Episode summary
Diesel is Spiking. The Market Has the AI Losers Wrong | Are You Betting Too Big?
Excess Returns
· · 48 min · Hosts: Jack Forehand, Matt Zeigler · Guests: Michael Baron, Eric Pachman, Kris Abdelmessih
Summary
The episode focused on three linked investor problems: finding mispriced opportunities, understanding hidden inflation drivers, and sizing bets so a real edge is not squandered. Michael Baron argued that the market is too quick to label software as an AI loser and that companies with proprietary data, like Shopify, Guidewire, and FactSet, may be better positioned than investors assume. He also explained that Baron Funds manages concentration by letting winners run while offsetting risk elsewhere in the portfolio rather than selling just to reduce a headline position size.
Eric Pachman walked through how diesel prices move into freight surcharges, retailer costs, and ultimately CPI, but with very different effects depending on where consumers sit in the chain. He also described a grocery-basket study using Kroger’s API that showed how government inflation measures can diverge from lived experience, especially once shoppers move from the “thrifty basket” to more processed, brand-name food.
Kris Abdelmessih’s Kelly criterion discussion tied the episode together: even a favorable bet can be ruined by overbetting, because survival matters more than being right once. The hosts used that framework to explain why position sizing, humility about probabilities, and portfolio construction are as important as identifying the idea itself.
Key takeaways
- Michael Baron argued that AI disruption is not a blanket threat to software, and that proprietary customer data can be a durable moat.
- Baron Funds said some AI-related winners can become less risky over time, even as they grow into much larger portfolio weights.
- Eric Pachman said diesel is flowing into inflation through freight and retail channels, but the effect on CPI can still be muted in the aggregate.
- Pachman’s Kroger study found the government’s thrift basket can differ sharply from the groceries many households actually buy.
- Kris Abdelmessih argued that Kelly-style betting only works if you survive long enough to benefit from the edge, and overbetting can destroy that.
- The hosts emphasized that investors should think about position sizing, not just signal quality, because probability estimates are always uncertain.
Notable quotes
“We do not believe that there are going to be, you know, just seven companies, the mag seven and doing everything for everyone”
“what happens to fuel search charge, which ultimately it takes some time, there's some lag”
“this is a good bet. You're you're you're 60% to win and you're going to get paid even money”
How the episode opens
Welcome to the XS Returns weekly rap. I'm Jack Forehand, joined as always by Matt Ziggler. Matt, how's it going? — I'm ready to wrap. I'm ready to wrap some clips here with you, Jack.
We got a we got a good diverse set of them today. We had uh we've got Michael Baron um of Baron Funds. Um you know, they have, as I found out in the research, they have like the number one, the Baron Partners Fund, I believe, is the number one performing mutual fund of all mutual funds um like in the past 20 or so years.
Um, we've got Eric Pacman who has does some awesome awesome stuff behind the scenes. Um, you know, in terms of the research he's doing and we were just talking before we recorded like he's he's pointed some stuff out months ago that now is in the mainstream with respect to diesel and some other stuff we're going to talk about. And we've got Chris Abdomia and that that was to be honest one of my favorite episodes we put out in a really really long time.
It's like the exact kind of thing I want us to do. I learned a lot from that one.
This is what the channel is for. Like we say over and over again. It's the the stuff that we would have watched.
We wish that this existed 10 years ago or 20 years ago for us when we're learning this stuff so we could have watched it. Chris gives a master class. Eric what he's doing with this data how right he's been on this diesel call and we're going to have to go back to midsummer or whenever it was that he literally pointed this out and and I know he mentioned it sooner but I think he really doubled down in the summer and saying these crack spreads are going to go crazy because I worked in this industry.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- ai winners beyond magnificent seven
- position sizing and fractional kelly
- portfolio concentration risk
- diesel costs and cpi link
- letting winners run and leverage/correlation
Companies and tickers mentioned
- TSLA
- KR
- Tesla
- SpaceX
- Kroger
Watch the episode
Watch “Diesel is Spiking. The Market Has the AI Losers Wrong | Are You Betting Too Big?” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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