Excess Returns Podcast Summary

Episode: The Water No One Can See | Graeme Foerster on Six Courageous Questions for 2026
Date: December 6, 2025
Guest: Graeme Foerster
Host: Jack Forehand (Excess Returns)

Overview

This episode explores the often “invisible” forces shaping investment environments, using the analogy of "water" to describe the unnoticed but influential undercurrents in markets. Jack Forehand interviews Graeme Foerster about his co-authored papers, particularly 'Six Courageous Questions for 2026.' They unpack why investors need to challenge their assumptions, rethink U.S. market dominance, examine active vs. passive investing, and confront seismic macro trends such as deglobalization, shifts in currency strength, and the role of AI. The conversation is rich with actionable insights for long-term investors, including memorable analogies, candid warnings, and frameworks for thinking about today’s rapidly evolving landscape.

Key Discussion Points & Insights

1. The "Water" Analogy: Why the Obvious Becomes Invisible

• Reference to David Foster Wallace's "This is Water" Commencement Speech:
  • The parable illustrates how people become so used to their environment they can’t see it, which is dangerous for investors stuck in entrenched trends.
  • Graeme Foerster [05:48]:

    “An investment environment can become so familiar as essentially to become invisible. And that's where the danger lies. So we get so used to how things are and things can stay as they are for awfully long time, decades. And so people stop really paying attention and they don't even notice the water, even as things start to shift.”

  • Empathy and humility are core themes, applicable to both life and investing.

2. The Self-Reinforcing Cycle Behind U.S. Outperformance

• Backdrop of U.S. Dominance:
  • For over 25 years, a self-reinforcing global cycle, especially between the U.S. (consumer/importer) and China (saver/exporter), created favorable conditions for U.S. asset appreciation, low interest rates, and widespread benchmarking to U.S. equities.
  • Key Point [09:18]:

    “This self-reinforcing cycle... China exports to the US and then it collects the excess savings in dollars...These savings went back into the US to finance further purchases and from China...round and round and round it goes.”

  • Resulted in higher asset prices, increased deficits, and clustered portfolios heavily skewed to the U.S.

3. Signs the Cycle May Be Breaking

• Emergence of Macro and Micro Shifts:
  • Rising dissatisfaction in deficit countries (like the U.S. and UK), changing political tides, new tariffs, onshoring, and nascent corporate/fiscal reforms—especially in Asia.
  • Graeme Foerster [11:57]:

    “This is catalyzing change at both a country level...Korea's value up program, you look at Japan's corporate reform program as examples...more fiscal stimulus...domestic investment instead of money going abroad.”

  • Expect under-owned asset classes, especially domestic Asian businesses and undervalued currencies, to benefit if the tide turns.

4. The Dangers of Benchmarking and Short-Termism

• Failures of Risk Perception and Incentive Structures:
  • Heavy indexing leads to crowding and missed opportunities; allocators mistake “deviation from the index” for “risk.”
  • Graeme Foerster [15:11]:

    “If you think about how exceptional wealth creation is delivered, there's only two things...time and return...Nowhere in that equation is active share. Nowhere does it say you've got to keep your active share low.”

  • The rise of passive investing shrinks the pool of independent thought and value discovery globally.

5. Deconstructing U.S. Equity Performance

• Mythbusting the "Permanent" Superiority of U.S. Businesses:
  • Most U.S. stocks’ actual underlying returns align with global averages (~7%), with excess gains coming from temporarily expanding margins and valuations.
  • Extrapolating these one-off boosts into perpetuity is unrealistic.
  • Graeme Foerster [18:57]:

    “The average share in the US has done 7. And they've done it through sales per share growth and doing a deal. But it's also delivered more than that...through margin expansion...and valuation change.”

  • Sustainability of those drivers for future returns is questionable.

6. The Case for International and Active Investing

• Much More "Value" Overseas:
  • Expected returns, based on broad quantitative models, are notably higher for non-U.S. stocks.
  • [22:35]:

    "A very low portion of U.S. stocks have high expected returns, but a much higher portion of international stocks...which is great for an active manager."

  • Inefficiencies, mispricings, and discounts abound outside the U.S., making “now a good time to go active, non-U.S.”
  • Diversification is essential: too many portfolios are “eggs in one basket.”

7. Questioning the Dollar’s Invincibility

• Challenging U.S. Dollar Hegemony:
  • Historically, the dollar was the “flight-to-safety” asset, but recent shocks have shown the dollar weakening rather than strengthening.
  • Graeme Foerster [25:24]:

    “The US dollar has been a nice diversifier...It’s been this flight to safety currency. And I think we're starting to see cracks in that. Not clear cracks, but the drawdown we saw earlier this year...coincided with the weaker dollar, which was quite unusual.”

  • If true, the implications for global asset allocation and currency management are profound.

8. Rethinking "American Exceptionalism"

• Beyond Mega-caps:
  • The stock market’s best days aren’t always found in the largest names.
  • Previous decades’ top-10 market cap leaders rarely remain so—the landscape evolves.
  • Graeme Foerster [27:11]:

    “They're not all priced the same way. We've had a selection of them on occasion where we believe there's a mispricing...But you've got to remember there's more and more differentiation between them. Stocks have come in and out of that group and there's plenty more ideas in the world that look much more interesting.”

9. Valuation and Biotech: Where to Find Value in the U.S.

• Emerging Opportunity in Healthcare/Biotech:
  • Post COVID biotech bust and flight of frothy capital have left select high-quality healthcare and biotech businesses extremely attractively priced.
  • Graeme Foerster [29:54]:

    “We've been able to pick up some amazingly innovative businesses...that trade at less than the net present value of their currently marketed drugs. So you get on the platform for free, for example.”

