4Q25: The Tail Wags the Dog

To My Partners:

“There was one earnings release that deserves mention. The first quarter results by Nvidia, a semiconductor company were outstanding. Perhaps the best earnings report I have seen since the early days of Apple and the iPhone… I still find the trillion-dollar valuation and the comparison to the iPhone as setting a rather high bar for expectations, especially when the CEO's examples for use of this cutting-edge technology are AT&T and car repair estimates.” 2Q23 It’s the Hope that Kills You

The horse’s patoot responsible for that quote is the same man responsible for managing your money. And boy was I wrong. iPhone sales over the past few years have averaged approximately $200 billion a year with a gross profit margin of about 36%.

NVIDIA’s most recent quarterly results included the announcement that they expected a half of trillion dollars of AI chip orders for the next 15 months. All with a gross profit margin 73%. In a couple years NVIDIA has sales expectations and profit margins that are more than double the iPhone. This indeed makes me feel like a giant horse’s patoot.

However, your money manager showed some redeeming foresight. Around the time of the earth-shaking NVIDIA earnings announcement, I had an email exchange with a colleague who was boasting about having zero exposure to the "Magnificent Seven" (NVIDIA, Apple, Microsoft, Google, Meta, Tesla, and Amazon) in his client portfolios, I argued: "Only the big seven can afford the necessary investments in AI - therefore, we have no choice but to invest in them."

Had I invested directly in NVIDIA stock, our accounts would certainly show a higher balance today. Instead, I opted for an indexed approach, concentrating on the large-cap US market, represented by the S&P 500.

According to a recent Forbes article, over the past couple years 75% of the S&P 500's gain, along with 80% of its profits and 90% of its capital spending, were driven by the AI efforts of the Mag-7 and a handful of others.

First, look at height. The average and median height of the crowd would be nearly identical—around 5’9’’ for men and 5’3’’ for women. The distribution is stable.

Now, look at wealth. The median net worth might be $200,000, while the average is skewed higher to $1 million. But here is the power law in action: If Jeff Bezos walks into that stadium, the average net worth instantly skyrockets to $5 million, while the median remains completely unchanged. In a power law environment, the outlier doesn't just skew the average; the outlier is the average.

In competitive arenas, failure acts as a repellent; people distance themselves to protect their own standing. Winning, however, is magnetic. It draws in people and resources, acting as a force multiplier where the first victory enables a larger second one. The Magnificent Seven have become economic black holes. Their sheer mass allows them to borrow capital for near-zero cost while competitors pay a premium. This advantage compounds because gravity applies to talent and consumers, too: no one wants the "5th best" smartphone, and top-tier engineers do not dream of working for the "5th best" software company. The universe doesn't just favor the giants; it feeds them.

Is it a Bubble?

Given all the attention to AI and the companies behind it, the question that keeps arising is whether we are experiencing a bubble. It is a difficult question to answer. Power laws don’t just make things unequal; they also make them fragile. Because so much of the market’s fate depends on so few. The gap between “incredible” and “look out below” can be triggered by an earnings release, new regulation or another technological shift.

Every major bubble has started with something real and important.

• Railway mania of the 1800s was about the industrialization of transportation and the conquest of geography.

• The automobile bubble was about the individual freedom of personal transportation.

• Nifty Fifty of the 1970s was about consumer brands that defined America.

• 90s Dot-Com bubble was about the Internet and mobile communications.

• 2000’s Housing bubble was about demand for housing driven by foolish financing.

In each case the story was fundamentally right. The error was in the extrapolation of the trend. AI fits the previous technological advancement pattern.

Obviously transformational potential

Uncertain economics and applications

0Capital intensive build out

You don’t need to be a computer science expert to see AI requires an enormous amount of computing power. We do need the humility to admit we have no idea about AI’s steady state.

• How much compute will we ultimately need?

• How quickly will efficiency gains reduce that need?

• Who will capture the economics? Chipmakers? Cloud providers? Application layers? Consumers?

• When will growth flatten? Every “S” curve eventually does.

What we do know is that today’s market prices implicitly assume:

• Many years of rapid AI spending growth.

• High sustained margins for a handful of winners.

• Limited disruption to the current group of leaders.

These assumptions may be true. They just aren’t knowable.

Those closest to the technology insist we are merely in the first inning. Those grounded in market history point to base rates and see a bubble. I cannot tell you which camp is right; I only know that applying the iPhone as a historical base rate for Nvidia two years ago left me wildly off the mark. Base rates do not apply to Earth-shakers. However, market physics still apply. The enthusiasm is undeniable, as prices climb, the air gets thinner. Every tick higher moves us closer to the line between rational growth and unsustainable extrapolation.

What are we doing?

We face a paradox: the very technology driving valid optimism is simultaneously creating structural fragility. As these stocks rise, the market becomes increasingly concentrated on a narrower base.

We have seen this movie before. The stock market boom of the 1990s was driven by excitement over real innovation. The ensuing crash was brutal for portfolios, but it was essentially a massive, crowdsourced subsidy for the world's fiber-optic infrastructure. Investors went broke, but society got to keep the internet.

