Fundamental Value: Tenth Anniversary Letter

Last week we celebrated our ten year anniversary as a firm. To mark that milestone, we’ve decided to frame this letter using quotes from our earlier writing. If you have read our letters, you will have noticed several things. First of all, you will see that our contrarian, value-based approach of exploiting investor behavioral biases has been consistent over time, despite the comings and goings of various fads and narratives. While this “does leave us vulnerable to looking foolish around extremes and turning points,” (2024) that discipline has rewarded us handsomely over time. Second, you will also see a narrative arc. Our earlier letters are filled with the humdrum of our typical investment process – what we bought and why. Our more recent letters obviously still include investment theses, but over time they have also become saturated with increasingly dire forecasts for the US stock market. We don’t think we’ve changed over the past decade. We think the market has.

Market commentary   Fundamental Value’s returns have been excellent over the past decade, averaging an annual return of 20.9% net of fees compared to the S&P 500 at 15.4%. In total, FV is now up 569.2% net since inception versus 318.8% for the S&P 500.1   “Active value investing is the core of our philosophy at Bireme Capital.” (2019) We are value investors both because it fits our temperament, and because evidence suggests “value investing offers superior long-term return prospects… Since 1926, value has outperformed growth by 3.7% annually according to the canonical Fama-French HML portfolio.” (2019) However, the past several decades have not been kind to value investors. Since FV’s inception, the S&P 500 Value Index has lagged the S&P 500 Growth Index by a dismal -5.0% annually.   We do not believe value is dead. Human nature undergirds the value spread, and human nature is unchanging. Counterintuitively, the fundamental reason for growth’s historical underperformance is its psychological appeal. Investors are biased towards buying growth stocks:   Being a growth investor is very appealing. It is exciting and rewarding to invest in hot new technology and ideas. People with interesting business ideas will seek you out, and you’ll be a hit at dinner parties. Investing at an early stage in the right growth company can lead to life-changing wealth. And if an investment does go wrong, no one will blame you, because everyone agreed with you in the first place.   Contrast this with value investing. Value stocks trade cheaply relative to earnings or assets; by definition this means they are relatively unloved by the marketplace. Value investing means finding companies that others eschew, investigating the problems at these companies, and determining whether or not these issues are as serious as others think.   People prefer to be growth investors for reasons other than the financial return. Therefore, we should expect returns to growth capital to be lower. (2020)   Value has endured protracted periods of lackluster returns before, notably during the run-up to the internet bubble in the 1990s. When that bubble finally popped, value came back with a vengeance, besting growth “by nearly 20% annually over the next 5 years, resulting in a phenomenal 147% of total outperformance.” (2019) Markets are cyclical, and at some point the value factor will return to prominence once again.   What we got right   Despite the style headwind, we’ve been able to beat the market by taking the investor behavioral bias behind the value spread and applying the lesson more broadly:   We’ve spent our careers as students of investor irrationality. We believe that markets are mostly efficient, punctuated by brief episodes of collective delusion that manifest as bubbles and panics. Collective delusion can occur on both the micro scale for individual assets, and on the macro scale for entire asset classes. Our Fundamental Value strategy seeks to exploit these rare opportunities: we attempt to identify situations where cognitive bias has caused investors to misvalue a security. (2024)   Thus, essentially by definition, many of our investments and our public stances are contrarian. Bucking conventional wisdom has served us well in the past. For example, we bought hand-over-fist during the COVID crash when other investors were panicking:   Great businesses with strong balance sheets who we think should emerge from the crisis relatively unscathed can be bought for very cheap. This has created very attractive investment opportunities – better than we’ve seen in many years – for the few who do have spare cash to profitably put it to work. We hope to be able to stay calm and take advantage of any opportunities that are caused by the panic selling and short-sightedness of others. (2020)   And we anticipated the surge in inflation and interest rates in 2021, and the ensuing collapse in speculative securities that followed:   We believe inflation is likely to be the catalyst that ultimately pops the everything bubble. If we are correct, eventually the Fed will have to reverse course, tightening policy and raising interest rates. When this happens, investors who have speculated in low or no-yielding assets like SPACs, high-flying growth stocks, and NFTs may find their portfolios permanently impaired. (2021)   And in 2022, when Meta reported poor earnings and ballooning virtual reality losses, investors soured on the stock (Jim Cramer was near tears). Meanwhile we pounded the table, calling Meta at $110 a share “one of the best investment opportunities we have seen in our careers.”   