Invest Like the Best with Patrick O'Shaughnessy
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?
00:40:35 · Dan Loeb
[00:40:35] S2: At one point, we own 7% of Sony, there's a list of companies that we at one point own significant stakes in that had I not sold would be worth in the mid to upper single digits billions of dollars. Serves like two runs at Sony. The first time we invested in it, it was basically a conglomerate. It had obviously the main Sony studios, it had a semiconductor business, a life insurance business, obviously had all the consumer electronics. So we advised them to separate these businesses, certainly at a minimum take out the insurance business, which had no place in it. We met with the management team. We had a big deck that we went through. At the end of the meeting, we told them, well, in the interest of transparency, we shared our investment thesis with the New York Times. So Andrew Ross Sorkin wrote the story. They went into a panic when we told them about that. Andrew agreed to embargo the story until the Japanese market closed. The story came out and they had prearranged us to go on a tour of their innovation center. But before we went on the innovation center, when we told him that there was going to be a story that came out, and it was Kaz Harai, and goes, You told the New York Times? I said, Yeah, but just the New York Times, nobody else. He says, Okay, just the New York Times. It was wild. We were walking around the Innovation Center, and we're looking at our BlackBerrys at The that story went everywhere and ended up being a really good investment. They really pushed back on everything that we recommended. Took them about five years. And I think one by one, they've done many of the things. They've broken out the semi business. They partially spun out, or they planned to spin out their financial services business. The one thing I learned is that activism in Japan is really hard. On one of our first trips, we met with the Prime Minister, and we met with his right hand man, Sugo san. I told him I would write a paper explaining to him why activism was good for Japan as a country. And they had released something called the three arrows. It was about fiscal, monetary and restructuring. And my suggestion was that they needed to include corporate governance, and in particular focus on return on invested capital as part of their three arrow strategy.
00:43:08 · Dan Loeb, Patrick O'Shaughnessy
And I came back to New York, I met with Larry Lindsey and Neil Ferguson, who wrote a three person paper. They did most of the writing. But we wrote a paper for AEIs and picked up as an editorial in the Wall Street Journal, and they then adopted that. It was pretty cool. But the government actually really wants the companies to do this. It's really the management teams that are more entrenched because the shareholders and the government want that. And you've really seen progress since we first went over there. They're breaking up some of these cross shareholdings. They're penalizing companies that trade at discounts to book value. There's a bunch of other things. I think they're definitely moving in the right direction. [00:43:58] S0: If you think about all the investments that you've made, is there any that stands out as the one that taught you the most just about like how this world works? I'm just always interested in these like instructive learning by doing versus by reading. You can read all these amazing books, the outsiders and Joel Greenblatt's book, and they're great. But it feels like part of investing is you have to get hit in the face or experience things to really imbibe the lessons. Is there any investment through your career that stands out as one like that?
00:44:26 · Dan Loeb
[00:44:26] S2: I think investing in Danaher has been the most instructive because it really is truly one of the best run businesses. It was also one of the first experiences that I had investing in a super high quality business that internalized some of the best practices of creating a corporate operating system. My partner then, Muneeb and I actually went to Danaher and got them to boil down their five day DBS Danaher Business System training into a one day thing for us. It was really instructive. It was a really, really good investment for about four years. What I learned by observing them, by watching them incrementally improve the business quality of the company, by shedding lower quality businesses, buying higher return on capital, better quality, higher margin businesses to shift from kind of general industrials into healthcare. I learned a ton, and then stopped working as an investment. Because of COVID. There were all kinds of irregularities, surges in orders and increases in inventory, and then a correction for that. All the benefits that they got from the surge in demand, there was a tailwind became a headwind. And they still haven't come out of it. It'll be interesting to see how they navigate AI in the next few years. We actually sold it recently, the recent sell off of Gotten back in, but in a small way. But I learned a lot about how really thoughtful businesses think philosophically and deeply about their operating system, about optimizing and motivating and inspiring their team, and even the fact that they have a system in place. And it's also been incredibly instructive watching the diaspora of executives.
00:46:25 · Patrick O'Shaughnessy, Dan Loeb
[00:46:25] S0: Larry Culp was there, right? [00:46:26] S2: Yeah. Larry Culp was there. The guy from Ingersoll Rand, which has been a well run business. [00:46:31] S0: If you had to sum up that one day, what was it? Just some system for continuous improvement was the thing that you took away? [00:46:38] S2: Cult is a little bit too strong of a word to describe it, but they had a very strong corporate identity and culture. It's one thing to say, we are a kaizen company and we're dedicated to continual improvement. But what they have is a whole system of implementing improvement across the organization. There are a lot of things that I learned that day. But one of things I took away is that they would hold people very accountable and individually show when people were underperforming. But the interesting thing about it was that because these things were all addressable and fixable, when they found someone that was underperforming, was celebrated because instead of shamed because look, look what all these things you're doing wrong, we can fix those. And they did, they do that over and over and over again. And they do it both in terms of operations, working capital. And it was really cool to just walk around the place. It was really amazing how everybody's on the same wavelength trying to accomplish that.