Invest Like the Best with Patrick O'Shaughnessy
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.
00:47:38 · Patrick O'Shaughnessy
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00:49:04 · Dan Loeb
[00:49:04] S2: We actually started an insurance company, De Novo, in 2010. We were backed by myself, Kelso, and Pine Brook, and we started a Bermuda based reinsurance company. And the thesis there when we started was we have an executive that will do these reinsurance deals, we will invest the float all in third point and in treasury, so sort of a barbell, and we can defer taxes, get leverage on our capital. Greenlight Re at the time was trading at a 140% of book value. I thought this would be the future, we'll just keep raising money for this vehicle. The problem was that the reinsurance business took a sharp turn for the worse. And we had some good years at third point, but we were like scrambling to offset the losses from the insurance company. About three years ago, I said, well, we had the right idea, but we had the wrong insurance vehicle. We were doing PNC insurance. We really should have just done plain vanilla annuities. Problem is the annuity business, though, can invest in the hedge fund, it can only do credit. So a few years ago, we started a reinsurance company. We've done two things since then. We merged our reinsurance company into a closed end fund that we had in The UK, Third Point Offshore Investors. We reincorporated that business from Guernsey to Cayman, and we repurposed it from a closed end investor in my hedge fund into an insurance company. Still has some of the investment in the hedge fund, but it now owns our reinsurance company. That company will then be in a position to do more reinsurance deals, issue primary annuities, And then third point manages the money in private credit, structured credit, whole loan mortgages, some direct lending in real estate, some investment grade corporate debt and private investment grade. But we also put the equity of that business in things like the junior tranches of structured financings, but we'll also be using it for growth equity investments.
00:51:17 · Patrick O'Shaughnessy, Dan Loeb
[00:51:17] S0: What's the hardest investment lesson that you've ever learned? [00:51:20] S2: I would have to say our investment in FTX. It looked great. The company was growing fast. We could verify it all on the blockchain. We felt like we had some good company on the cap table with us. We did. Turned out that it wasn't what we thought it was and it was painful because, you know, I think in general, one of the amazing things about our capitalist system and that venture backed companies have this incredible ability to go out and raise capital for interesting ideas. Most people are good actors with good intentions. We've rarely had any kind of mishap. Doesn't mean that you don't do very careful due diligence. I will say that now our due diligence process, we definitely like check bank balances and do like the most basic due diligence that probably would have turned stuff up on this. If he hadn't ended up being a crook or very sloppy, the venture investments he made would have [00:52:18] S0: It's like the best venture investor