my Panzer divisions and I can go right across the land and attack your country."

Easy peasy, relatively speaking.

But, "if there's a big body of water between us, in a world where you have lots of submarines, aircraft, land-based missiles that can hit those surface ships, it is very, very hard to attack across a body of water."

His go-to example? The Allied invasion of Normandy in 1944. A massive, costly, and incredibly risky undertaking.

The Taiwan Strait is wider and often stormier than the English Channel. Plus, unlike 1944, we now live in an age of satellites. Any significant amphibious invasion force preparing to set sail wouldn't exactly be a surprise. Taiwan would know. The world would know. The element of a sudden, overwhelming shock is largely off the table. No one is "walking in and taking" Taiwan in an afternoon.

Because of Taiwan’s defensibility and the lack of any expiring lease, the Sino-British talks over Hong Kong are a largely inapplicable precedent for any future Beijing-Taipei discussions, but there is one key aspect about Taiwan that is easier for Beijing compared to HK.

3. Lost in Translation (Or Not, For Taiwan)

A significant hurdle for Beijing in Hong Kong after the 1997 handover was winning hearts and minds. This effort, or lack thereof in some views, culminated in the city's most intense protests and riots in 2019.

A major contributing factor? Language. Hongkongers predominantly speak Cantonese. Mainlanders predominantly speak Mandarin.

For many Hong Kong protesters, Mandarin was perceived as the language of an encroaching, unwelcome authority and community. As a result, the protesters often harassed and attacked Mandarin speakers, even those from Taiwan, Singapore, and North America.

This linguistic barrier between Hong Kong and Mainland China made it tough for mainland Chinese culture to gain traction, let alone the kind of soft power that might cultivate a sense of shared national pride.

Now, pivot to Taiwan. The Taiwanese, by and large, share a common language with the mainland: Mandarin. This is not a small thing. For the younger generation, this shared language means that content from mainland Chinese apps like TikTok and Xiaohongshu (RedNote) is easily accessible and consumable. Despite the Great Firewall, a significant amount of Chinese content ends up on platforms like YouTube.

A Mandarin teacher in Taiwan, Chu Yi-chun, notes:

“Even if they consume American, Japanese, Korean or whatever else on TikTok, they absorb Chinese content most easily. They include Chinese cultural references and lingo from that content in their speech and writing.”

Mainland Chinese influence on Taiwan’s young people have become more apparent over time.

"Smaller-scale studies have found that many Chinese slang words have entered Taiwan’s youth lexicon in the past three years. The northern Chinese term “niu” (meaning “awesome”) was unheard of in Taiwan until recently, but now appears commonly on teenagers’ social media feeds and in real life. Other Chinese-influenced memes and games have become commonplace, teachers say."

This cultural seepage is happening against a backdrop of China's expanding global soft power. If you throw in an erratic and unpredictable U.S. administration that antagonizes historical allies, including Taiwan, a growing number of Taiwanese might start to see some pragmatic advantages in aligning with a culturally familiar and economically and militarily powerful neighbor.

Indeed, Taiwan's Gen Z, having come of age during China's ascent to global superpower status, appears to be cultivating a distinctly realistic view of their giant neighbor. When high school students were quizzed on the optimal survival strategy for Taiwan, the overwhelming response was that Taiwan must do everything in its power to avoid provoking a Chinese attack.

“Almost without exception, they wrote that, being small and weak, Taiwan must avoid appearing as a threat to China. No matter how they harass us, we must tolerate it.”

This is not the language of students preparing to storm the legislature to block trade deals with China, as happened during the 2014 Sunflower Student Movement.

Since then, the outlook of young Taiwanese has shifted significantly.

"According to data published by the Taiwanese Public Opinion Foundation polling organisation last year, people between 20 and 24 are no longer the age group who feel their Taiwanese identity the strongest, bucking a long-established pattern. And there are indications that, among young people, Taiwan’s decades-old trend towards ever stronger support for independence might also be going into reverse."

Much has changed in the attitudes of Taiwanese students towards China since the Sunflower Movement 11 years ago, and much will continue to change over the coming decades due to China’s growing hard and soft power.

"Taiwanese educators and researchers fear that the ever greater numbers of children using [Chinese apps] risk being exposed to content that seems innocent, but causes them to look more favourably upon the People’s Republic and feel more negative towards their own nation — something they suspect is a deliberate strategy by Beijing."

This shouldn't be surprising. Reunification has been Beijing's #1 priority6 since the PRC's founding in 1949. It's their North Star, but this doesn’t mean invasion is inevitable or even likely.

The Dangling Sword (and Why It Will Just Dangle)

For those who see Chinese warships on the horizon at every news cycle, it's worth remembering a core tenet about Beijing's leadership, as articulated by geopolitical expert John Mearsheimer: "the Chinese are realists to the core." This isn't to say they don't have grand ambitions, but cost-benefit analysis rules the day for them.

An actual invasion of Taiwan, as discussed, presents a veritable minefield of obstacles. It would be incredibly messy, with potentially devastating second-order consequences that could seriously undermine the Communist Party's own stability. Think about it: the risk of triggering a wider conflict (hello, nuclear deterrence), the certainty of crippling economic sanctions that would gut their export-driven economy, and the high probability of sparking significant social unrest at home due to an inevitable economic slowdown. The PLA might well "win" an invasion, given enough time and a willingness to absorb horrific losses, but Beijing cannot afford the aftermath.

So, the possibility of invasion, the military drills, the missile tests, and the probing of Taiwan's Air Defense Identification Zone (ADIZ) are less about an imminent D-Day and more about maintaining a proverbial Sword of Damocles over Taipei.

Beijing will undoubtedly continue to sharpen this sword to motivate a greater willingness for Taipei to come to the negotiating table. But Beijing is also acutely aware that if that sword were to actually fall, the consequences for the PRC itself could be catastrophic.

This is China’s two-pronged approach: the carrot of burgeoning soft power and economic integration, and the stick of an ever-present, ever-improving military capability. With both of these elements growing, China can afford to play the long game. It can infiltrate Taiwan’s government and military7, exploit divisions within Taiwan society, leverage its economic might, and use their shared language to allow its media to create compelling content that influences a generation of Taiwanese to think more positively about China.

The Surprisingly Chill Cold War Across the Strait

Given the constant drumbeat of "imminent invasion" talk, it's almost jarring to remember a simple fact:

The last time a combat-related death occurred between the PRC and the ROC was in 1958, during the Second Taiwan Strait Crisis over the ROC-controlled islands of Kinmen and Matsu. That's 67 years ago.

Compare this to other geopolitically contentious relationships and the most recent instance where a person on one side was killed by the other side in combat: India-Pakistan (2025), Israel-Palestine (2025), Israel-Iran (2025), Russia-Ukraine (2025), North and South Korea (2020). These adversaries have caused far more frequent and recent bloodshed compared to China and Taiwan.

One of the clearest, most unambiguous signs of progress towards a less overtly hostile peace is the curious evolution of the Kuomintang’s (KMT) attitude towards the CCP in Taiwan. Today, in the complex dance of Taiwanese politics, the KMT is the strongest advocate for closer, more amicable relations with Mainland China.

During and for decades after the Chinese Civil War, the Chinese Communist Party and the KMT were mortal enemies. One can only imagine Mao Zedong and Chiang Kai-shek, having presided over one of the 20th century's bloodiest conflicts against the other, rolling in their graves at the thought of their political successors seeking closer, peaceful ties.

Beijing understands a crucial lesson from history: the death and destruction wrought by war breeds a uniquely virulent, generational hatred and resistance. It fosters future rebellions. This is the unfortunate emotional landscape between Indians and Pakistanis, Israelis and Palestinians, and Russians and Ukrainians.

The long peace between Beijing and Taipei means that this deep-seated, visceral animosity is largely absent. Mainlanders and Taiwanese routinely travel across the strait for work, study, tourism, and business, with Taiwanese making over four million trips to Mainland China in 2024, up 54% from 2023.

This Japanese proverb8 certainly is true when it comes to top leaders on both sides and the people they govern.

Beijing understands the importance of preserving peace in order to have the right starting point for constructive negotiations. Any military attack would unite the Taiwanese against Beijing, a counterproductive action given that Taiwan is a deeply divided democracy.

The Negotiation Table: Taiwan's Unexpected Leverage

In April 2024, President Xi told former Taiwan President Ma Ying-jeou (translated):

"People on both sides of the Taiwan Strait are all Chinese. There are no knots in our hearts that cannot be untied. There are no problems that cannot be discussed. There is no force that can separate us." (emphasis added)

Despite the growing power disparity between Beijing and Taipei, Taiwan actually approaches this hypothetical negotiation table with more leverage than many seem to believe. Taiwan’s high defensibility, combined with the absence of an imminently expiring lease, means Beijing can't just impose its will.

"One Country, Two Systems" as implemented in Hong Kong is unpopular even with the KMT, the most pro-China major political party in Taiwan.

Historically, direct negotiations between Beijing and Taipei have focused on pragmatic economic and trade issues, like hammering out trade agreements. It's a reasonable assumption that future cross-strait negotiations under a non-DPP Taiwanese administration would continue to prioritize economic integration over politically fraught questions of sovereignty.

Given Taiwan's defensive strengths and the severe downsides of an invasion for China, Taipei could negotiate a governance framework with major differences compared to the version of One Country, Two Systems as currently implemented in Hong Kong9.

Who Best To Negotiate With Beijing On Behalf Of Taiwan?

In Beijing's eyes, the answer is simple: pretty much any Taiwanese president not from the Democratic Progressive Party (DPP). The DPP's charter explicitly rejects the "One China" principle and the 1992 Consensus, making them a non-starter for direct, official talks with Beijing.

The 2024 Taiwanese presidential election results offer some insight here. While the DPP candidate won, it was with only 40% of the vote, and the party lost its legislative majority. This suggests that 60% of the Taiwanese electorate is not interested in direct confrontation with Beijing.

So what do they want? Polls and economic indicators suggest a focus on bread-and-butter issues: rising wages (which have been stagnant for decades) and affordable housing10. They also want to preserve their system, rights, and freedoms.

Crucially, most appear to have no appetite for a devastating war they are unlikely to win against a vastly more powerful neighbor.

A majority (66%) of Taiwanese are unwilling to pay higher taxes to strengthen the island's military.

Mandatory military service, currently one year for able-bodied men, is deeply unpopular. Reports of at least 120 men, including 11 celebrities, being arrested for falsifying health records to evade the draft underscore this sentiment.

"In recent decades, Taiwan’s people have seen their military in a negative light due to perceptions that mandatory military service is a 'waste of time' and that Taiwan’s chances of prevailing in a war against China are meager as the gap in military capabilities continues to widen across the Taiwan Strait."

The government has resorted to threatening seven-year prison sentences to enforce conscription, which is supposed to be a civic duty.

Ironically, this is one of the areas where Noah Smith's observations are right:

"Even as the titanic battle-fleets of a menacing empire surround their home, even as the empire’s state media bellow threats of war, Taiwanese people stroll through night markets and sip Ruby #18 tea and line up for the latest cat cafe. There is an easy, laid-back tranquility to this culture like nothing I’ve ever seen, not even in Amsterdam or a California beach town."

This tranquility isn't born of ignorance or a rabbit-like obliviousness. It stems from a pragmatic understanding that:

1. China, for all its bluster, would strongly prefer not to invade

2. Taiwan itself holds a powerful key to de-escalation: the choice to negotiate and give up some degree of sovereignty and autonomy in exchange for guaranteed peace.

The 2049 Deadline and the Pull of History

For the Chinese Communist Party, the "Taiwan issue" is more than just a geopolitical objective; it's the final, crucial chapter in their narrative of national rejuvenation. It's about formally ending the Chinese Civil War, erasing the last vestiges of the "century of humiliation," and completing the restoration of the Chinese nation. The year 2049, the 100th anniversary of the People's Republic of China, is often cited as the target date for achieving reunification. For Beijing, Taiwan is the ultimate, non-negotiable red line.

Given China’s unwavering determination, their multi-pronged approach (economic incentives, cultural outreach, diplomatic pressure, and the ever-present military option held in reserve), and their demonstrated willingness to play the very long game, it seems more likely than not that Beijing will eventually achieve an outcome it deems acceptable.

Conclusion: The Path of Peace

When all the pieces are on the board—the economic self-interest of China, the deterrent effect of potential nuclear escalation, the surprisingly long history of actual peace across the strait, the growing cultural and linguistic bridges, the sheer military difficulty of an amphibious invasion, and the apparent pragmatism on both sides (Beijing's realism, Taiwan's desire to avoid an unwinnable conflict)—the scale tips away from imminent, large-scale war.

Beijing’s long-term strategy favors soft power, economic integration, and patient diplomacy (with a sharpened sword kept visible, just in case). Coupled with Taiwan's inherent defensibility and a populace that seems to prefer prosperity and peace over a doomed military showdown, the most probable path forward is one of continued, complex interaction, negotiation, and gradual evolution, rather than a sudden, violent confrontation.

The Future of Cross-Strait Relations

October 2025 update: KMT’s Cheng Li-wun and Xi’s congratulations

In September 2025, Cheng Li-wun, then running to become the next chairperson of the KMT, did an interview with YouTuber Holger Chen, better known as Gym Boss. Her quotes are from ’s translation.

Cheng echoed much of the sentiments in this article.

⁠Fighting a war here in Taiwan would be the dumbest thing imaginable. You’d not only flatten the economy, but also wipe out a generation of young people and reduce Taiwan to ruins. At that point, all the talk about “unification” or “independence” would be a joke. Turning Taiwan into a battlefield is the most foolish option, and I don’t believe Beijing wants that either. After all, they consider Taiwanese to be compatriots. Are they really so foolish that they’d fall for an American trap that has us slaughter one another and leave Taiwan destroyed? Do you honestly think the mainland wants a ruined Taiwan? Of course not.⁠

While she wants better cross-strait relations, she understands that reunification can’t be done quickly.

Wanting the two sides to reconcile isn’t something you do overnight, and it’s not solved by one word—“unification.” There are layers of complicated feelings, and yes, we even fought wars before. Where’s the mutual trust? The sense of kinship? The shared understanding? What’s the actual basis for engagement?

Cheng’s primary concern is the wellbeing of the Taiwanese people.

What I care about is whether the people living under it [the “one China” policy] have good lives—are they safe, prosperous, and happy?

She seeks to “build a foundation for century-long peace across the Strait”, which means

organic linkages in the economy, infrastructure, education, and public security—connections in every domain. Let ordinary people taste the benefits of reconciliation and cooperation: a better future and a better life.

Cheng’s vision is to have Taiwan

stand on the shoulders of a giant [Mainland China] and shine together in culture, the arts, sports, technology, and trade—so the world says: “Wow, this place everyone thought was on the brink of war, not only isn’t at war; it’s thriving. People are living better, and the energy and experience here are being shared with the world.”

After Cheng successfully became KMT chairperson in October 2025, President Xi personally congratulated her and reiterated her preference for more cooperation and exchange.

Xi expressed his expectations for the two political parties to strengthen their common political foundation and unite the vast majority of people in Taiwan to deepen exchanges and cooperation, boost common development, and advance national reunification.

He added that the CCP and KMT had a long history of working together to ensure peace and build connections between both sides.

Xi said that over the years, the two parties -- based on the common political foundation of upholding the 1992 Consensus and opposing “Taiwan independence” -- have promoted cross-Strait exchanges and cooperation, worked to safeguard peace and stability across the Strait, and enhanced the affinity and well-being of people across the Strait, achieving positive results. (emphasis added)

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Inverteum Limited (HK) is a trading firm that specializes in long-short algorithmic strategies to generate returns in both bull and bear markets.

Inverteum has generated 50%+ annualized returns since inception.

How We Invest

1. Minimize allocation to individual stocks due to their unpredictability

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Beijing’s loud opposition killed the deal by the end of March, and commentators have been quick to lament the death of Hong Kong’s freewheeling capitalism. But this narrative misses the forest for the trees.

The real story isn’t Hong Kong’s decline; it’s the predictable flexing of great power rivalry between the US and China, where national security trumps corporate freedom on both sides of the Pacific.

The Deal That Never Was

In early March, CK Hutchison, the sprawling conglomerate built by Hong Kong tycoon Li Ka-shing, announced it would sell a portfolio of 43 ports in 23 countries to a BlackRock-led group. These weren’t just any ports; they included critical nodes like those at both ends of the Panama Canal. Beijing, unsurprisingly, wasn’t thrilled, with Chinese state media and officials framing it as a matter of national security. By the end of March, the deal was dead.

Western analysts pounced, arguing this was proof of Hong Kong’s eroding autonomy, where businesses can’t make deals without Beijing’s say-so. The New York Times summed up the vibe:

“The concern among business leaders cuts to the heart of the question facing Hong Kong: Are its companies free to make their own business decisions, or must they consider China’s broader national interests as do mainland Chinese firms?”

But let’s flip the script. Imagine BlackRock, the $12 trillion asset management behemoth based in New York, trying to sell those same 43 ports, including each port on both ends of the Panama Canal, to HK-based CK Hutchison.

Picture the reaction in Washington. A hypothetical Truth Social post from Trump would likely read:

“Commie Larry Fink just handed over BOTH ENDS of the Panama Canal to CHINA, a DISASTER for national security!! The Radical Globalists NEVER cared about America, only PROFIT. BLACKROCK is a GLOBALIST NIGHTMARE. They should be investigated IMMEDIATELY. America Last?? NOT ON MY WATCH!!!”

Sound familiar? It’s practically a mirror of Beijing’s editorials on the CK deal. Trump would likely move heaven and earth to block such a sale.

Great Power Rivalry, Not Local Failure

The symmetry between Washington and Beijing here is the point. If the US and China both squash deals in favor of national interest, the issue isn’t Hong Kong’s business environment. It’s the global reality of great power competition.

The US and China are two superpowers locked in what Graham Allison calls “the fiercest rivalry in history,” competing across technology, military, economy, politics, and global influence.

When ports—literal chokepoints of global trade—are on the table, neither side is going to let the other gain an inch. BlackRock ($12 trillion in assets) and Li Ka-shing (“Superman” of Hong Kong business) are just collateral damage in this geopolitical cage match.

Both Trump and Xi prioritize national and economic security over the free market. Trump’s tariffs, which roiled markets, cost American shareholders dearly in early April. Meanwhile, China’s industrial strategy of building monopolies in chips, solar panels, batteries, and among other products gives it leverage to weather trade wars.

In 2023, we wrote about the massive dependencies on China that the rest of the world has developed for its modern way of life, how Beijing deliberately sought to create these dependencies, and how this would allow China to assert its will with the West.

"China wants to be TSMC, but a hundred times bigger. They want to be the source for everything the world needs. Chips, solar panels, batteries. You name it. Because if everyone needs you, you have leverage. Real leverage.

As the world’s foremost and largest manufacturing cluster, i.e. the factory of the world, China’s primary comparative advantage is hardware, and what Beijing most wants are industrial monopolies like TSMC."

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Beijing’s resistance to Trump’s tariffs, coupled with its pivot to high-value manufacturing and outsourcing low-end assembly to Southeast Asia, shows it’s been playing the long game since its first trade war during Trump’s first term.

In late April 2025, while Trump seemed to be manifesting for a trade deal with China by claiming ongoing trade negotiations, Beijing refuted this, signaling confidence in its position.

Hong Kong’s Still Got It

So why isn’t this failed BlackRock-CK Hutchison port deal a death knell for Hong Kong? Because the city remains a top 3 global financial hub: #1 in Asia, #3 globally. HK traders can still short US markets, e.g. with the inverse ProShares Short S&P500 ETF (SH)1 and its juicy 5% dividend yield, and invest globally.

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Global traders can do this because US-China tensions are extremely unlikely to boil over into direct conflict. The stakes are too high; Trump’s refusal to commit to defending Taiwan underscores the mutual deterrence.

Hong Kong’s business environment thrives not because it’s immune to Beijing’s influence but because it’s a gateway to China’s economic engine. Similarly, New York benefits from being the financial heart of the US, despite Trump’s whims. Both cities are tethered to their respective superpowers, and that’s a feature, not a bug, in a bipolar world.

