THE AMERICAN EXCEPTION, PART IV

FROM THE DESK OF STEVEN FELDMAN

OPEN POSITION

Chips Off the Table

American capitalism is exceptional. The index that represents it is not what it was. And the reason so few people are looking is older than the market.

Index funds surpassed actively managed funds in late 2024 — the first time in history, on Morningstar’s data. That lead has only grown. As of the last official reporting, $21.9 trillion sits in index funds — roughly $3 trillion more than in actively managed ones.

The majority rules.

This is the last of four letters in the American Exception series. The foundation underneath them all has been that American capitalism is indeed exceptional. A rare combination of deep capital markets, a massive consumer class, relentless innovation, and a capital-friendly legal, regulatory and tax framework. The owners of capital have been handsomely rewarded, with stock market investors at the top of this list.

The purpose of the series has been to explore why the vast majority of investors are conflating exceptionalism with index investing. Why index investing deserves more scrutiny.  And what, if anything, should an index investor be doing now.

If you have not read the first three letters, no matter. This one will suffice.

THE FOUNDATION -- What the Index Is Sitting On

Start with what is true. The S&P 500 is self-curating. The weak get shed, the strong get added, continuously and without sentiment. Where have you gone, Sears? That machinery is real, and it is the legitimate reason the index has beaten almost everything for nearly two decades.

But a self-curating index still owns companies that sit on top of an economy, and the economy underneath it has been getting more fragile. Multi-trillion-dollar federal deficits at full employment. Corporate balance sheets built for low rates now refinancing, and borrowing even more, into a higher-rate regime. Trusted institutions that weaken a little each year. Politics that is theatrical rather than deliberative. And an AI buildout whose capital spending assumes, in aggregate, that all of it works out.

None of that is a crash call. It is the slow erosion I described in Part I of this series. No dramatic collapse, just gradual decline while markets keep rising and the system quietly becomes more vulnerable each year. That scenario feels stable in real time. It only looks corrosive in hindsight.

The index has worked. It may well keep working. But is the foundation precarious?  It raises the question I did not ask in the first three letters: is this a chips-off-the-table moment?

THE VEHICLE -- The Rules Turned Out to Be Negotiable

Even if you don’t buy the shakier foundation argument, you would at least think that the integrity of the index would be beyond reproach.

Nope.

In Part III I wrote about SpaceX. Its IPO would float too few shares to qualify for index inclusion under the rules as they stood. So Nasdaq loosened the rules — because it was competing with the NYSE for the listing fees and the prestige.

So the rules were bent and index inclusion stopped being a standard to be met and became a prize to be negotiated.

The entire case for passive rests on the index being a better selector than you are, because its rules are neutral. Neutrality is what makes automatic buying defensible. Once index providers move those rules to compete for listings, the neutrality is no longer absolute — and every passive dollar still buys anyway.

THE THREE STAGES -- FOMO, YOLO, and OCHO

Part II dealt with the psychology — why investors keep buying regardless of the field conditions. Three postures, each demanding less thought than the last.

FOMO — fear of missing out — has been the dominant investor psychology since 2009, and it has been substantially rational. Every macro warning of the last seventeen years was right about the risks and wrong about the market. FOMO is an active condition.

YOLO — you only live once — is more self-aware. The YOLO investor has read the warnings, looked at the valuations, and concluded: so what. Seventeen years of catastrophe, seventeen years of new highs.

OCHO — over it, checked out — is my own addition, and it is the one that worries me. It is not a thesis. It is the absence of one. If the risks are existential, no portfolio survives them; if we muddle through, you should be long; there is no middle case worth the cognitive effort. So stay invested and stop thinking about it.

Three stages of the same surrender. Each feels reasonable in the moment. Each leaves you more exposed than the last.

But something still nagged at me. All three explain why an investor stays long. None of them explain why the surrender feels like relief.

That took me to a longshoreman.

THE FOURTH REASON -- What the Longshoreman Knew

Eric Hoffer worked the docks of San Francisco and wrote with the clarity of a man unworried about getting tenure. His 1951 book The True Believer asked why people join mass movements.

His answer runs in two steps. First, a movement supplies a doctrine — one explanation that settles every question in advance. Second, the doctrine’s real product is not that it is correct. It is that it relieves you of the burden of being wrong alone. Adopt it and you can no longer fail personally. You can only fail collectively, which human beings survive in a way they do not survive failing by themselves.

Hoffer identified the susceptible group precisely. Not the desperately poor, who are busy getting through the day and have no time for movements. It is the frustrated middle class, with enough to lose that uncertainty is intolerable, enough education to build the rationalization, and enough status anxiety that a collective identity feels like rescue.

Now describe the bargain passive investing actually offers. Stop evaluating companies. Stop forming judgments. It starts from a premise that is entirely reasonable — you are unlikely to beat the market — and extends it into something much larger: that judgment is usually a liability. Vanguard built the church. “The index always wins in the long run” became the hymnal.

And who carried the movement? 401(k) holders. Investors burned by active managers and their fees. People who concluded the game was rigged against the individual. That is Hoffer’s frustrated middle class almost word for word.

