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One problem with AI chatbots, as you've probably noticed, is that you can push them around to reflect back to you almost anything you want. Sometimes they'll dig in a little, for example when I told Claude it was violating the securities laws (which it was), it got defensive. Teenager Claude.
In the financial markets, this is not new. Financial search queries for the past two decades have generally returned something in line with the query. In markets themselves, one problem is that enough information exists to back up almost any idea or thesis. So how do you know what to do, if everything is justifiable?
In a way, indexing punts on the whole problem. Instead of trying to figure it out, indexers just give up and say, "We can't, we're done, it's 5 o'clock somewhere." It feels weird to say that giving up is a smart thing to do, as that is not how all of us were raised. But in this case the indexer just says, "Let monkeys throw darts to pick stocks; they outperform the professionals anyway, and all those fancy financial towers exist because the salespeople are good at convincing Americans otherwise."
But are we all to withdraw like Heraclitus of Ephesus, who in 500 BC became depressed and misanthropic as he pondered the unreachable nature of truth? And Heraclitus was 60 years old when he died--admittedly a good run for his era, but let's face it, he didn't have to worry about exhausting his retirement portfolio.
For those of us who have the reality of money and life to deal with, decisions do need to be made, if not at the individual stock level. For example, indexes track many asset classes. Ratios between them, rebalancing, index construction--these things matter, and hence require decisions, which demand critical thinking.
This is where things get difficult.
The chancellor of Vanderbilt, Daniel Diermeier, recently quoted the Kalven Report:1 "The university is the home and sponsor of critics; it is not itself the critic." Internally, as investors we have to be the sponsors of critics, but also have enough conviction in our thinking to choose a path forward. In that regard, we're different from a university, which should both discover and continually embrace differing ideas.
One way you can clarify financial decisions is to invert your thinking. This was an approach championed by Buffett's partner Charlie Munger. In the summer of 2025, energy trader John Arnold posted on Twitter a good example of thought inversion. He used the example of federal land ownership, as the feds were talking about selling publicly held land. Many people were opposed. The opposition group thought a lower amount was bad. But inverting this, there were few people in that group saying, "the feds should actively buy more." Did this mean, Arnold asked, that a large chunk of America thought federal land ownership percentages were, somehow, exactly correct?2
This same type of critical thinking underpins personal financial decisions. You must be the university, open to differing ideas. But as you approach adoption of an idea, which you have to do if you don't want to end up wallowing like Heraclitus, inverting the question can expose logical weaknesses.
That critical thinking creates conviction in investing, so you aren't just being pushed around.
~Dan Cunningham
1. The Kalven Report is a famous 1967 University of Chicago policy document that establishes institutional neutrality on political and social issues.
2. There are other explanations, such as maybe people thought more land is better, but knew it wasn't going to happen, so didn't say anything.
I can save you a lot of time. When you apply humans to a complex process and expect predictable results... you won't get them. Psychology can turn the investment landscape into a minefield.
When I was heading to work last week, my son said, "Watch the outcome bias." I'm not sure outcome bias was the first thing on my mind when I was a junior in high school, but I assured him it was now front and center. Outcome bias leads you to evaluate the quality of your decisions based on how things turned out, rather than their reasonableness at the time they were made. It's particularly dangerous in investing. For example, if you bought Nvidia 30 years ago when its primary market was selling to teenage boys who spent more time researching gaming accelerators than showering, today you would be happy. This despite the risk you absorbed: Nvidia almost went bankrupt three times in the 1990s, coming within 30 days of missing payroll in one particularly harrowing incident.
The problem with outcome bias is that it leads you to formulate your next investment decision based on tenuous reasoning. Perhaps it was just luck that your outcome ended up as it did, whether good or bad.
A second psychological tendency that afflicts investors is over-weighting errors of commission relative to errors of omission. For example, one year ago had you committed to an investment in Charter Communications, today it would be down about 65%. You would have felt bad as you watched your investment dwindle, and refreshing the web page several hundred times did not make the investment rise. You perhaps didn't think much about buying Micron stock, but you could have; it was omitted from your range of actions. And a year later Micron would have delivered 10X your money. The opportunity cost of not buying Micron was higher than the cost of the Charter loss, but it doesn't feel that way.
