Invest Like the Best with Patrick O'Shaughnessy
00:02:27 · Patrick O'Shaughnessy
[00:02:27] S0: My guest today is Dan Loeb, the founder and CEO of Third Point. Dan started Third Point in 1995 with a few million dollars, and today the firm manages 24,000,000,000 across equities, corporate and structured credit, venture, and insurance. He is best known for his activist work at companies like Sotheby's, Sony's, Yahoo, and for the public letters he has written to boards over the years. What I find most interesting about Dan is how much his approach has evolved across those thirty years. He came up as a credit and event driven investor at Warburg Pincus and Jefferies, built Third Point, then layered in quality investing, thematic technology investing, and now a very large credit business that sits alongside the hedge fund. We cover how he thinks about the AI stack and the companies inside it he believes matter most, The difference between good and bad governance, the Sony and Sotheby stories, the power of writing. Please enjoy my conversation with Dan Lope. Dan, we've only been trying to do this for six years. Welcome. I've been excited to finally chat with you about all things markets. It's such a crazy time. And I was walking in here, I'm like, am I actually the most curious about as it relates to how Dan runs his life? And one of the questions is the simplest, which is, in this time where there's more information than you could ever read, literally, what does your day look like to stay up to speed on all the investments that you've made the investments that you could make? How do you stay on top of the fire hose?
00:03:45 · Dan Loeb, Patrick O'Shaughnessy
[00:03:45] S2: I wish I could say I have a Claude code that is organized all the information in one place, and I go through it all. But you know, I check the news and see what's relevant for the economy, and what's relevant for our positions. I try not to get too obsessed with the minute to minute stuff, because that will drive you crazy. Try to be a little more tactical than strategic. People ask me about macro, what's important, and I think when people think about macro, think about all the typical stuff that the government reports, growth, unemployment, inflation, rates, currencies, where's gold, where's crypto? And I think that all that stuff is trumped right now by two things. Where's oil? And that's going to be dictated by what happens in the war, geopolitics, and what's happening with AI both on the spending front, infrastructure, and what's the impact of that going to be on society and on the economy. So those are the main things I'm focused on really trying to deeply understand. [00:04:42] S0: What is your model of both of those things? Do you feel like you need to have just a clear view or a differentiated view? Like how do you process things as big as this where probably no one person can understand the whole thing?
00:04:53 · Dan Loeb
[00:04:53] S2: I'm not natively a tech person, but I think given where the world is today, there was a time when you could say I'm just gonna punt on tech and focus on industrials and consumer and health care. I think you have to be a tech person today. It's a big and growing and compounding part of the economy. It affects everything else. So I think best as I can, I try to talk to smart people regularly? Jensen is laid out well and everybody talks about the AI stack, starting with power and energy at the bottom and chips and infrastructure and moving up through the LMs and software and applications and how that plays through. I think that's a good mental model to just think about all of it. We've played different elements of that through industrials and infrastructure and hyperscalers and things like that. But right now, the stocks is up 40%. I don't think I have ever seen an event like that. In fact, you just go back a few years, semiconductors were kind of left for dead. They were like roadkill in the market. People were not about them at all. And I think that all changed when NVIDIA reported its March results three years ago. And I think you either were there or it's okay if you weren't, you could quickly play catch up. That was the big event. And now, of course, it's sort of thinking about the NVIDIA, the Tranium, and the TPU ecosystems and how those play out and relative strength and how that plays through the different hyperscalers. And then, of course, the foundational models. I try to think in terms of that stack, but I also think about what's going on in the three most consequential companies today, NVIDIA, Anthropic, and Elon World, all of his companies collectively. There's a lot of ways to look through the prism, but for me, that's been an effective way to kind of think about how things flow through.
00:06:48 · Patrick O'Shaughnessy
[00:06:48] S0: How would you describe yourself as an investor? You have an early reputation for this incredibly precise ability to go through things with sort of a forensic lens as an activist early in your career. But now Third Point is a much bigger, broader, more diversified collection of 25,000,000,000 or so of assets. How do you think of yourself as stylistically as an investor?
00:07:09 · Dan Loeb
[00:07:09] S2: The roots of Third Point really come out of my experience as a credit investor in my time at Jefferies. Jefferies was like my laboratory for studying some of the best investors. My clients were people like David Tepper, who had not yet started Appaloosa, but started Appaloosa. Guys like Eric Mendich, who ran the trading desk at Goldman. Firms like Angelo Gordon, Farallon, was able to watch firsthand how the best, I guess at that point, we would call them either distressed debt, or event driven or risk arbitrage investors. So my natural first lens was to think about credit. But on the equity side to think about it in terms of a hierarchy and a mental model, I completely thought about it through the lens of event driven investing. Merger arbitrage a little bit off to the side, because that's less directional. But on the non merger arb part, which is really just a mathematical exercise in earning a return and the risks that you're taking, but in terms of a fundamental investment lens, I think it would be best characterized by those types of firms and the best book, which I think is still relevant today would be Joel Greenblatt's book, the classic, You Can Be a Stock Market Genius. I think the original title was You Can Be a Stock Market Genius Even If You're Not That Smart. I think he took that part out because investors don't like to think of themselves that way. That's a brilliant book. And most of people I know in that world kind of use that as their framework. Talked about things like spin offs, demutualizations, privatizations, post reorg equities. That's how I thought about things. I was totally unfocused on business quality, the moat, return on capital. I barely even thought about relative multiples for different kinds of businesses. All I thought about is, am I buying something really cheap that has the following characteristics? A new security is often created, which is priced and valued at a very cheap price because of a lack of liquidity. So when a large company or any company spins off a subsidiary, especially in those days, or part of the business, there's a new stock being born. The existing investors at that point in time, especially usually mutual fund types, or folks that didn't want to, for whatever reason, it maybe wasn't in their sector, they just weren't doing the work. So just routinely sell it.
00:09:44 · Dan Loeb
So there'd be this sort of liquidity gap. And if you could figure out the value of the business, those tended to be good trades. That was exacerbated by the fact that the management teams would go out in the case of a spin off and do a roadshow that would present a very conservative view. Some might even say sandbag the numbers. Why? Because people are always creatures of incentives. Their incentive package would be set at the time of the spin off. So they would come out very conservatively, but there's more. The companies themselves were inefficiently operated within these larger businesses. So margins were lower than they should have been. Sales were probably less. The management team didn't have the incentives to really optimize the businesses. So that was an incredible business model. And that dynamic that I just described, it applied to spin offs, it applied to privatizations, applied to demutualizations, it applied to newly created companies like Visa or MasterCard. So that was a beautiful business and it was sort of under appreciated for a long long time and you could generate really excess returns. We'd take that basic framework and start applying it to other things like the synergies that come when you combine two companies in a major merger, something like the Union Pacific Norfolk Southern merger, things like that. From 1995 when we started the fund, probably up until the early twenty thirteen to '15, that was our bread and butter and how we thought about investing. And