Excess Returns

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In this episode of our new show, 100 Year Thinkers, Robert Hagstrom and Chris Mayer explore how investors should think about base rates, extreme outcomes, and the realities of long-term wealth creation in markets. Applying the work of Michael Mauboussin, the conversation challenges conventional ideas like mean reversion and highlights why a small number of companies drive most stock market returns—and what that means for portfolio construction.
This episode brings together Robert Hagstrom and Chris Mayer to explore how investors should think about base rates, extreme outcomes, and the realities of long-term wealth creation in markets. The conversation challenges conventional ideas like mean reversion and highlights why a small number of companies drive most stock market returns—and what that means for portfolio construction.
Topics covered
• Why markets are driven by extreme outcomes and power laws, not averages
• The Best & Bessembinder research showing a handful of stocks create most wealth
• Base rates vs outliers and when to trust historical probabilities
• Why the 100 bagger framework focuses on studying winners, not predicting them
• Portfolio construction as a way to capture asymmetric upside
• Buffett’s approach to consistency, durability, and long-term operating history
• Inside view vs outside view and how narratives distort investing decisions
• Why AI may be breaking traditional base rate assumptions in software and tech
• The limits of mean reversion and why it can lead investors astray
• Return on invested capital and how competition erodes excess returns over time
• Identifying durable moats and why most advantages eventually get attacked
• Winner-take-all dynamics and how they shape long-term investing outcomes
• The twin engines of returns: earnings growth and multiple expansion
• Return on incremental capital as a key driver of long-term compounding
• Intangible assets and why accounting understates true business value
• Amazon as a case study in misunderstood profitability and reinvestment
• AI CapEx cycle and why current spending may not be sustainable long term
• Why great businesses matter more than great management in long-term investing
Timestamps
00:00 Why extreme outcomes drive stock market returns
01:00 Base rates vs studying 100 baggers
03:00 Power laws and why markets are a game of outliers
05:00 Just 46 companies created half of all market wealth
07:00 Buffett on consistency and long-term operating history
10:00 How to think about base rates in AI, energy, and macro cycles
12:00 Does AI invalidate historical base rates?
15:00 Inside view vs outside view in investment decision making
19:00 Buffett’s “certainty at a discount” framework
23:00 How often investors should evaluate businesses vs prices
29:00 Mean reversion myths and where it breaks down
33:00 Return on invested capital and competitive pressure
36:00 Moats, winner-take-all markets, and long-term dominance
41:00 Twin engines of compounding: growth plus multiple expansion
43:00 Return on incremental capital and forecasting future returns
47:00 Intangibles and why accounting distorts real business value
50:00 Amazon, CapEx cycles, and hidden profitability
53:00 AI infrastructure buildout and the future of returns

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This episode breaks down the growing tension beneath the surface of today’s markets, where volatility signals, options positioning, and macro risks like war and inflation are increasingly misaligned. Brent Kochuba and Jack Forehand explain why markets appear calm despite heavy hedging, and what that disconnect could mean for a potential volatility spike and downside move ahead.
Brent Kochuba on Twitter
https://twitter.com/SpotGamma
SpotGamma Website
https://spotgamma.com
Topics covered in this episode
• Why volatility looks elevated beneath the surface even as markets remain relatively calm
• The growing gap between implied volatility VIX and realized volatility and what it signals
• How options expiration OPEX can create turning points in both price and volatility
• Why current positioning is unusually put-heavy and what that means for downside risk
• The role of market makers and hedging flows in driving market moves
• How geopolitical risks like the Iran conflict are changing options behavior and hedging demand
• Why correlation is spiking and what it says about investors moving from stock picking to asset allocation
• The breakdown of traditional diversification including the 60/40 portfolio
• How credit markets and liquidity risks could amplify equity volatility
• The impact of zero DTE options and why traders are shifting to longer-duration hedges
• The significance of the JP Morgan collar trade and key levels to watch into month-end
• Why volatility spikes often follow periods of suppressed market movement
• The potential for a sharp upside rally if geopolitical risks suddenly resolve
• How options positioning can help both traders and long-term investors with timing decisions
Timestamps
00:00 Volatility premium vs low market movement disconnect
01:00 Why markets feel calm despite rising risks
05:20 Explosion in options volume and impact of Monday Wednesday Friday expirations
07:00 How market maker hedging flows drive price movements
08:40 Dynamic hedging and why options impact evolves over time
09:20 Why OPEX can trigger market turning points
10:30 VIX expiration effects and short-term volatility suppression
13:00 Negative gamma and how it amplifies market volatility
14:10 Why hedging demand remains high despite OPEX clearing
16:00 Jump risk scenario and potential VIX spike to 40
17:10 Shift from zero DTE trading to longer-term hedging
18:00 Put-heavy positioning across equities and indices
20:40 Size and significance of the current OPEX event
22:20 VIX spike dynamics around expiration
23:40 JP Morgan collar trade and key SPX levels
25:00 Why OPEX often marks short-term market lows or highs
28:30 Review of prior OPEX signals and market setup
30:00 Rising correlation and shift to asset allocation mindset
32:00 Dispersion breakdown and implications for equities
34:00 Software sector volatility and AI disruption narrative
36:30 Using options signals for better timing decisions
39:00 Correlation spike and risk-off behavior across markets
41:30 Why investors are avoiding calls and piling into puts
44:30 Cross-asset correlation breakdown and bond hedge failure
48:00 Credit market risks and spillover into equities
49:00 Extreme VIX vs realized volatility spread
50:50 Why realized volatility remains unusually low
52:30 Oil, inflation, and macro feedback loops