The Playbook for a Bipolar World

With this unprecedented global rivalry, neutrality sounds appealing but isn’t as great as it sounds. During World War II, neutral Switzerland and Sweden flourished while belligerents suffered. But in a cold war for global supremacy, aligning with a superpower is the smarter bet.

The US and China drive innovation, host the biggest companies, create the most advanced technology, and wield unmatched influence.

Sandwiched in the middle between these two great powers, the Singapores of the world depend on the good graces and friendship of these superpowers, which can be withdrawn at any time.

Singapore's Prime Minister Lawrence Wong inherently understands this:

"I've said before that the world is changing in ways that will disadvantage small, open economies like Singapore. [...]

If other countries adopt the same approach as the US, abandoning the WTO and trading only on their own preferred terms country by country, it will spell trouble for all nations, especially small ones like Singapore. We risk being squeezed out, marginalized, and left behind. (emphasis added) [...]

We cannot expect that the rules which protected small states will still hold."

Superpower-based cities like Hong Kong and New York, embedded in their respective spheres of influence, are better positioned to ride the wave of protectionism and obsession with national power.

China’s edge lies in its state capacity and industrial policy, which outstrip the US’s fragmented approach. Beijing’s focus on dominating high-value supply chains, while preaching free trade to win allies, contrasts with America’s tariff-driven isolationism. Yet the US remains a financial juggernaut, with liquid markets and innovation hubs that keep it highly competitive.

For investors, Hong Kong offers proximity to China’s growth, while New York provides unmatched liquidity, trading opportunities (particularly on the short side), and access to capital. Neither is perfect, but both are and will be resilient because they’re anchored to the world’s two biggest economic engines.

The Takeaway

The BlackRock-CK Hutchison deal’s collapse isn’t a Hong Kong problem; it’s a symptom of a world where Washington and Beijing call the shots. Both nations are converging on a model where national security trumps corporate freedom, and their leaders, Trump and Xi, aren’t shy about flexing that power.

Hong Kong’s business environment isn’t dead; it’s just adapting to the same realities New York faces. The real lesson is that in this rivalry, no one’s fully free—not BlackRock, not Li Ka-shing, and certainly not the markets. But for those in Hong Kong or New York, the game’s still worth playing, because the biggest players are on your side.

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About

Inverteum Limited (HK) is a trading firm that specializes in long-short algorithmic strategies to generate returns in both bull and bear markets.

Inverteum has generated 52% annualized returns (39% after fees) since inception.

How We Invest

1. Minimize allocation to individual stocks due to their unpredictability

   Inverteum Capital

   Why Picking Individual Stocks Is a Fool's Game

   The TL;DR version of this post…

   Read more

   a year ago · 21 likes · 27 comments · Inverteum Capital

2. Build the most suitable trading strategy and go all in. Here’s a sample trading strategy.

   Inverteum Capital

   158,022% Returns? The Algorithm That Would've Turned $100k Into $158M (Backtest)

   This post is for informational purposes only and does not constitute investment advice. Do your own research and consult with a financial professional before investing…

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   a year ago · 8 likes · 6 comments · Inverteum Capital

3. Be prepared for bear markets and ensure profitability during bad times by implementing a short selling component to the strategy.

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Markets are less about what a company is and more about what those who participate in them do. Fundamental investors, clutching their copies of Ben Graham’s Security Analysis, love to quote him:

“In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”

Elegant, poetic, almost wise. But wrong. The weighing machine is just a voting booth with better branding. Buy orders, sell orders, HODLing, panic-dumping—these votes collectively decide the weight. Always, both in the short and long term.

Value Traps: When Fundamentals Lie

Value traps are the market’s cruelest prank. A company prints cash, sports a low P/E, maybe buys back stock like it’s Black Friday. Fundamentals scream “buy!” Yet the stock sits there, or worse, slinks downward. Why? Market participants, whether humans, algos, or your cousin who day-trades, sell every time the price twitches up.

No income statement or balance sheet, no matter how pristine, can outmuscle collective apathy. Technical analysis, staring coldly at price and volume, sees this. Fundamentals? Too busy admiring the company’s assets to notice the market’s mood.

Microsoft under Ballmer (2000-2014): The Thermostat That Broke Fundamentalists

Take Microsoft under Steve Ballmer (2000–2014). A cash juggernaut, growing net income from $9.4 billion in 2000 to $22 billion by 2013. In 2011, its P/E was 7—not a typo—versus the S&P 500’s 16. Price-to-book? A cozy 2–4. Fundamentals said: grab this steal. But the stock? A “thermostat stock,” stuck between $20 and $35 (split-adjusted).

Technicals told the truth. Death crosses (when the 50-day moving average dives below the 200-day) flashed in 2000 (dot-com crash), 2008 (financial crisis), and 2011 (Nokia acquisition flop). Golden crosses? Rare, fleeting, like a sunny Seattle day. Relative Strength Index (RSI) loafed between 40 and 60, a sign of neutral momentum. Even on earnings beats, RSI barely hit 70. Oversold moments (RSI < 30) in 2008 and 2011 led nowhere. The market voted “pass” on Ballmer, and technicals read the ballots. Meanwhile, the fundamentals still dreamed of Windows dominance.

IBM when Buffett owned it (2011-2018): Buffett’s $11 Billion Misstep

Warren Buffett’s Berkshire Hathaway bet $11 billion on IBM in 2011, charmed by a P/E of 7–8 from 2011 to 2017 (S&P 500 P/E over the same period: 15–24). IBM’s $50 billion in buybacks from 2011–2018 propped up EPS at the expense of R&D and its financial position.

In 1996, Buffett commented that he has “enormous respect for the power of a really outstanding business. And we recognize how scarce they are. And if a management wishes to further intensify our ownership by repurchasing shares, we applaud.”

But it turned out that IBM wasn’t outstanding. The stock sank from $200 in 2012 to $110 by 2018.

Technicals waved warning flags: death crosses in 2013, 2015, and 2017 (e.g., 2015, stock fell from $170 to $140). Golden crosses, like one in 2012, fizzled fast. RSI stayed in the 40–60 range, too weak to rally. Oversold conditions (RSI < 30) in 2015 and 2018 didn’t spark recoveries.

“No IT manager was ever fired for buying IBM,” but fund managers sure were. Technicals saw the votes piling up against Big Blue; fundamentals missed the memo.

Walgreens (Since 2015): A Pharmacy in Decline

From 2015 to 2016, Walgreens’ P/E was 14–19, below the S&P’s 21–22; price-to-book was under 2. But the stock plummeted from $90 in 2015 to $11 today.

Technicals screamed “trap”: death crosses in 2016, 2018, and 2020 (e.g., in 2018, the stock fell from $70 to $50 on Amazon’s pharmacy threat). Since 2017, the stock (WBA) spent most of the time below its 200-day moving average.

RSI stayed around 30–50, unmoved by dividend hikes. Rare RSI spikes above 70 (e.g., 2015) led to sharp drops, confirming bearish sentiment. The market voted “no” on Walgreens, and technicals caught it. Fundamentals? Still counting pills.

Blue Chips, Strong Fundamentals, Weak Stocks

With the full benefit of hindsight, it’s easy to say that one would've known all along that these three specific blue chip companies weren’t as strong as they seemed at the beginning of their respective analysis periods, one cannot argue that the fundamentals underpinning each one of these companies, whether ratios measuring earnings and assets like P/E or P/B, market share, brand recognition, or moat, weren’t strong at the time.

Microsoft dominated software, IBM was a tech titan, Walgreens a pharmacy leader. Yet the market’s votes, reflected in price action, overruled their fundamentals. Technicals saw the disconnect; fundamentals didn’t.

Bitcoin: Votes Without Value

Contrast this with Bitcoin. No fundamentals, no P/E, just vibes. Yet it’s soared because people bought and held. Technicals like rising volume, bullish MACD, and RSI hitting 80 caught the wave. Fundamentals? Busy calling it a tulip bubble. The market can stay irrational longer than you can stay solvent, and technicals thrive on that. They track behavior, not “immutable characteristics.”

If you're observant enough of current and past data, market participants will collectively tell you whether they will buy or sell an asset in the future, i.e. whether the price will go up or down.

Technicals: The Universal Edge

If you profit from a low P/E, great. That means enough investors agreed with you about the potential of the stock. But stock buying is behavior that technicals see it. A low P/E looks juicy, but if the stock stays below its 200-day moving average and RSI is flat or down, the market’s saying: no one cares.

Technicals work for stocks, crypto, or any asset because they’re about price. They let you build an antifragile portfolio, with a short component that gains in crashes. Fundamentals can’t do that.

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Macro: The Fundamentalist’s Blind Spot

No stock, no matter how “undervalued,” escapes macro, e.g. interest rates, recessions. Technicals bake in the macro because the price is affected by investor behavior, which is influenced by macro. Fed hikes? The 50-day moving average might drop below the 200-day moving average.

By contrast, looking at fundamentals means crunching discounted cash flows while your portfolio bleeds. Waiting for the weighing machine to “work” isn’t fun, especially when your spouse questions your picks. You’ll sell at the worst time because we’re all human and we’re all scared of losing money.

Price Pays, Votes Win

Price is what pays. Technicals track the votes that drive it. Fundamentals hope the votes align. Watch behavior, not ratios. And sorry, Ben Graham, the stock market is actually always a voting machine, even over the long term.

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Inverteum Limited (HK) is a trading firm that specializes in long-short algorithmic strategies to generate returns in both bull and bear markets.

Inverteum has generated 52% annualized returns (39% after fees) since inception.

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Welcome to Hong Kong: a city that’s not only a gateway to East Asia but the ideal place to live and invest from.

East Asia: The Most Livable Region in the World

Let’s start with the big picture. East Asia is, objectively, the best region in the world to live in.

Safety

When it comes to public safety, East Asia is practically utopian. Excluding North Korea (an outlier for many reasons), every jurisdiction in the region boasts a Numbeo Safety Index of at least 75—safer than Switzerland (74.7).

Compare that to the U.S., where the safety index is a paltry 51, and you begin to understand how extremely safe and crime-free East Asia is, particularly compared to the rest of the world.

Infrastructure

This is the land of high-speed rail and skyline-dominating skyscrapers. East Asia has more of both than the rest of the world combined.

The region is also pioneering drone-powered economies, which sound like science fiction but are becoming reality here.

With excellent infrastructure, gleaming skyscrapers, minimal crime, and drones filling the skies, East Asia is quite literally the futuristic world depicted in the The World If meme.

Economic Prosperity

By purchasing power parity (PPP), East Asia has the highest total GDP of any region globally. If the global economy were divided into 1,000 units of GDP, East Asia would account for 257, outpacing North America (200) and Europe (214).

Why Hong Kong Stands Out

Now that we’ve established the upsides of living in East Asia, let’s narrow it down. Why Hong Kong?

1. Language and Internationalism

Hong Kong is the most international city in East Asia. It’s the only place in the region where English is an official language, widely used in business, legal, and commercial contexts. For global investors, this means no translation necessary and far fewer hurdles navigating contracts, regulations, or tax policies.

2. Investor-Friendly Tax Policies

Hong Kong offers the best tax policy in East Asia for investors. There’s no tax on dividends or capital gains, making it the most attractive jurisdiction for wealth preservation and growth.

For private equity funds, carried interest (performance fees) can even be totally exempt from income tax.

Unsurprisingly, according to the Global Financial Centres Index, HK ranks #1 in the world for Investment Management, above NYC.

3. Globally Trusted Legal System

Businesses worldwide trust Hong Kong’s legal system for dispute resolution. In fact, Hong Kong is the #1 preferred seat for arbitration in East Asia and #3 globally1, after London and Singapore2. Even after the tumultuous democracy protests of 2019, Hong Kong’s global ranking improved from #4 in 20183 to #3 in 2021. That’s a testament to the robustness of its legal and business environment.

4. Access to China

Regardless of their citizenship, permanent residents of Hong Kong and Macao can obtain Mainland Travel Permits to travel to China, even allowing them to use express channels to cross the border.

5. Unparalleled Food Scene

Hong Kong has 78 Michelin-starred restaurants—more than New York City.

After billionaire Larry Ellison bought the Hawaiian island of Lanai, he called the food there “inedible” before importing the luxury Japanese chain Nobu. In Hong Kong, you don’t need to fly in great food; it’s already at your doorstep.

6. Wealth

170+ years of trade and capitalism combined with HK’s position as gateway to the world’s second largest economy have made Hongkongers the wealthiest people in Asia, with double the median wealth of Singaporeans.

The massive prosperity of East Asia compared to Southeast Asia means HKers have access to better opportunities to accumulate wealth compared to Singaporeans.

The 2019 Protests and National Security Law: A Necessary Reset

In 1994, just before the 1997 handover, the last British governor of Hong Kong, Chris Patten, introduced democratic reforms that allowed millions of Hong Kong residents to vote for their Legislative Council representatives for the first time.

It was blatant hypocrisy. For 150 years, Britain ruled Hong Kong as a colony without any form of democracy. Introducing democracy three years before handing the territory back to China was Patten’s way of giving Beijing a governance headache that the British themselves never had to contend with.

The father of modern Hong Kong4, Murray MacLehose, criticized Patten

for spoiling the "cooperative relationship" between Britain and China over Hong Kong and added "such mindless political polarisation cannot be in Hong Kong's interest" on 11 March 1994.

MacLehose was right. The partial democracy Patten implemented led to decades of gridlock and ineffective governance. Before resigning en masse in late 2020, the pan-democrat camp in the Legislative Council repeatedly used filibusters to block necessary legislation, stalling the government’s ability to function for several years.

Meanwhile, housing costs soared, apartments shrank to “mosquito flats,” and public discontent grew. Due to the high cost of living, there was a growing sense of hopelessness that no matter how hard you worked, your life wouldn't get any better, and you’d never be able to afford to buy a home and move out of your parents’ place.

In 2019, the time bomb exploded, and frustrated Hong Kongers took to the streets. The NSL and 2021 electoral reform was Beijing’s response to restore stability and government functionality. These measures were controversial, but they’ve started to deliver results.

Since 2019, while the population has grown 0.4%, housing costs have dropped almost 30%, in large part because of the government’s efforts to increase supply of both private and public housing in order to soothe public discontent.

Now, the government is finally able to pass and implement policies that improve the lives of ordinary citizens.

Previously infamous for the world’s highest rents, today, Hong Kong’s rents don’t even crack the top 10 in the world.

One Country, Two Systems Is Alive and Well

Despite Western skepticism, “One Country, Two Systems” isn’t dead. In fact, here’s some of the strongest evidence of Hong Kong’s unique freedoms compared to Mainland China.

1. Visa-Free Travel for Taiwan’s Allies

Taiwan is the ultimate red line5 for Beijing. Yet, citizens of 11 out of the 12 nations that recognize Taiwan as a sovereign country can travel to Hong Kong visa-free.

These are countries whose governments refuse to acknowledge the legitimacy of the People's Republic of China, yet their citizens can freely visit the richest city in China.

2. Uncensored Internet

You can use YouTube, Gmail, Substack, and WhatsApp without a VPN6. This is much more convenient for those coming from the West7.

The global, instant nature of the Internet allows you to be more familiar with an industry than even those living there. For instance, when it comes to assessing the quality of AI chatbots, there is no better resource than LMSYS Chatbot Arena's leaderboard.

3. Open Capital Account

Hong Kong has no capital controls, unlike Mainland China. Investors can freely move their money to wherever it gets the highest return.

Hong Kong has nearly double the number of family offices compared to rival Singapore8. The smart money knows where to go.9

4. Low Corruption

Hong Kong ranks as the least corrupt place in East Asia (#17 globally), beating out Japan (#20), Taiwan (#25), the US (#28), South Korea (#30), and Mainland China (#7610). Low corruption means that laws protect you and your rights, and you don’t need to have connections to get things done.

In fact, if you are ever solicited for a bribe11, even by an employee of a private company, or offered a bribe by anyone, you can report that to the Independent Commission Against Corruption (ICAC), and your counterparty will be investigated by the ICAC. The ICAC is obligated to keep your identity and your complaint strictly confidential (廉署保密，密密實實).

5. One Country, Two Systems is Here to Stay

One of the biggest concerns fueling the 2019 protests was what would happen to HK after 2047, 50 years after the 1997 handover. Specifically, the fear was that the city be reintegrated back into China and lose “its English common law legal system, its low tax rate and open markets”.

In 2022, Beijing made it clear that One Country, Two Systems is here to stay.

The End of Borrowed Time

For decades, one phrase hauntingly described Hong Kong: "a borrowed place on borrowed time." This sentiment stemmed from real-world deadlines. First, as a British colony with a lease set to expire in 1997, and later, as a Special Administrative Region with a "One Country, Two Systems" framework guaranteed for 50 years, until 2047. This timeline always cast a shadow of uncertainty over the city's long-term future, creating a persistent question mark for long-term investors and residents alike.

That chapter has decisively closed following the implementation of the National Security Law and the city's return to normalcy and order. Now, there is a clear and strong sense of permanence. The message is unequivocal:

This newfound stability provides an unshakable foundation with which to put down roots. The question is no longer "what happens after 2047?" but rather "how do we build on this stable, enduring foundation?" For businesses, investors, and families looking to plant deep roots, the time is no longer borrowed. Hong Kong's future is its own, and it is here to stay.

About

Inverteum Limited (HK) is a trading firm that specializes in long-short algorithmic strategies to generate returns in both bull and bear markets.

We have generated 50%+ annualized returns since inception.

How We Invest

1. Minimize allocation to individual stocks due to their unpredictability

Inverteum Capital

Why Picking Individual Stocks Is a Fool's Game

The TL;DR version of this post…

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a year ago · 21 likes · 27 comments · Inverteum Capital

2. Build the most suitable trading strategy and go all in. Here's an example.

Inverteum Capital

158,022% Returns? The Algorithm That Would've Turned $100k Into $158M (Backtest)

This post is for informational purposes only and does not constitute investment advice. Do your own research and consult with a financial professional before investing…

Read more

a year ago · 8 likes · 6 comments · Inverteum Capital

3. Be prepared for bear markets and ensure profitability during bad times by implement a short selling component to the strategy

Inverteum Capital

Why All Professional Investment Strategies Should Have a Short Component

So, you’ve been told to buy and hold, right? Just pick some nice long-term investments, sit back, relax, and in 30 years, you’ll be sipping piña coladas on a beach somewhere. It’s the dream. And, sure, markets generally go up over time — we can all agree on that. But there’s a teeny-tiny problem: They don’t always go up. In fact, they go down quite a bi…

Read more

a year ago · 12 likes · Inverteum Capital

For the first time, Inverteum is posting a simple algo trading strategy as an introduction to algorithmic trading for those who are unfamiliar. Algo trading (or systematic investing) is where you trade based on a pre-determined set of rules.

Algo Trading Strategy: Triple Accelerator

These are the rules for this Triple Accelerator algo trading strategy:

1. When the S&P 500 is above its 200-day moving average, go all-in on TQQQ, the 3x levered Nasdaq-100 ETF.

2. If TQQQ’s 10-day RSI crosses 79 (a.k.a. “overbought”), pivot to UVXY, one of many “fear index” VIX ETFs, to bet on a short term mean reversion in the market.

   1. VIX ETFs can go up a lot when the market becomes fearful and are extremely volatile, but you can lose money quickly if you get the timing wrong.

3. When the S&P 500 dips below its 200-day moving average, retreat to plain-vanilla SPY to deleverage your portfolio when the market is doing poorly.Backtest Performance

• Start date: Oct 4, 2011

• Cumulative return: 158,022% over 13.5 years

• Annualized return (CAGR): 63%

• Max drawdown: 61%

A 61% drawdown requires a strong stomach, and most investors would find it difficult to hold on and keep faith in the strategy. That being said, large market drawdowns have happened throughout history, e.g. S&P 500’s 52% drawdown in 2008-09, Nikkei’s 80% drawdown in the 1990s.

Performance by year and month compared to S&P 500

The Triple Accelerator algo trading strategy significantly beats the market in 12 out of the past 14 years, but at the same time, it is very volatile, with large losses in 2022 and 2025 YTD. Monthly performance ranges from -29% in Jan 2022 to +99% in June 2020.