What we got wrong   While many of our predictions have come true, an oft-repeated one very conspicuously has not. From 2021’s Part III: Apex of a Bubble (and reiterated several times since then): “These extreme valuations presage real returns that investors will find severely disappointing – and likely negative – for many asset classes over years to come.”   Instead, after a painful but brief bear market in 2022 and 2023, the S&P has roared to dramatic new highs on the back of strong earnings, an AI capex boom, a return to nosebleed valuations, and a frenzy in the most speculative securities.   Though we’ve been wrong thus far and the S&P continues upwards unabated, we do not think it is time to change course. We continue to believe that investors are “applying peak multiples to peak earnings in an environment of deteriorating institutions, ballooning deficits, and rising geopolitical risk. It is difficult to imagine a scenario less likely to lead to durable stock market gains.” (2026) The US stock market sits at historical extremes on nearly every measure. The S&P trades around 25x trailing operating earnings, within a few turns of all-time highs. The Shiller PE, a long-term valuation measure which smooths earnings over time, looks even more elevated at 41x, only slightly below the all-time high set in 1999. The dividend yield of ~1.0% is basically at all-time lows. And with interest rates high and rising, the S&P 500 earnings yield is lower than the 10 year Treasury yield – the first sustained negative reading since 2003.   Speculative fever has supplanted rational analysis. It’s been going on so long that most market participants no longer seem to even notice: “Bouts of unhinged speculation have been so frequent and pervasive that investors have become inured to it.” (2026) In a single record-setting day this spring, investors bought an astounding $2.6 trillion of S&P 500 call options. Margin debt has climbed to a record $1.3 trillion, up 53% in a year, while assets in leveraged equity ETFs doubled in just two months. A failed sneaker company rose nearly 600% in a day by renaming itself “NewBird AI.” Quantum-computing stocks trade at more than 600 times sales even as their own insiders have sold nearly $1b worth of stock.   Even the SPAC is back: blank-check issuance has returned to its highest level since 2021, despite the average SPAC losing -62% of its value after merging. We caricatured these vehicles in 2021 as “Sponsors Pilfering Average Consumers... a virtually no-lose situation for SPAC sponsors, investment banks, and hedge funds, subsidized by retail investors.” Chamath Palihapitiya, who billed himself as the next Warren Buffett, created four SPACs that merged with operating companies. They’ve since collapsed -35% from their IPO price on average. If all investors who bought into his SPAC IPOs had held through today they would’ve been sitting on a roughly $800m loss, nearly the mirror image of Chamath’s reported $750m windfall of sponsor profits. Investors are undeterred: in September 2025 he got back in the SPAC game with American Exceptionalism Acquisition Corp – ironic, given our last missive was titled The End of American Exceptionalism.   As we said in that letter:   We are now in the throes of that final, extreme wave of speculation. In software engineering, coders are vibe coding, giving in to the vibes and forgetting that the code even exists; in capital markets, investors are “vibe investing,” giving in to the vibes and forgetting that the financials even exist. Assets are priced based on their ability to spin a fantastical science-fiction story rather than on any plausible estimate for future cash flows. (2026)   The statistics and anecdotes above are flashing red warning signs that investors are all-in. The equity risk premium is perilously thin: “When markets are priced for perfection and sentiment is euphoric, even a small amount of negative news flow can trigger substantial declines. And truly bad news can trigger historic crashes.” (2025) We expect air pockets, like those that occurred in the past week, to become more frequent and severe.   We are concerned that some may consider us permabears. Admittedly, we’ve spent much of the past six years making a series of escalating warnings about long-term index-level returns that – thus far – have not borne out. However, in our defense, our predictions have not always been so dire as they are today.   In 2018 we pointed to a US equity market that was getting more expensive, but one in which we could still find attractive opportunities: “Despite the market’s increasingly rich valuation, we continue to find stocks we believe will generate high single-digit to low double-digit returns.” (2018) In early 2020 we wrote benignly that “valuations as a whole are still not especially compelling.” (2020)   While these high-level macro views help inform us where to look for opportunities, all of our individual stock selections are made using a bottom-up process. What we’ve found on the ground has been consistent with what we saw from the air, and our positioning has reflected it. We had negligible short exposure from inception until the middle of 2020, when valuation indifference and the meme-stock frenzy made the opportunity set too compelling to pass up. As recently as 2023, we were finding substantial value in US longs, and our international investments totaled only about a third of NAV. Today, however, we are 92% net long internationally, and given our shorts are predominantly based in the US, we now have a -25% net short position in US-domiciled companies. Our exposure to the US has decreased virtually monotonically since inception (excepting the 2022 bear market), commensurate with our assessment of the relative opportunity in the US versus overseas.

