Investor Carl Kawaja says the market has permanently shifted: the era of rewarding unprofitable hype is over, and companies must now focus on cash flow. He likes Apple for its sticky iPhone ecosystem, notes Amazon's layoffs as a sign of adaptation, and warns Meta's $8-10 billion annual metaverse spending is risky. He advises paying more attention to the energy transition than the AI hype.
This episode of Invest Like the Best features Capital Group portfolio manager Carl Kawaja, who discusses the "regime change" in capital markets and its investment implications. The core argument is that the current market environment has shifted from one of low interest rates and high experimentatio
Capital Group fund manager Carl Kawaja (a top-tier investor who has managed massive portfolios for decades) discusses with Patrick O'Shaughnessy the impact of "regime change" in capital markets. Kawaja's core judgment: the current market environment has undergone an irreversible regime shift—the paradigm of "the further from profitability, the wilder the idea, the higher the stock price" during the low-interest-rate era has ended. High capital costs will force all companies to move from "experimental expansion" to "cash flow discipline," which is healthy for long-term investors.
Kawaja believes that 2022 marks a turning point with a permanent rise in the cost of capital, as the market has shifted from rewarding "wild experimentation" to penalizing "no path to profitability."
He notes that large-scale layoffs at companies such as Amazon, Meta, Alphabet, and Wayfair are essentially "reducing flexibility for projects with uncertain NPV or unclear profitability paths." In the private market, a large number of "big losses" are occurring—and this is precisely the ideal time to "separate the wheat from the chaff," because "for a long time, the chaff performed better than the wheat."
Kawaja uses an agricultural analogy to distinguish two types of behavior:
He emphasizes: "I don't think we will go back to the past. Some chaff is gone forever, and the wheat is changing and adapting."
Key data point: In a conversation with Amazon executives in early January 2023, Kawaja noted that "the tone was markedly different"—a micro-signal of the institutional shift.
Kawaja distills three core investment lessons from decades of boom and bust in the oil and gas industry: maintain an open mind, embrace long-term cycles, and sow the seeds of success during periods of pain.
Kawaja notes that Buffett once declared for decades he would "never invest in gold," likening it to "holding 35 ExxonMobils plus all U.S. farmland," yet later bought gold. "He argued so passionately for one thing, then did the opposite—this teaches us an important lesson about mental flexibility." Similarly, Berkshire's investment in Japan's five major trading houses is essentially "leveraged commodity investing"—"You're not buying new phones or new services; you're buying iron ore, coal, gold, and oil."
The oil and gas sector fell from 12% of the S&P 500 weight to roughly 1-2%, and "oil and gas hedge funds have almost entirely disappeared." Kawaja admits that his positive returns in energy stocks last year were "earned by enduring pain"—"I wish I could say I smartly bought everything on January 1, but that's not the case. Some positions I've held for nearly a decade; they kept falling, and it was painful, but I believed the core thesis was still intact, so I held on."
"You sow the seeds for success five years from now, today. Not every investor can start from a blank slate every January 1—I'm not that kind of person."
Key data: In 2022, the top contributors to the S&P 500 included Chevron and Exxon—"It's hard to outperform the market without energy exposure."
Kawaja believes that the starkly different outcomes of Buffett’s investments in IBM and Apple reveal the most underappreciated truth in investing: you are usually only 55% right, but the “home runs” when you are right are enough to make up for the mistakes.
When Buffett bought IBM, Kawaja once questioned his internal analysts: “Buffett is buying IBM—we must be missing something. What the hell are you idiots doing?” The analysts responded with “detailed chapters and verses”—where IBM lacked competitiveness and where it was being disrupted—and “they were very convincing and logical.” It turned out that Buffett was completely wrong.
Kawaja attributes Buffett’s success with Apple to a simple judgment: the iPhone is “completely, utterly, and absolutely remarkable.” He used his own experience to illustrate product stickiness: “If I had to replace my iPhone with a phone invented by Patrick that is ‘not bad either,’ that would be a very sad day. I would be willing to spend a lot of money to stay on the iPhone.” He even told a story about his father: because one brother insisted on using Android, the family group chat had poor video display, and eventually “he was kicked out of the family group chat.”
Kawaja quoted a classic line from the baseball movie Bull Durham: “Do you know what the difference is between hitting .250 and .300? 25 hits. 500 at-bats is 50 points. A season is 6 months, about 25 weeks—if you get one more ‘gork’ (lucky hit) per week, you’re in Yankee Stadium.”
He conducted a 10-year retrospective analysis of the New Perspective Fund he manages: “There are too many gorks in it—too many things I never expected at all.”
Key data: Buffett was “right about half the time” in tech stock investments—but when he was right (Apple), the returns were “home run” level.
Kawaja’s methodology for uncovering overlooked investment opportunities rests on three pillars: an extremely wide screening funnel, cross-domain insights, and embracing contradictory positions.
"Some investors are disciplined—they look at 20 things a year, do deep research, and find three winners. I look at 2,000 things—when my pattern recognition tells me something is interesting, I go deep; the rest I let flow by."
Kawaja draws investment inspiration from multiple non-traditional sources:
Kawaja cites the approach of colleague Hilda Applebaum: "She simultaneously holds bank stocks sensitive to rising interest rates and SaaS stocks sensitive to falling rates. People ask how that makes sense. She says, it doesn’t. I keep my mind flexible and can balance two different things."
