Image Source: Unsplash

2Q25 Letter To Investors

Mistakes of the First 18 Years And The Maturation of My Game

7 months ago I moved from the Bay Area to Davis to escape the fast pace and stress of the big city in exchange for a better quality of life and an environment conducive to deep reflection. It is clear now that the move has been a good one.

One of the results has been a reckoning with the first 18 years of Top Gun. I have come to understand the biases and blind spots that held back my performance in the first 18 years which has laid the foundation for a new beginning. While I can’t undo the past, I can learn from it in order to create a better future.

Bears Don’t Make Money

I dropped out of Philosophy Graduate School in 2006 when I was 28 to start Top Gun to profit from the collapse of the housing bubble and the nasty recession I foresaw. Everything played out exactly as I expected.

I shorted and bought puts on the investment banks and mortgage lenders with toxic mortgage backed securities on their balance sheets like Bear Stearns, Lehman Brothers and Countrywide. All three of those companies went bankrupt or were acquired for pennies. Top Gun returned +15% in 2008 compared to -38% for the S&P 500. I acquired a bunch of clients and felt confident that I was on my way.

But I had no plan for what came next. I was taken completely by surprise by the enduring market rally off the March 2009 lows that has continued through the present. I stayed bearish and the market steamrolled me.

(Click on image to enlarge)

It took me a long time to realize that bears don’t make money. One look at a long term chart of the US stock market shows this to be the case. There are many reasons for this. The primary one is what Warren Buffett has aptly called The American Tailwind – the combination of economic freedom and entreprenurialism that characterizes American culture.

Another reason is that the entire structure of the market is geared for it to go up. All of the major players want the market to go up. The government wants the market to go up in order to stay in power. Companies want their stocks to go up and so report earnings and other developments in the most positive light. Brokers and investment banks want the market to go up in order to make money from commissions, IPOs, mergers and acquisitions, etc…

The result is that the bearish macroeconomic factors that could upend the market are constantly mitigated and forestalled by the key players and a crisis is averted until it no longer can be. Things like the deficit and the national debt or extreme valuation, in other words, don’t matter until they do – and that is often far longer than the lonely bear might think. “The market can stay irrational longer than you can stay solvent,” opined the great macroeconomist and investor John Maynard Keynes. The upshot is that the prudent investor must give the market the benefit of the doubt and assume a Bullish Bias.

Cheap Stocks And Wonderful Businesses

It is better to own a wonderful business at a fair price than a fair business at a wonderful price – Warren Buffett

On top of my bearishness for macroeconomic reasons, I looked for cheap stocks instead of great businesses. Warren Buffett made the same mistake in the first part of his career which he reckoned with in his 2014 Letter to Shareholders in the section titled “Berkshire – Past, Present and Future”.

The problem with cheap stocks is that they are usually cheap for a reason. Frequently they are second or third rate businesses or are in competitive, commoditized industries with low margins.

The stocks that perform the best over the long term are high quality businesses with some sort of durable compettive advantage that can compound earnings over long periods of time. Think Apple or Google. You can frequently pay 30x earnings for these businesses and still have superior returns because of their outstanding economic characteristics. Contrary to my inititial intuition – and Buffett’s – a low P/E is frequently a warning sign that you are looking at a low quality business.

Top Gun: Past, Present and Future

If only I’d known these things sooner all of us would be a lot wealthier. Unfortunately, while I regret my past mistakes there is nothing I can do about them now. I had to make these mistakes and learn these lessons the hard way in order to get to where I am now.

But it is personal. I feel a deep sense of mission to do right by those of you who have entrusted me with your money. And so we keep going…..

More By This Author:

Turnaround Brewing At DG
The Evolution Of Value Investing: From Ben Graham To Warren Buffett – And Beyond
Reasons For Concern: Interest Rates, Tariffs, Valuation