While this may seem extreme, remember that “American exceptionalism is not preordained.” (2026) Over the years we have pointed out various risks and crises-in-the-making. Beyond the market itself, we worry about the macro backdrop: structurally higher inflation while oil and commodity prices are newly exposed to geopolitical shocks. Our government maintains Depression-level fiscal spending while the economy is booming, despite ballooning debt and interest payments. Layered on top are political dysfunction, institutional decay, the slow erosion of America’s edge in technology, academia, and industry, and a looming crisis in the old-age dependency ratio. Some may point to AI as a panacea, justifying the valuations despite the risks. We are skeptical: “Enormous value will be created by artificial intelligence. But the vast majority of that value will not be captured by producers, but instead accrue to users of the technology in the form of consumer surplus.” (2026)   These are all long-term phenomena, none necessarily imminent; several are merely risks rather than predictions. We don’t claim to know if or when the market will be forced to reckon with them. But they are worth keeping firmly in mind, because today’s valuations leave no margin of safety to absorb them: “Lower returns are embedded because of rich valuations; should any of these idiosyncratic risks materialize, that will merely worsen our expectations.” (2019)   Regardless, our success is not dependent on the fortunes of the US equity market. With our current conservative positioning and attractive, idiosyncratic names, we expect to make money whichever direction the American indexes travel. We continue to find many compelling opportunities overseas, and a precious few here in the US. When the US sees a normalization of earnings and/or valuations, we expect our current positioning to be enormously accretive.   Conclusion   We’ve been able to beat the market handily over the past decade. And today, Fundamental Value has rarely, if ever, been more strongly positioned to outperform the US market. Our long book is full of high-quality companies, mostly overseas, that trade at reasonable valuations. Our short book overflows with mediocre growers trading at 30-60x earnings, and high-growth names trading at obscene valuations, often over 100x sales, that they will not be able to grow into. There’s no guarantee that this trade will work tomorrow – momentum-chasing can always get more extreme. But we are confident it will work in the near future.   We’ve always said that our job is two-fold: “generating strong long-term returns through the full market cycle, and retaining capital through the full market cycle.” (2024) The latter is why we don’t just report our returns, but write these thorough investor letters: “This is why we have poured our heart and soul into these letters since we founded Bireme Capital in 2016. Rather than relying on our exceptional returns to sell to new clients and retain existing ones, we encourage investor education, seek philosophical alignment, and thoroughly document our process and predictions.” (2024) Thank you to our clients for sticking with us through the ups and downs, whether our portfolio positioning makes us look prescient or foolish.   As we celebrate Bireme’s ten-year anniversary, we feel very lucky. We love investing – attempting to beat the market is the world’s most challenging and stimulating intellectual pursuit. And we love writing these letters for you – thank you for reading them. It’s been a pleasure to go on this journey with you for the past ten years.   Portfolio commentary   Bolloré, still one of our largest positions, announced a €1.5 per share special dividend during the first quarter, equal to more than 30% of the company’s share price. The dividend is funded by proceeds from the 2022 and 2024 divestitures of its logistics businesses which generated roughly €10b of cash.   This large dividend will reveal the true nature of Bolloré’s structure, which we discussed at length in our 2019 writeup. The economic share count of Bolloré is less than half the reported share count because most Bolloré shares are self-owned by subsidiaries in a complicated web of corporate crossholdings. For example, a publicly traded entity named Compagnie de l’Odet owns roughly 71% of Bolloré shares, yet many of L’Odet’s owners are themselves owned or controlled by Bolloré. So while L’Odet has said it intends to distribute at least two-thirds of the dividend it receives, a large portion of that cash will ultimately remain within the Bolloré group. In other words, Bolloré can pay a 30% dividend to external shareholders while still retaining most of the cash inside the controlling structure.   With the opaque structure properly accounted for, Bolloré stock remains heavily discounted, with a net asset value of around €12 versus a share price around €5. L’Odet took advantage of this discount by aggressively buying €177m of Bolloré shares in Q1. Each additional share acquired by L’Odet at these attractive prices is accretive to per-share value, widening the price-to-NAV gap.   Bolloré’s most valuable asset is its ownership stake in Universal Music Group. UMG declined from €28 at its peak in 2025 to around €18 today despite reporting 8.6% constant currency EBITDA growth in FY 2025. While our previous calculations of Bolloré’s NAV per share could perhaps have been criticized for implicitly valuing UMG at 25x forward earnings, UMG’s 16x multiple today is near its lowest ever and seems quite reasonable. This gives us more confidence in the accuracy of our Bolloré valuation. Regardless, with Bolloré trading at a >50% discount to NAV, we have a comfortable margin of safety.   Software   In the first quarter, US-listed software had its worst drawdown since the financial crisis, with the iShares Expanded Tech-Software Sector ETF (IGV) down -24.3% through March 31 as advances in AI capabilities caused investors to reassess the strength and valuation of these businesses.   For years it has been common knowledge that chatbots like ChatGPT, Claude, and Gemini can write excellent code and dramatically improve the productivity of programmers.   