You can measure a movement by the heat it generates. Bernstein’s Inigo Fraser-Jenkins published “The Silent Road to Serfdom: Why Passive Investing Is Worse Than Marxism” in 2016. Michael Burry compared index funds to synthetic CDOs. In both cases the reaction ran hotter than the argument warranted. So have some of the emails I get when I have the audacity to question being overweight an index.

Which brings me back to OCHO. I have described it as exhaustion, and it is. Hoffer explains what the exhaustion is for. The OCHO investor is not a fourth stage arriving after FOMO and YOLO — he is what the “True Believer” looks like in a brokerage account. Someone who has found the one place he can hold a stake in American prosperity without being accountable for how he got it. FOMO watches the scoreboard. YOLO decides the scoreboard always reads the same way. OCHO hands the scoreboard to the movement and walks away.

PERMISSION -- You Are Allowed to Own the Index

Here is where I part company with the Michael Burrys of the world.

The case for passive remains strong. Over the decade through December 2025, just 21% of active funds survived and beat their passive counterpart, per Morningstar’s Active/Passive Barometer — with U.S. large-cap among the weakest categories in the study. Fees compound against you relentlessly. Most people who set out to reclaim their judgment will use it to buy the wrong thing at the wrong time and pay more for the privilege. The movement grew because the alternative on offer was genuinely worse.

So own the index. I am not asking you to exit the S&P; I have never once asked that. Trimming is not exiting.

I am asking you to stop owning it blindly. Know the regime you are actually in. Know that the inclusion rules moved, and why. Know what the top of the index is priced for — the AI complex alone now approaches 40% of the index by market capitalization, which is not a diversified position no matter how many tickers sit underneath it. And know how much of your total net worth sits inside that one vehicle, because that is the decision no fund manager makes for you.

THE CALL -- Four Anchors

So — chips off the table? Some. Not the whole stack, and you do not leave the table.

The alternative to the True Believer is not the stock picker. Call it the “Learned Investor”: someone who knows what he owns, why he owns it, and what would have to be true for it to fail.

The call, stated plainly: keep your low-basis equity core, and fund a deliberate real-asset sleeve by trimming index exposure rather than by drawing down cash. Trim a percentage of the position — and if you would rather not sell at all, route new contributions there instead.  Consider redeployment as follows:

Gold is the monetary anchor. In virtually every letter or speech since 2022, I have been recommending a higher allocation to gold.  It started after Russia’s reserves were frozen and every central banker on earth got the same message at once: dollar assets held abroad can be switched off, gold in your own vault cannot. It didn’t matter that rates were rising.  In fact, it bolstered the case for gold as federal debt interest expense was set to explode against continued chronic fiscal deficits. And here we are – just this week hitting $40T of debt and the treasury market protesting.  Would have been better to buy in 2022, but the regime has not changed.  Size it as insurance with asymmetric upside, not as a quarterly return driver.

Real assets are the scarcity anchor. Start with what the AI buildout requires, not what it returns. I do not know which model wins, which chip wins, or whether the return on the capital now being spent will be good, mediocre or terrible. Nobody does. But the data centers get built either way, and they need power — generation, transmission, cooling, and the copper that carries all of it. That is a demand claim that survives a disappointing return on investment, which is exactly why I prefer it to owning the promise itself. Uranium is the dispatchable zero-carbon baseload the arithmetic of a modern grid keeps forcing governments back to. Copper is the physical medium of electrification.  Farmland, if you can find a good manager, cannot be automated into existence or reweighted into an index.

Non-AI “Quality Compounders” are the earnings anchor. Real pricing power, fortress balance sheets, cash generation that works at 2% inflation or 5%, bought at a price you can defend. You can own American corporate excellence without owning the index that packages it. I know the objection, because I made it myself a few paragraphs ago: most people who go looking for great companies buy the wrong ones. Fair. For most investors this anchor belongs in a concentrated quality fund rather than a screen of their own.

Liquidity is the optionality anchor. Cash earns a real return today. Dry powder is only worth holding if you have decided in advance what you are waiting for.  Think of it as a paid option: the cash return is the carry, the opportunistic deployment is the strike.

This is a multi-year view, and it will lag a ripping S&P for stretches. But here is what would change my mind: the AI complex falling back below 25% of the index by market capitalization and holding there for three or four consecutive quarters, alongside a fiscal path that stabilizes debt-to-GDP. That would tell me the erosion I have described is smaller than I think it is. The threshold is mine and it is arbitrary. Naming it before the fact is what makes it worth anything.

THE HARD PART -- Staying Awake

Hoffer understood what financial analysis misses. The hardest part of standing slightly outside a movement is not that you might be wrong. It is that you may feel wrong for a long time before you are proven right.

Four letters, one idea: American capitalism is exceptional. Owning the index does not require you to stop thinking about it.

Stay awake.

Steven Feldman is the co-founder & CEO of GBI. This newsletter is for informational purposes only and does not constitute investment advice.