Random Ramblings May 2025

Episode Summary

Executive Summary: Andrew Walker’s May 2025 ramble covers a cautious macro outlook amid tariff-driven uncertainty, a framework for how AI could reshape investing skill sets, skepticism about management teams’ salesmanship, the challenge of investing in companies whose products you don’t personally like, and a deeper critique of busted biotech capital allocation. Across the episode, he argues that uncertainty is slowing corporate decision-making, AI may advantage different investor archetypes, and small biotech management teams often ignore full economic costs.

Main Topics: Market outlook and tariff uncertainty (Priority: 5/5): Walker says markets recovered sharply after Liberation Day/tariff shocks, but he remains wary because CEOs appear frozen by policy uncertainty. He argues delayed capex, hiring, and deal-making can tip the economy toward recession even if headlines improve. AI and the evolution of investing skill (Priority: 5/5): Using sports analogies, Walker explores how AI may change which investors thrive. He suggests AI can neutralize weaknesses in quantitative work while amplifying edge in management-reading and judgment, much like modern sports/medicine changed which athletes succeed. Management teams as highly effective salespeople (Priority: 5/5): He argues investors are often outmatched in conversations with CEOs, who are elite sellers trained to pitch their companies. This makes direct management meetings potentially misleading unless paired with disciplined independent research. Parsing claims from management carefully (Priority: 4/5): Walker gives examples where executives can sound impressive but require close reading, such as influencer marketing that may actually involve expensive product giveaways. The point is that management language often omits economically meaningful detail. Buying what you don’t personally like (Priority: 3/5): He examines whether an investor can own a company whose product they dislike, using his underwhelming Meow Wolf experience as an example. He concludes product taste alone should not determine investments because many great stocks are in unpopular or unfamiliar categories. Biotech capital allocation and hidden overhead (Priority: 5/5): Walker argues busted biotech teams systematically misjudge expected value by ignoring risk-adjustment, time value, and especially full corporate/R&D overhead. He says a “good” trial can still destroy shareholder value once all expenses are included.

Key Arguments: Markets may look calm, but two months of tariff-related uncertainty has likely caused real economic delay in capex, hiring, and deal-making. The economy can move from growth to recession on the margin when CEOs repeatedly defer decisions. AI may reshape investing the way the three-point line and modern medicine reshaped basketball: it can both elevate certain skill sets and obsolete others. Investors who are strong at management interpretation but weaker in quantitative/model work may become more valuable if AI commoditizes the latter. CEOs are often master salespeople, meaning a one-on-one meeting can overstate business quality and investor conviction. Independent research and reading filings may be more reliable than being swayed by charismatic management presentations. Management statements require close parsing; seemingly “free” promotion can hide expensive in-kind giveaways or other economic costs. Disliking a product is not sufficient reason to avoid a stock, because market winners can come from products that are not personally appealing. In small biotechs, trial economics must include probability of success, discounting for time, direct trial spend, and full overhead; otherwise decisions are badly distorted. For one-product biotechs, corporate and R&D overhead can overwhelm the apparent economics of a single promising trial, destroying shareholder value even if the asset succeeds.

Data Points: Russell 2000 performance (quarter): Basically flat - Walker says small-cap markets recovered after Liberation Day and were roughly flat for the quarter. S&P 500 performance (quarter): Up a little - He notes large-cap equities recovered quickly after early-April tariff-related declines. S&P 500 year-to-date: Down 3% to 4% - He cites year-to-date performance as a mild drawdown despite recent recovery. Russell 2000 year-to-date: Down about 10% - He uses this as evidence that small caps remain under pressure. Management/CEO phone calls: About 1 per day - He estimates his own average pace of management conversations. Preclinical/phase success base rate: About 50% - He argues small biotech teams should anchor on historical trial success rates rather than assuming exceptional odds. Phase 1 to Phase 2 success rate: ~50% - Used as a general historical benchmark for clinical trial progression. Phase 2 to Phase 3 success rate: ~50% - Used to illustrate compounded probability across trial stages. Example trial cost: $15 million - Illustrative direct cost to run a phase 1 product over two years. Example successful trial value: $100 million - Management’s claimed value if the trial succeeds in his biotech example. Risk-adjusted value after applying 50% probability: $50 million - Walker’s adjusted valuation of the trial before other costs. Time-discounted value: $40 million - He estimates a two-year-delayed payoff should be discounted further. Estimated R&D overhead: $20 million per year - Illustrative overhead for a small biotech’s research organization. Estimated company-wide overhead: $20 million per year - Illustrative general corporate overhead for a small public biotech. Combined overhead used in example: $50 million per year - Walker rounds up to show how overhead can swamp trial economics over two years. Meow Wolf footprint: 5 locations currently, 6th in LA, 7th planned for New York in 2027 - Used as the example company/product where he personally disliked the experience but acknowledged commercial success. Influencer endorsement economics: $50,000 paid endorsement vs. multi-thousand-dollar free product giveaway - He explains that apparent free promotion can mask a costly barter arrangement. Steph Curry early contract discount: Max contract said to be $20 million per year; first extension around $11 million - Used to show how injury and market conditions can create team value and change career outcomes.

Pivotal Quotes: "you are the JV team. Playing against a professional." — Andrew Walker: Describing how retail/value investors compare with elite CEOs in one-on-one management meetings. "every bull market climbs a wall of worry" — Andrew Walker: Explaining why markets can rise despite ongoing macro and policy uncertainty. "you need to have 100% probability of this product being a success. For this to even be borderline, it makes sense for you to invest in this thing once you factor in the overhead costs" — Andrew Walker: Summarizing his critique of how small biotechs ignore full economic costs when funding trials.

Implications: Listeners should be more skeptical of management pitches, more disciplined about risk-adjusted and fully loaded economics, and more open to AI changing which investing skills matter. The episode argues that apparent business quality can mask weak economics, especially in small biotechs.