Triple Accelerator Algo Component Breakdown

1. When the S&P 500 is above its 200-day moving average, go all-in on TQQQ, the 3x levered Nasdaq-100 ETF.

Since October 2011, the algo spends 82% of the time in this logic, and more than half (55.6%) of the total net profit generated came from holding TQQQ.

It's not surprising that the majority of gains come from holding a 3x levered long ETF in a bull market, which is why it’s called the Triple Accelerator.

2. If TQQQ’s 10-day RSI crosses 79 (a.k.a. “overbought”), pivot to UVXY, one of many “fear index” VIX ETFs, to bet on a short term mean reversion in the market.

The algo spends 3% of the time in this logic, but 41.8% of total net profit came from holding UVXY.

When the market becomes overbought in a bull market, there are inevitably corrections where the market reverts to the mean, and those can be big opportunities.

As stated before though, the VIX can be volatile and hard to predict, making this component unquestionably the highest beta—highest risk, highest potential return—part of this algo.

3. When the S&P 500 dips below its 200-day moving average, retreat to plain-vanilla SPY to deleverage your portfolio when the market is doing poorly.

The algo spends 15% of the time in this logic, and it only accounts for 2.6% of total profits.

Unsurprisingly, profits are thinnest (but not nonexistent) in a bear market, in no small part because 1) there is no short component to this algo and 2) SPY is a non-levered ETF, unlike TQQQ.

Disclaimer: Future market conditions will not be the same as the past, so past performance is not an indication of future returns. Don't invest in an algorithm whose mechanics you don't thoroughly understand.

Inverteum has not invested in and does not endorse the Triple Accelerator strategy.

Why Algorithmic Trading is the Best Form of Investing

The Power of Backtesting

For algo trading, your rules for making trades are written down and tested according to historical conditions to see how it would have performed.

With stock picking, those rules are in your head. There is no way to backtest your strategy, e.g. companies with low P/E ratios, and see how it would've performed historically.

Inverteum Capital

Why Picking Individual Stocks Is a Fool's Game

Investing in individual stocks is a lot like trying to guess if it’ll rain in a week based on the cloud you see today. Sure, you might get it right once in a while, but if you make a habit of it, you’ll often find yourself standing in the rain without an umbrella. Even the most brilliant minds in finance have been humbled by the market, and yet, there w…

Read more

a year ago · 13 likes · 8 comments · Inverteum Capital

Even if you successfully figured out when to buy the stock, it is very difficult to figure out when to sell. Do you hold it forever? It's never clear at the time.

With algo trading, there are clear rules as far as when to buy and sell, making trading much easier. Those rules won't always be right, but at least they are written down and backtested1.

The returns, of course, can be consistently market-beating.

This post is for informational purposes only and does not constitute investment advice. Leveraged index and VIX ETFs are very volatile and risky, and algo trading can lead to significant and permanent loss of capital.

About

Inverteum Limited (HK) is a trading firm that specializes in long-short algorithmic strategies to generate returns in both bull and bear markets.

Inverteum has generated 50%+ annualized returns since inception.

How We Invest

1. Minimize allocation to individual stocks due to their unpredictability

Inverteum Capital

Why Picking Individual Stocks Is a Fool's Game

The TL;DR version of this post…

Read more

a year ago · 21 likes · 27 comments · Inverteum Capital

2. Build the most suitable trading strategy and go all in. Here's an example.

Inverteum Capital

158,022% Returns? The Algorithm That Would've Turned $100k Into $158M (Backtest)

This post is for informational purposes only and does not constitute investment advice. Do your own research and consult with a financial professional before investing…

Read more

a year ago · 8 likes · 6 comments · Inverteum Capital

3. Be prepared for bear markets and ensure profitability during bad times by implement a short selling component to the strategy

Inverteum Capital

Why All Professional Investment Strategies Should Have a Short Component

So, you’ve been told to buy and hold, right? Just pick some nice long-term investments, sit back, relax, and in 30 years, you’ll be sipping piña coladas on a beach somewhere. It’s the dream. And, sure, markets generally go up over time — we can all agree on that. But there’s a teeny-tiny problem: They don’t always go up. In fact, they go down quite a bi…

Read more

a year ago · 12 likes · Inverteum Capital

A Material Change in Market Sentiment

Since the market’s peak in mid-February, we’ve seen a material shift in sentiment. The S&P 500 is down 8%; the Nasdaq-100 is down 12%. Most importantly, both benchmarks have spent several trading sessions below the all-important 200-day moving average.

“Nothing good happens below the 200-day moving average.” — Common trader wisdom

The last time we saw a bull run of over two years end1 was in early 2022, right before the tech bear market.

The Market Is Looking Ahead, and It Doesn't Like What It Sees

Markets are ever forward-looking, constantly repricing risk and opportunity. In 2022, the fear was inflation and the rate hikes needed to contain it. This time, the concerns are different but still worrisome.

Steve Cohen, the billionaire owner of Point72 Asset Management, put it bluntly in February 2025:

“When you take a brew of tariffs […] slowing immigration […] and DOGE—that’s austerity—we think growth is going to slow to 1-1.5% from 2.5% in the second half, so I’m actually pretty negative for the first time in a while. It may only last a year or so, but I think the best gains have been had. It wouldn’t surprise me to see a significant correction.”

The weakness in the economy was already severe enough to cost the incumbent president’s party (Democrats) the election. Now, additional policy shifts—tariffs and DOGE—could lead to a bear market.

DOGE: The Austerity You Didn’t See Coming

US Treasury Secretary Scott Bessent has said that, “Every $300 billion we cut is about a percent of GDP.”

According to DOGE Tracker, DOGE has already cut $115 billion in spending. That’s about 0.4% of GDP. DOGE’s goal is $2 trillion in cuts. That’s almost 7% of GDP.

Investors, understandably, are a little spooked.

If Congress actually follows through on slashing trillions in spending, that’s a structural drag on growth that market participants need to price in.

And they are.

The last time the government got serious about austerity—after the financial crisis, when deficit hawks insisted on reigning in spending—the result was sluggish growth and repeated market tantrums every time a debt ceiling fight or budget showdown loomed.

This time, it’s happening again, but with higher interest rates, sticky inflation, and a market that’s already looking for reasons to sell off.

If you’re wondering why stocks are struggling, DOGE is a big part of the answer.

Tariffs: Inflation’s Unwelcome Friend

Tariffs are a fascinating economic lever, mostly because they rarely work as intended. The goal is to make foreign goods more expensive so that domestic manufacturing thrives. The real-world result is that consumers end up paying more, while businesses adjust their supply chains in ways politicians didn’t expect.

Higher prices from tariffs can make it harder for the Federal Reserve to cut interest rates. But in theory, tariffs could also cause “demand destruction,” which might cap inflation—though that's a tricky bet.

The problem is that the link between consumer demand and pricing isn’t always as strong as you’d think. Some industries, particularly those with a high degree of consolidation, would rather sell fewer units at higher margins than lower prices to maintain volume.

Take two examples:

1. Cars. In 2024, the average price of a new car was $48,205—up 21% from 2019.

"Automakers aren’t sufficiently motivated to solve the affordability crisis because they’re making more money selling fewer cars to richer buyers."2

2. Eggs. The egg industry is effectively a duopoly that has reduced the number of hens available to egg producers by 19% since 20213. Unsurprisingly, the price of eggs has risen significantly4.

In these cases, demand destruction not only wouldn't reduce inflation; demand destruction and the subsequent inflation—reducing supply to increase prices—is the goal of the businesses involved.

Unlike in his first term, Trump cares much less about Wall Street than Main Street, which largely does not own stocks and does not follow the market. They voted for higher tariffs because they believe it will bring back American manufacturing jobs. Whether they’re right or wrong, the market doesn’t like it.

The way things are going, stagflation—a mix of stagnant growth and persistent inflation—isn’t out of the question.

Mean Reversion and the "Mag 7"

The Magnificent Seven—Apple, Microsoft, Nvidia, Alphabet, Amazon, Meta, and Tesla—have carried the market for two years. But even the best trades don’t go up forever.

On March 1, 2025, commented on the state of these stocks:

“Mag 7 is really priced to perfection, so you have to believe that the world kind of stays the way that it is, otherwise you're going to have some amount of mean reversion.”

Mean reversion suggests that the stocks that ran up the most—like Nvidia and Meta—could also fall the hardest. It remains to be seen whether investors will still believe in AI, cloud computing, and digital advertising at the multiple expansion levels they’ve been willing to pay.

The Economic Outlook Is Just Not Great

writes:

The macro backdrop is about as unfavorable as it gets for the stock/bond ratio; heightened uncertainty, reform-like policy moves, and declining economic confidence makes the risk of recession a real possibility (and the Treasury Secretary is basically telling us this).

If the President and his Treasury Secretary are emotionally preparing the American public for a recession, it’s probably not wise to bet against it.

The Party Isn’t Over—It’s Just Getting Started

If you’re a long-only investor, this might be bad news. But if your strategy alternates between long and short, this is when things get interesting.

Inverteum Capital

Why All Professional Investment Strategies Should Have a Short Component

So, you’ve been told to buy and hold, right? Just pick some nice long-term investments, sit back, relax, and in 30 years, you’ll be sipping piña coladas on a beach somewhere. It’s the dream. And, sure, markets generally go up over time — we can all agree on that. But there’s a teeny-tiny problem: They don’t always go up. In fact, they go down quite a bi…

Read more

a year ago · 5 likes · Inverteum Capital

To be clear, shorting isn’t for everyone. It’s painful, expensive, and, in a bull market, a spectacular way to lose money. But when the market turns south, it becomes the only real way to generate returns.

We don’t short stocks because we enjoy it; we’re not Peter Schiff or Michael Burry. But it’s our job to deliver returns in both bull and bear markets. And in 2025, that means we might very well need to invoke the short component of Inverteum’s long/short trading strategy.

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This post is for informational purposes only and does not constitute investment advice. The author is not responsible for any investment decisions made by readers based on the information contained herein. Investing involves risk, and you could lose money. Do your own research and consult with a financial professional before investing.

About

Inverteum Limited (HK) is a trading firm that specializes in long-short algorithmic strategies to generate returns in both bull and bear markets.

We have generated 52% annualized returns (39% after fees) since inception.

"The cumulative 2-year gain of 58% in the S&P 500 in 2023 and 2024 is the highest the index has recorded in 36 years! The S&P 500’s trailing P/E ratio at the end of 2024 was 29 versus its long-term average of 16.

By contrast, Fund W trades at a P/E of 7.2. Fund W is trailing the S&P 500 significantly since inception 15 months ago. This is a marathon, not a sprint. Our mission is to beat the S&P 500 over the long term and I love how well we are positioned to do so from here. We are very bullish on the Fund’s prospects."

You see this kind of thing a lot from value investors: The market has gone crazy, stocks are overvalued, but my fund—my wonderful, underappreciated, deeply discounted fund—is sitting here with a single-digit P/E ratio, just waiting for the market to come to its senses.

And yet, the market does not seem to be coming to its senses. Despite the recent drawdown, the market still gives the S&P 500 a P/E of 28 while ignoring the "cheap" stocks that Fund W specializes in. As of the end of February 2025, Fund W is underperforming the S&P 500 by almost 40 percentage points over 17 months1.

At some point, you have to ask: Is the market wrong, or is Fund W?

Profits Are Just One Piece of the Puzzle

One of the favorite arguments of value investors is that stock prices should be based on profits. The lower the price relative to profits, the better the deal.

But let’s look at some actual data.

Consider the rankings of the top 50 most valuable companies (by market capitalization2) and the top 50 most profitable companies (by FY2023 net income). How much overlap is there?

• 40? Nope.

• 30? Still too high.

• Just 22 companies (44%) appear on both lists.

Of those 22 companies:

• 12 have a higher market cap rank than profit rank. That is, their stock market value is higher than their profits alone would suggest.

  (Google’s market cap rank and profit rank are identical: #4.)

• Only 9 of the top 50 most profitable companies (18%) have a higher profit rank than market cap rank—meaning they are among the rare companies where profits alone seem to drive their valuation.

So if you are a value investor who only looks at P/E ratios, what you are really doing is focusing on the way that just 18% of the top 50 most valuable companies got there.

That does not seem like a very good strategy.

The Ben Graham Problem

Part of the problem is that value investing, as practiced by many of its adherents today, is stuck in the past.

NYU Professor of Finance Aswath Damodaran put it best when he discussed how value investing has changed since Ben Graham published The Intelligent Investor (1949):

"To run Ben Graham's 12 screens in the 1950s, you'd have to sit down with the ledger sheet, take every company, enter the numbers by hand, sit there with an abacus—there were no calculators—and compute each ratio.

Just doing this on 50 companies—the thought of it gives me a headache. But if you were able to do it, you had a significant advantage over other people who didn't have access to those annual reports, who didn't have the time and the patience or the resources to do it.

Today I can go online and there are all these automated ‘Ben Graham 12 screens.’ I hit them, they're on the 12 screens for me two seconds later, the companies pop up, and the question is: If I can pull that up, what makes you think that running these screens is going to give you a differential advantage?"

Fund W’s manager brags about his 7.2 P/E ratio, but what he is really bragging about is running screens—which gives you minimal alpha in today’s digital world.

The Market Is Usually Right

In the book Hedge Fund Market Wizards, when asked what he looks for in a trader, the billionaire hedge fund manager Michael Platt commented:

"The type of trader I don't want is an analyst who has never traded—the type of person who does a calculation on a computer, figures out where a market should be, puts on a big trade, gets caught up in it, and doesn’t stop out. And the market is always wrong; he’s not. Market makers know that the market is always right. You are wrong if you are losing money for any reason at all. Market makers have that drilled into their head.”

That’s a lesson that value investors struggle with.

They love to cite Ben Graham’s allegory of Mr. Market—the irrational stock market that sometimes offers you great deals and sometimes offers you terrible ones.

And sure, sometimes the market is wrong. Some amount of underperformance due to medium-term volatility is expected in the process of generating long-term capital appreciation.

But if you are consistently underperforming the S&P 500, by as much as 40 percentage points over 17 months, at some point, you have to admit that maybe—just maybe—it’s not the market that’s wrong.

It’s you.

Buffett Is Not a Value Investor (At Least Not in the Way You Think)

When people think of "value investing," they think of Warren Buffett.

But Buffett’s portfolio does not look like what Fund W’s manager imagines a value portfolio should look like.

Consider Berkshire Hathaway’s top 9 holdings (individual companies that account for at least 2.5% of the Berkshire’s portfolio). They have a P/E ratio of 243.

• The S&P 500’s P/E at the end of 2024? 29

• Fund W’s P/E? 7

Buffett’s portfolio P/E ratio is much closer to the supposedly overvalued S&P 500 than to Fund W.

Why?

Because Buffett is not just buying low P/E stocks. He’s buying great companies.

Look at his top three holdings: Apple, American Express, and Coca-Cola.

• All have strong brands, loyal customer bases, and wide economic moats.

• And none of them are "cheap" in the way Fund W’s manager means. Their P/E ratios range from 19 to 34.

None of them have single-digit P/E ratios.

Buffett is not just a value investor. He is a quality investor. And quality does not come cheap.

Conclusion: Value Investing Needs to Evolve

The problem with value investors is not that they believe in "buying low and selling high."

The problem is that many of them are just running screens rather than actually valuing companies.

The problem is that they assume the market is wrong, instead of considering that they might be.

The problem is that they think Buffett is a low-P/E investor, when really he’s a quality investor.

If you want to be a great investor, you don’t need to abandon value investing.

You just need to stop doing it wrong.

About

Inverteum Limited (HK) is a trading firm that specializes in long-short algorithmic strategies to generate returns in both bull and bear markets.

We have generated 52% annualized returns (39% after fees) since inception.

How We Invest

1. Minimize allocation to individual stocks due to their unpredictability

Inverteum Capital

Why Picking Individual Stocks Is a Fool's Game

The TL;DR version of this post…

Read more

a year ago · 21 likes · 27 comments · Inverteum Capital

2. Build the most suitable trading strategy and go all in. Here's an example.

Inverteum Capital

158,022% Returns? The Algorithm That Would've Turned $100k Into $158M (Backtest)

This post is for informational purposes only and does not constitute investment advice. Do your own research and consult with a financial professional before investing…

Read more

a year ago · 8 likes · 6 comments · Inverteum Capital

3. Be prepared for bear markets and ensure profitability during bad times by implement a short selling component to the strategy

Inverteum Capital

Why All Professional Investment Strategies Should Have a Short Component

So, you’ve been told to buy and hold, right? Just pick some nice long-term investments, sit back, relax, and in 30 years, you’ll be sipping piña coladas on a beach somewhere. It’s the dream. And, sure, markets generally go up over time — we can all agree on that. But there’s a teeny-tiny problem: They don’t always go up. In fact, they go down quite a bi…

Read more

a year ago · 12 likes · Inverteum Capital

Or at least, it was.

In her bestselling book Quiet, described how Western culture glorifies the "Extrovert Ideal"—a world where charisma, networking, and being seen matter more than deep thought and quiet mastery.

The Extrovert Ideal has its roots in the rise of industrialization and urbanization beginning in the late 19th century. The rural-oriented culture of character in the 19th century gave way to the urban-oriented culture of personality in the 20th century.

Today, the tides are shifting once again. We are moving from an urban-oriented culture of personality (20th century) to a network-oriented culture of technology (21st century).

And what most people—including introverts themselves—fail to realize is that this shift is tilting the playing field dramatically in favor of introverts.

Why?

Because the new world is optimized for:

• Deep work and analysis

• Proficiency with AI and automation

• Written over verbal communication

• Asynchronous collaboration instead of in-person politicking

In this new world, it is the extroverts who will need to adapt—learning to "pass" as introverts by mastering written communication, tech tools, and AI.

Meanwhile, introverts are already at home in this environment.

There are three catalysts driving this shift:

1. AI and automation

2. Online social networking

3. Remote work

Let's break it down.

AI: The Great Equalizer

Naval Ravikant, tech investor and startup philosopher, talks a lot about leverage—the ability to scale your output beyond just trading time for money.

There are three types of leverage:

1. Labor – Hiring people to work for you

2. Capital – Using money to make more money

3. Products that can scale infinitely – Code, media, AI

#3 product leverage is the most compelling to Naval because it’s “permissionless”. You don't need anyone's say-so to use it.

• No gatekeepers.

• No VCs to beg for money.

• No HR department to approve your hires.

Labor leverage? You need people to want to work for you. Capital leverage? You need someone to give you the money. But product leverage? You just do it. You write the code, you launch the product, and the market decides.

This is where introverts have had a big advantage, particularly when it comes to code. But there’s always been a limit to how much a single highly productive coder can accomplish on their own without building a team around them.

Historically, this meant bringing in an extrovert to scale up, and labor leverage—getting people to follow you, rallying teams, inspiring people, leading organizations—is generally an extrovert's superpower.

Think Steve Ballmer, sweating through his shirt while screaming, "DEVELOPERS! DEVELOPERS! DEVELOPERS!"

But AI is changing that.

AI transforms labor leverage into product leverage

• Instead of managing an army of employees, you can manage an army of AI agents.

• Instead of hiring a full design, marketing, and sales team, you can automate it.

• Instead of motivating people, you just need to prompt AI effectively.

• Instead of employing and training hundreds of customer service reps, you can set up a 24/7/365 call center in an hour.

Already, the most enthusiastic AI adopters—tech startups—are seeing a 13x productivity boost.

• Pre-AI, it took a team of 6-7 about a year to hit $1M in annual recurring revenue.

• Today, two founders with AI tools are hitting that milestone in three months.

The entire landscape of work is changing.

Every knowledge worker job—any role done in front of a screen—will have an AI-powered equivalent. This chart from is just the beginning.

And who’s best positioned to harness this? Introverts.

The people comfortable with deep focus, technical mastery, and automation.

The people who already prefer working with machines over people.

Online Networking: The Rise of the Digital Introvert

A 2022 study from Stanford, MIT, and Harvard found that:

• The best job opportunities come from "moderately weak ties"—connections that aren’t your closest friends but aren’t total strangers either.

• In high-growth industries, weak ties create significantly more career mobility.

