In a market defined by volatility and noise, Kevin Xu makes a counterintuitive claim: the most profitable strategy for the second quarter of 2025 wasn't aggressive trading, but the disciplined application of "equanimity." This isn't just a philosophical musing; Xu backs it with a stark "cave scenario" analysis suggesting that doing nothing would have yielded solid returns, yet he argues that the active stress of navigating the chaos was worth the extra 18% gain. For investors weary of constant market whiplash, this piece offers a rare, data-driven defense of emotional stability as a tangible financial asset.
The Psychology of the "Cave"
Xu opens by reframing the quarter's turbulence not as a threat, but as a forge for mental resilience. He defines equanimity through its Latin roots, "aequus" and "animus," to describe "an equal mind." This framing is deliberate, shifting the focus from market mechanics to the investor's internal state. He writes, "Experiencing and navigating all the emotions, turbulence, and a (hopefully temporary) loss of mental balance is a necessary path to forging a stronger sense of equanimity." This is a bold admission for a professional fund manager, acknowledging that the "fun of investing" is inextricably linked to the pain of uncertainty.
To test his own discipline, Xu constructed a hypothetical scenario: "had we held our portfolio exactly the way it was at the end of day on March 31, 2025, went to a cave with no Internet access... what would have happened?" The result was a 15% gain, outperforming major benchmarks by a slim margin. However, the reality of active management added an extra 18% to the returns. Xu argues that while most would choose the stress-free cave, he found the active engagement "absolutely worth it." This distinction is crucial; it suggests that the premium for active management isn't just about picking winners, but about the capacity to endure the "stomach churning stress" that paralyzes others. A counterargument worth considering is that this "worth it" calculation is survivorship bias in action—had the market turned sharply against his active decisions, the stress would have been for naught.
Whether an additional 18% is worth all the stomach churning stress is an entirely personal question. I can see most people answering that question with a resounding "no". But for me, it was absolutely worth it!
The Hunt for the Poorly Understood
The core of Xu's investment thesis rests on a binary classification of opportunity: the "poorly understood" versus the "misunderstood." He argues that finding great technology businesses is easy, but finding them when they are mispriced is the real challenge. He writes, "For the poorly understood group to work, it requires a lot of educating and waiting. For the misunderstood group to work, it requires a lot of convincing and correcting." This distinction highlights the friction of market psychology. It is easier to introduce a new concept to a confused audience than to dismantle the "strongly-held priors" of a skeptical one.
Xu categorizes companies like Nebius and WeRide as poorly understood, noting they have "technologies and businesses that are barely understood and hardly analyzed by the market." In contrast, he places Intel, Okta, and Alibaba in the misunderstood bucket, describing them as former "high flyers" that have "fallen from grace." His analysis of Intel is particularly specific, citing "Lip-Bu Tan's track record as a humble and humbling turnaround maestro" as the "right antidote." This granular focus on management character over just balance sheets is a hallmark of his operator background. However, critics might note that relying on a turnaround narrative for legacy giants like Intel carries significant execution risk, especially in a rapidly evolving semiconductor landscape where speed often trumps experience.
The reaction you tend to get when mentioning a name in the poorly understood group is a quizzical look – confused but curious. The reaction you tend to get when mentioning a name in the misunderstood group is an opinion or argument – a bit defensive if not stubborn.
Adapting to the AI Shift
Xu does not shy away from admitting errors, which adds significant credibility to his forward-looking analysis. He details a mistake where he initially believed cloud software infrastructure would benefit from AI agents, only to realize the paradigm was shifting entirely. "As this year progressed, it became increasingly clear to me that, because of the growing acceptance of AI coding agents, all future software will be written and deployed in a completely different way," he writes. This admission leads to a decisive action: "I have cut out cloud software names aggressively from our portfolio." This willingness to pivot based on the structural changes in how software is built, rather than clinging to old models, demonstrates the "rhythm" he claims to assess.
His view on Alibaba further illustrates his long-term horizon. He suggests that after surviving regulatory headwinds, the company's "decade-plus investment in cloud infrastructure and open source is, perhaps, finally enabling it to tap into the structural advantages of China's tech and research ecosystem." This is a nuanced take that separates the geopolitical noise from the underlying technological moat. Yet, the geopolitical risks inherent in investing in Chinese tech giants remain a volatile variable that no amount of "equanimity" can fully neutralize.
Generally, I prefer the poorly understood ones more than the misunderstood ones. The reason has less to do with technology or company fundamentals, more to do with human nature.
Bottom Line
Kevin Xu's strongest argument is that emotional discipline is a quantifiable edge, proven by the fact that active management outperformed a "do nothing" strategy only because he could withstand the volatility others avoided. The piece's biggest vulnerability lies in its reliance on the "turnaround" thesis for legacy tech giants, which often underestimates the speed of obsolescence in the AI era. Investors should watch whether Xu's ability to maintain an "equal mind" holds up when the next structural shift renders his current "poorly understood" picks obsolete.