In this episode, Jared Dillian joins Excess Returns to break down why markets consistently misprice major regime shifts, geopolitical risks, and inflation shocks—and what that means for investors today. The conversation explores how changing correlations, Fed policy constraints, commodities, and portfolio construction are reshaping the investing playbook in 2026.
Jared Dillian Twitter
https://twitter.com/DailyDirtNap
Daily Dirt Nap
https://www.dailydirtnap.com
Topics Covered
Why markets fail to price low-frequency, high-impact events like war and geopolitical shocks

The concept of regime change and why investors struggle to adapt to new market environments

The breakdown of the 60/40 portfolio and stock-bond correlation in an inflationary regime

Commodities bull market dynamics and why energy, agriculture, and hard assets may outperform

The role of options and “long gamma” positioning in uncertain macro environments

Bitcoin as a liquidity trade vs. store of value and how sentiment drives crypto cycles

Fed policy, oil prices, and why central banks follow the “path of least embarrassment”

Inflation psychology, consumer behavior, and risks of 1970s-style market conditions

Political bias in investing and how ideology shapes portfolio decisions

Risks in private equity and private credit, including valuation marks and liquidity issues

The Awesome Portfolio framework and why diversification across asset classes reduces drawdowns

AI, productivity shifts, and how technological change impacts markets and labor trends

Timestamps
00:00 Why markets misprice geopolitical risk and regime change
02:00 Ukraine, Iran, and delayed market reactions to obvious risks
05:00 Overreaction cycles and the Peloton example
06:00 What it means to be long gamma in investing
09:00 Oil volatility and asymmetric risk opportunities
10:00 Regime change explained through stock-bond correlation breakdown
12:00 Non-stationarity and why investing rules constantly change
14:00 Why most investors fail to adapt to new regimes
17:00 Position sizing, risk management, and staying “small”
19:00 Commodities bull market and broad participation across assets
20:30 Bitcoin as a liquidity sponge and sentiment-driven asset
22:00 Fed policy, inflation, and the path of least embarrassment
25:00 Oil-driven inflation vs demand destruction dynamics
27:00 Inflation psychology and real-time indicators
29:00 Are we entering a 1970s-style macro regime
31:00 How political views shape investment strategies
35:00 Learning from past mistakes and adapting to new trends
37:00 Private equity and private credit valuation risks
40:00 Liquidity cycles and refinancing risk in credit markets
43:00 The Awesome Portfolio explained
46:00 Behavior, drawdowns, and why diversification works
49:00 Real estate allocation and portfolio construction
51:00 Labor trends, productivity, and changing work dynamics
54:00 AI productivity boom vs social media drag
57:00 The dangers of consensus thinking and unpopular views

