Invest Like the Best with Patrick O'Shaughnessy
00:22:50 · Vlad Barbalat
[00:22:50] S2: I could do it. That's a classic example of conglomerates. Shareholders don't generally welcome that approach. And it's especially difficult if you're starting from scratch. Why should you have the right to build a world class investment organization if you're not really starting there? I think the public sphere therefore operates differently, and is held to a very very tight standard on the underwriting side. Now, the flip side of that, if you're a mutual, you don't have the forcing function of shareholders to ensure that you are operating at your best. But that's an optional feature of mutuality, that's not a requirement. The only requirement is that you can't raise equity. We've made the choice that we want to be an exceptional operator, and that includes exceptional underwriting results and exceptional investment organization. How it benefits our policyholders? Well first and foremost, again, are going to be there through thick and thin when inevitably trouble strikes. The other component I mentioned that our insurance businesses are incredibly diverse. So if you think about other large insurers, take Progressive, incredibly successful company, lots to admire, but they're very focused on a particular vertical, motor in The US. They're incredible at it. Those risks require a certain types of balance sheet. They're not particularly long tailed. If you think about our mix, we have risks that can come back from twenty, thirty years ago and be very fat tailed. It is really really important to differentiate the balance sheet that company like Progressive needs versus a company like Liberty Mutual. Our tails are fatter, our balance sheet requirements are very different. That goes back to this what we describe as a flywheel. If we do well for our policyholders in terms of underwriting, efficiently creating various products that tailor and suit their risks, and then invest our capital well, we can perpetuate the strength in the service of our policyholders.
00:24:43 · Patrick O'Shaughnessy, Vlad Barbalat
[00:24:43] S0: If I were to sum that up, the success on the investment side unlocks product or service quality for policyholders. [00:24:51] S2: Product breadth, future risks that currently may not be visible to you but are going to evolve, we can be your partner [00:24:58] S0: And risks some of that you can underwrite that maybe others couldn't because of the nature of the balance sheet. Correct. Got [00:25:03] S2: it. At the most extreme, you could think of Berkshire as being that. People think about Berkshire's insurance operations, the most visible obviously is GEICO, the original. But they are the insurer of last resort very very often. The reason they can do that is because they've got this incredible balance sheet. Berkshire is a universe of its own, particularly in the way shareholders have regarded Berkshire not asking for capital back. But that's an extreme example of what you can do when you have a balance sheet like that.
00:25:03 · Vlad Barbalat, Patrick O'Shaughnessy
[00:25:03] S2: it. At the most extreme, you could think of Berkshire as being that. People think about Berkshire's insurance operations, the most visible obviously is GEICO, the original. But they are the insurer of last resort very very often. The reason they can do that is because they've got this incredible balance sheet. Berkshire is a universe of its own, particularly in the way shareholders have regarded Berkshire not asking for capital back. But that's an extreme example of what you can do when you have a balance sheet like that. [00:25:33] S0: I had lunch with a Jet Jane one time, the savant that has run Berkshire's insurance business forever. He described what he did as the exact same as how I would describe investing, which is he literally said, I wait around and wait for the phone to ring. People call me with the craziest propositions, the craziest risks that I can price and underwrite, and then I price risk. It sounded much more like Warren's job of waiting for fat pitches, as he would describe it. It's sort of the extreme version of this, not this programmatic auto insurance, but wacky stuff that nobody else in the world could do. So it sounds like part of what you've built in our building is something that moves more out in that direction, and isn't just this rote, repetitive, single kind of underwriting.
00:26:16 · Vlad Barbalat, Patrick O'Shaughnessy
[00:26:16] S2: Exactly. We are incredibly diversified in our insurance businesses. You're spot on in the way you've just described what Ajit said, but we think about the similarity between not all our insurance lines, but particularly those more esoteric ones or really in the commercial and specialty space, is very similar in spirit to the practice of what investing is, which you're deploying capital into uncertainty to achieve a return. That's true across both. The risks tend to be not six month and one year risks, they tend to be multi year risks. The same disciplines and the same conceptual framework applies. How do you manage your reserves? How do you manage your liquidity? These concepts go back and forth between the balance sheet. Let's be clear, these businesses operate in their own spheres and ecosystem. Not a lot of operational synergy, but definitely strategic synergy. [00:27:07] S0: One of the things that you and I have talked about many times that I think is so important for the context that you bring to the job, is the power of America and the American system. I have found this phenomenon that the people that love America most often weren't born here. They're immigrants. They saw some other system. They came to this one. You have an incredible story in this regard. Can you tell that early life story in whatever vivid detail you're able to put a finer point on this thing that I've noticed of the people that appreciate this system the most came from outside of it?
00:27:38 · Vlad Barbalat
[00:27:38] S2: Yes, I do love America and we're gonna celebrate America's 200 birthday this summer. When you're born outside The United States, you are exposed to a way of life that is very difficult to actually understand for those that are fortunate enough to be born in The United States. You take certain things for granted, you assume they are like gravity because they just exist, but they're not. I was born in Moldova, a former republic of the Soviet Union, currently an independent country right outside of Ukraine. I was very very fortunate that my parents decided to uproot their life in 1990 and make the journey to The United States. Now to be clear, this wasn't a difficult decision, this was something that people could only dream of. We were very fortunate for a number of different reasons to take the path that we did which was a direct path to The United States. I think what is true in The US, always has been true, still true today, despite all the many ways you could criticize America is that the level of agency you have as a citizen of The US or as a resident of The US is unparalleled to anywhere else in the world. That's because it is a vast country with vast amount of regional differences, cultural differences along the way. We have done an incredible job of ultimately integrating people into our society. And if you have talents, if you have motivation, there's an infinite amount of way you can both define what success is, define how you will contribute, and ultimately live a life where you have the option to thrive. Not everyone thrives, but you have the option to. And that option is not available to the vast majority of humanity because you'll be burdened by your family's history, your ethnicity, your religion, your government's oppressive system, and inability to move up the socioeconomic ladder because of the way the economy is set up. All those things and versions of or combinations of are present just about everywhere. But in The US, you have an opportunity. One of the ways I described the fascinating thing about America is, believe it or not, through the lens of a croissant. I remember as a kid in The Soviet Union, at about six years old or so, my mom would send me to go get bread, and the way you get bread is, there's a bread store and there is one, maybe two types of bread, and there'd be lines outside of it and you'd get the bread.
00:30:13 · Vlad Barbalat, Patrick O'Shaughnessy
Never went hungry, so don't want to create those impressions, but the view was very simple, bread is bread. Why would you need more bread? You get your loaf and you go have your calories. In The US, we take the exact opposite view. If you want to reinvent the croissant, which exists in a thousand different ways right around Union Square, you can do that, and if you can figure out a way to make it special to you and to your customer, there will be a market for that. And what is the act of that? That is human creativity. That is humans iterating and perfecting and continuing to apply themselves and to express themselves on something that doesn't need necessarily a different way of consuming calories. But it's beautiful. It's what drives I think people in general in The United States is to constantly make little tweaks that make things better and we all benefit from those. [00:31:10] S0: I'm curious what else the experience was like in that first decade of life. Breadster is very illustrative of the power of a market system and permissionless innovation and all these things that you and I have talked a lot about. But paint a little bit more of a picture of what it was like to spend the formative decade of your early childhood there, draw the contrast to what your experience was then in The US.