For decades, building relationships with weak ties meant cocktail parties, conferences, and handshakes—things introverts hate.

But now?

Online social networks have changed the game.

• You don’t need to "work the room" at an event—you can build a digital presence that works for you.

• You don’t need small talk—you need clear writing and deep insights.

• You don’t need to be in the right place at the right time—you just need one great post to reach the right person.

Online networking > In-person networking

• Depth: Online, you can see everything someone has ever written and deeply understand their perspective.

• Asymmetry: Instead of hoping to meet a VIP at a party, you can attract them with your ideas.

• Scale: A single viral post can reach a billionaire, a CEO, or a bestselling author.

In real life, that never happens—unless you're already well-connected1.

But on the internet? Your ideas are your credentials.

And introverts—who thrive in writing, long-form thinking, and structured communication—dominate in this world.

Remote Work: The Death of Office Politics

Before, career advancement was about visibility:

• Being seen in the office

• Speaking up in meetings

• Schmoozing at networking events

Extroverts thrived in this environment.

But the pandemic changed everything.

Remote work made written communication king—clear emails, structured Slack updates, well-documented project notes.

And even in hybrid setups, promotions are increasingly based on deliverables, not face time.

This is fantastic news for introverts.

• No more exhausting small talk at the office.

• No more loud, chaotic open offices.

• No more worrying about "looking busy"—just actual results.

Hybrid work is here to stay.

And with it, introverts finally have a level playing field in the workplace.

The Iron Man Era

This post was inspired by two things:

1. A post by documenting how he runs The Generalist (130K+ subscribers) as a one-person AI-empowered machine.

2. A graphic from showing how an introvert with AI can outproduce a leader leading a team of employees.

   

We are entering the Iron Man era—where one person, with the right skills, tools, network, and vision, can outproduce entire teams.

And guess what?

The three biggest paradigm shifts of the 21st century—AI, online social networking, and remote work—are all introvert-friendly.

The era of the charismatic corporate climber, the networking schmoozer, the conference circuit hustler?

That world is fading.

The future belongs to the quiet builders.

The deep thinkers.

The AI natives.

That’s why introverts will rule the networked world.

This is the best time in history to be an introvert, and most people don't even realize it yet.

About

Inverteum Limited (HK) is a trading firm that specializes in long-short algorithmic strategies to generate returns in both bull and bear markets.

Inverteum has generated 52% annualized returns (39% after fees) since inception.

How We Invest

1. Minimize allocation to individual stocks due to their unpredictability

Inverteum Capital

Why Picking Individual Stocks Is a Fool's Game

The TL;DR version of this post…

Read more

a year ago · 21 likes · 27 comments · Inverteum Capital

2. Build the most suitable trading strategy and go all in. Here's an example.

Inverteum Capital

158,022% Returns? The Algorithm That Would've Turned $100k Into $158M (Backtest)

This post is for informational purposes only and does not constitute investment advice. Do your own research and consult with a financial professional before investing…

Read more

a year ago · 8 likes · 6 comments · Inverteum Capital

3. Be prepared for bear markets and ensure profitability during bad times by implement a short selling component to the strategy

Inverteum Capital

Why All Professional Investment Strategies Should Have a Short Component

So, you’ve been told to buy and hold, right? Just pick some nice long-term investments, sit back, relax, and in 30 years, you’ll be sipping piña coladas on a beach somewhere. It’s the dream. And, sure, markets generally go up over time — we can all agree on that. But there’s a teeny-tiny problem: They don’t always go up. In fact, they go down quite a bi…

Read more

a year ago · 12 likes · Inverteum Capital

It’s a simple setup, but the prisoner’s dilemma is more than just an academic problem; it’s a metaphor for life. Because, really, every day you face your own little prisoner’s dilemmas. You’re constantly deciding whether to cooperate with the people around you—your friends, colleagues, customers, investors—or to defect on them for short-term gain.

Examples: defect or cooperate?

• Do you sell your customers a shoddy product at a high profit margin, or do you sell them a quality product at a lower margin, hoping they’ll come back and spread the word about your business?

• Do you take credit for your collaborator’s work to make yourself look good at their expense, or do you share the praise so that they’ll want to work with you again?

• Do you chase fleeting pleasures, sabotaging your long-term happiness for a moment of immediate gratification? Or do you dedicate yourself to your spouse, work through the inevitable challenges, and build a lasting, committed relationship?

• Do you spread gossip that someone has confided in you to gain social status, or do you keep the secret and remain a trusted confidant?

In each of these scenarios, you’re playing a game of trust. And trust—the ability to convince others that you will cooperate more often than you defect—is the most valuable currency in life.

The Reputation Economy

The accumulated result of these decisions—whether to cooperate or defect—is your reputation. Every time you cooperate with someone who matters1, you add a little bit to your reputation. Every time you defect with someone who matters, you subtract from it. Over time, your reputation compounds.

Think of it like an investment portfolio: small, consistent deposits of cooperation build up over time, creating a reputation that attracts more opportunities, more connections, and more trust. But if you start making withdrawals—if you defect too often—your reputation account runs dry. And when it does, the people who matter most to you will stop working with you, investing in you, or trusting you.

This is why long-term success isn’t about being purely altruistic or purely selfish—it’s about being long-term greedy.

What Does It Mean to Be Long-Term Greedy?

The phrase “long-term greedy” might sound like an oxymoron. After all, isn’t greed bad? Isn’t it selfish and short-sighted? Well, yes, but only if you’re thinking short-term. Short-term greed is trying to make a quick buck by ripping someone off. It’s betraying a partner to get ahead in the moment. It’s defecting in the prisoner’s dilemma.

Long-term greed is different. It’s the understanding that the best way to maximize your success over time is to build trust with the people who matter. It’s underpromising and overdelivering. It’s cooperating more often than you defect—not because you’re a saint, but because you realize that the compounding returns on trust are worth more than any one-off gain.

Why the World Runs on Trust

Let’s take a step back for a second. Why does trust matter so much?

The simple answer is that the world runs on it. Every interaction you have—whether it’s with a customer, a colleague, or your spouse—is built on the assumption that both parties will cooperate. When that assumption breaks down, everything else breaks down with it.

Think about your favorite brand. Maybe it’s a car company, a restaurant, or a tech company. Why is it your favorite? Probably because it consistently delivers a great experience. In other words, it cooperates with you. It gives you something of value instead of leaving a bad taste in your mouth.

This is what a brand is, at its core: a reputation. It’s the collective opinion of everyone who’s ever interacted with the company. And the best brands are the ones that consistently choose to cooperate, building trust over time.

The same is true for people. Your personal brand—your reputation—is what those who matter in your life think and say about you based on their interactions with you. And just like with companies, the people who have the best reputations get a disproportionate amount of interest and opportunities.

This is why inequality is inevitable. The rich get richer, and the poor get poorer, not just in terms of money, but in terms of trust. Everyone wants to work with the people who have the best reputations, and no one wants to work with the people who have bad reputations. Over time, this creates a kind of feedback loop where the trusted become more trusted, and the untrusted become even less trusted.

The Problem with Short-Term Greed

Of course, not everyone plays the long game. Some people get greedy—short-term greedy—and try to profit at the expense of those who matter to them.

Take the finance industry, for example. It’s full of people who tricked their clients out of their savings to pad their own wallets2. Sure, they made a quick buck in the moment. But what happened next? Their clients left and told everyone about their bad experience, ruining the advisors’ reputations. Eventually, the advisors ran out of people who were willing to work with them.

Compare that to the investors who take a long-term greedy approach. They don’t try to squeeze every last dollar out of their clients upfront. Instead, they focus on growing their clients’ wealth over time, knowing that if their clients succeed, they’ll succeed too by earning performance fees and getting new client referrals from existing happy clients.

This isn’t just good ethics—it’s good business. Because reputations, like investment portfolios, compound.

The Long-Term Benefit of Cooperation

The thing about the prisoner’s dilemma is that, in the long run, cooperation with those who matter is inevitably more rewarding. If you keep defecting, eventually no one will want to work with you. But if you keep cooperating, you’ll build a reputation that attracts more and more opportunities.

This is why the most successful people are long-term greedy. They understand that the way to win is not by taking advantage of the people who matter to them, but by cooperating with them—even when it’s hard, even when it’s inconvenient, even when it doesn’t offer an immediate payoff.

What Can We Learn from Successful People?

So, what can we learn from the people who play the long game?

First, they understand the value of trust. They know that trust is the foundation of every relationship—personal, professional, or otherwise—and they work hard to build it.

Second, they underpromise and overdeliver. They don’t make big promises they can’t keep. Instead, they set realistic expectations and then exceed them.

Third, they’re selective about who they cooperate with. Not everyone is worth trusting, and not everyone is offering something they need. But for the people who matter—the people they want to build long-term relationships with—they almost always choose cooperation over defection.

Finally, they understand the power of compounding. They know that every interaction is an opportunity to add to their reputation, and they treat it as such.

The Bottom Line

At the end of the day, life is just a series of prisoner’s dilemmas. Every decision you make—whether to cooperate or defect—adds to or subtracts from your reputation. And your reputation, more than anything else, determines the opportunities and relationships that come your way.

So, be long-term greedy. Build trust with the people who matter. Underpromise and overdeliver. And remember: reputations, like investment portfolios, compound.

About

Inverteum Limited (HK) is a trading firm that specializes in long-short algorithmic strategies to generate returns in both bull and bear markets.

Inverteum has generated 52% annualized returns (39% after fees) since inception.

How We Invest

1. Minimize allocation to individual stocks due to their unpredictability

Inverteum Capital

Why Picking Individual Stocks Is a Fool's Game

The TL;DR version of this post…

Read more

a year ago · 21 likes · 27 comments · Inverteum Capital

2. Build the most suitable trading strategy and go all in. Here's an example.

Inverteum Capital

158,022% Returns? The Algorithm That Would've Turned $100k Into $158M (Backtest)

This post is for informational purposes only and does not constitute investment advice. Do your own research and consult with a financial professional before investing…

Read more

a year ago · 8 likes · 6 comments · Inverteum Capital

3. Be prepared for bear markets and ensure profitability during bad times by implement a short selling component to the strategy

Inverteum Capital

Why All Professional Investment Strategies Should Have a Short Component

So, you’ve been told to buy and hold, right? Just pick some nice long-term investments, sit back, relax, and in 30 years, you’ll be sipping piña coladas on a beach somewhere. It’s the dream. And, sure, markets generally go up over time — we can all agree on that. But there’s a teeny-tiny problem: They don’t always go up. In fact, they go down quite a bi…

Read more

a year ago · 12 likes · Inverteum Capital

There’s something timeless about speculative bubbles. Like the changing of the seasons or the rotation of the earth, they’re a constant feature of markets. Whether it’s tulips, tech stocks, crypto, or the latest AI-powered widget, bubbles emerge, inflate, and (eventually) pop. Asset prices don’t rise forever in a straight line, and yet, time and time again, we convince ourselves that this time is different (and sometimes, this time really is different).

Bubbles aren’t just about math, though. They’re about people—human psychology, herd behavior, and the eternal tug-of-war between greed and fear. No matter how sophisticated we believe our markets or algorithms have become, bubbles keep showing up because human nature doesn’t change.

If Isaac Newton, one of history’s smartest people, couldn’t resist jumping back into the South Sea bubble, losing a fortune in the process, what hope do the rest of us have?

“I can calculate the motions of the heavenly bodies, but not the madness of the people.” – Isaac Newton

But here’s the thing: bubbles aren’t just dangerous pitfalls to avoid. They’re also opportunities. And if you play them right—or, more importantly, avoid playing them wrong—they can actually be a powerful tool for building wealth.

Conventional Wisdom Is Wrong About Bubbles

If you’ve ever read an investing manual or listened to your risk-averse uncle, you’ve probably heard something like this: “Avoid bubbles at all costs.” Sounds reasonable, right? After all, no one wants to be the last person holding the bag when the music stops.

But here’s the problem: avoiding bubbles entirely is nearly impossible. Watching your neighbor get rich while you sit on the sidelines is…not fun. It’s also psychologically excruciating. During the South Sea Bubble, Newton initially made a tidy 100% profit by selling early. But as the stock kept climbing, he couldn’t resist the pull of FOMO. He bought back in, lost the equivalent of millions of dollars in today’s money, and spent the rest of his life forbidding anyone to mention the words “South Sea” in his presence.

If Newton couldn’t resist the Siren call of speculative mania, what makes you think you can?

Bubbles Can Create Wealth, Even Last

Here’s the awkward truth about bubbles: they’re not all bad. In fact, a well-inflated bubble can do wonders for wealth creation—at least for those who know how to ride the wave.

“Whenever I see a bubble forming, I rush in to buy.” – George Soros1

Take Tesla, for example. For years, critics dismissed the company as a bubble waiting to pop. And yet, investor enthusiasm (or mania, if you prefer) helped Tesla raise billions of dollars, scale production, become profitable, and achieve a market cap of $1.4 trillion—nearly as much as the rest of the auto industry combined.

Fundamental investors who bet against Tesla’s “bubble” have lost a staggering $63 billion shorting the stock since its IPO in 2010.

Something that starts out looking like a bubble could end up being worth a lot, so avoiding all potential bubbles could wind up being very costly to your net worth.

How to Survive (and Thrive) in a Bubble

So, how do you handle bubbles without losing your shirt? The answer lies somewhere between Newton’s despair and Soros’s enthusiasm.

Think of bubbles like the Sirens in Greek mythology.

"The Sirens of Greek mythology are infamous for their deadly ability to lure sailors to their doom. These half-woman, half-bird creatures lived on rocky islands, where they used their enchanting songs and mesmerizing voices to attract sailors, causing them to crash their ships on the jagged coastlines or drown as they drew closer to the irresistible sound."

Just as bubbles appeal to investors' desire for riches, "the Sirens would tap into the deepest desires and longings of their victims."

In Homer’s Odyssey, Odysseus wanted to hear the Sirens’ song but knew the danger. So, he had his crew plug their ears with beeswax and tie him to the mast of his ship. No matter how much he begged, the crew wouldn’t untie him until they were safely past the Sirens’ island.

When it comes to bubbles, you need to be like Odysseus. Want to buy into the hype? Fine—but tie yourself to the mast first. Here’s how:

1. Diversify. Don’t put all your eggs in one bubble. Keep the bulk of your portfolio in more stable, long-term investments like index funds.

2. Hedge. Consider adding a short component to your strategy. If you’re buying into a bubble, make sure you set a stop-loss.

3. Take profits. Don’t get greedy. If you’ve made a windfall from one skyrocketing asset, take some chips off the table and reinvest in a more diversified strategy. You can’t lose money you’ve already cashed out.

This way, you can participate in the wealth creation in bubbles while being hurt less if they burst.

The Bottom Line

Bubbles aren’t going away. They’re an inevitable part of markets, fueled by human psychology and the irresistible allure of easy riches. But instead of trying to avoid them entirely, you can learn to navigate them—carefully, with a healthy dose of skepticism and a plan for when things go south.

Because at the end of the day, bubbles are like fire. Mishandled, they can burn your portfolio to the ground. But harnessed correctly, they can light the way to great fortunes.

About

Inverteum Limited (HK) is a trading firm that specializes in long-short algorithmic strategies to generate returns in both bull and bear markets.

Inverteum has generated 52% annualized returns (39% after fees) since inception.

How We Invest

1. Minimize allocation to individual stocks due to their unpredictability

   Inverteum Capital

   Why Picking Individual Stocks Is a Fool's Game

   The TL;DR version of this post…

   Read more

   a year ago · 21 likes · 27 comments · Inverteum Capital

2. Build the most suitable trading strategy and go all in. Here's a sample trading strategy.

   Inverteum Capital

   158,022% Returns? The Algorithm That Would've Turned $100k Into $158M (Backtest)

   This post is for informational purposes only and does not constitute investment advice. Do your own research and consult with a financial professional before investing…

   Read more

   a year ago · 8 likes · 6 comments · Inverteum Capital

3. Be prepared for bear markets and ensure profitability during bad times by implementing a short selling component to the strategy.

Inverteum Capital

Why All Professional Investment Strategies Should Have a Short Component

So, you’ve been told to buy and hold, right? Just pick some nice long-term investments, sit back, relax, and in 30 years, you’ll be sipping piña coladas on a beach somewhere. It’s the dream. And, sure, markets generally go up over time — we can all agree on that. But there’s a teeny-tiny problem: They don’t always go up. In fact, they go down quite a bi…

Read more

a year ago · 12 likes · Inverteum Capital

There’s a reason hedge fund managers make so much money, and it’s not just because they wear Patagonia vests or have Bloomberg terminals running 24/7. It’s because they have to do two important jobs at once. Well, technically it’s one job—managing money—but money management is actually two jobs: making money (the Chief Investment Officer part) and making sure they don’t lose it all (the Chief Risk Officer part).

If you think about it, these two jobs are fundamentally at odds with each other. The CIO wants to floor the gas pedal, racing to generate the highest possible returns and dreaming of champagne-soaked performance fees. The CRO, on the other hand, is sitting there with their foot hovering over the brake, muttering about volatility and drawdowns and how investors won’t like it if the fund “blows up.” The CIO wants to win the race. The CRO just doesn’t want to die in a fiery crash.

Managing an investment portfolio is like driving a car up a winding mountain road. You want to go as fast as you can without flying off the cliff. Crucially, you can’t have one person pressing the gas (CIO) and another person working the brakes (CRO). That’s how you end up in the kind of situation where the car is wrapped around a tree and everyone’s yelling, “It’s not my fault!”

So hedge fund managers get paid a lot of money because they’re not just controlling the steering wheel and gas pedal; they’re also navigating, braking, and making sure the tires don’t explode.

The Gas and the Brake

Let’s start with the basics.

As an investor, the easiest way to make a lot of money—on paper—is to take on a lot of risk. Load up your portfolio with high-beta stocks and crypto, leverage it to the moon, and hope the market goes up. If it does, congratulations, your returns are through the roof. Of course, if it doesn’t, your fund might be down 80% by the end of the year, and your investors will not be thrilled.

On the flip side, the easiest way to avoid losing money is to take no risk at all. Buy some Treasury bonds or keep your portfolio in cash. You won’t blow up, but you’re also not going to impress anyone with your 4% annualized returns. Investors don’t pay hedge fund fees for Treasury-like performance.

So, the job of a hedge fund manager—whether they’re called the CIO, the CRO, or just “the boss”—is to navigate this tradeoff. They need to generate strong, market-beating returns without taking so much risk that the portfolio implodes. They need to know when to press the gas pedal and when to hit the brakes1.

This is really hard to do! It’s why star hedge fund managers like Ken Griffin, David Tepper, or Steve Cohen can charge 2-and-202 (or more) and still have people lining up to give them money. They’re not just investors; they’re expert proverbial drivers, navigating a dangerous and uncertain road.

Why Splitting the CIO-CRO Roles Doesn’t Work

Given the dual nature of the job—maximize returns, minimize risks—you might think it makes sense to split the responsibilities into two roles. Have one person (the CIO) focus on making money and another person (the CRO) focus on risk management. Let the CIO press the gas and the CRO handle the brakes.

This seems logical. It’s also disastrous.

Let’s go back to the winding mountain road analogy. Imagine you’re in a car where one person controls the gas pedal, and another person controls the brakes. What happens?

Well, for one thing, there’s going to be a lot of arguing. The person with the gas pedal (the CIO) is going to want to go faster—“We’re falling behind! We need to take more risk!” The person with the brakes (the CRO) is going to want to slow down—“This curve looks dangerous! We need to reduce risk!” And if the car does crash, they’re both going to point fingers at each other.

Even if they don’t argue, the incentives are all wrong. The CIO is rewarded for generating returns, so they’re naturally going to push for more risk. The CRO is rewarded for managing risk, so they’re naturally going to push back. And if the CIO has more power—which they almost always do—the CRO’s warnings are likely to be ignored.

In other words, splitting the roles doesn’t create balance. It creates confusion.

The Directly Responsible Individual

The solution, then, is to combine the roles. Make one person responsible for both maximizing returns and managing risks. Make them the driver of the car—the person pressing the gas, working the brakes, and steering around the curves.