The pace accelerated further in 2025 when Anthropic released Claude Code, a command-line tool that lets Claude read and edit files directly on a user’s machine in an agentic, hands-off loop. This is not only a step-change in usefulness for trained developers, it is also capable enough to be directed by non-professionals, dramatically expanding the number of people who can build software. We’ve both used Claude Code and similar tools for internal software projects and have come away awed and amazed. In just a few weeks, Evan – who has little software-development training – built an internal equity research platform. Ryan created an agentic investment analyst pipeline that knows the Bireme philosophy, searches for new investment candidates, and surfaces initial memos for the most promising.   It is clear that we have entered a new paradigm for software development. Software can now be created cheaply and easily by individuals or small teams with minimal training. This portends an increase in competition and margin pressure. Furthermore, the rise of AI agents poses still more questions. The traditional SaaS seat-based pricing model may be pressured as agents handle more knowledge work, reducing the number of human users. Alternative pricing methods like usage- and outcome-based pricing have been proposed, but profitability and adoption remain uncertain. Agents could also disintermediate SaaS platforms that are central to every enterprise. Today, CRMs are the center of every salesperson’s workflow; if AI agents become the primary user orchestration and interaction point, that could reduce previously integral software platforms to mere CRUD databases, with concomitant pressure on margins.   There’s been little to no measurable effect on the financials of most software businesses thus far – but the current financials were never where most of the value lay. IGV’s top ten holdings started the year at 10x forward sales and 43x forward GAAP earnings, implying that most of the value sat far out in the future. With the rise of AI, pricing indefinite double-digit growth at traditional software margins now seems foolish. Thus, the selloff represents a rational reassessment of software’s exuberant terminal values. This is the inherent risk of buying businesses at high valuations: it requires certainty about future states of the world. Given today’s elevated uncertainty, the epistemic humility of value investing feels especially prudent.   While the current downswing took IGV to ~29x forward earnings, software continues to trade at a premium to the S&P 500. Still, we believe discerning investors can find selective opportunities in this space. While competition may increase, we do not believe many companies will soon rip out mission-critical enterprise software like CRMs and ERPs for vibe-coded homegrown solutions. And there are potential revenue-generation and cost-cutting opportunities for incumbents as well. For businesses insulated from AI’s effect, trading at reasonable valuations, the recent broad-based software stock declines could be seen as a case of availability bias: investors over-weighting negative news headlines rather than analyzing the business rigorously.   This is what we’ve found in Japan: our investee companies trade at 7-10x forward PE ratios net of cash even while growing revenue in the high-single- to low-double-digits. Unlike in the US, these earnings ratios are clean, as they do not attempt to wave away the very real expense that is stock-based compensation. Such add-backs obfuscate many “adjusted” PE ratios reported in the US software industry.   Japanese software also enjoys very low churn rates – often below 5% annually – versus double-digit rates for similar SMB-focused US software products. And these companies have room to grow: the SaaS spend in Japan is much lower than in other advanced economies. According to one estimate, Japanese companies currently spend about 4% of their IT budget on SaaS versus 17% for US companies.   Solid, growing companies that sell mission-critical software valued at single-digit PEs – this is the kind of pessimism that gets us excited.   Despite their modest valuations, our Japanese software holdings declined in Q1. PCA Corp. (9629) fell -12% and Software Service (3733) fell -15%, while ORO (3983) was roughly flat but remains down about -40% from its August 2025 peak. The global software selloff has not made us less interested in these companies. If anything, it has clarified the distinction we see: unlike many US software stocks, these businesses trade at modest multiples, retain customers at high rates, and operate in a market where cloud and SaaS adoption remains underpenetrated. We used the weakness to add to some existing positions and continue to research similar names.   We are grateful for your business and your trust. If you know someone who may wish to allocate capital alongside us, we would welcome an introduction.   - Bireme Capital   Follow our content by subscribing here. __________________ 1 FV performance is shown net of a 1% management fee and a 10% performance fee. Available for Qualified Clients only as SEC rules do not permit performance fees for nonqualified investors. Fee structures and returns vary between clients. FV inception was 6/14/2016. Advisory fees and other important disclosures are described in Part 2 of Bireme’s Form ADV. Reported performance is a dollar-weighted average of the securities in the Fundamental Value L/S Model Portfolio maintained at Interactive Brokers from inception through October 2023. From November 2023 onward, reported performance is a dollar-weighted average of the performance of all client accounts invested solely in the Fundamental Value L/S strategy with no client-directed customizations to the portfolio composition. Performance is shown net of a 1% management fee and 10% performance fee. Available for Qualified Clients only as SEC rules do not permit performance fees for nonqualified investors. Past performance is not indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. The SPY ETF seeks to track the performance of the S&P 500 Index, and the performance described includes both fees and the reinvestment of dividends and other distributions. Registration does not constitute an endorsement of the firm, nor does it indicate that the advisor has attained a particular level of skill. See biremecapital.com/disclaimer for important disclosures. Sources: Bloomberg Finance LP, Interactive Brokers LLC, Bireme Capital LLC.