Bullish case that the tech giants' capital spending will pay off; When do you 'average down'?; More on my work in Ukraine
1) I caught up with an old friend, John Zolidis of Quo Vadis Capital, at the ValueX conference last week. And I wanted to relay his latest investing letter, in which he expresses bullishness that the huge increase in capital spending by Alphabet (GOOGL) and its peers will pay off – a sentiment I share. He writes:
As you might expect, this kind of outlay made investors nervous that spending on AI and whatnot had become unhinged. The stocks promptly sold off. I think the reaction makes sense as investors usually don't like elevated capital cycles for the simple reason that it represents cash going out of a business and the potential return (pay-off) of the spending is uncertain. As I am a skeptic, my initial reaction was also to see these huge numbers as confirmation that even if we aren't in an AI bubble, at least we are in an AI-spending bubble.
Then I took a step back and thought about Charlie Munger's admonition to "invert, always invert." Instead of seeing the spending as a big risk, what if the spending works out better than expected? After all, GOOGL, META, MSFT, AMZN are in aggregate generating outstanding returns on their collective capital and are still growing at robust rates. As investors we should want companies to reinvest capital in their own businesses. Again, my instinct is to look at the brain-breaking amounts and assume the returns will be incrementally lower. But what if the pay-off is incrementally higher, or even simply good?
He concludes:
One last item to consider on this topic. In addition to its capital spending plan, GOOGL reported its year-end backlog of future orders with its fourth quarter and full-year 2025 results. The company reported $240 billion of backlog, up 55% sequentially and more than 100% compared to a year-earlier. This is a staggering sum and growth. It suggests GOOGL's recent spending is working. At the risk of sounding like a cheerleader, I am excited to see what 2026's capex will produce.
To this point, another friend at the conference shared the fascinating chart below with me. It shows the skyrocketing cloud-computing backlog for Amazon (AMZN) and, even more so, Alphabet (y-axis is in billions of dollars):
This is further evidence that these companies aren't crazy in spending massive sums to keep up with this exploding demand, which I expect will continue to be high margin.
To that point, check out this chart my friend sent me by Rothschild & Co Redburn (y-axis is in billions of dollars):
Clearly, profits are exploding along with demand. So I continue to be bullish that all this spending from the tech giants will pay off – especially for my two current favorites, Alphabet and Amazon.
2) With so many stocks down recently, I wanted to pass along a classic essay written more than nine years ago by Australian fund manager John Hempton of Bronte Capital: When do you average down?
He starts by explaining what it means to average down:
Warren Buffett is famously fond of "averaging down." If you liked it at $10 you should love it at $6. If it goes down "just buy more." And in the value investing canon you will not find that much objection to that view.
Yet this can be very dangerous, he (correctly) argues:
But averaging down has been the destroyer of many a value investor. Indeed averaging down is the iconic way in which value investors destroy themselves (and their clients).
After all if you loved something at $40 and you were wrong, you might love it more at $25 and [you're] almost as likely to be wrong, and like it more still at $12 and could equally be wrong.
And before you know it you have doubled down three times, turning a 7 percent position into [an] 18 percent loss.
Do that on a few stocks and you can be down 50 percent. And in a bad market that 50 percent can be 80 percent.
Hempton gives a specific example:
And if you do not believe me this has a name: Bill Miller. Bill Miller assembled a startling record beating the S&P [every] year for fifteen straight years and then blew it up.
Miller had a (false) reputation as one of the greatest value investors of all time: In reality he is one of the biggest stock market losers of all time and a model of how not to behave in markets.
How not to behave is be a false value investor, buying stocks on which you are wrong, and recklessly and repeatedly average down.
So, how does one average down smartly? As Hempton asks, "under what circumstances are you wrong" and "how would you tell"?
Most importantly, Hempton (again, correctly) says:
... you must not average down (much) on highly levered business models.
And looking at Buffett he is very good at that. He bought half a billion [dollars'] worth of Irish Banks as they collapsed. They went approximately to zero. But he did not double down. He liked them down 90 percent, he did not like them more down 95 percent.
By contrast these are the stocks that Bill Miller blew up on: American International Group, Wachovia, Washington Mutual, Freddie Mac, Countrywide Financial and Citigroup. They were all levered business models.