Kawaja once invested in Canadian conglomerate George Weston. Under CEO Dick Curry, its Loblaw grocery division "in 25 years, earned more EBITDA in a single day than it did in a whole year when Curry joined." Yet Weston’s stock had long underperformed due to drag from other businesses. It wasn’t until Galen Weston moved Curry to CEO of the holding company that he made a series of brilliant decisions—including redefining the bread business from a "baking business" to a "transportation business," selling off old downtown bakeries, and building new plants at highway hubs.
Key Data: Weston’s stock "likely rose 7x" during Curry’s tenure.
Kawaja argues that the energy transition is the most important investment theme for the coming decades, surpassing AI/SaaS in significance—yet the market underestimates this, and there are numerous overlooked "middle-ground" opportunities.
"If someone is 40 years old and asks me where to build deep knowledge for investment success over the next few decades, I would encourage them to spend time studying the energy transition, rather than SaaS or AI. Everyone is busy becoming a ChatGPT expert—this is a bit like the 'learn Chinese or you're doomed' frenzy from 15 years ago. But it turned out the Chinese were learning English."
Kawaja cites Canadian oil sands as an example: oil sands are one of the dirtiest sources of oil, but Canada is a geopolitically stable supplier. The Pathways Alliance, a group of oil sands companies, aims to sequester most of their carbon emissions back underground over 20 years with an investment of approximately $75 billion—"If this can reduce carbon emissions by 90%, isn't that powerful?"
"We have made tremendous progress in reducing the cost of solar and wind power, but very little progress in energy storage technology. Hydrogen is considered the best solution, but we lack hydrogen infrastructure—building pipelines in the US is already difficult, and building hydrogen pipelines is even harder."
Kawaja cites notes from internal analysts Dominic Phillips and Gigi Pardesani: "The marginal cost of electricity is approaching zero. When it becomes free, what changes will that bring?"
Key Data: Pathways Alliance target—20 years, $75 billion investment, to sequester most carbon emissions from the oil sands industry.
| Position | Guest Stance | Key Data |
|---|---|---|
| Apple | Bullish (extremely strong product stickiness, excellent capital discipline) | iPhone user stickiness is extremely high; Buffett bought due to product strength + capital allocation plan |
| Amazon | Watching (clear signs of institutional transformation) | Executive conversation in January 2023 had a "noticeably different tone" |
| Meta | Risk warning (massive spending vs. organic product growth) | Investing $8-10 billion annually in the metaverse for 5 consecutive years |
| Berkshire Hathaway | Neutral (learning case) | IBM was a wrong investment vs. Apple was a correct one; tech stock investments were "half right, half wrong" |
| Chevron / Exxon | Bullish (source of positive returns in 2022) | Among the largest contributors to the S&P 500 in 2022 |
| George Weston / Loblaw | Bullish (classic "rough diamond" case) | Stock price rose approximately 7x during Curry's tenure |
| Orkla (Jens Heyerdahl) | Bullish (successful diversification model) | One of the best-performing stocks in Europe from 1982 to 2002 |
| Reliance Enterprises | Neutral (counterintuitive success case) | Large-scale retail expansion succeeded, challenging the assumption that "good businesses start small" |
| ServiceNow | Neutral (growth company ceiling) | An excellent CEO is hard to surpass by a successor who is "7 times better" |
| Novo Nordisk / Eli Lilly | Bullish (product-driven) | GLP-1 class drugs (Wegovy) have "stunning" efficacy |
| PG&E | Watching (potential beneficiary) | If electric vehicle adoption increases, as a regulated utility in California, it could benefit |
1. "Institutional change is irreversible" (Kawaja) — In an era of high capital costs, companies further from profitability are punished more severely, the exact opposite of the past decade. Falsification condition: if the Fed returns to zero interest rates and sustains them for years, but Kawaja considers this probability extremely low.
2. "You plant the seeds for success five years from now, today" (Kawaja) — Kawaja admits he cannot start from scratch every year; he must capture opportunities through long-term holding and gradual position building. He held certain energy stocks for nearly a decade before seeing returns.
3. "One more gork (lucky hit) a week, and you're in Yankee Stadium" (Kawaja, quoting Bull Durham) — In investing, being "half right, half wrong" is the norm; the key is that the payoff when right must be large enough ("30 home runs"). His 10-year backtest of his own fund revealed numerous "completely unexpected gorks."
4. "Good ideas start small, then spread like wildfire — not by piling up a heap of wood and then lighting it" (Kawaja) — This is his core critique of Meta's metaverse strategy, contrasting with AWS's natural growth from retail infrastructure. Counterexample: Reliance's large-scale retail expansion in India succeeded, proving "sometimes you have to do it at scale."
5. "Buy an 'extremely bad' company, wait for it to become 'terrible,' and that's a huge gain" (Kawaja) — The essence of value investing is "buying bad companies and waiting for them to become less bad." In growth companies, it's hard to find a successor who is "7 times better" than the current CEO; but in a bad company trading at 2.5x EBITDA, such a possibility is far greater.
6. "Buffett was completely wrong on IBM and completely right on Apple — the greatest investor is only right half the time" (Kawaja) — The key is not the accuracy rate, but the magnitude when right. Kawaja once questioned his own analyst because of Buffett's purchase of IBM, only for the analyst to be proven correct.
7. "The energy transition is more important than AI, but severely underestimated" (Kawaja) — The market's frenzy over ChatGPT resembles the "learn Chinese fever" of 15 years ago, while the energy transition involves massive unresolved issues like storage, hydrogen, and carbon capture, hiding numerous investment opportunities.
8. "What does the world look like when the marginal cost of electricity approaches zero?" (Kawaja, quoting an internal analyst) — This is an overlooked disruptive perspective that could change everything from transportation to manufacturing. Kawaja believes investors should spend time thinking about this question rather than chasing AI trends.