July 30, 2026

To My Partners:

During the first half of 2026, we outperformed the S&P 500 by 5.5

percentage points. Here are the figures:

BlackBird

15.7%

Advantage

S&P 500

10.2%

5.5%

Note: BlackBird Financial returns are presented net of all fees and expenses. S&P 500 returns include dividends. All figures are as of

June 30, 2026.

Portfolio Activity

In my 2025 annual letter, I highlighted two of our investments that offered

exceptional value: Tidewater and Builders FirstSource. At the time, I noted

that both positions were relatively modest, adding: “If prices decline, I

intend to increase them substantially.”

In the immediate aftermath of the letter’s publication, Builders FirstSource

shares entered a sharp and sustained decline. Amid persistent weakness in

the housing market, the company’s market capitalization contracted from

$12.2 billion to just $7.1 billion at its May low. As the valuation grew

increasingly attractive, I added aggressively to our position, deploying

capital from new partners and reallocating funds from several smaller

investments. Builders FirstSource is now our largest investment and

represents a substantial portion of the portfolio.

I will not pretend I knew where the nadir was. I did not, and I never do. We

were simply buying a strong business at a substantial discount to its intrinsic

value, and that was enough. I expect Builders to generate excellent returns

over the coming years. More importantly, I believe the risk of permanent

capital impairment over a multiyear holding period is exceptionally low.

Tidewater, by contrast, appreciated meaningfully over the same period,

leaving little opportunity to increase our position. Readers seeking more

information on both Builders FirstSource and Tidewater may refer to our

2025 annual letter.

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We also initiated two new investments during the first half of 2026. Neither

is currently large enough to materially influence our results, so I will reserve

a fuller discussion for a future letter.

Current Market Environment

I make no attempt to forecast the course of the economy or the stock

market. Instead, I devote my efforts to identifying businesses trading below

their intrinsic value. That does not prevent me, however, from recognizing

when market prices reflect expectations that are difficult to justify. Although

the timing is unknowable, I believe the euphoria embedded in today’s lofty

AI valuations will ultimately end in tears.

None of this diminishes the significance of Artificial Intelligence. I believe it

will profoundly reshape both the global economy and daily life. Yet even the

most consequential technologies remain subject to the laws of economics.

Three considerations are especially important:

1. Competition shifts much of the value to customers: Competition is

fierce at every layer of the AI value chain, from semiconductors and cloud

infrastructure to foundation models and end-user applications. This rivalry is

highly beneficial to consumers, as companies invest aggressively to enhance

their offerings and lower prices in pursuit of market share. For shareholders,

however, the same forces can prove far less rewarding, as they steadily

erode excess returns.

2. Overbuilding is almost inevitable: The history of transformative

technologies, from railroads to telecommunication, reveals a remarkably

consistent pattern: Expansion rarely stops at equilibrium; it typically

continues until capacity exceeds demand. Several recurring forces help

explain why:

Boundless expectations. New technologies tend to inspire unbridled

optimism, leading executives and investors alike to view the potential

market as virtually limitless.

The fear of falling behind. Convinced that a generational opportunity is at

hand, the risks of underinvesting are regarded as far greater than those of

overbuilding. Excess capacity may be costly, but falling behind can erode a

company’s competitive position and, in time, threaten its very survival.

Faced with that asymmetry, the instinct is clear: when in doubt, build more!

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Inertia. The long lead times required for large-scale infrastructure make it

necessary to expand capacity well in advance of projected demand. When

the market begins to normalize, projects commissioned during the boom

continue to come online just as conditions begin to cool. The resulting

imbalance can take years to resolve.

All three forces are on full display in the current AI investment cycle. For

example, Alphabet, Amazon, Meta, Microsoft, and Oracle are expected to

spend an unprecedented $700 billion combined on capital expenditures this

year alone, most of it devoted to AI infrastructure, with annual outlays

projected to surpass $1 trillion by 2027! Believing the opportunity to be

virtually infinite, these companies are willing to bet the farm to ensure they

emerge victorious from this rivalry. This race is unlikely to de-escalate until a

glut begins to form, thereby depressing returns until the excess is absorbed

and the market finds equilibrium again.