This idea is rooted in the concept of the “directly responsible individual” (DRI), which originates from Apple. If something goes wrong, there should be one person who is ultimately accountable. Not two people, not a committee, not some vague sense of shared responsibility. One person.

In a car, that person is the driver. In an investment portfolio, that person should be the fund manager. And just like the driver of a car, who gets injured or dies in the event of an accident, the CIO’s personal net worth should be invested in the same strategy they are using on behalf of their clients3. That “skin in the game” causes fund managers to be doubly cognizant of mitigating risks.

Why This Works

When the same person is responsible for both returns and risks, their incentives are naturally aligned. They can’t push the gas pedal too hard without considering the consequences, because they know they’ll be the one held accountable if the car crashes. They have to think holistically—balancing risk and return in real time, rather than treating them as separate objectives.

This is why the most successful hedge funds don’t separate the CIO and CRO roles. At Bridgewater, Ray Dalio wasn’t just making the investment decisions—he was also thinking deeply about risk. At Berkshire Hathaway, Warren Buffett doesn’t have a separate CRO looking over his shoulder; he’s managing risk himself, whether he’s buying stocks or deploying billions of dollars in capital for acquisitions.4

Contrast this with firms that have struggled with risk management failures. In many cases, these failures can be traced to a star trader with little skin in the game being given a huge amount of capital to manage; if the trade makes money, the trader gets a huge bonus or cut of the profits, but if the trade loses money, the firm gets stuck with the losses5.

When no one is truly in charge of both returns and risks, bad things happen.

The Real Reason Hedge Fund Managers Get Paid So Much

So, why do hedge fund managers get paid so much money? It’s not because they’re just CIOs or just CROs. It’s because they have to be both.

They have to press the gas pedal and work the brakes. They have to balance risk and return in a way that few people can. They have to navigate the winding mountain road of investing with skill, judgment, and accountability.

They’re saddled with an enormous responsibility: achieve market-beating returns while controlling risk on a portfolio of assets worth billions of dollars.6

If they get it wrong—if they take too much risk and the portfolio blows up, or if they play it too safe and underperform the market—they’re the ones who get blamed.

Conclusion

Managing an investment portfolio is hard. It’s not just about making money—it’s about managing risk. And it’s not just about managing risk—it’s about making money.

So, the next time someone complains about how much hedge fund managers make, consider this: Would you feel safe as a passenger in a car where a remote control committee decides when to turn the steering wheel and hit the gas or brake? Or would you rather have one expert driver, navigating the road with skill and accountability?

That’s why hedge fund managers get paid so much money. Because they’re not just investors; they’re drivers who must safely speed on a dangerous mountain road, ensuring the car doesn’t fly off the cliff.

About

Inverteum Limited (HK) is a trading firm that specializes in long-short algorithmic strategies to generate returns in both bull and bear markets.

Inverteum has generated 52% annualized returns (39% after fees) since inception.

How We Invest

1. Minimize allocation to individual stocks due to their unpredictability

Inverteum Capital

Why Picking Individual Stocks Is a Fool's Game

The TL;DR version of this post…

Read more

a year ago · 21 likes · 27 comments · Inverteum Capital

2. Build the most suitable trading strategy and go all in. Here's an example.

Inverteum Capital

158,022% Returns? The Algorithm That Would've Turned $100k Into $158M (Backtest)

This post is for informational purposes only and does not constitute investment advice. Do your own research and consult with a financial professional before investing…

Read more

a year ago · 8 likes · 6 comments · Inverteum Capital

3. Be prepared for bear markets and ensure profitability during bad times by implement a short selling component to the strategy

Inverteum Capital

Why All Professional Investment Strategies Should Have a Short Component

So, you’ve been told to buy and hold, right? Just pick some nice long-term investments, sit back, relax, and in 30 years, you’ll be sipping piña coladas on a beach somewhere. It’s the dream. And, sure, markets generally go up over time — we can all agree on that. But there’s a teeny-tiny problem: They don’t always go up. In fact, they go down quite a bi…

Read more

a year ago · 12 likes · Inverteum Capital

3

In the case of the top 15 highest earning hedge fund managers from the top, across the board, more than half of their earnings came from gains on their own personal investments in their funds.

6

The largest hedge funds have assets worth upwards of tens of billions of dollars.

In fact, if you’re picking individual stocks, you’re probably doing something closer to gambling than investing. As we point out in Why Picking Individual Stocks Is a Fool’s Game, the odds of picking stocks that consistently outperform the market are slim at best. Most stocks fail to beat the broader index, and even professional fund managers, with teams of analysts and statistical models, often fall short.

But let’s say you’re not most people. Let’s say you’re a pro—or at least you think you are. How does one consistently beat the market when picking individual stocks is a fool’s game?

The answer, according to Cliff Asness, the co-founder of quantitative hedge fund AQR Capital and an all-around finance nerd, lies in taking one or both of two primary types of investment risk: concentration risk or leverage risk. Oh, and if you’re really serious about this, you’ll probably also want to get comfortable with shorting, especially during bear markets.

Buffett’s Playbook: Concentration + Leverage

Warren Buffett, the greatest investor of all time, has provided a masterclass in how to beat the market for decades. But contrary to popular belief, Buffett doesn’t just buy stocks and let them magically compound. He operates with a clear set of principles that AQR’s researchers have broken down:

“In essence, we find that the secret to Buffett’s success is his preference for cheap, safe, high-quality stocks combined with his consistent use of leverage to magnify returns while surviving the inevitable large absolute and relative drawdowns this entails. Indeed, we find that stocks with the characteristics favored by Buffett have done well in general, that Buffett applies about 1.6-to-1 leverage financed partly using insurance float with a low financing rate, and that leveraging safe stocks can largely explain Buffett’s performance.”

Translation: Buffett used both concentration risk (in cheap, safe, high-quality stocks) and leverage risk (using insurance float) to generate returns.

Buffett’s strategy involves two key components:

1. Concentration Risk: Buffett has invested in cheap, safe, high-quality businesses—think Apple, American Express, Coca-Cola, Disney, and GEICO. These companies have strong competitive moats, predictable cash flows, and excellent management. But here’s the kicker: all of Berkshire Hathaway’s returns come from just 12 companies1. Buffett is not diversified in the traditional sense. He’s concentrated, and he’s comfortable with that because he knows he’s betting on the best.

2. Leverage Risk: Buffett doesn’t just invest his own money. He uses float—the premiums collected by his insurance companies that won’t need to be paid out immediately—as a form of low-cost leverage. Essentially, he’s borrowing money to invest in high-quality assets, magnifying his returns.

This combination of concentration and leverage has allowed Buffett to outperform the market for decades. Even when he makes mistakes—and by his own admission, most of his capital allocation decisions have been mediocre2—the winners in his portfolio more than make up for the losers.

But Isn’t Leverage Bad?

Ah, leverage. The word itself sends shivers down the spines of risk-averse investors, and for good reason.

“My partner Charlie says there is only three ways a smart person can go broke: liquor, ladies, and leverage. Now the truth is—the first two he just added because they started with L—it’s leverage.”
—Warren Buffett

Buffett’s not wrong. Leverage, when used recklessly, can destroy you. Just ask Bill Hwang, the man behind Archegos Capital. At its peak, Hwang’s family office Archegos managed over $36 billion in assets. But Archegos was leveraged 5-to-1, meaning even a 20% drop in his portfolio would wipe out his equity. Spoiler alert: that’s exactly what happened3.

Buffett, on the other hand, has always used leverage responsibly. His 1.6-to-1 leverage ratio means that it would take a 63% drawdown to wipe out his equity—a far safer margin of safety.

The lesson here is simple: leverage is not inherently bad. When used in moderation and applied to high-quality assets, it can magnify returns in a highly positive way. But if you go full Archegos, don’t be surprised when your portfolio implodes.

Tips

For Everyone

1. Buy High-Quality Assets

The easiest way to do this is with index funds. Index funds, by their nature, contain both good and bad companies, but over time, they increase ownership of the good ones and decrease ownership of the bad ones. Think of it as momentum investing for dummies.

Why It Works: Index funds are typically weighted by market capitalization, meaning they buy more of the stocks that are going up and less of the ones that are going down. To borrow a phrase from Peter Lynch, index funds automatically “water the flowers and cut the weeds.”

2. Be Patient

Beating the market isn’t a sprint; it’s a marathon. The long-term compounding of high-quality assets is where the real magic happens.

For Pros Only

3. Leverage: Borrow to Magnify Returns

Leverage is the ultimate double-edged sword. When used responsibly, it can significantly boost your returns. When used recklessly, it can wipe you out.

Buffett’s use of insurance float is a prime example of how to use leverage responsibly. By borrowing at a low cost, he’s able to amplify his returns without taking on undue risk.

But leverage isn’t just for billionaires with insurance companies. Many hedge funds and professional investors use modest leverage to enhance their returns. The key is moderation. A 1.6-to-1 leverage ratio, like Buffett’s, provides a healthy margin of safety. A 5-to-1 ratio, like Archegos, is a recipe for disaster.

4. Short Selling: Profit in Bear Markets

The third strategy for beating the market is short selling—betting against overvalued assets or the broader market during downturns.

Short selling is not for the faint of heart. It requires a deep understanding of market dynamics, a willingness to go against the crowd, and the stomach to handle sharp losses, particularly during bear market rallies. But when executed correctly, it can protect your portfolio during bear markets and even generate significant profits.

Professional investors often use short selling as a hedge against their long positions, reducing overall portfolio risk. In adverse market conditions, shorting can mean the difference between a small loss and a catastrophic one.

As Why All Professional Investment Strategies Should Have a Short Component points out, incorporating shorting into your strategy is an essential tool for navigating volatile markets.

Conclusion

Beating the S&P 500 is not for the faint of heart. It requires taking risks—concentration risk, leverage risk, or both—and, for the truly ambitious, using short selling to navigate bear markets.

Warren Buffett has shown us that it’s possible to consistently outperform the market, but his success didn’t come without calculated risks. He concentrated his portfolio in high-quality businesses and used leverage responsibly to magnify his returns.

For most investors, the best approach is to buy and hold index funds. But for the pros out there, the path to beating the market lies in understanding the risks, taking them responsibly, and sticking to a disciplined investment strategy.

Get a Sense for How Inverteum Uses Algorithms to Beat the Market

Inverteum Capital

158,022% Returns? The Algorithm That Would've Turned $100k Into $158M (Backtest)

This post is for informational purposes only and does not constitute investment advice. Do your own research and consult with a financial professional before investing…

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About

Inverteum Limited (HK) is a trading firm that specializes in long-short algorithmic strategies to generate returns in both bull and bear markets.

We have generated 52% annualized returns (39% after fees) since inception.

How We Invest

1. Minimize allocation to individual stocks due to their unpredictability

   Inverteum Capital

   Why Picking Individual Stocks Is a Fool's Game

   The TL;DR version of this post…

   Read more

   a year ago · 21 likes · 27 comments · Inverteum Capital

2. Build the most suitable trading strategy and go all in. Here’s a sample trading strategy.

   Inverteum Capital

   158,022% Returns? The Algorithm That Would've Turned $100k Into $158M (Backtest)

   This post is for informational purposes only and does not constitute investment advice. Do your own research and consult with a financial professional before investing…

   Read more

   a year ago · 8 likes · 6 comments · Inverteum Capital

3. Be prepared for bear markets and ensure profitability during bad times by implementing a short selling component to the strategy.

Inverteum Capital

Why All Professional Investment Strategies Should Have a Short Component

So, you’ve been told to buy and hold, right? Just pick some nice long-term investments, sit back, relax, and in 30 years, you’ll be sipping piña coladas on a beach somewhere. It’s the dream. And, sure, markets generally go up over time — we can all agree on that. But there’s a teeny-tiny problem: They don’t always go up. In fact, they go down quite a bi…

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a year ago · 12 likes · Inverteum Capital

Unlike JL Collins though, Inverteum does have its methods to beat VTSAX without picking individual stocks.

Investing in individual stocks is a lot like trying to guess if it’ll rain in a week based on the cloud you see today. Sure, you might get it right once in a while, but if you make a habit of it, you’ll often find yourself standing in the rain without an umbrella. Even the most brilliant minds in finance have been humbled by the market, and yet, there will always be investors who believe they can outsmart it. Why? Because the market is, at its core, just a giant casino. And in a casino, every gambler thinks they have an edge.

There’s always a flavor of the day/week/month stock or asset class. It could be Tesla, Bitcoin, or a collection of AI-driven tech companies that promise to revolutionize every industry from healthcare to agriculture. These flavors are wrapped in narratives that are seductive and, at least for a brief moment, seem undeniable. But that doesn’t make them any less speculative. The thing about individual stock picking is that, after a while, you’ll realize that most of your time is spent chasing after stories rather than profits.

The Market Is a Giant Casino

Tesla short sellers

Let’s talk about Tesla for a moment. It’s a prime example of how the market can defy logic and punish even the most informed investors. Remember when hedge funds were lining up to short Tesla? Some of the smartest, most well-credentialed investors in the world were convinced that the company was overvalued, that Elon Musk’s vision was more pipe dream than reality. These hedge funds weren’t just staffed with amateurs—they were full of MENSA candidates and Ivy League graduates, people who had spent their lives mastering the art of finance. These were people who had made fantastic investment calls in the past. And yet, they got burned.

How badly, you ask? Hedge funds shorting Tesla lost at least $5.2 billion since Donald Trump won the U.S. presidency this year.

And the thing is, these hedge fund managers didn’t lose because they were stupid. They lost because they were too smart. They had seen this story before. They had shorted overhyped companies in the past and made a killing. They had developed pattern recognition skills that had served them well for decades. And they were right—except for one small detail: this time was different.

Tesla wasn’t just another overhyped tech company. It was a cult stock with a visionary leader, a fanatical customer base, and a market that was willing to suspend disbelief. And that was enough to send the stock soaring, despite all the financial models that said it should have crashed.

Going long can be equally value-destroying

But of course, it’s not just the short-sellers who get burned. Going long on individual stocks can be just as perilous, and often in a much more painful way. After all, at least when you short a stock, you know from the start that you’re doing something risky, something contrarian, something that might get you laughed at at cocktail parties. But going long? That’s supposed to be the safe play. You’re betting on growth, on innovation, on the future. You’re betting on the inevitable march of progress.

Or at least, that’s what you tell yourself. But then you wake up one day and realize that you’ve bet on Peloton, Zoom, or Snap, and suddenly it’s not so clear that the future is going to look the way you thought it would. Remember those glory days in 2020 and 2021 when these companies were the darlings of the pandemic trade? Peloton was revolutionizing home fitness, Zoom was going to replace the office, and Snap was... well, Snap was doing whatever Snap does, but investors loved it anyway.

And then? Well, and then the world changed. People went back to gyms, back to offices, and back to ignoring Snap. And the stocks, once flying high, came crashing back to earth, incinerating billions of dollars in market cap along the way.

Even the best of the best stock pickers can make big mistakes. Bill Ackman, one of the highest earning top hedge fund managers in the world, sold out of Netflix in 2022 at the stock's lowest point since 2018.

“I only invest in blue chips”

You might think, fine, avoid the speculative tech nonsense, stick with the blue chips, the stalwarts, the companies that have been around forever and will outlive us all. Surely, those are safe? Well, not quite. Going long on individual stocks, even the supposedly bulletproof ones, can be a one-way ticket to value destruction.

Take a look at 2008, when the Great Recession turned the market into a shredder. AIG, Citigroup, General Motors—household names, pillars of the economy—saw their stock prices collapse like a house of cards in a windstorm. These weren’t fly-by-night startups; these were institutions that had been around for upwards of 100-200 years. And yet, if you were holding those stocks, you were staring at drawdowns of more than 95%. Good luck staying zen through that kind of carnage.

The point is, even the “safe” stocks can test the resolve of the most patient investor, because the market doesn’t care about your faith in a company’s brand or its storied history. Blue-chip doesn’t mean bulletproof. In 2008, the market didn’t care if you were founded in 1812 or 1919; investors lost trillions of dollars.

The Fallacy of Pattern Matching

This brings us to the core issue with stock picking: it’s often based on pattern matching, the idea that if you’ve seen something before, you can predict what will happen next. In the world of finance, this is seductive logic. After all, financial markets do have patterns, and if you can spot them, you can get rich. Or so the thinking goes.

But here’s the problem: sometimes things really are different. The past is not always prologue, and markets have a tricky way of rewriting the rules just when you think you’ve figured them out. Tesla was different. The rise of cryptocurrencies was different. And the next big thing—whatever it is—will probably be different, too.

Even professional investors, with all their resources and experience, fall into this trap. It’s not a question of intelligence. It’s a question of conviction. Hedge funds didn’t lose billions shorting Tesla because they were dumb. They lost because they believed too strongly in their ability to recognize patterns. They had seen this story before, and they were sure they knew how it would end. They just didn’t count on Tesla rewriting the script.

The Science Behind the Gamble

If you’re still not convinced that stock picking is a fool’s game, let’s talk about the data. A study by Hendrik Bessembinder, a finance professor at Arizona State University, found that only about 4% of stocks have significantly outperformed Treasury bills over their lifetimes. Let that sink in for a moment. Out of all the stocks that have traded on U.S. markets between 1926 and 2016, only 4% accounted for nearly all of the net dollar wealth creation. The other 96%? They were, at best, mediocre investments. Many of them lost money.

So, if you’re picking individual stocks, you’re essentially betting that you’ve found one of the 4% that will outperform over the long term. That’s not investing—that’s gambling. And the odds are not in your favor. The house—just like in a real casino—almost always wins.

Yet investors still believe they can beat the odds. After all, they believe they can recognize patterns and spot opportunities that others miss. But as the Tesla short sellers and countless other examples have shown, pattern recognition isn’t enough.

The S&P 500 Problem

If you’re not convinced by the Tesla example or the Bessembinder study, let’s look at some more sobering statistics. The majority of professional fund managers—who are paid handsomely to pick stocks—failed to beat the S&P 500 in 20 of the last 23 years (87% of the time).

So, if professionals, with all their resources and expertise, can’t consistently beat the market, what hope does the average retail investor have? The answer is: not much.

The Macro Disadvantage

Another issue with picking individual stocks is that it leaves you vulnerable to macro conditions. If you’re holding a portfolio of individual stocks, how do you prepare for a bear market? How do you hedge against inflation, rising interest rates, or geopolitical instability? The reality is that you probably don’t.

You’re too focused on picking the right companies, and you assume that if you’ve chosen well, you’ll be fine in the long run. This is the logic behind the popular investing mantra: “time in the market beats timing the market.” And while there’s some truth to that, it’s not the whole story.

The problem is that when you’re holding individual stocks, it’s psychologically difficult to make adjustments when macro conditions change. You’ve invested so much time and energy into researching and picking these stocks that it’s hard to let go, even when the market is screaming at you to do so.

And let’s be honest: most people who pick individual stocks have a certain amount of unwavering conviction in their picks. Whether you’re long or short, you probably believe that you’ve found something that everyone else has missed. You’re not easily swayed by volatility, because you’re certain that you’re right and the market is wrong. Unfortunately, this kind of thinking can lead to stubbornness, and stubbornness can lead to big losses.

The right investment strategy should shift and be able to benefit when macro conditions worsen, but such a strategy is difficult to implement in a portfolio filled with individual stocks.

Inverteum Capital

Why All Professional Investment Strategies Should Have a Short Component

So, you’ve been told to buy and hold, right? Just pick some nice long-term investments, sit back, relax, and in 30 years, you’ll be sipping piña coladas on a beach somewhere. It’s the dream. And, sure, markets generally go up over time — we can all agree on that. But there’s a teeny-tiny problem: They don’t always go up. In fact, they go down quite a bi…

Read more

a year ago · 9 likes · Inverteum Capital

The Allure of “Wonderful Companies at Fair Prices”

There’s a certain romance to the idea of finding “wonderful companies at fair prices” and holding them forever. This is the philosophy espoused by Warren Buffett and other value investors, and it has a certain appeal. After all, who wouldn’t want to own a piece of a company like Apple or Google and watch their investment grow over the years?