10. AI – Bubble, Revolution, or Both?

• Is AI a Bubble or Just Beginning?
  • Bubbles are defined by excessive overvaluation fueled by fear of missing out and herd behavior among the leaders.
  • Graeme Foerster [32:32]:

    “Bubbles...offer an amazing opportunity to do a huge service for your clients by not investing in the assets because probably they have quite a lot of capital invested there.”

  • AI is pervasive, and its impact is hard to value—opportunity lies in indirect exposure at discounted prices (e.g., SK Square in Korea).
  • The Star Trek generation of tech leaders is incentivized to push AI to its limits, which creates unique investment risks.

11. The “Wants vs. Needs” Paradigm in Global Policy

• Maslow’s Hierarchy Shift in Focus:
  • Societies (especially the West) have catered to “wants” at the expense of “needs.” Now, national security and domestic basics (energy, food, defense) are coming to the fore.
  • Graeme Foerster [41:27]:

    “So in the West, we've arguably been through a period where capital, both monetary and political, has been flowing to the top of the pyramid at the expense at the bottom...Now we're sort of C2B.”

  • De-globalization means more capital stays home, benefiting industries tied to national self-sufficiency.

12. The Limits of Macro Forecasting and the Necessity of Diversification

• No One Path Forward:
  • Investors hoping for more quantitative easing and interest rate cuts may be disappointed; the distortions of previous cycles are acknowledged, but policymakers don’t want to repeat them.
  • Emphasis on humility, resilience, and bottom-up stock selection, while not ignoring macro context.
  • Graeme Foerster [48:01]:

    “With humility there are a range of outcomes around every situation...despite all these macro threads...you can always put a portfolio together with idiosyncratic differentiated ideas and make sure you're not carrying too much risk.”

13. Emerging Markets: Risk of Owning vs. Avoiding

• EM Still Offers Quality at a Price:
  • U.S. does not have a monopoly on high-quality businesses (e.g., TSMC in Taiwan). But passive EM investing is risky due to complexity.
  • China is both opportunity and risk. Tail risk of U.S.-China conflict cannot be ignored.
  • Graeme Foerster [53:52]:

    “My overriding fear is that if you look at the history of when two superpowers have clashed and there's a growing one challenging an existing one, it doesn't tend to end well... It's okay to own some, but just don't go overboard and recognize that there's tail risk.”

Notable Quotes & Memorable Moments (with Timestamps)

• On Humility in Investing:

  • "To be definitive and certain about pretty much anything in a highly stochastic and uncertain world I think is just crazy. It’s the height of folly."
    — Graeme Foerster [58:22]

• On the Danger of Invisibility:

  • "We get so used to how things are...people stop really paying attention and they don't even notice the water, even as things start to shift."
    — Graeme Foerster [05:48]

• On U.S. Market Dominance:

  • "Portfolios get really clustered into the same assets...given we now live in a world of heavy indexing and benchmarking."
    — Graeme Foerster [14:00]

• On Active Management:

  • "If you think about how exceptional wealth creation is delivered, there are only two things...time and return...Nowhere in that equation is active share."
    — Graeme Foerster [15:11]

• On Global Policy Shifts:

  • "All the capital's coming back...it's mostly that bottom-of-the-pyramid type stuff that they're going to be putting their money into."
    — Graeme Foerster [44:31]

• On Decision Making vs. Outcome:

  • "Making a great decision and experiencing a great outcome are quite distinct...The amount of noise, volatility, and luck in the investment industry [is] much, much higher than in any poker game...you need to make great decisions 90%–95% of the time to have a measly 60% winner ratio."
    — Graeme Foerster [55:49–57:46]

Timeline of Important Segments

• 00:00–05:48: "This is Water" — Setting up the central metaphor of invisible environments in investing
• 09:18–13:28: How the U.S.-China self-reinforcing cycle drove asset price inflation and global imbalances
• 14:00–17:32: Critique of benchmarking, short-termism, and perverse incentives in portfolio management
• 18:08–21:09: Breaking down the components of U.S. equity market outperformance and questioning the sustainability
• 22:35–24:23: International vs. U.S. valuation realities—expected returns far more attractive outside U.S. markets
• 24:26–26:19: The dollar’s role is changing, with early signs that it may no longer always be a “safe haven”
• 29:54–31:51: Biotech and healthcare as a rare current value opportunity in the U.S.; thoughts on valuing intangibles
• 32:32–37:57: Is AI a bubble? The incentives, the capital cycle, and the right approach for investors
• 41:27–44:31: Maslow’s Hierarchy and the reprioritization of capital: from "wants" to "needs"
• 50:18–53:47: The EM dilemma—risks of owning vs. avoiding; China’s attractions and fundamental geopolitical risks
• 55:49–57:46: The misunderstood statistics of investing success—great investors’ decisions vs. outcomes
• 58:05–59:16: Closing advice: humility as the investor’s greatest ally

Takeaways & Lessons for Investors

• Question Your Assumptions: The forces driving markets may be so familiar you no longer see the risk of change—stay humble and vigilant.
• Diversify Intelligently: Don’t let short-term performance or benchmarking completely dictate allocation, especially when imbalances abound.
• Think Globally and Actively: Non-U.S. markets may be where the best opportunities are, especially for active management.
• Be Cautious of “Sure Things”: The dominance of mega-cap U.S. stocks, dollar strength, and tech-platform outperformance are cycles, not laws of nature.
• Balance Macro Awareness with Stock-Picker’s Discipline: Ignore global shifts at your peril, but don’t build a portfolio on macro bets alone.
• Humility: Recognize the limits of forecasting. Favor managers who admit what they don’t know and build resilience into your strategy.

For full papers and more, visit orbis.com.