3. The earnings hurdle is monumental: Given the staggering capital

expenditure expected in the years ahead, companies across the AI

ecosystem will need to generate astronomical earnings growth merely to

sustain the returns on capital investors have come to expect. The arithmetic

is sobering. Take the five largest spenders:

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Additionally, reaching this hurdle will be even more difficult than it first

appears as hundreds of billions of dollars in annual depreciation expense

begin flowing through the income statement in the coming years.

To be clear, I am not suggesting that these companies will fail to achieve

such ambitious results. My argument is simply that such an outcome

remains aspirational, leaving shareholders in a vulnerable position. Like

parents who expect too much of their children, investors may be setting

themselves up for disappointment.

If these economic realities are so consequential, why have investors

been so willing to overlook them? Investors tend to extrapolate the

recent past into the future. Since the Global Financial Crisis, aggressive

speculation has been richly rewarded, while more cautious investors have

consistently lagged behind.

It is emotionally difficult for a conservative investor to watch glib speculators

who bought Tesla or Bitcoin on little more than a dream vastly outperform

despite having conducted none of the careful research or exercised any of

the discipline that prudence demands. When this continues long enough, the

pull to follow the crowd becomes nearly impossible to resist. Even rational

investors can begin to relax their standards and accept risks they would

never have considered previously.

A striking example of this behavior came in July 2007, as cracks began to

emerge in the subprime mortgage market. Asked how long the credit boom

could continue, Citigroup CEO Chuck Prince foolishly replied:

“When the music stops, in terms of liquidity, things will be complicated.

But as long as the music is playing, you've got to get up and dance.

We're still dancing.”

Sixteen months later, Citigroup stood on the brink of collapse. The

destruction of shareholder value was so severe that, nearly two decades

later, its shares remain roughly 75% below their pre-crisis peak.

Prince’s remark demonstrates how a prolonged boom can cloud the

judgment of even the most experienced executive. For years, banks with the

greatest exposure to the subprime market, including Citi, had reported

profits that vastly outpaced their more cautious peers. Each additional year

of gains appeared to validate their approach and made restraint look

increasingly misguided. Even as warning signs began to surface, Prince could

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not bring himself to step back and risk falling behind his competitors while

the rally still had momentum. He could not quit.

In Berkshire Hathaway’s 2000 annual letter, published in the wake of the

dot-com bubble’s collapse, Warren Buffett offered a memorable analogy to

explain the psychology underlying this behavior:

“Nothing sedates rationality like large doses of effortless money. After a

heady experience of that kind, normally sensible people drift into

behavior akin to that of Cinderella at the ball. They know that overstaying

the festivities, that is, continuing to speculate in companies that have

gigantic valuations relative to the cash they are likely to generate in the

future, will eventually bring on pumpkins and mice. But they nevertheless

hate to miss a single minute of what is one helluva party. Therefore, the

giddy participants all plan to leave just seconds before midnight. There’s

a problem, though: They are dancing in a room in which the clocks have

no hands.”

I don’t know how long we have until midnight comes, but when it does, as it

surely will, many of today’s celebrated executives and investors will find

themselves surrounded by pumpkins and mice.

As for us, nothing changes. In Chapter 4 of Security Analysis, Ben Graham

wrote: “For investment, the future is something to be guarded against rather

than to be profited from.” At BlackBird, we’ve always heeded that lesson and

have avoided companies in industries that are evolving quickly. Naturally,

this has precluded us from owning virtually everything that is related to AI.

Semi-Annual Review

Please use the link below to schedule your mid-year investment review:

https://calendly.com/blackbirdfinanciallp/judahspinner

Thank you for your continued confidence and partnership. I look forward to

speaking with you soon.

Your fiduciary,

Judah Spinner, CFA

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