But here’s the thing: even Buffett has admitted that he’s made mistakes. And for every Apple or Google that you successfully pick, there are dozens of other companies that will disappoint you. The problem is that the world changes, industries evolve, and what seems like a wonderful company today might not look so wonderful in a few years.

The Case for Index Funds

So, if picking individual stocks is a fool’s game, what’s the alternative? The answer is simple: index funds. Rather than trying to beat the market, index funds allow you to be the market. By investing in a broad, diversified portfolio of stocks, you can capture the market’s overall returns without having to worry about picking winners and losers.

Yes, index funds are boring. They don’t offer the thrill of picking the next Tesla or Bitcoin. But they also don’t offer the heartbreak of losing your nest egg on a bad bet. And over the long term, they’ve consistently outperformed the vast majority of active investors.

One reason indexes are so devilishly hard to beat is that they're inherently momentum-driven, in a way that's actually pretty sensible. As great companies overperform, their portfolio weight grows larger, while underperformers get quietly removed from the index. It's like the index is constantly rebalancing itself, adding to winners and cutting losers. Peter Lynch once quipped that some investors "pull out the flowers and water the weeds" by selling their winners and holding onto their losers. Indexes, on the other hand, do the opposite: they water the flowers and cut the weeds. They're not emotional, they're not sentimental, and they're not trying to be clever. They just follow the momentum, and over time, that tends to work out pretty well.

So, the next time someone tells you about the hot stock they just bought, remember: the stock market is a giant casino, and in a casino, the house almost always wins in the end. Instead of trying to beat the odds, why not join the house?

You Don’t Need to Pick Stocks to Beat the Market (Seriously)

Here’s a fun thing: you can generate market-beating returns without playing stock market bingo. That’s right. No need to divine the perfect entry point for Palantir or to pretend your DCF model for Nvidia is anything more than spreadsheet fan fiction.

Consider this: a simple algorithmic strategy—composed of a VIX ETF (for mean reversion corrections when the bull market is overbought), a 3x leveraged Nasdaq-100 ETF (for bull markets), and a plain old S&P 500 ETF (for bear markets)—produced a 63% annualized return over 13.5 years. That’s not a typo. That’s one-thousand-five-hundred-eighty-one times your money. 1581x. If you started with $100,000, you’d now be staring down the barrel of $158 million and wondering whether “yacht” is too cliché.

Inverteum Capital

158,022% Returns? The Algorithm That Would've Turned $100k Into $158M (Backtest)

This post is for informational purposes only and does not constitute investment advice. Do your own research and consult with a financial professional before investing…

Read more

a year ago · 4 likes · 4 comments · Inverteum Capital

Now, yes, yes, yes—past performance is no guarantee of future returns. Of course. Backtesting has its flaws, but there's a reason why the most successful hedge fund manager of all time, Jim Simons, swore by it, mandating that no one could override the computer’s decision.

"The only rule is we never override the computer. No one ever comes in any day says, 'The computer wants to do this. That's crazy. We shouldn't do it.' You don't do that because you can't simulate that. You can't study the past and wonder whether the boss was gonna come in and change his mind about something." - Jim Simons

Your flesh and blood brain simply does not have the historical patterns and data that the computer does. What seems crazy to you may be exactly the right thing to do given certain conditions. Conversely, what seems right to you might be precisely the wrong thing to do.

To be clear: this isn’t magic. It’s not free money. But it is a reminder that the real game isn’t about predicting which stock will become the next Tesla. It’s about using tools that are already in front of you, wrapping them in some logic, and letting compounding do the heavy lifting.

So no, you don’t need to pick stocks. You just need to stop pretending you're Buffett with a Robinhood account and start thinking like a quant with a backtested methodology you thoroughly understand.

About

Inverteum Limited (HK) is a trading firm that specializes in long-short algorithmic strategies to generate returns in both bull and bear markets.

Inverteum has generated 50%+ annualized returns since inception.

How We Invest

1. Minimize allocation to individual stocks due to their unpredictability

Inverteum Capital

Why Picking Individual Stocks Is a Fool's Game

The TL;DR version of this post…

Read more

a year ago · 21 likes · 27 comments · Inverteum Capital

2. Build the most suitable trading strategy and go all in. Here's an example.

Inverteum Capital

158,022% Returns? The Algorithm That Would've Turned $100k Into $158M (Backtest)

This post is for informational purposes only and does not constitute investment advice. Do your own research and consult with a financial professional before investing…

Read more

a year ago · 8 likes · 6 comments · Inverteum Capital

3. Be prepared for bear markets and ensure profitability during bad times by implement a short selling component to the strategy

Inverteum Capital

Why All Professional Investment Strategies Should Have a Short Component

So, you’ve been told to buy and hold, right? Just pick some nice long-term investments, sit back, relax, and in 30 years, you’ll be sipping piña coladas on a beach somewhere. It’s the dream. And, sure, markets generally go up over time — we can all agree on that. But there’s a teeny-tiny problem: They don’t always go up. In fact, they go down quite a bi…

Read more

a year ago · 12 likes · Inverteum Capital

Bear Markets: A Not-So-Fun Fact

Let’s start with some cold, hard history. If you’ve been investing for five years, congrats! You’ve likely spent one of those years in a bear market, watching your portfolio slowly deflate like a sad birthday balloon. The "buy-and-hold" crowd says, "Don’t worry, it’ll recover!" And yeah, sure, it will—eventually.

The Math of Loss: It’s Worse Than You Think

Here’s the thing about losses: they’re sneaky.

• When you lose 20%, it’s not enough to just make 20% back to break even. You need 25%.

• A 30% loss? You’ll need a 43% return.

• Lose 50%, and you need to double your money just to get back to where you started.

• And heaven help you if you lose 75%—you’ll need a 300% return to recover.

That’s the kind of math that makes you question all your life choices.

Example 1: The S&P 500’s Rough Days

Since 1962, the S&P 500 has had some pretty brutal drawdowns—up to 52% in 2008-2009. You would need a 108% return just to get back to even1. Imagine losing half your money, then having to double it to break even. You don’t need to be a quant to know that’s not fun.

Example 2: Japan’s Nikkei 225 — A Horror Story

Then there’s Japan’s Nikkei 225, which dropped a staggering 80% in the 1990s. You’d need a 400% return just to get your original money back. That’s not investing; that’s waiting for a miracle2.

Compounding: The Reverse Version

You’ve probably heard about the magic of compounding — the way your money grows exponentially over time. But what no one tells you is that during bear markets, compounding works against you. Instead of snowballing into a bigger pile of money, your losses compound downward, especially if you’re pulling money out, say, for retirement. Every withdrawal during a downturn means selling more shares at lower prices, which is basically like eating your seed corn.

Beyond Buy and Hold: There’s More to Life Than Waiting

"Buy and hold" is great and all, but it’s not a panacea. The market may rise over the long term, but when you’re stuck in a nasty drawdown, a few things happen that no one really talks about:

1. Psychological Freak-Outs: Watching 30% of your portfolio vanish is not conducive to calm, rational thinking. People panic and sell at the worst possible times because, well, they’re human.

2. Time: Recovery from major losses can take years. The Nikkei 225 took decades to recover.

3. Opportunity Cost: While your money languishes in a bear market, it’s not doing anything else. You’re missing out on potential gains elsewhere, or even just better uses for that capital.

Warning: Short Selling is Not for the Faint of Heart

Now, let’s talk about short selling. It sounds like the perfect solution to all of this, right? When markets go down, you make money. Easy peasy. Except, no. Short selling can be like playing with fire. It’s for the pros, the folks who spend their days glued to screens, poring over market data, looking for trends, and generally living in a permanent state of stress. If you’re not one of those people, maybe stick to index funds.

Here’s why: bear market rallies are real and vicious. You think the market is going to keep tanking, and then suddenly, it pops back up, and your short position is toast. Not fun.

But If You’re a Pro and You Want to Short...

Done right, a short component can actually help you in a few ways:

1. Protection: Shorting can act as a hedge, so when your long positions are getting clobbered, your shorts are making money. It’s like having an umbrella in a storm — you’re still wet, but at least you’re not soaked.

2. Profit: If you time it right, you can actually make money as the market falls. This is the part everyone likes to talk about, but it’s also the part that’s hardest to pull off.

3. Faster Recovery: If your short positions limit your losses, you don’t need to make as much money on the way back up to recover. It’s the difference between needing a 50% gain versus needing a 100% gain.

Short Strategy Implementation Options

There are a few ways to incorporate short positions into your portfolio, depending on how much of your sanity you’re willing to sacrifice:

• Direct Short Selling: You borrow shares and sell them, hoping to buy them back cheaper later. This is risky, requires a margin account, and needs constant attention.

• Inverse ETFs: These are easier for retail investors. They go up when the market goes down, but they have quirks like daily rebalancing that can mess with long-term returns.

• Put Options: These give you the right to sell at a set price. The risk is defined, but time decay can eat away at your gains if the market doesn’t move fast enough.

• Market-Neutral Strategies: These involve balancing long and short positions to reduce exposure to overall market movements. They’re complex and often require professional management, but they can help smooth out volatility.

Risk Management: The Buzzkill You Need

Don’t get cocky. Implementing a short strategy without proper risk management is like driving without brakes; it might be fun for a while, but it won’t end well. Here’s what you need to keep in mind:

• Position Sizing: Don’t go all-in on any one short. Keep your exposure limited and spread it around.

• Stop-Loss Discipline: Know when to get out. Set exit points and stick to them.

• Diversification: Don’t just bet against one sector. Spread your shorts across industries, market caps, and geographies.

Case Studies: The Good, the Bad, and the Ugly

1. The 2008 Financial Crisis

The global financial crisis demonstrated how quickly market conditions can deteriorate. The S&P 500's 52% drawdown devastated many traditional portfolios, while investors with short exposure were able to offset losses or even profit during the downturn. The most famous example was profiled by Michael Lewis’ The Big Short, where a set of maverick investors3 bet against the housing bubble and made out like bandits.

2. The Dot-com Bubble

The technology sector's collapse in 2000-2002 showed how even seemingly unstoppable market segments can experience profound reversals. Investors who maintained short positions in overvalued technology stocks protected their capital and profited from the sector's eventual return to reasonable valuations.

3. The Japanese Experience

The Nikkei 225's collapse serves as a stark reminder that markets can remain depressed for extended periods. The index's 80% drawdown and decades-long recovery period highlights the importance of capital preservation through market cycles.

Conclusion: Don’t Be a Passive Victim

Bear markets happen. They’re painful, and they last longer than anyone wants. Ignoring them and hoping for the best isn’t a strategy. The math of losses is brutal, and the road to recovery is long. If you’re not preparing for the bad times, you’re not really preparing at all. Shorting can be part of a larger, more resilient plan—but only if you do it carefully.

Successful investing isn’t just about riding the bull markets. It’s about surviving the bears too. In an environment where markets can spend years in decline and recovery periods can span decades, the ability to profit from falling markets is not merely advantageous; it is essential for long-term investment success.

The World’s Largest SWF Has Added a Short Component (March 2025)

Long opposed to hedge funds due to high fees, even Norway's giant $1.7 trillion sovereign wealth fund has decided it needs a short component in its portfolio.

FT reports:

Norway’s $1.8tn sovereign wealth fund has made its first investment with an external hedge fund betting on rising and falling stock prices, and plans to allocate billions of dollars more to this strategy as it tries to boost returns. […]

NBIM’s move comes as some investors grow increasingly concerned that equity market valuations look stretched and that simply owning a long-only portfolio of stocks may no longer be the best way to make money from markets.

The Index is 36% Tech, For Better or Worse (Nov 2025)

One big issue today with indexing, along with all the risks mentioned above, is that 36% of the S&P 500 is now technology, and nearly all of that is the Magnificent 7. This concentration is being powered by a tidal wave of investor optimism over AI, which some people are calling a bubble.

When you buy an S&P 500 index fund today, more than one-third of your money is going into a bet that the AI party will continue. When this party eventually ends, and it will (parties always do), the multiples for all these companies will compress. That will drag the entire index down. Your safe, “boring” index fund will not provide much protection from the fallout.

This is another, perhaps a more 2025, reason why a purely long-only strategy can be a bit naive. If your main diversification tool, the index itself, is concentrated, then you are exposed. An integral part of an investment strategy must therefore be the ability to short; you need a way to bet against the very thing everyone else is betting on, if only to save yourself when the consensus turns out to be wrong.

About

Inverteum Limited (HK) is a trading firm that specializes in long-short algorithmic strategies to generate returns in both bull and bear markets.

We have generated 52% annualized returns (39% after fees) since inception.

How We Invest

1. Minimize allocation to individual stocks due to their unpredictability

   Inverteum Capital

   Why Picking Individual Stocks Is a Fool's Game

   The TL;DR version of this post…

   Read more

   a year ago · 21 likes · 27 comments · Inverteum Capital

2. Build the most suitable trading strategy and go all in. Here’s an example.

   Inverteum Capital

   158,022% Returns? The Algorithm That Would've Turned $100k Into $158M (Backtest)

   This post is for informational purposes only and does not constitute investment advice. Do your own research and consult with a financial professional before investing…

   Read more

   a year ago · 8 likes · 6 comments · Inverteum Capital

3. Be prepared for bear markets and ensure profitability during bad times by implement a short selling component to the strategy

Inverteum Capital

Why All Professional Investment Strategies Should Have a Short Component

So, you’ve been told to buy and hold, right? Just pick some nice long-term investments, sit back, relax, and in 30 years, you’ll be sipping piña coladas on a beach somewhere. It’s the dream. And, sure, markets generally go up over time — we can all agree on that. But there’s a teeny-tiny problem: They don’t always go up. In fact, they go down quite a bi…

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a year ago · 12 likes · Inverteum Capital

I don’t mean “hard” in the way school might have been hard when you forgot to study for a physics exam or had to pull an all-nighter to finish a term paper. I mean “hard” in the sense that it’s mostly thankless, often lonely, and usually unpaid for years. It’s the kind of thing that weeds people out not because they aren’t capable, but because they don’t want it badly enough.

This is why your why matters. If you’re doing it for the money, status, or recognition, you probably won’t push through the inevitable obstacles: rejection, failure, and long stretches of time when it feels like no one cares about what you’re doing. You’ll burn out. You’ll quit. And you’ll probably be better off for it because, frankly, if you don’t love the thing you’re building so much that you’d do it for free, you’re not going to survive the grind of getting it off the ground.

The best entrepreneurs aren’t the ones chasing cash or clout. They’re the ones who can’t imagine doing anything else. They’re the ones who would keep going even if no one noticed, because they’re obsessed with the work itself.

MrBeast’s Story

Jimmy Donaldson, better known as MrBeast, is the most-watched YouTuber in the world. His videos routinely rack up tens of millions of views, and his channel has become a juggernaut with hundreds of millions of subscribers. He’s built an empire by giving away millions of dollars, staging elaborate stunts, and creating a level of spectacle that feels like a mix of Willy Wonka and Elon Musk.

But the MrBeast you see today—the shiny, wildly successful version—didn’t just show up one day and take over YouTube. His journey was messy, slow, and deeply unglamorous.

In the foreword of the book The YouTube Formula, MrBeast wrote:

“When I was a kid, I watched YouTube all the time. It was always my dream job. I didn’t want to be an astronaut or a doctor—I couldn’t envision a world where I wasn’t a YouTuber.”

He started his channel in 2012. In his first year, he got exactly 40 subscribers. Not 40,000. Not 4,000. Forty. By the end of his second year, after posting over 100 videos, he’d grown that number to a whopping 350 subscribers.

If you’d posted 100 YouTube videos and only gotten 350 subscribers in two years, would you keep going? Most people wouldn’t. Most people would quit.

But MrBeast didn’t quit because he wasn’t doing it for the status. He was doing it because he loved making videos. He was obsessed with it. He didn’t care that few were watching; he just wanted to keep improving.

MrBeast’s advice to aspiring YouTubers:

“If you are just getting started on YouTube, do not expect to pull any type of viewership in your first year. If this isn't something you can accept, don't start. But if you can, then you need to do this: make 100 videos. It doesn't matter what they are because they will be terrible, but do something you like doing. Your first 10 videos will be garbage. Then make 10 more. These will also be garbage, and so will the next 10. But eventually, things will start to improve. You'll get better little by little. The best way to improve your content is to make content and see what people like.”

As his subscriber graph since 2012 shows, it took MrBeast five years of consistently posting videos to see any real progress with YouTube. Five years of making videos for hundreds or thousands of viewers at most. Five years of experimenting, learning, and failing.

Now, of course, he’s the biggest YouTuber in the world. But that success didn’t come from chasing views or money. It came from loving the process so much that he was willing to endure years of obscurity just to get better at it.

The Trap of School for Smart People

Here’s the thing about smart people: they’re good at school.

They learn early on that if they apply themselves, they can get good results. Study hard, do the homework, ace the test, and you’ll be rewarded with an A (and maybe a gold star, if your teacher is particularly generous).

The problem is that school trains you to persist even when you have no passion. It teaches you that success is about grinding through things you don’t care about to get to the reward at the end.

In the real world, that strategy doesn’t work.

Unlike school, success in life doesn’t come in a semester or even a year. It takes years—sometimes a decade—of consistent effort. Think about MrBeast. It took him five years to get any traction on YouTube. Five years of grinding with no guarantee of success.

If you don’t genuinely love what you’re doing, that kind of timeline is unbearable. You’ll burn out. You’ll quit. And honestly, you should, because why would you spend years of your life grinding away at something you don’t enjoy?

This is why chasing hot trends or doing things just for the money is a losing strategy. If you’re only in it for the potential payout, you’ll bail the second things get hard (and they will get hard). But if you’re doing something you love—something you’d do for free—you’ll keep going even when the rewards seem impossibly far away.

The best test of whether or not you truly enjoy something is this: if you had $1 million in the bank and 10 years left to live, would you still do it? If the answer is no, you’re probably in the wrong field.

The (Lack of) Alternatives

One of the reasons MrBeast was able to stick with YouTube for so long without success is that he felt like he didn’t have a better alternative.

Success at any endeavor is inversely correlated with the quality of your best alternative. If you have a cushy job waiting for you or a fallback plan that’s easier and more lucrative than your current grind, it’s going to be hard to resist jumping ship when things get tough.

MrBeast didn’t have that. YouTube wasn’t just his Plan A; it was his only plan. He couldn’t envision a world where he wasn’t a YouTuber. That gave him the kind of singular focus most people never achieve.

This is a hard truth about entrepreneurship: in the beginning, it’s usually unpaid, and often it’s actively costing you money. If you don’t love the work for its own sake, you’re going to quit the second something better comes along.

This is why passion matters. It’s not just a feel-good cliché; it’s a survival mechanism. If you’re not obsessed with what you’re building, you won’t make it through the lean years.

Luck: The Invisible Hand of Success

It would be misleading to say that passion and persistence alone were enough for success. Luck matters too.

Take MrBeast, for example. Yes, he worked obsessively for years, churned out hundreds of videos, and improved his craft relentlessly. But he also happened to start his YouTube journey in the mid-2010s, a moment in time that was uniquely favorable for what he was trying to do.

Back then, YouTube was a different place. It wasn’t yet the hyper-saturated, hyper-competitive platform it is today. People weren’t dropping out of college to start YouTube channels en masse, and being a “content creator” wasn’t yet a mainstream career aspiration. The ecosystem was smaller, the stakes were lower, and the barrier to entry was higher—not because it was harder to create videos, but because fewer people were even trying.

And here’s the kicker: back in those days, if someone subscribed to your channel, they’d actually watch your videos. Shocking, I know. You’d post a video, and your subscribers would, for the most part, see it in their feeds and click on it. Today, that dynamic has shifted. YouTube has become so saturated with creators that the competition for viewer attention is ferocious. People are much more reluctant to subscribe to a channel now, and even if they do, the odds that they’ll watch your next video are significantly lower.

If MrBeast started his channel today with the exact same strategy he used back then, would he still succeed? Probably. He’s clearly brilliant at what he does, and his obsessive focus on improvement would likely carry him far. But would he dominate YouTube to the same extent that he has? Almost certainly not. The landscape has changed.

There Are Always Opportunities

But don’t let the importance of luck in success demoralize you. There are always opportunities in our global free market economy to apply human ingenuity.

