Invest Like the Best with Patrick O'Shaughnessy
00:11:35 · Dan Loeb
[00:11:35] S2: No, they still exist all the time. The real opportunity today is understanding those types of opportunities, and looking for something that combines that with a business quality lens. So let's talk about how my business evolved, and how we evolved. I think if you look at a lot of the people who have underperformed or haven't survived the last decade or so, when people are really stuck on the idea of deep value, low multiples, being really stubborn about how they viewed businesses and less flexible about moving into higher multiple companies or growthier companies. So we basically just started to look at companies that grew faster, that had better returns on capital that were quote unquote quality businesses, that kind of opened up a whole new world for us. So I would call that the other significant part of what we do, would be quality investing, thematic investing. And that's when we started to organize our team around industry experts and less generalists and less around the transactions. And if I would suggest a couple of books, I'm sure people have mentioned them, I think he may have even interviewed some of the people who wrote them. Probably the two most consequential books that I read that had the most influence on me in that area. One would be The Outsiders talks about more from the perspective of the managers who understand capital allocation along with great operations. So companies like Danaher, TransDigm, and others. The most influential and eye opening book to me was this book Quality Investing by Cunningham. And that I think really lays out the idea of super high quality businesses with good moats and high return on capital, and that you might want to own for many, many years. Now, happened last year was really interesting because a lot of these companies that appeared to be super high quality, it's probably the worst year going into the beginning of this year because of the disruption of AI. A lot of these apparently high quality companies very rapidly became less so.
00:13:51 · Patrick O'Shaughnessy
[00:13:51] S0: One of the most distinctive things about you and the business is how much of that you've done, how much changing of your stripes or evolving of your strategy you've done relative to others. And I'm curious, I'm assuming that's going to have to keep happening, the world's going to keep changing, probably at a faster clip even than before. How have you done that? And how do you think about the conditions or the cultural touch points? Or what is the key to doing that well across thirty years now for you?
00:14:17 · Dan Loeb
[00:14:17] S2: In 2013, I was in a room. It was a dinner in Davos, which I don't go to anymore. It was a Goldman Sachs dinner. Eric Schmidt was there and gave it talk. And if you go back to 2013, it was a time of when you look back at it was almost quaint in terms of the technological innovation. This was probably around the time that maybe the Uber app came out and the iPhone was starting to come up with some interesting apps which were starting to be adopted. The SaaS revolution was sort of at the front end. Companies like Microsoft were starting to find their footing. Think about all the period from the dot com bubble through the GFC. The nineties were at times of incredible technological innovation. And yes, stuff was happening, but I don't think we felt there was a lot going on. There are other things going on in those years, but it was the sexy industries at times were natural resources, energy, financial services. So he said to the room, it will be your natural tendency to think that this increase in technological innovation and disruption and change that we've been experiencing for the last couple years is an anomaly, and that things are going to go back to a kind of a steadier type of innovation and growth. But hold on to your seats because things are only going to accelerate from here. And he was really right. I think you could have said that again in 2017. You could have said it again in 2020. I think you can really say that right now. Like it has just continued to logarithmically accelerate and we're going through something now where we're at the front end of AI. At this point, we're just gonna have to learn to live with this. In the same way, I don't know that from an evolutionary standpoint, brains have been able to deal with things like social media and some of the other changes. It's going to take a lot of work for us to just prepare ourselves as a species, and even mentally, how to ingest all this information. And Brad Gerstner talks about this book, Essentialism. And I think we also have to adopt this idea of essentialism because you can't do it all. You have to figure out the things that are most important and most relevant to what you do. As your
00:16:41 · Patrick O'Shaughnessy
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00:18:02 · Dan Loeb
[00:18:02] S2: There's so much wisdom in books for investing. Of my favorite books, Reminiscences of a Stock Operator, quotes, I think it's from Ecclesiastes, which says there's nothing new under the sun. And the question is, will AI take human nature and the flaws in human emotion out of the investment process? Or might the AIs even adopt some of that under the name of risk management or managing downside or whatever? It will test the theory that there's nothing new under the sun. And the thing that doesn't change is hysterias, bubbles, panics, and just the extremes of human nature, both optimistically and pessimistically. Think about just this year, why is the socks up so much? It's up so much because all the evidence pointed to the fundamentals in semiconductors, semi cap equipment, memory, everything around it being super strong. What happened? Expectations were too high in the same way that NVIDIA after Q1 three years ago had this monster quarter, people piled on, it kept going up. You had a couple of quarters in a row where it put up solid numbers, then shockingly good numbers and the stock tanked. The whole sector went down and I think people were just scratching their heads saying, why did the numbers look so good and stock prices keep going down? And then the same thing happened with Micron. They had a phenomenal quarter up 80%, way ahead of expectations. The stock went up a little bit because expectations were too high and then it went down. Now that happens a lot. It happened to Meta a couple of years ago. They put up a good quarter, stock went up, it was like Wile E. Coyote, there was no one else to buy the stock, it tanked. So those things happen and I think that's where the human element comes in to understand and to be able to make those tough trading decisions when fundamentals are going one way and stock prices are going the other way, to be able to take the pain of losses in the short run. The advantage that someone like me, being a fundamental investor who doesn't make trading decisions based on computers, is that there are still a lot of market irregularities caused by some very good strategies, but collectively they create these anomalies.
00:20:29 · Dan Loeb, Patrick O'Shaughnessy
So you have quants and CTAs, you have pods, they have a great strategy for them and their investors, but it causes some unusual behaviors because fundamental investors believe that when, as Warren Buffett would say, if a stock goes down, you celebrate it because it's a chance to buy more at a better price. They have risk metrics, which have forced selling on the way down. So they do the opposite. It might be rational for their business model, but it's not rational for long term investors. So you have a lot of these things that will continue to create opportunities, I think, for fundamental investors. [00:21:11] S0: So interesting to imagine where the source of potential outsized returns are human behavior, which as you said, maybe that changes how much that impact prices and structural things like these and absent those two, maybe it'd be a less exciting market or something like that.