Quarterly Newsletter: 3rd Quarter, 2026
Investment Commentary
In our second quarter newsletter we discussed our view that there is a bubble building in Artificial Intelligence (AI). To continue this important theme and further develop an understanding of the level of excess investment in a small number of companies, we can look at the current composition of the most widely followed stock index, the S&P 500. It is made up of the 500 largest US companies.
Of the companies listed above, only Berkshire Hathaway has no/limited direct exposure to AI. The weight of the top ten companies has historically been 20% to 25% and ten years ago it was 18%. With the vast influence of AI, it is now twice its historical average. With the addition of SpaceX to the S&P 500 soon (and likely to merge with Tesla), and possibly Anthropic and OpenAI joining as well, that would push the top 10 close to 50%.
Many of these companies are feeding each other’s growth. Anthropic, Open AI, and SpaceX are spending massive amounts on products from the companies in the top 10. The top 10 are providing massive amounts of funding to keep AI companies operating with massive losses – so they can continue buying their products. This circular dealing (and lack of profitability) isn’t sustainable.
The Tendency Towards Bubbles in Investments
We are confident in the investments we own but are also aware we are still connected to general investment markets. Until balance is restored in AI, AI is likely to impact our investments. Balance being restored will likely require a significant reduction in stock prices for AI stocks. Right now, the imbalance in AI continues to take money away from high quality, discounted stocks, to pay for investments in a small number of very expensive AI stocks.
To avoid an over focus on the negative side of this, we would like to share how we seek to take advantage and add value during and after bubble periods like this one.
Investing is an extremely difficult and highly competitive endeavor. Like any other high-stakes area of life, it is prone to emotional decision making and we all often make poor decisions when driven by emotion. In investing there are two emotional factors that are most important in driving the creation and destruction of bubbles. Both are fear driven. The first is our fear of missing out. We hate to miss out on something we perceive to be good. If our livelihood depends on not missing out, we are even more prone to be controlled by this fear. Most investment professionals cannot underperform market averages for long before they risk losing clients, their job, or both. Their fear of missing out tends to be stronger than most.
The second factor is the fear of losing our hard-earned money. As much as we love to make as much money, as quickly as possible, the pain we feel when we see our money losing value is much more powerful. This helps to explain why bubbles tend to build for a lot longer than they burst.
Many of us can avoid the ‘fear of missing out’ for a long time because our fear of losing money is far stronger. Eventually though, many of us give in. We don’t like to look or feel stupid. When it seems like everyone else is making money and we are the only ones who are not, it becomes harder to say no. We often jump in at exactly the wrong time as the peak is approaching. Then, when the downturn does come, we throw in the towel a lot quicker. We have been ‘expecting’ a downturn to happen and kick ourselves for getting caught up in it. We will do anything to stop the pain. This makes the downturn much steeper as the bubble bursts.
The good news is that for those of us with the patience to sit it out as the bubble builds, there are dramatic discounts that can provide years of outperformance. They can more than make up for the long period of ‘missing out’. It also means that during the extreme pain of a bubble bursting, we can avoid much of the emotional turmoil that comes with it.
There has been a tremendous, drug fueled party going on in AI stocks. Eventually, there is going to be a horrendous, extended hangover for all the participants. The longer the party goes on for, the worse the hangover is likely to be.
We are all human and we all make mistakes. Just as emotional decisions can lead us astray in day-to-day life, they do so when we invest. Financial professionals are just as likely to act in this way (sometimes more so) due to the pressures and demands of our employment. It is human nature when times have been good for a long time to forget that they are not always that way. The same goes for the bad times. When investing, if prices go up a lot today it gives us good performance today – at the expense of tomorrow. Higher prices lead to lower future returns and lower prices lead to higher future returns. We can’t escape that fact.
We have included a link at the end of the newsletter to our overview of how we estimate future annual returns for all our investments. It explains how important the price we pay for investments is in determining our future investment returns.
AI Related Stocks We Own
We have several AI related stocks we have purchased over the past year at deeply discounted prices. These companies are incorporating AI into their businesses, and we believe they will meaningfully benefit from increased efficiencies and greater business opportunities because of AI. These investments should provide significant future investment returns. Their purchase prices were significantly discounted due to the uncertainty that AI has created around which industries/businesses will benefit from AI and which may become obsolete. As of the end of the third quarter, the average performance since we purchased them (across all our accounts) is listed below. We also included our estimate of their likely future annual returns for the next five to ten years, as well as what we expected those annual returns to be before their prices changed:
Everforth: +20%, 25% future annual returns (29% before the price increase)
ServiceNow: +50%, 18% future annual returns (22% before the price increase)
Adobe: -15%, 23% future annual returns (20% before the price decrease)
These stocks are likely to be highly volatile for the foreseeable future. They are also highly likely to provide us with outsized performance for years to come.
Current Research
Our current research is focused on some very well-known, highly successful companies. They have started to approach more acceptable purchase prices where we can generate a high enough return to justify an investment. We will go into more detail on these (and more) in future newsletters.
Netflix: the number one global streaming platform for traditional TV and movie content. Its stock has fallen over 50% from its peak in June 2025. It recently passed our minimum 15% future annual return target as its price has dropped.
Chipotle: a highly successful, fast growing, high quality, fast (relatively) healthy food, Mexican chain restaurant. The stock has fallen over 50% from its peak in June 2024. It is still reasonably expensive, but getting closer to a price at which we would consider investing. We estimate 12% future annual returns based on its current price.
Investment Strategy and Sustainability
We pay particular attention to the price we pay for investments because paying less means higher future returns. As a reminder, we intend to hold all investments for periods of at least five years and preferably much longer. This has the side effect of minimizing trading costs and capital gains taxes.
We seek to hold 20-30 individual stocks, some of we cover in our newsletters. All our current individual stock investments are listed in a separate PDF we send out along with our newsletter each quarter. These are all stocks we consider to be offering a high probability of future outperformance versus market averages at their current prices. We combine these individual stocks with other active investment managers (mutual funds) to help further diversify your investments across stocks, bonds, and alternative investments. Our investment managers have similar philosophies to ours seeking out and taking advantage of overlooked and/or underappreciated investments and buying at a discount to outperform market averages.
Given our focus on the long-term, we invest in companies we believe are sustainable. Companies that produce high returns (profits) for their investors but also give equal focus to their other stakeholders – particularly employees and the environment. This helps create stability and high performance for the long-term.
We believe we are well-positioned for future success. There will be periods when investment returns aren’t where we’d like them to be. This is most likely to happen during periods of excessive enthusiasm as the investments driving outperformance during those times tend to be ‘trendy’ and expensive. Our research process gives us the confidence to remain patient and allow our investments time to reach their full potential. This should translate to long-term outperformance.
We will continue to monitor your investment portfolios and keep you informed on major global events that may impact them. If you’d like to set up a meeting to talk in more detail, please reach out at any time.
Links to Additional Information
1) Our 2nd quarter newsletter: https://www.atlassustainable.com/post/quarterly-newsletter-2q-2026
2) How we estimate future annual returns for all our investments: https://www.atlassustainable.com/post/the-importance-of-price-and-value-in-investing
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