Today I want to address the changes in my professional journey and share my insights on the evolving investment landscape. My departure from my previous firm wasn't a decision I made lightly, but stemmed from fundamental disagreements about marketing approaches and corporate direction.
I couldn't align with their aggressive marketing tactics or their corporate destination. Despite my high regard for colleagues like Tim Plain and Jay Soloff, the disconnect with corporate leadership ultimately led to my exit. The transition wasn't without its challenges, particularly regarding subscriber relationships and portfolio management.
I've received numerous emails asking why I didn't simply recreate the same portfolios in my new services. Let me be clear about this: it wasn't possible or prudent for several reasons. First, many of the positions we held are up significantly. Our Underground Income positions are all winners, with several mergers gaining over forty percent plus substantial dividend yields. The Twenty Percent Letter portfolio shows similar success, with most positions up considerably over the past year.
Starting a new service with positions that have already appreciated significantly wouldn't serve new subscribers well. We're in a different market environment now, with the S&P 500 at elevated levels and multiple valuation metrics showing overvaluation. Even Goldman Sachs, typically optimistic, projects baseline returns of just three percent over the next decade, with a best-case scenario of seven percent and a worst-case of negative one percent.
Looking at our track record, my strategies have proven remarkably successful. Our Underground Income closed-end fund product has delivered exceptional returns, with three mergers resulting in gains over forty percent, plus an average approximately nine percent yield. Similarly, our Twenty Percent Letter portfolio has shown impressive performance, with most positions up significantly over the past year, accompanied by substantial dividend yields.
As markets evolve, I'm identifying a crucial shift on the horizon: the impact of artificial intelligence on market efficiency. While markets are already "mostly efficient," with participants having access to similar information, AI is poised to take this efficiency to unprecedented levels. The market is going to become ruthlessly efficient, and I'm convinced that many current trading strategies and anomalies will become obsolete.
However, I see two investment approaches that are likely to remain effective. The first is trend following, which has proven successful across centuries and various asset classes. When news is consistently positive or negative, AI won't neutralize these trends but rather accelerate them. The second approach involves focusing on small, deep-value stocks – an area where large institutions and AI-driven strategies are unlikely to compete effectively.
The Energy Imperative
Perhaps the most compelling opportunity I see is the intersection of AI and energy demand. The energy requirements for AI infrastructure, combined with the reshoring of industries to the United States and the transition to electric vehicles, is creating unprecedented demand for electricity.
This goes way beyond just AI. The energy story encompasses multiple sectors, from natural gas serving as a bridge fuel to nuclear power's resurgence. At a recent conference in Riyadh, Blackstone's CEO highlighted that within four years, current electricity capacity could be fully utilized, necessitating massive infrastructure development.
The nuclear energy sector, while promising, requires patience. We're five to ten years away from being able to draw significant amounts of energy from new nuclear assets. Meanwhile, natural gas will play a crucial role as a bridge fuel, and renewables continue to gain importance.
Looking Forward
The implications of this energy transformation extend beyond power generation. I see real estate being impacted through data center development and supply chain reformation. Infrastructure, particularly the electrical grid, will require extensive modernization to accommodate new nuclear plants and renewable energy sources.
For us as investors, these changes present opportunities across multiple sectors. From infrastructure financing to real estate development, from traditional energy to renewables, the ripple effects will be far-reaching. AI is bigger than you think it is, and the energy demand that's going to be needed to make this a reality is much bigger than you think it is.
Success in this evolving landscape will require adhering to time-tested principles of deep value investing and trend following, while maintaining the flexibility to adapt to new market realities. For those of us who can navigate these changes effectively, the opportunities for substantial returns appear significant.
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