Biotech is one of the few areas in investing where specialized knowledge may still generate persistent alpha. In this episode of Excess Returns, D.A. Wallach, venture capitalist and co-founder of Time BioVentures, joins us to explain how biotech investing works, why development-stage drug companies behave like portfolios of options, and why specialist investors play such a large role in this market. We also explore the cycles that have driven biotech performance, the impact of interest rates and capital flows, and how AI and global competition may reshape the industry in the years ahead.
D.A. Wallach – Twitter
https://x.com/DAWallach
Topics covered include
• Why biotech may be one of the last areas where specialist investors can generate persistent alpha
• The “bag of options” framework for valuing development-stage biotech companies
• How probabilities of drug success and clinical base rates drive biotech valuations
• Why rising interest rates hit biotech stocks harder than many other sectors
• How capital flows and investor narratives create boom-and-bust cycles in biotech
• What happened to biotech during the pandemic surge and the post-COVID downturn
• Why AI and tech narratives compete with biotech for investor attention
• The role of specialist biotech hedge funds in the public markets
• How large pharmaceutical companies drive returns through biotech acquisitions
• Differences between biotech venture capital and traditional tech venture investing
• How venture investors evaluate drug development programs and scientific evidence
• Portfolio construction and diversification when investing in highly uncertain biotech companies
• The emerging role of China in clinical trials and global drug development
• Whether AI can improve drug discovery, clinical trials, and pharmaceutical R&D productivity
• Why investors should avoid rigid value vs growth ideologies and stay adaptable
Timestamps
00:00 Why biotech investing requires specialized knowledge
01:40 Is biotech one of the last places for persistent active alpha?
02:45 The “bag of options” model for valuing biotech companies
05:00 Drug development phases and probabilities of success
07:00 Using base rates to estimate clinical trial success
09:20 Estimating total addressable markets for new drugs
11:10 Why rising interest rates hurt biotech valuations
13:00 Capital flows and why biotech underperformed in recent years
15:30 The biotech boom and bust around the COVID pandemic
18:00 How AI and tech compete with biotech for investor capital
22:20 The role of specialist biotech hedge funds
24:00 How pharmaceutical acquisitions drive biotech returns
25:20 How biotech venture capital differs from tech VC
30:50 Why biotech investors must evaluate complex scientific data
34:20 Where AI may improve drug discovery and R&D productivity
42:00 Portfolio construction and diversification in biotech venture investing
44:30 Volatility, valuation marks, and private market pricing
48:00 Managing risk across different drug technologies and disease areas
49:30 Why China is becoming important for clinical trials
53:00 Why biotech investing must be viewed as a global industry
54:30 The importance of flexibility between value and growth investing
58:50 Will investing become more systematic and quantitative over time

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In this episode, we break down the most important insights from the week on Excess Returns,, with insights from Vitaliy Katsenelson, Jim Paulsen, and Joseph Shaposhnik. Markets today are being shaped by powerful crosscurrents including AI disruption, defense spending, macro policy shifts, and historically high valuations. In this episode, we highlight the biggest ideas from our conversations and explore what they mean for investors trying to navigate an uncertain world. Topics include the importance of humility in investing, the potential disruption of software by AI, the growing divergence within the economy, and why long-term structural trends like defense spending may create new opportunities.
Topics Covered
• Why humility may be the most important trait for investors in a rapidly changing world
• How uncertainty around AI, geopolitics, and macro policy is widening the range of possible market outcomes
• Why some investors are reducing exposure to software businesses amid AI disruption
• The importance of management teams that can adapt and evolve in periods of technological change
• Jim Paulsen’s framework for understanding the “new era” economy versus the rest of the economy
• Why a small portion of the economy may now be driving overall GDP growth
• The idea that successful investing may be about being “least wrong” rather than perfectly right
• How long-term structural trends like defense spending could create a multi-year investment tailwind
• Why experienced investors focus on analyzing businesses rather than reacting to headlines
• The potential deflationary impact of AI and how lower prices could shift spending across the economy
• Why high market valuations may act as a headwind for future returns
• The importance of deep research and preparation when unexpected events hit markets
• Jim Paulsen’s concept of “policy juice” and how fiscal and monetary policy drive bull markets
• Whether a new wave of policy support could broaden the current market rally beyond mega-cap tech
Timestamps
00:00 Introduction
02:00 Why humility matters more than ever in investing
08:50 AI disruption and the future of software businesses
18:07 The growing gap between the “new era” economy and the rest of the economy
25:00 Surviving first and being the least wrong as an investor
31:43 The potential defense spending supercycle
37:44 AI’s deflationary impact and how innovation reshapes economies
44:42 Why valuations act as a long-term headwind for stocks
50:56 How investors should respond to geopolitical events
56:49 Jim Paulsen on policy juice and the future of the bull market