I don’t know exactly how this current inflection point will play out. But I can speak for our collective goal: We want to participate in the technological progress, but we have no desire to be the ones providing ‘sacrificial capital’ to subsidize this grand AI experiment.

Because the market is becoming increasingly top-heavy, I am concerned the eventual decline will be sharp. In a market driven by a "Power Law," traditional diversification—owning a little bit of everything—stops working. It acts like a sander, smoothing away your best returns while failing to protect you from the jagged edges of a real market crash.

So, we are taking a different path.

As an investor, you eventually learn that having the right opinion isn't enough to make money. It is how you express that opinion that matters. The financial instrument you use is often more important than being right.

I have spent the past year restructuring our portfolios to focus on adding convexity by using options for protection.

In financial terms, convexity is a fancy word for an asymmetric bet: heads we win, tails we don't lose much. It allows us to participate in the market’s upside while placing a hard, limit on our downside. This structure is a deliberate countermeasure to the market fragility I described above - building a wall of protection against a brittle system.

By paying a small, known price for this explicit protection, we avoid the devastating losses that destroy long-term wealth creation. Compounding works best when it is uninterrupted. By capping our downside, we don’t just protect capital; we mathematically improve our ability to grow it. We are effectively turning defense into offense, ensuring we have the dry powder to capture the upside while others are digging out of a hole.

This structure makes us simultaneously hyper-conservative and hyper-aggressive. We refuse to settle for 'medium' risk. In our view, the middle of the road is not where safety lives; it is where you get run over. Other’s mediocrity is our opportunity.

Innovation is a fire that fuels growth, but it also burns capital. Our job is to warm our hands by the fire, not burn them in it. We must participate in the 'Inflection Bubble' to build wealth, but ensure our portfolio is fireproofed against the heat.

A Turkish proverb reminds us “no road is long with good company.” This sentiment captures exactly how I feel after another great year working with you. Thank you for your continued trust; it is an honor to have you as an investment partner.

Cautious Investing,

Eric Wills

P.S. Written with ink and paper, edited for grammar with AI. I also learned, AI does not like the word “patoot.” Except for the Mag 7 CEO cartoon that was all AI.

Stress-Relieving or Stress-Inducing? The 0.01% Rule

With the holidays behind us—and the heavy focus on spending still fresh in our minds—a new framework has been percolating as a way to measure "guilt-free" spending.

If we are being honest, many of us savers struggle with the psychology of "pulling the trigger." I’ll be the first to admit that even when I can afford a purchase, I struggle to spend money at times. Recently, a new rule of thumb has gained popularity to help high-savers overcome this mental block.

The Formula

The concept is simple: take 0.01% of your total net worth as a benchmark for a safe, guilt-free purchase.

• If your net worth is $500,000, you can spend $50 without a second thought.

• If your net worth is $1,000,000, that number moves to $100.

The logic is that these amounts are so marginal relative to your total wealth that they have zero impact on your long-term financial trajectory.

The "Prescription" and Its Side Effects

For those who have spent a lifetime mastering the art of saving, this rule is a welcome prescription. It provides the permission some people need to enjoy the fruits of their labor. However, every prescription comes with a warning label.

If this "medicine" is taken too liberally, it can lead to a cycle of impulsive spending that eventually detracts from your primary savings goals. The rule was intended to help those who only know how to save, not to provide a blank check for those still building their foundation.

Final Thoughts

We recommend using the 0.01% Rule in moderation. It is meant to relieve the stress of frugality, not to induce the stress of a diminishing bank account. This isn't just a reason to spend; it’s a tool to help you break the habit of constant accumulation when a small "win" is deserved.

The most important aspect of any financial rule is self-honesty. As the late Charlie Munger so aptly put it:

"Above all, never fool yourself, and remember that you are the easiest person to fool."

So go ahead and identify that one item or experience you’ve been putting off that falls under this dollar amount and remind yourself that the purchase only represents 1/10,000^th or your wealth.

In your corner,

-Adam Ogle

“No Bamboozlement Here” I recently saw that line at the start of another legal disclaimer. It caught my attention and hope it captured yours as well. Disclaimers boil down to the following statement – if you choose to believe any of this, then you are on your own. Jeepers! Given the ramifications, I too must disclaim liability for errors, omissions, and offer no warranties. I encourage you to verify my information, point out and forgive any errors. I am human and prone to mistakes, though I always strive for honesty.

While I do not intend to mislead, I cannot guarantee the accuracy of my content or the interpretation of my ideas. As an investor, I strive to do a good job and provide informative updates on my actions and thought processes. I hope these letters are read in the same spirit in which they are written.

Common sense tells you that the price and value of shares can vary greatly, and while I do not aim for this, we must also recognize that impairment of capital is possible.In my communications, I refer to clients as “partners.” I do this to convey a relationship that I seek where we share an experience and common destiny. I do not mean to suggest that there is a partnership in a strict legal sense of the word between clients, prospects or others that have an interest in the content produced by Park River Advisors LLC.