"Within every bad idea is a kernel of a good idea waiting to come out."
- Eric Ries, The Lean Startup

PayPal started out as a way to send money between Palm Pilots (Confinity), like Venmo today.

Microsoft started out building computers to process traffic data (Traf-O-Data).

YouTube started as a dating site.

Instagram started out as a mobile check-in app, like Foursquare.

The list goes on.

Inevitably, in the process of working on your idea, you come across promising ideas that allow you to apply your passion and persistence but offer you greater returns and a higher likelihood of success. But if you’d never gotten started, you never would’ve come across this better idea in the first place.

Or as they say, the harder you work, the luckier you get.

The Meaning of Life

“Death is the destination we all share. No one has ever escaped it.” - Steve Jobs

It’s a grim truth, but it’s also freeing. If the end is the same for all of us, what really matters in the time we have?

From where I sit—and I’m borrowing heavily from Greek philosophers here—there are really only two things that matter:

1. How much you enjoyed your life and became the best version of yourself. The Greeks called this eudaimonia. It roughly translates to happiness, but that doesn’t quite capture the full meaning. It’s more about flourishing—living a life that feels deeply fulfilling and authentic.

2. The positive impact you had on others. Did you leave the world a little better than you found it? Did you create something meaningful? Did you help people?

The journey is the reward. If you’re slogging through something you hate just to reach some mythical finish line where everything will suddenly be perfect, you’re doing it wrong.

MrBeast didn’t start his YouTube channel because he thought it would make him rich or famous. He started it because he loved making videos. That love carried him through years of obscurity, and it’s what continues to drive him today. Even now, with all his success, he reinvests almost everything he makes back into his videos. He’s not chasing profits; he’s chasing the thrill of creating something amazing.

So, Would You Keep Going?

If you’d posted 100 YouTube videos and only gotten 350 subscribers in two years, would you keep going, the way MrBeast did?

If the answer is no, that’s fine. It’s better to know that now than to waste years of your life on something you don’t truly care about. But if the answer is yes—if you’d keep going even if few cared—then maybe you’ve found your thing.

The best way to be successful is to do something you’d do for free. Not because money and status don’t matter (they do), but because the people who love the work are the ones who stick with it long enough to get good at it.

That’s the secret. It’s not just about talent, luck, and timing. It’s about showing up every day and doing the work because you can’t imagine doing anything else.

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Inverteum is a proprietary trading firm that specializes in long-short algorithmic strategies to generate returns in both bull and bear markets. We strategically short sell and opportunistically deploy leverage with the aim of consistently beating the S&P 500.

"Despite some severe interruptions, our country's economic progress has been breathtaking. Our unwavering conclusion: Never bet against America." - Warren Buffett

Look, Warren Buffett says don't bet against America. Fine. Sensible enough in a folksy, grandfatherly kind of way. But let's be real, America isn't some monolithic, unchanging entity. It's a messy, dynamic system, and what drives it, what drives everything, is human ingenuity.

That’s not confined to any one country, let alone a zip code in California. Silicon Valley is a state of mind—a global, interconnected network of caffeinated strivers trying to build the future, one line of code, one venture capital pitch deck at a time.

How do you invest in human ingenuity? You buy companies. The messy, ambitious, occasionally-delusional companies listed on stock exchanges worldwide. They’re the vehicles for this ingenuity, the engines of progress.

Now, what happens when you bet against ingenuity? You load up on "safe" assets. Cash, real estate, commodities. You're essentially saying, "I bet humans won't figure out a better way to do things." And history, my friends, is a long, hilarious graveyard of people who made that bet.

Examples of betting against human ingenuity by buying “safe” assets

1) Cash

Take cash. A dollar from 1913 buys you…well, not much a century later. It's lost 96% of its value!

Take cash. A dollar in 1913 buys you… well, not much in 2023. It's lost 96% of its value! Meanwhile, the Dow is up, what, like a bazillion percent since then? (Okay, 69,247%, but who’s counting?).

Inflation, you see. Governments need inflation. It greases the wheels, encourages spending, and quietly erodes their mountain of debt. Great for the economy, terrible for your cash hoard.

2) Real estate

Then there’s real estate. Remember San Francisco? Prime office space for the fast-growing tech industry, the hottest ticket in town. Then boom, pandemic. Suddenly, Zoom calls are a thing, and those gleaming towers are ghost towns. Values down 80% and vacancy rates through the roof, skyrocketing from 3% in 2019 to 30% in 2023. Oops.

Residential real estate? Demographics, remote work, zoning reform… all these forces swirling around, making it a much more complicated bet than it seems. Ingenuity finds a way, sometimes in ways you don't expect.

3) Commodities

The best performing commodities in one year can be the worst performers in the following year. 

• 2014 -> 2015: nickel dropped from #2 (+7%) to last (-42%)

• 2015 -> 2016: lithium dropped from #1 (+187%) to second last (-9%)

• 2016 -> 2017: natural gas went from #3 (+59%) to last (-21%)

• 2017 -> 2018: lithium went from #2 (+41%) to last (-55%)

• 2019 -> 2020: oil went from #2 (+34%) to last (-21%)

• 2020 -> 2021: silver went from #1 (+48%) to second last (-12%)

• 2021 -> 2022: coal dropped from #2 (+161%) to last (-48%)

• 2022 -> 2023: lithium, nickel, and natural gas fell from #1 (+72%), #2 (+43%), and #3 (+20%) respectively to first (-81%), second (-45%), and third last (-44%)

Taleb nailed it: shortages lead to gluts. High prices incentivize innovation.

Expensive coal? Hello, natural gas.

Expensive oil? Electric cars.

Expensive nickel for NCM (nickel-cobalt-manganese) batteries? LFP (lithium-iron-phosphate) batteries to the rescue.

Expensive lithium? Scientists are already tinkering with sodium-ion batteries.

Commodities are a zero-sum game. You're betting on scarcity, and ingenuity is constantly working to undermine you.

The power of human ingenuity

The real magic, the only truly appreciating asset in the long run, is human ingenuity itself. It's the ultimate exponential curve.

Human ingenuity is the only resource on the planet that gets more valuable over time, as humans discover new and better ways to do more with less.

Cash, real estate, commodities – those are the "less and less." Companies1, driven by human ingenuity, capture the "more and more."

Look at the S&P 500. Sure, it has its ups and downs, its bear markets and corrections. But the long-term trend? Relentlessly up. 1,907% over the last 30 years. A 10.52% compounded annual growth rate.

That’s the power of human ingenuity, compounded over time. So, yeah, don't bet against America. But more importantly, don't bet against the relentless, chaotic, beautiful force of human ingenuity2. It’ll eat you alive.

About

Inverteum Limited (HK) is a trading firm that specializes in long-short algorithmic strategies to generate returns in both bull and bear markets.

We have generated 52% annualized returns (39% after fees) since inception.

How We Invest

1. Minimize allocation to individual stocks due to their unpredictability.

   Inverteum Capital

   Why Picking Individual Stocks Is a Fool's Game

   The TL;DR version of this post…

   Read more

   a year ago · 21 likes · 27 comments · Inverteum Capital

2. Build the most suitable trading strategy and go all in. Here’s a sample trading strategy.

   Inverteum Capital

   158,022% Returns? The Algorithm That Would've Turned $100k Into $158M (Backtest)

   This post is for informational purposes only and does not constitute investment advice. Do your own research and consult with a financial professional before investing…

   Read more

   a year ago · 8 likes · 6 comments · Inverteum Capital

3. Be prepared for bear markets and ensure profitability during bad times by implementing a short selling component to the strategy.

   Inverteum Capital

   Why All Professional Investment Strategies Should Have a Short Component

   So, you’ve been told to buy and hold, right? Just pick some nice long-term investments, sit back, relax, and in 30 years, you’ll be sipping piña coladas on a beach somewhere. It’s the dream. And, sure, markets generally go up over time — we can all agree on that. But there’s a teeny-tiny problem: They don’t always go up. In fact, they go down quite a bi…

   Read more

   a year ago · 12 likes · Inverteum Capital

1

Obviously, there are bear markets where stocks go down, but the long term trend is unequivocally up.

S&P 500 performance over last 30 years: +1,907% return for a 10.52% CAGR (compounded annual growth rate)

2

Unless you’re in a bear market, in which case you should short, but always make sure to cover the position in time because human ingenuity will eventually win in the end.

Inverteum Capital

Why All Professional Investment Strategies Should Have a Short Component

So, you’ve been told to buy and hold, right? Just pick some nice long-term investments, sit back, relax, and in 30 years, you’ll be sipping piña coladas on a beach somewhere. It’s the dream. And, sure, markets generally go up over time — we can all agree on that. But there’s a teeny-tiny problem: They don’t always go up. In fact, they go down quite a bi…

Read more

a year ago · 14 likes · Inverteum Capital

Piketty uses 250 years of economic data to argue that under free market capitalism, inequality tends to worsen when the rate of return on capital exceeds overall economic growth, leading to concentration of wealth.

He contends this increasing inequality inherent in capitalism risks democratic values unless policies like a progressive global wealth tax intervene.

The Statistics

We are constantly inundated by the latest statistics on inequality.

Just to name a few:

1. The top 1% of the global population owns 38% of the world’s wealth, while the bottom 50% owns only 2% of the global wealth.

   

2. It's even more unequal in the United States, where the top 1% hold 40.5% of the wealth.

   

3. The bottom 50% of the Americans have a total wealth of just $3.6 billion.

   

Put another way, the combined wealth of the bottom 167 million Americans wouldn't even make the Bloomberg Billionaires list, where the world's 500th richest person, Patrick Collison as of Nov 15, 2023, has a $5.1 billion net worth.

These 167 million Americans have the same combined amount of wealth ($3.6 billion) as the 314th richest American does alone.

Just one low single-digit billionaire, e.g. Donald Trump's son-in-law's younger brother Josh Kushner, has as much wealth to his name as the bottom 167 million Americans combined.

Single digit billions is far lower than the wealth of Jeff Bezos, Elon Musk, Bill Gates, Warren Buffett, or any of the extremely wealthy billionaires with household names, whose wealth is dozens of times more. This is Josh Kushner's wealth alone.

The left sees this massive inequality as a sign to tax the rich, the 1%.

The right sees massive inequality as a sign of the lazy, entitled welfare class (i.e. Romney’s 47%) refusing to work, instead preferring to rely on the government for handouts.

No one cares to look past these dire statistics and focus on what unites us, the 100%.

The Internet Unites Us

What's great about this country is that America started the tradition where the richest consumers buy essentially the same things as the poorest. You can be watching TV and see Coca-Cola, and you know that the President drinks Coke, Liz Taylor drinks Coke, and just think, you can drink Coke, too. A Coke is a Coke and no amount of money can get you a better Coke than the one the bum on the corner is drinking. All the Cokes are the same and all the Cokes are good. Liz Taylor knows it, the President knows it, the bum knows it, and you know it.

- Andy Warhol, The Philosophy of Andy Warhol (1975)

The Internet has spread this Coca-Cola phenomenon to far more products.

Rich people use the same Google, YouTube, Twitter/X, TikTok, Substack, and ChatGPT1 as poor people do.

Poor kids who have a smartphone have access to the world's smartest, most knowledgeable tutor (ChatGPT), whose abilities triple every two years2.

Imagine what is possible in a world where every curious child has the world's knowledge at their fingertips, where they can ask a question to AI Warren Buffett or Elon Musk and get a great answer instantly based on all their published content and life experiences.

Historically, the guidance of highly educated mentors was a privilege limited to only the very rich and well-connected. 

Today, with AI, everyone—rich or poor, prominent or unknown—can have their own personalized mentor.

The Internet is the Ultimate Mentor

In his book Mastery, Robert Greene talks about how you need mentors to achieve mastery.

Greene goes as far as to explicitly discourage learning primarily from books, the only source of information for an obscure but ambitious young person before the Internet.

The information in books is not tailored to your circumstances and individuality; it tends to be somewhat abstract. When you are young and have less experience of the world, this abstract knowledge is hard to put into practice.

The Internet provides specific guidance for putting abstract knowledge into practice because unlike with text, tacit knowledge can be transferred through video.

YouTube University: Tuition-Free and Open 24/7

Sociologist and political consultant Samo Burja writes: 

Critically overlooked is its [YouTube's] unlocking a form of mass-scale tacit knowledge transmission which is historically unprecedented, facilitating the preservation and spread of knowledge […]

Tacit knowledge is knowledge that can’t properly be transmitted via verbal or written instruction, like the ability to create great art or assess a startup. […]

Before video became available at scale, tacit knowledge had to be transmitted in person, so that the learner could closely observe the knowledge in action and learn in real time — skilled metalworking, for example, is impossible to teach from a textbook. […]

Learners who wish to acquire tacit knowledge, but who are unable to figure things out on their own, are therefore limited by their access to personal observation of skilled people.

Massively available video recordings of practitioners in action change this entirely. Through these videos, learners can now partially replicate the master-apprentice relationship, opening up skill domains and economic niches that were previously cordoned off by personal access.

In his article the YouTube learning machine, Trung Phan mentions how 19 year old NBA players today are demonstrating basketball skills previously perfected by 30+ year old players, asserting that this is largely due to the rise of YouTube and how it has enabled aspiring young players to closely mimic the plays of the best NBA players.

Cameroon-born "Joel Embiid — the 7’0 star centre for the Philadelphia 76ers — credits YouTube for his own development."

Embiid writes about how he learned basketball:

So I’m chilling one night, and I go on YouTube, and I’m thinking I’m about to figure this shooting thing out.

I go to the search box like….

HOW TO SHOOT 3 POINTERS.

Nah.

HOW TO SHOOT GOOD FORM

Nah.

Then the light bulb went off, man. I typed in the magic words.

WHITE PEOPLE SHOOTING 3 POINTERS.

Listen, I know it’s a stereotype, but have you ever seen a normal, 30-year-old white guy shoot a three-pointer? That elbow is tucked, man. The knees are bent. The follow-through is perfect. Always.

I seriously got to the league by watching YouTube and living in the gym.

Increasingly, the best basketball players in the world get there by watching YouTube and learning precisely how to play great basketball from the best practitioners of the sport.

As young people with no money or connections, they could never hope to meet these legends, let alone be coached by them, but because of YouTube, all they need is athleticism, hard work, and determination to make it to the top basketball league in the world.

Besides basketball, YouTube has an infinite number of videos about every subject under the sun.

There will be millions of Joel Embiid’s in every field who started out with little money and connections and achieved success by watching YouTube, reading Substack or Twitter3, and living in their proverbial gym, getting the 10,000 iterations needed to reach mastery.

Robert Greene’s Mastery needs to be updated because the Internet is the greatest mentor ever. It is both all knowing and will never hold you back4 from learning and achieving more.

The Best Things in Life Are (Almost) Free

There has never been a better time in history to be poor, smart, and ambitious.

Anyone with a smartphone today has better access to knowledge and expertise than a Harvard graduate from the most illustrious family 20 years ago (don’t @ me, Harvard alums).

In March 2023, renowned venture capitalist Marc Andreessen wrote: 

We are heading into a world where a flat screen TV that covers your entire wall costs $100, and a four year college degree costs $1 million, and nobody has anything even resembling a proposal on how to systemically fix this.

Andreessen meant this negatively, but it's worth noting that that $100 digital device becomes more useful and provides more knowledge over time while that $1 million college education becomes less and less necessary and valuable as a result. 

Young people are wising up to this new reality. Over the past decade, 

The percentage of young adults who said that a college degree is very important fell to 41 percent from 74 percent. Only about a third of Americans now say they have a lot of confidence in higher education.

A Word from Our Favorite Dropout

Because of the internet, more underprivileged children will see that clip and live a different life than they otherwise would have.

(Knowledge) Capital in the 21st Century is More Distributed Than Ever

While financial inequality is higher than ever, knowledge inequality is lower than ever, and knowledge is perhaps the most important form of capital.

Knowledge can't be lost, only accumulated or forgotten.

Knowledge can't be inherited, only learned.

Knowledge can't be stolen or scammed from its holder, only copied.

Knowledge can't be squandered, only unused. It is like untapped oil underground or sunlight in a place without solar panels.

Knowledge is perpetually renewable. It can't be used up, only spread.

This is why knowledge, imparted through education, is the conduit for generational wealth.

A natural experiment during one of the darkest periods of human history proves the enduring value of knowledge and education compared to financial capital. 

The Chinese Experiment

After the Communists swept to power in China in 1949, the Party confiscated land and businesses from the elite and redistributed it to the working class.

Yet decades later, after economic reforms in the country, the children and grandchildren of elites purged during the Chinese Communist Revolution regained their families’ socioeconomic status, in no small part because of the knowledge and habits passed down to them by their parents.

After the Communist Revolution, the working class benefited from wealth and educational opportunities that previously belonged exclusively to the elite, yet that financial and human capital was worth far less than the knowledge capital from previously wealthy parents.

Now, because of the Internet, that knowledge belongs to anyone who wants it badly enough. 

The Gini coefficient only measures wealth and income inequality, not knowledge inequality, which is lower than it has ever been in human history.

In a globally networked world where anyone with a smartphone has the power to learn anything from anyone, knowledge is the ultimate superpower. 

Be a sponge for knowledge.

About

Inverteum Limited (HK) is a trading firm that specializes in long-short algorithmic strategies to generate returns in both bull and bear markets.

Inverteum has generated 52% annualized returns (39% after fees) since inception.

How We Invest

1. Minimize allocation to individual stocks due to their unpredictability

Inverteum Capital

Why Picking Individual Stocks Is a Fool's Game

The TL;DR version of this post…

Read more

a year ago · 21 likes · 27 comments · Inverteum Capital

2. Build the most suitable trading strategy and go all in. Here's an example.

Inverteum Capital

158,022% Returns? The Algorithm That Would've Turned $100k Into $158M (Backtest)

This post is for informational purposes only and does not constitute investment advice. Do your own research and consult with a financial professional before investing…

Read more

a year ago · 8 likes · 6 comments · Inverteum Capital

3. Be prepared for bear markets and ensure profitability during bad times by implement a short selling component to the strategy

Inverteum Capital

Why All Professional Investment Strategies Should Have a Short Component

So, you’ve been told to buy and hold, right? Just pick some nice long-term investments, sit back, relax, and in 30 years, you’ll be sipping piña coladas on a beach somewhere. It’s the dream. And, sure, markets generally go up over time — we can all agree on that. But there’s a teeny-tiny problem: They don’t always go up. In fact, they go down quite a bi…

Read more

a year ago · 12 likes · Inverteum Capital

Look, let's be clear: Peter Lynch was a legend. 29% annualized returns? Come on. That's the stuff of myths. He loved those small caps, the Taco Bells, the Pep Boys. He wrote a whole book about it. "Invest in what you know," he said. And for a while, that worked. Like, really worked.

But here’s the thing about investing in what you know: What you know might be outdated. Lynch’s world, the world of 1989, was a world where a $39 billion General Electric was a giant. He literally said GE couldn’t grow much faster “without taking over the world.”1 Cute. Adorable, even. Today, Apple’s market cap is over seventy times that. Seventy! Times! The world has changed.

Lynch’s thesis, that small caps outperform because they're nimble, used to make sense. But now? Innovation is expensive. Obscenely expensive. And who has money? Big companies. They’d rather throw money at robots than deal with, shall we say, the complexities of human resources.

Robots and Chips: A Tale of Two Expenses

1) Industrial robots

Take robots. Amazon’s warehouses are basically robot theme parks. A million bucks for a starter kit? $20 million for a thousand robots? That’s chump change to Amazon. But try telling your average small e-commerce company to pony up that kind of cash. They’ll laugh you out of the Zoom call.

Amazon, meanwhile, is laughing all the way to the bank, or at least to a warehouse full of tireless, non-unionized robots.

2) GPUs (AI chips)

Then there are GPUs, the fuel of the AI boom. Want to build the next ChatGPT? Prepare to remortgage your house, your car, and your soul. Nvidia’s H100 chips cost $30,000 each. OpenAI, the darling of the AI world, needs hundreds, thousands of these things. They’re talking about raising one hundred billion dollars. That’s not startup money; that’s nation-state money.

