“Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.” – Peter Lynch
“Never bet on the end of the world, it only happens once.” – Warren Buffett
Q2 2025 - Market Update
Dear Clients and Friends,
If I had to characterize financial markets this year with one word it would be volatile. That said, you would be forgiven for thinking not much had happened this year based solely on the market’s headline performance of 6.20% year-to-date for the S&P 500.
For context, the year was already on shaky ground coming into the second quarter, and then “Liberation Day” on April 2nd ignited one of the most turbulent periods in market history. This extreme volatility saw the S&P 500 collapse by 22% over the span of just days. This rollercoaster was not limited to equities. Virtually every asset class, including bonds and the U.S. dollar, experienced significant declines.
The primary catalyst for this turmoil was the administration's new trade policy. The sudden unveiling of steep and unpredictable tariffs, which would vary by country, caught the market by surprise. Said another way, the rollout of the trade policy was confusing and disorderly. The administration had spent months creating the impression that tariffs would be reciprocal and precisely calculated. However, the announced rates were based solely on trade imbalances and did not seem targeted for national security, leaving investors and business leaders confused about the ultimate objective. The White House eventually chose to delay the tariffs for 90 days, but only after significant damage was already done to the financial markets.
While this delay has provided some much-needed relief, the core issue remains the vast uncertainty surrounding the policy itself. The unpredictable nature of the policy being implemented, reversed, increased, and then delayed pending opaque negotiations creates a paralytic environment for businesses. It is our belief that this prolonged uncertainty, and the potential for demand pull-forwards along with decision paralysis pose a greater threat than the direct financial cost of the tariffs themselves.
Compounding the market’s anxiety, Moody’s downgraded the U.S. sovereign debt on May 16th. While this event caused a stir, our reaction was one of inevitability rather than surprise. This move followed downgrades from Standard & Poor's back in 2011 and Fitch in 2023, reflecting a long-acknowledged concern over the U.S. debt trajectory. The downgrade came as long-term rates were already rising, driven by concerns over higher inflation and tariffs.
If that wasn’t already enough, adding another layer of geopolitical risk to the landscape, tensions in the Middle East escalated into a direct conflict between Israel and Iran in June. This “12 Day War” involved direct strikes from both nations and stoked fears of a broader regional conflict that could destabilize the entire area. The hostilities raised immediate concerns about the security of critical energy infrastructure and key shipping lanes, which are vital to the global economy.
Fortunately, a ceasefire agreement, reportedly brokered by the U.S., was announced on June 23, bringing a halt to the immediate conflict. While the ceasefire is a welcome development, the situation remains tense and serves as a stark reminder of the fragile geopolitical environment.
Against all this, and as we have stressed before, crises create opportunities, particularly for fundamental investors. Recall that in our First Quarter Update, we wrote:
“We don’t know where these companies that we own will be trading tomorrow (no one does) but from here the long-term returns they will provide us with are very enticing. We have been through market downturns before and panics like this are the time to think about buying more, not selling.”
That comment turned out to be prescient as stocks rallied significantly off the lows to new all-time highs. This brings us to the main topic we want to discuss in this update: how investors should think about these seemingly increasingly volatile markets.
How We Think About Volatility
In the world of investing, a fundamental misunderstanding often arises between the concepts of risk and volatility. Conventional financial theory, frequently taught in academic institutions and echoed in market commentary, equates risk with volatility. Metrics like beta and standard deviation are used to measure the fluctuation of an asset's price with greater fluctuation implying greater risk. However, we take a more profound and time-tested perspective. True investment risk is not the temporary ebb and flow of market prices, but rather the probability of a permanent loss of capital.
This redefinition is crucial, as it shifts one’s focus from the ephemeral short-term noise of the market to the enduring economic reality of underlying businesses.