If you are a reflective person, avoiding errors of omission can drive you borderline crazy and lead to decision paralysis. So many things start to look like an error of omission that the constant comparison itself becomes a problem.
If you somehow controlled these and other psychological investing hurdles, that wouldn't fully resolve the issue, because everyone else also faces them. And that means others are going to swing markets in ways that are unpredictable, and which will affect you. This is a reason many professional investors have struggled the past two decades in the markets: decisions often are not based on balance sheets or securities analysis. Much buying and selling is based on what your neighbor--the one who leaves his trash can on the street for too many days but otherwise has some great stock tips--thinks.
As an investor, you want to control for these psychologies, but assume they'll continue to exist elsewhere.
~Dan Cunningham
1. More from Science Direct on outcome bias
2. Charter, Micron stock values: 5/26/25 - 5/29/26, YCharts
2026 has begun with an asset class performance reversal in the United States. Small capitalization stocks, which lagged their larger-cap peers last year, have come out of the gate roaring ahead.1 There are several reasons for this shift. One is valuation: traditional investment theory suggests that valuations tend to revert toward a mean over time, and asset classes had become somewhat stretched relative to one another.
Another factor is interest rates. Small caps tend to benefit from the prospect of lower rates, and markets appear to expect that may be coming. Smaller companies generally carry more debt, and that debt is often shorter in duration.2
Consider a hypothetical example. Imagine you are an investment banker, and Apple Inc. (large cap) and Crocs Inc. (small cap) approach you to raise debt capital.
Crocs may say, "Look, contrary to your sartorial instincts, we are quite fashionable. And we designed this new texture on the bottom of the sandal that kind of massages your foot as you walk. We think people are going to love it!" You may think "My feet are tingling, but that's not much of a competitive advantage. I could take a little chisel and change the sandal mold myself fairly easily."
Then it's Apple's turn. There's a little swagger in their pitch because they are Apple. Maybe they say "Ok, it's true we’ve stumbled with Siri for three consecutive years. And our text autocorrect has probably broken up a few marriages. But have the customers left? No. They're deeply embedded in our ecosystem. And if needed, and we will hire our biggest competitor, Google, to help improve it." You think, "That's a very durable protective moat and large competitive advantage."
Under this scenario, Apple secures the long-duration, low-cost debt financing. And Crocs doesn't. But in theory, it means that when rates come down, Crocs, and small caps, will benefit more. As interest expenses fall for companies like Crocs, profitability improves, and markets often respond positively.
Moving beyond the hypothetical, I want to clear up a little definitional confusion about indexes, index funds, mutual funds, and ETFs.
An index is simply a defined collection of securities that you are going to invest in. It’s essentially a rules-based list. Constructing that list is harder than it sounds. Most large fund companies, such as State Street, BlackRock, or Vanguard, license these lists from index providers. As an example, the S&P 500 is created and maintained by Standard & Poor’s, an index provider.
Once the fund companies have the license, they then build funds that we can invest in for you. These generally take the form of either mutual funds or ETFs. Each form has advantages and disadvantages. But we almost always will use an ETF for liquidity and tax efficiency reasons.
Importantly, the ETF or mutual fund is simply the wrapper — the basket that holds the underlying securities defined by the index.
~Dan Cunningham
1. Small vs large-cap performance: Stockcharts.com
2. More technical discussion if you are interested:
Debt exposure is quite different between small and large caps. Net Debt to EBITDA is 3x for small cap vs large cap. (Source: State Street 7/18/25). Floating rate debt of the Russell 2000 is more than 5x the S&P 500 (Source: Goldman Sachs 11/4/25). Constituents of the Russell 2000 had weighted average debt maturity of 4.8 years versus 8.8 for large companies as of late 2022 (Source: Boyar Research Q3 2023 letter), meaning they have to refinance sooner into higher rates, or pay off debt sooner.
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