Speaking of nation-state money, Microsoft, with its $2.6 trillion market cap, is happily bankrolling OpenAI. Why? Because Satya Nadella, Microsoft’s CEO, wants a piece of Google’s search pie. And he’s willing to pay whatever it takes. One hundred billion is a rounding error to him. He’s playing a different game.

Here's what Microsoft CEO Satya Nadella had to say about his determination to win at search.

Nadella will happily invest ungodly sums of money to raise Microsoft’s market share in search compared to Google, and OpenAI’s ChatGPT represents the most direct challenge to Google’s search monopoly in 25 years. There are, at best, just a handful of tech companies around the world who have both the ability and willingness to take such a large bet.

Big Tech: Your Landlord, Your Lender, Your Everything

Here’s the other thing: small companies depend on big tech. Ramp, the corporate credit card company, put out a list of top vendors for startups. Guess who’s at the top? Google, Facebook, Amazon.

These companies are the infrastructure of the modern economy. They’re selling picks and shovels in the digital gold rush.

What’s most remarkable is these three software services companies have far higher profit margins compared to the other vendors on this list, which include shipping companies, airlines, retailers. These companies operate in the physical world and have the higher cost structure associated with that, whereas software services shift bits around in cyberspace.

Big tech specifically dominates the expense categories of tech startups. Here is a list of expense categories that tech startups have and the market share of the tech giants in the space.

• Digital advertising: Google (29%), Facebook (20%), Amazon (13%)

  • Digital ad spending as a whole grew 11% in 2022 and has grown double digits annually for several years.

• Cloud servers: Amazon (32%), Microsoft (22%), Google (11%)

  

• GPUs (i.e. AI chips3): Nvidia (80%)

  • AI startups can either buy GPUs directly from Nvidia or more commonly, rent them from the cloud.

Knowing this, it should be unsurprising to learn that a significant portion of venture capital funding goes straight to the top line of big tech companies.

This includes multi-billion dollar investments in AI startups such as Microsoft's investment in OpenAI (spent on Azure), Amazon and Google's investment in Anthropic (spent on AWS and Google Cloud), and Nvidia's investment in CoreWeave (spent on Nvidia GPUs).

The Innovator’s Dilemma: Not a Problem for the Paranoid

Big tech companies aren’t stupid. They know about the Innovator’s Dilemma. They’ve read the book. They’re constantly looking over their shoulders, copying features, launching new products, desperately trying to avoid being disrupted. Facebook cloned Snapchat. Instagram and YouTube aped TikTok. Google is frantically trying to keep up with ChatGPT. This constant paranoia is their strength. Examples:

1. Facebook & Google: To compete with TikTok's short video format, Instagram released Reels in 2020 and YouTube introduced Shorts in 2021. The user base and viewership on both have already exceeded TikTok.

   

2. Facebook: In 2017, after suffering from declining engagement of young users, Facebook ripped off Snapchat's features and put them into Instagram, WhatsApp, and Facebook. Today, after a spike in 2020-22, Snap is down 64% since its 2017 IPO while Facebook is up 120%.

3. Google: In response to the success of ChatGPT in Nov 2022, CEO Sundar Pichai declared a "code red", in recognition of the fact that AI chatbots could replace Google Search and kill its core business. Google has since integrated AI features across the company's suite of tools.

   Only time will tell if Google can hold onto its formidable 90%+ search market share. So far for 2023, it certainly has.

   

4. Apple: In 2014, after years of touting the benefits of small phone screens, Apple released the iPhone 6 with larger screens to fend off Android competitors. Since then, Apple stock is up more than 3x compared to Samsung.

5. Microsoft: Under CEO Satya Nadella, the company embraced open source software after decades of staunch opposition under Bill Gates and Steve Ballmer.
   Nadella pivoted Microsoft from selling desktop Windows and Office to selling subscriptions through the cloud, with Azure and Microsoft 365 (formerly Office).

6. Nvidia founder and CEO Jensen Huang bet the whole company on GPUs more than 10 years ago.

   We saw early on, about a decade or so ago, that this way of doing software could change everything. And we changed the company from the bottom all the way to the top and sideways. Every chip that we made was focused on artificial intelligence. - Huang

   Now, Nvidia GPUs power the AI revolution.

7. Amazon turns expenses into new business lines:

   1. servers -> AWS: for startups that didn't want to buy servers before launch and companies that wanted to flexibly purchase compute

   2. website -> Amazon Marketplace: for third party sellers to make more sales

   3. warehouses -> Fulfillment by Amazon: two-day shipping for third party sellers

   4. logistics -> Amazon Flex delivers for the most profitable package delivery routes, leaving costly, rural routes to USPS

   That’s just a few examples of Amazon of using outside revenue to boost its own scale, make its service highly cost competitive, and gain market share.

8. Amazon released "Buy with Prime" in 2022, which takes advantage of customer expectations for free, fast shipping to entice Shopify merchants to use Amazon logistics, hurting Amazon Retail's main competitor Shopify.

   Amazon Logistics, "thanks to the sheer expense necessary to build it out, has a nearly impregnable moat that is not only attractive to all of the businesses competing to be consumer touchpoints — thus increasing Amazon’s addressable market — but is also one that sees its moat deepen the larger it becomes."

   Shopify lacks the logistics capacity to offer the same service at a competitive cost, giving it no choice but to provide the ability for merchants to enable customers to turn over transaction data and revenue to its primary competitive threat, Amazon.

   

Bezos on The Innovator’s Dilemma

In all of these examples, big tech leaders are keenly aware of the perils of the Innovator's Dilemma. They know they must innovate even if it risks cannibalizing an existing business line because otherwise, some other company will eventually kill their business.

Early Amazon executive Dan Rose described the degree to which Jeff Bezos internalized the Innovator's Dilemma. In 2004, Bezos told Steve Kessel, the head of Amazon's books, music, and video business at the time:

Effective tomorrow, you've been fired from your job of running our core business. […] Your new job is to build a digital media business. You're the only employee of that team. Go build a new team and your job is to kill your old business. (emphasis added)

Amazon’s entire revenue at the time came from books, music, and video, so Bezos’ decision was ridiculously bold.

Companies whose management teams deeply believe they must continually reinvent themselves, even if it comes at the risk of disrupting their existing business, are the ones who will dominate the economy of the future.

This vigorous competition between these top tier companies will be a forcing function for their continuous improvement, protecting their continued dominance.

Antitrust? Please.

Remember when the government broke up Standard Oil and AT&T? Those were the days. Now? We have five tech giants with trillion-dollar market caps. The government is outgunned, outmanned, and outspent. Lina Khan’s FTC tried to block Microsoft’s Activision deal. They lost.

The giants are too big. They have armies of lawyers. They poach former FTC officials. They’re playing chess while the government is playing checkers.

The US government failed to break up Microsoft in its landmark case, when it was the only tech giant with a market cap exceeding $500b (or $924b in 2023 dollars).

Now, there are five tech giants that are the same size as or larger than Microsoft in 1999, with >$1 trillion market cap: Apple, Microsoft, Google, Amazon, Nvidia. 

This divides the government's resources over several cases, reducing the likelihood of the government's success in each individual case.

Each mega-cap company has significant financial resources and can afford to hire top-notch legal teams to fight antitrust cases. This gives them a serious advantage over regulatory agencies that don't have the same level of resources at their disposal.

Conclusion

The 2023 market rally was all about the “Magnificent Seven” tech stocks. That’s not a coincidence. It’s a sign of the times4. Big is getting bigger. We’re going to see $5 trillion, $10 trillion companies. It’s inevitable.

This is not to say there won't be successful startups in the future; there definitely will be. But they will either need to be niche or exceedingly well capitalized and preferably backed by big tech, e.g. OpenAI, Anthropic.

Otherwise, their returns on invested capital are unlikely to outpace mid to large cap tech.

Today, the most valuable company in the world is Apple at $2.8 trillion.

The increasingly capital intensive nature of technological innovation, the fiercely competitive arena of big tech, management’s active avoidance of the Innovator’s Dilemma, and the inadequacy of antitrust regulation to limit the dominance of large corporations all give a significant edge to the largest, most well-funded companies of our time.

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April 2024 update

Exactly as expected:

The gap in expected NTM net income between mega-cap tech and the bottom 493 of the S&P is widening.

This isn’t just about trade wars and TikTok bans. This is about two totally different systems going head-to-head. Two fundamentally different ways of thinking about, well, everything.

One system, the American one, is all about the free market. Entrepreneurs do their thing, the market decides if it’s good, and every few years we switch up the political party in charge just to keep things interesting. It’s messy, sure, but it’s also…kind of free-wheeling. Companies and entrepreneurs mostly do what they want, and as long as their activities are legal, the government doesn’t get in their way.

Then there’s China. State capitalism. They’re okay with profits, fine, but the businesses those profits are derived from have to serve the state’s interests. The president’s in charge, and the long-term plan is the long-term plan. Things change only when they decide they need to change.

Munger’s folly

So, Charlie Munger, right? Mr. Value Investor. Warren Buffett’s right hand man. He buys a bunch of Alibaba, like 18% of Daily Journal's portfolio, back in 2021. Pays somewhere between $180 and $200 a share. Seems smart. Alibaba’s huge, dominant in China.

Then… things go south. Fast. He sells half his stake at $116. Ouch. And the rest? Still holding it as of October 2023, at around $85 a share. Down more than 50%. Double ouch.

What happened? Did the Abominable No-Man…whiff?

Well, back in 2021, another Alibaba bull, Tom Hayes, was saying, basically, Alibaba’s a steal. A billion users! #1 e-commerce company in the world’s second largest economy! Moats the size of the Great Wall! Buffett and Munger, geniuses!

And in a normal, free-market, rule-of-law kind of country, he’d have been right. Alibaba looked like a classic value play. Dominant company, growing revenue, stock price down. Textbook.

But China isn’t a normal, free-market, rule-of-law country. In China, entrepreneurs are allowed to succeed to the extent that the state sees their actions as beneficial to the country's greater interest.

Your moat could be filled with crocodiles and dragons, but if Beijing decides your business isn’t in their interest, life will be tough for you.

Was Jack Ma too outspoken? Or did Chinese big tech get too powerful for the Party to tolerate?

The story everyone told was that Jack Ma, Alibaba’s founder, got a little too big for his britches. Criticized the government, maybe got a little arrogant. And Beijing smacked him down. Antitrust, they said. Too much power.

Bloomberg wrote a whole thing about it, how Beijing was cracking down on Big Tech. One trillion and a half wiped out! Wild swings! Drama!

China’s government kicked off a sweeping crackdown on its most powerful corporations a year ago.

The campaign that started with Ma’s twin giants—Ant Group Co. and Alibaba Group Holding Ltd.—last November soon spread to more companies like Tencent Holdings Ltd. and Didi Global Inc., as Beijing stepped up oversight on everything from antitrust to data security and wealth distribution. The crackdown triggered a selloff that, at its most extreme, erased $1.5 trillion from Chinese stocks, which experienced wild swings with every new government probe, rule and warning.

But here’s the thing: China loves monopolies. Just not the wrong kind of monopolies. They’re happy with CATL (batteries), SMIC (chips), Huawei (telecom), DJI (drones). These companies are strategically important. They help China win.

Dan Wang, smart guy, said it best:

I find it bizarre that the world has decided that consumer internet is the highest form of technology. It’s not obvious to me that apps like WeChat, Facebook, or Snap are doing the most important work pushing forward our technologically-accelerating civilization. To me, it’s entirely plausible that Facebook and Tencent might be net-negative for technological developments. The apps they develop offer fun, productivity-dragging distractions; and the companies pull smart kids from R&D-intensive fields like materials science or semiconductor manufacturing, into ad optimization and game development.

China doesn’t want its best and brightest building the next WeChat. They want them building things that matter, things that give China an edge. And they’re willing to pay for it. Salaries in EVs and batteries are holding up. Finance and internet? Not so much, cut in half from before.

The importance of industrial monopolies to Beijing

China wants to be TSMC1, but a hundred times bigger. They want to be the source for everything the world needs. Chips, solar panels, batteries. You name it. Because if everyone needs you, you have leverage. Real leverage.

As the world’s foremost and largest manufacturing cluster, i.e. the factory of the world, China’s primary comparative advantage is hardware, and what Beijing most wants are industrial monopolies like TSMC.

1) Solar

Take solar. It’s cheap, it’s clean, it’s the future.

Today, solar + batteries ($46-102/MWh) is either cheaper than or cost competitive with other baseload sources of energy, including natural gas ($39-101/MWh)—the top electricity source in the US.

Through being able to provide power around the clock, solar + batteries enable a complete replacement of fossil fuels, particularly in the sunniest parts of the world, including the United States, Southern Europe, and Central and South Asia.

Unsurprisingly then, solar has been the fastest growing source of electricity since 2016, and when it comes to new power plant construction, batteries have surpassed natural gas.

Two-thirds of all investment in renewable energy is solar—2x all other renewables combined.

Guess who makes most of the world’s solar panels? China.

Like, 70-90% of everything. The West wants to go green? They need China.

2) Batteries + EVs

Same with batteries and EVs.

China has majority share (up to 80%) in most material processing and manufacturing of battery cell components, battery cells, and EVs.

With bans on fossil fuel vehicles set to go in effect as early as 2030, the world’s going electric, and China controls the supply chain.

They’re like OPEC, but on steroids. China's share of solar and battery manufacturing capacity today (60-80%+ for key components) far exceeds OPEC’s share of oil production during the 1970s energy crisis (~50%), which wreaked havoc on the West.

Even California, the land of tech and innovation, is going to China for help with fighting climate change. Gavin Newsom, hanging out with Xi Jinping. Because California can build apps, but they can’t build green technology like China can2. America gets the profits, China gets the power. See how this works?

Why is China so far ahead?

Simple: industrial policy. And a huge domestic market.

They saw the future with solar and EVs, and they built it. Cheap loans and land for factories, subsidies for consumers.

Supply

China made it expensive to build gas-guzzlers and cheap to build EVs.

China introduced a dual-credit system for the auto industry in 2017, which awards points for making clean cars and penalties for those with high fuel consumption. Cars from producers with negative scores may be taken off the market. To avoid punishment, manufacturers can buy credits from rivals with positive scores, like Tesla Inc. or BYD. It can get expensive. State-owned Chongqing Changan Automobile Co. lost 4,000 yuan in profit for each car sold in 2020 as it bought credits to avoid the penalty.

Beijing only subsidized EVs “if the battery was made by a Chinese company” to ensure the growth in EVs benefited the country.

Demand

At the same time, Beijing created huge incentives for the Chinese public to switch to EVs.

• National subsidies reimbursed EV Buyers with as much as US$8k.

• EV sales are not subject to the 10% tax on cars until 2025.

• Fossil fuel cars are subject to a license plate lottery or auction while EVs can get a green license plate much more easily.

They built charging stations everywhere, even before anyone needed them. No range anxiety in China!

A vast, mostly unused, EV charging network prevents embarrassments like the US energy secretary’s team using a gas car to block an EV charging port and getting the police called on her staff during their 620-mile (998 km) EV road trip.

Home court advantage

Because China’s so big, they can create their own demand. Globally, more than half of EVs and solar panels are sold and installed in China respectively.

They build the factories, they get the scale, they dominate the global market. It’s a virtuous cycle, if you’re China. Less virtuous if you’re, say, a US automaker.

China's economy hasn't collapsed—it's transforming

Everyone’s talking about China’s real estate woes.

The Chinese saw housing as a much safer investment than stocks and bonds and sought to put nearly all their wealth into housing, believing “the notion that China’s property prices could only go up”.

This irrational demand for housing fueled a massive speculative property bubble throughout the country starting in 2008, causing real estate’s share of GDP in China to dwarf other developed economies.

China’s housing became completely unaffordable for the middle and working class.

Towards the late 2010s, Beijing grew increasingly concerned about housing unaffordability. In 2017, President Xi emphasized, “houses are built to be inhabited, not for speculation”. The government unveiled a raft of measures to cool the market.

Today, that housing bubble has finally popped, with the fall of Evergrande and default of Country Garden—two Chinese property giants.

Housing is a mess, sure. But it’s also…kind of the point. China built a housing bubble, and now they’re letting it deflate. Because they’re moving on. They’re…

Shifting to Manufacturing

China is focusing on what matters: manufacturing. They’re doubling down on being the world’s factory3.

Starting in 2020, Chinese bank loans shifted away from the now struggling property sector and toward manufacturing.

They’re building solar factories, EV factories, battery factories. They’re building everything, and their industrial production has kept growing ever since.

China is the only country in the world with every single industrial category in the United Nations industrial classification. It is the world’s factory, and it fully intends on making even more of the goods the world relies on.4

Beijing’s shift in economic focus has already significantly increased the strength of the two industrial monopolies mentioned earlier.

1. Solar: 5x growth in solar cell manufacturing since 2018

   

2. EVs: 8x growth in "new energy vehicles" (i.e. EVs) since 2020

China has already built enough solar panel factories to supply the entire world’s needs. It has built enough auto factories to make every car sold in China, Europe and the United States. And by the end of 2024, China will have built in just five years as many petrochemical factories as all of those now running in Europe plus Japan and South Korea.

This shift in China’s economy from real estate and services to manufacturing will involve a lot of short term pain. Young people don’t want to work in labor intensive jobs in factories, even electing to deliver takeout and goods instead.

A combination of higher wages and greater automation will likely solve this issue over time. China today already has more industrial robots than the rest of the world combined.

Greater automation allows backbreaking blue collar work to transform into mentally stimulating white collar work, making factory jobs more appealing to young people.

In October 2023, Beijing removed all restrictions on foreign investment in the manufacturing sector. National security? Eh, details. Manufacturing is king.

Capitalism, Beijing-style

China’s not interested in maximizing profits for shareholders. They’re interested in maximizing power for the state. If your company helps them do that, great. If not… good luck.

The harder it is for the West to wean itself off of Chinese products5, the more easily Beijing can assert itself in the future.

They have a name for the companies they want: “category champions” (单项冠军企业). Companies that dominate their niche globally. They have hundreds of them. And they’re building more every day.

“Category champions”

In her 2023 report titled “Little Giants, Single Champions”, went into detail on “category champions”.

To be considered a “category champion”, a Chinese company must rank in the top 3 companies by global market share in its specific niche.

As of 2023, China has more than 600 “category champions”, more than triple its 2016 goal of 200.

Examples of category champions:

• Xi’an LONGi Silicon Materials: 46% global market share in silicon wafers, used in all semiconductor chips.

• Shanghai Quectel Wireless Solutions: 38% global market share in cellular modules, necessary for cars, drones, smart factories, robots, and power grids.

• GRIPM Advanced Materials: 38% global market share in copper-based metal powders, used for 3D printing.

Even Raytheon, the US defense contractor, can’t find alternatives to some Chinese components. The F-35, America’s top fighter jet, used a Chinese part! Think about that.

US vs. China

The US free market system maximizes 1) wealth for entrepreneurs and investors who most profitably serve the market and 2) tax revenue for the state, in that order.

The Chinese state capitalist system maximizes 1) power for the state and 2) wealth for entrepreneurs and investors who advance the interests of the state, also in that order.

The US is rich, powerful, globally involved. But China is…focused. They have a plan, a tight collaboration between the public and private sector, and they’re executing it. They’re building the future, whether we like it or not.

The key difference is industrial policy

“The US has an industrial policy. Here’s the policy: We don’t have one,” says Jeff Chamberlain, who spent more than a decade at Argonne National Laboratory trying to commercialize battery tech before starting a venture capital firm in 2016. “I’m not saying we should become socialist or communist, but other countries that have decades-long industrial policies, they’re gonna eat our lunch.”

Due to policy changes from administration to administration, the US has no consistent industrial policy. Unsurprisingly, the country often fails to nurture breakthrough industries in hardware and leaves nascent companies to the whims of the free market.

The US has resources, but China has…strategy. They’re playing the long game. And they’re winning. Because they understand something fundamental: in the 21st century, industrial power is real power. And China is building a lot of it.

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China’s rollout of renewable energy generation capacity exceeds the rest of the world combined and is forecast to grow significantly in the future.