This distinction is brilliantly captured in Benjamin Graham's allegory of “Mr. Market.” In this allegory, Mr. Market is a manic-depressive business partner who, on any given day offers to buy your shares, or sell you his, at a price dictated by his mood. His quotes swing from wildly optimistic to deeply pessimistic, often bearing little resemblance to the actual value of the business. As such, to treat Mr. Market’s daily pronouncements as a reflection of a business's true worth is to confuse fleeting sentiment for fundamental truth.
The best way to avoid this trap is to understand that true investment risk comes not from Mr. Market’s mood, but from fundamental business factors.
From this perspective, market volatility is not something to be feared but rather embraced as an opportunity. When widespread pessimism or temporary setbacks cause market prices to fall significantly below a business's intrinsic value, the fundamental investor sees a chance to acquire great assets at a discount. In other words, the short-term fluctuations of the market, driven by news cycles and herd behavior, always create mispricing that the long-term, business-focused investor can exploit.
How? This requires a deep understanding of a company's products, competitive position, earnings power, and management quality. Instead of being swayed by quarterly earnings reports or sudden stock price movements, the fundamental investor concentrates on whether the underlying business itself is sustainably growing its per-share intrinsic value over time. This is the real work of investing, understanding the engine of value creation within a company itself, rather than trying to predict the whims of the market.
This long-term perspective is the antithesis of the speculative mindset that seems to dominate the market. An investor focused on the next few months is inherently more susceptible to the market's random fluctuations, leading to decisions based on attempts to predict market direction rather than on an assessment of business value. This increases the likelihood of buying high and selling low, the surest path to permanent capital loss.
In short, the price of a stock over the long term will reflect the progress and economic reality of the underlying business. While the market can be irrational in the short term, it cannot be irrational forever. Successful investing, therefore, is an exercise in business analysis, valuation discipline, and emotional temperament, not in market timing or forecasting.
The best way to demonstrate this is with examples. We want to highlight two recent purchases where we think great businesses were undeservingly sold off by the market due to short-term fears. The first is West Pharmaceutical Services (Ticker: WST), which we purchased through our Friedberg Focused Equity and GCI Select Equity strategies. The second is Uber Technologies (Ticker: UBER), which we purchased through our Brasada Equity and GCI Select Equity strategies.
West Pharmaceutical Services
West designs and manufactures advanced integrated containment and delivery systems for injectable drugs and healthcare products globally. Their product portfolio includes proprietary primary packaging, such as stoppers, seals, syringe and cartridge components, and drug delivery systems like auto-injectors and pens. They also offer contract manufacturing and integrated solutions to leading biologic, generic, pharmaceutical, diagnostic, and medical device companies worldwide. In short, West partners with customers to deliver safe and effective drug products. GLP-1s are a good example.
As far as quality, West’s components are essential for the safe and effective delivery of injectable medicines. While the price of a single West component, such as a stopper or a plunger, may be measured in cents, the value it provides in ensuring the stability of a multi-million-dollar drug product is immense. Once West's components are specified into regulatory approvals for a drug, switching suppliers would be extremely costly and difficult, leading to sticky recurring revenue that can last for decades. West also benefits from scale through its extensive global manufacturing footprint and diversified supply chain. All of this creates significant pricing power and durability.
Despite this fundamental durability, West experienced a nearly 40% stock sell-off earlier this year due to several short-term concerns that impacted West’s 2025 earnings guidance. This was mainly attributed to margin dilution from their SmartDose wearable injector and the strategic decision to exit continuous glucose monitoring (CGM) manufacturing contracts due to unfavorable economics.
Combined, the CGM contract terminations, along with the underperforming SmartDose line, created a significant headwind at a time when the company was already facing ongoing inventory destocking issues due to lingering Covid impacts. In other words, a lot of different short-term issues popped up at the same time leading to the stock price reaction that we saw.
