Invest Like the Best with Patrick O'Shaughnessy
00:33:06 · Patrick O'Shaughnessy, Dan Loeb
[00:33:06] S0: What's the thread that unites all those things like asbestos liability and private credit and corporates? It seems all over the place. [00:33:15] S2: I've worked in venture capital, I've worked in risk arbitrage, I've worked in credit, I've worked in equities, having a view of value, and thinking about valuing enterprises, whether there are earlier stage, mid stage or mature businesses, and looking to invest in whatever the fulcrum security is in that enterprise. Obviously, for an early stage company, the only fulcrum is the equity. [00:33:43] S0: What does that mean fulcrum?
00:33:44 · Dan Loeb
[00:33:44] S2: The one that's going to have the best risk reward. It's usually used in terms of companies that have debt and equity. Do you want to be in the equity? Do you want to be in this junior debt? Do want be in the senior debt? Let me give you an example. Like when Credit Suisse was going through its troubles and being bought by UBS, you could invest in the preferred shares, you can invest in the Holdco paper, or you can invest in the OpCo paper, which was most senior within the capital structure. This fulcrum there was actually the holdco paper that had the most upside, but the opco paper also did well, the pref was wiped out. So that was the wrong place to be. But there are always different interesting places within the capital structure to play. And having a comprehensive view of these companies gives you a really great vantage point to make alpha generating investment decisions. Let me give you two examples. We had a good enough knowledge of Twitter and XAI to understand the equity value of both of those businesses. And without making a decision whether or not we wanted to own equity in XAI, There were two financing transactions that came up, one for XAI and another one for Twitter. The Twitter debt was a resale of the financing debt that was offered when Elon bought the company. Morgan Stanley sat on it for a while. It was deep underwater. When it got close to par, they decided to sell it. Most credit investors were really scared and nervous to buy that even though it was like ninety six, ninety seven cents on the dollar. It was yielding around a 12% yield. We were comfortable enough with the underlying value of the business and with the fundamentals that we made that at that time our largest credit position. Then when xAI did a debt financing, very few credit people wanted to play in that one because there was no cash flow. Dollars 2,000,000,000 in revenues and a $20,000,000,000 enterprise value, but we were very comfortable that this was a real business. We looked at them as credit investors, but we also were able to bring in the resources of our private investing knowledge.
00:36:02 · Patrick O'Shaughnessy, Dan Loeb
[00:36:02] S0: Yeah, it's a fascinating example of the value of seeing across the whole ecosystem and being able to invest however you want, which brings me to the question of, again, I understand it, you're sort of still the single portfolio manager that sits on top of all these assets across all these different buckets, like ultimately, you have to make the decision to buy or sell something. [00:36:19] S2: Let me just push back on that. Sure. I'm the portfolio manager of the hedge fund. But private credit, CLO, [00:36:26] S0: operate independent, [00:36:27] S2: structured credit, a high yield business, they'll have their own PMs. I will come in if there's an interesting opportunity. We supersize both of those, both Twitter and xAI when I got involved, but I'm not even on the investment committees of those businesses. [00:36:44] S0: So to zoom in, I'm just the hedge fund where you're the PM. You mentioned before you could be a great investor and not bother with tech Warren Buffett style or something. And now today, the market's 70% tech. What do you think of that complex of companies today, the sort of Amazon, Microsoft, Google, big technology companies, relative to the last ten years of watching them and investing in them carefully. What does the setup feel like to you today?
00:36:44 · Patrick O'Shaughnessy, Dan Loeb
[00:36:44] S0: So to zoom in, I'm just the hedge fund where you're the PM. You mentioned before you could be a great investor and not bother with tech Warren Buffett style or something. And now today, the market's 70% tech. What do you think of that complex of companies today, the sort of Amazon, Microsoft, Google, big technology companies, relative to the last ten years of watching them and investing in them carefully. What does the setup feel like to you today? [00:37:07] S2: I think the setup's great. You can still buy Nvidia, maybe the multiple slightly higher right now. But there's such a catch up trade in Nvidia at 15 times 27, 12 times 28 for the most dominant, very fast growing company at its size. I looked through our whole semis, cap equipment, hyperscaler portfolio, and I thought my instinct was gonna be okay, we've got to take profits here. I looked at the valuations, I looked at their growth rates. Unless you are really draconian or negative, and you think that somehow the AI world is going to roll over in '31 or '32. I think it's most attractive sector right now is where the bulk of our capital is invested. [00:37:54] S0: As a person that was born in this sort of value discipline and made a lot of money in that kind of investing, those people who tend to have not evolved as much would point today and say, oh, it's just like another classic example of like a giant bubble in the making. Do you feel seeds of that at all? Are there aspects of the market that feel euphoric or strange?
00:37:54 · Patrick O'Shaughnessy, Dan Loeb
[00:37:54] S0: As a person that was born in this sort of value discipline and made a lot of money in that kind of investing, those people who tend to have not evolved as much would point today and say, oh, it's just like another classic example of like a giant bubble in the making. Do you feel seeds of that at all? Are there aspects of the market that feel euphoric or strange? [00:38:14] S2: If you don't believe the CapEx numbers are going to yield a return, then you would have to believe that they're just flushing money down the toilet and that they're not going to get a return because the GAAP earnings numbers are really strong and the multiples on that And they might say, yes, but the cash flow after CapEx is squatting. But these are companies also that are, for the most part, investing money off their balance sheets that are generating enormous amounts of cash. So it's very different from the .com bubble, which we were short going into and had good numbers in those years. You don't have the valuation bubble now on those companies that you had on those companies back in those days. You see Anthropix revenue growth and the adoption and the usefulness of its products and the anecdotes you hear about the next generation mythos and what that's going to do. We're barely scratching the surface. There's so many layers of corporations, they're just getting started. I'm in the optimist camp in terms of seeing this is something that's going to play out.
00:39:21 · Patrick O'Shaughnessy, Dan Loeb
[00:39:21] S0: What about the rest of the world? I'd love you to tell the Sony story, the story of going to Japan and spending so much time there and everything that you learned. I think it's a really colorful, cool story. But it's also an excuse to ask about the rest of the world and what you see going on there. I know you'd be willing to invest anywhere. Whereas the American companies get basically all the attention in markets these days. Whichever order you want to go into, you can tell the Sony story first. That's just an example of this, but I'm curious how you think about everything outside The US. [00:39:47] S2: Israel's an interesting market. It's kind of a niche year market and we had one of our top investments there that despite the war has been one of the best performing stocks in our portfolio. But in terms of the big markets, there's a lot going on in Korea, Taiwan, Japan, I'm probably more bullish on them just in terms of hunting ground to find great companies. The European markets are tough right now, given the regulatory environment, they just have a different attitude about business and capitalism. And we're invested in a couple businesses there, Rolls Royce, ASML, but the companies that are in Europe dependent on the local economy are challenged. [00:40:31] S0: Can you tell that Sony investment story and kind of everything you learned through that process?