By contrast you can probably safely average down on Coca Cola: indeed Buffett did. It is really hard to work out a realistic circumstance in which Coca Cola is a zero.
He also says to avoid averaging down on companies facing technical obsolescence:
Kodak was made obsolescent and was a value stock all the way down to bankruptcy. The circumstances on which you might be wrong (digital photography going to 95 percent of the market) could have been stated pretty clearly in 1999.
You might [think] it was worth owning Kodak as a "cigar butt stock" – plenty of cash flow and deal with the future later. There was a reasonable buy case for Kodak the whole way down. But technical obsolescence is always a way you should be wrong. When the threat is obsolescence you are not allowed to average down.
Lastly, he advises adopting risk parameters:
We have a default at Bronte – and the default at Bronte is that we have a maximum percentage for a stock (typically say 9 percent but often as low as 3 percent depending on how we assess the risk of the stock) and as the fund manager I am allowed to spend that whenever I want but I am not allowed to overspend it. If we have a 6 percent position with a 9 percent loss limit and it halves I am allowed to add three percentage points more to the exposure. But that is it...
We will not fall for the value investor trap of losing 18 percent on a 7 percent position.
This is all very good advice!
3) Many readers have expressed interest in what I've been doing in Ukraine for the past four years. I've visited six times, most recently three days in Kyiv last weekend.
It's a long story, and I don't want to get political – I understand that some folks feel that the U.S. shouldn't be supporting Ukraine. But, simply put, when the full-scale invasion happened four years ago and I saw the images of civilians suffering across the country, I wanted to help.
I had an American friend there who was raising money to buy EcoFlow battery packs like this one to provide Ukrainians with electricity and heating. So I sent around an e-mail to my friends and quickly raised $50,000 to buy 50 of them.
Funny thing: When you show up in a war zone with that kind of money, the world beats a path to your door...
So the next thing I knew, I heard of a need for ambulances and, dozens of e-mails and phone calls later, my friends – most notably my college buddy Bill Ackman of Pershing Square – had donated millions of dollars to buy 27 of them. We donated the ambulances to a wonderful charity called MOAS (Migrant Offshore Aid Station), founded and run by American entrepreneur and humanitarian Chris Catrambone.
MOAS currently operates 51 ambulances out of 14 operating bases located across the entire front line, transporting wounded soldiers and civilians, most in Condition Red (unconscious and intubated). It has transported 115,000 people and has never lost a single one.
Here's a picture of Chris and me with the mayor of Kyiv and former world-champion heavyweight boxer, Vitali Klitschko, after meeting with him on Monday:
And here's a YouTube video of an interview I did with Chris that same day.
My first trip to the country was in February 2023, when I decided to deliver the first donated ambulance myself to Lviv in western Ukraine:
Over the years, the ambulances have been breaking down from nonstop usage, terrible roads and accidents, and the bitter cold. (Fortunately, none have been damaged from Russian drone strikes... yet.)
Here's one of the ambulances last week after it got caught up in the anti-drone netting that covers many of the main roads in eastern Ukraine:
Chris struggles every month to raise the money to pay his 150 staffers – primarily the three people in each ambulance: a driver, medic, and doctor/anesthesiologist. So I've been raising money for him.
On Monday, I texted one of my hedge-fund friends (who chooses to remain anonymous, but you would know his name) that I was with Chris. And I'm pleased to report that he donated another $100,000 on the spot.
During my latest trip, I raised an additional $250,000 from other friends, which I've already sent to more than a dozen people and organizations to alleviate suffering and help Ukraine win the war. They've used that money to buy things like generators, EcoFlows, vehicles, electronics, and other items I can't discuss publicly (use your imagination and you'd likely be correct).
If you'd like to learn more and/or support my campaign, simply go to the dedicated website set up for me by my charity partner, TAPS (Tragedy Assistance Program for Survivors): www.taps.org/Tilson.
And if you donate, please send me an e-mail by clicking here so I can have TAPS track it and confirm the receipt. I will then send the funds, usually the same day, to whatever my friends in Ukraine tell me is most urgently needed. (I later get reimbursed by TAPS.)
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.