Our view is that there is nothing structurally wrong with West. We estimate that only ~7% of West’s lower margin business is in jeopardy. Against that, the rest of the business remains well-positioned for long-term recovery and sustained growth. We expect several long-term growth drivers to propel this performance. The increasing use of biologics in the pharmaceutical pipeline, in which West has over 90% participation in newly approved molecules, will continue to drive demand for West’s high-value-products. The recent Annex 1 regulation in Europe is also a significant accelerant, encouraging customers to transition to these higher-quality, higher-margin solutions. Furthermore, West’s participation in the burgeoning GLP-1 market, both through elastomer components and contract manufacturing, will be a significant multi-year tailwind.
The ~40% price drop here was a prime example of short-term concerns creating opportunities for long-term investors. As such, we were happy to build a position.
Uber Technologies
Uber is a technology provider that connects riders with drivers, and customers with restaurants and food couriers, operating its on-demand platform in over 70 countries with more than 170 million monthly users. Less known, Uber also facilitates connections between shippers and carriers in its freight segment, as well as maintaining a burgeoning AI data-labeling business. In short, Uber doesn’t really need much introduction since Uber has basically already become a verb in our vocabulary.
As far as quality is concerned, Uber operates one of the best business models around, a network-based marketplace. Uber aggregates both the supply and demand of transportation services at a scale large enough to give it both a cost and service advantage over any would be competitors.
Adding to this, extensive user data enables continuous improvement in dynamic pricing and utilization algorithms, which in turn enhances the value proposition for both drivers and riders. This combines into a powerful flywheel where both the product and economics of the business continuously improve with the passage of time. As such, what started as a taxi alternative, has expanded to encroach on car rentals and public transportation, and now even competes with car ownership among certain demographics.
Late last year and into the beginning of this year, Uber's stock sold off as much as 30% due to investor concerns regarding autonomous vehicles (AVs). To start, this theoretical risk is mainly applicable to Uber's U.S. ridesharing business, which accounts for approximately 25% of its gross bookings. It is harder for AVs to compete with food delivery and the labor cost of lower-income countries. But let’s leave that aside for now.
We believe these concerns are misplaced for two main reasons, 1) the timeframe for AV adoption will be longer than expected and 2) adoption will ultimately be a good thing for Uber as it will expand their total addressable market considerably.
For #1, while we admit that AV technology is advancing rapidly, broad-based commercialization is expected to be more measured due to key limitations such as achieving consistent super-human safety records, establishing harmonized regulatory frameworks nationwide, scaling cost-effective manufacturing, and developing on-the-ground infrastructure and operations. Adding to these issues is the highly variable nature of ridesharing demand, which fluctuates massively throughout the day, week, and year (think vacation destinations). This variability in demand would make it very hard to build out a fixed AV fleet that maximizes profits without a third-party marketplace to smooth that volatility. They would either under-supply and lose customers, or over-supply and lose money.
Said another way, Uber's marketplace model, with its dynamic supply of human drivers, can naturally adjust to peaks in demand, allowing for optimized utilization. Therefore, we believe the most likely outcome is that partnering with existing rideshare networks like Uber will be the most effective solution for AV players to scale faster, maximize vehicle utilization, and avoid the substantial operating expenses of recreating Uber's capabilities
For #2, if we believe partnering with Uber is the best strategy for AV providers, then having a product that is a much better consumer experience on Uber’s network, at a significant price step down, should unlock a lot of new business for Uber. Consider that today the most penetrated use case for Uber is airport drop-off and pick-ups. In a world where AVs make ridesharing both cheaper and more convenient, we could imagine more and more consumers forgoing car ownership all-together, leading to a significant acceleration of Uber’s business.
That the market sold Uber’s stock off so dramatically over AV concerns is just one more example of the opportunity volatility can create for long-term investors. As such, we were also happy to build a position in Uber.
As always, we are grateful for your continued trust and partnership, and we are always happy to answer any questions you may have so please feel free to email, call, or come into the office to see us.
Sincerely,
David Shahrestani, CFA
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