Invest Like the Best with Patrick O'Shaughnessy
00:51:17 · Vlad Barbalat
[00:51:17] S2: One of the newer ones that is really interesting is this notion of how do you think about valuations across not just software, software I think has been the most talked about one. How do you think about valuation of businesses in a world where the future is increasingly invisible? It was perhaps always invisible, but you could get comfortable that certain things had a lot more staying power through thick and thin than not. And whenever you have that dynamic, you could put a higher multiple on things, and that's how you rationalize paying a price for an asset. I think today, you kinda gotta ask, well, do I really really know which businesses will thrive ten years from now or fifteen years from now? I think that's really difficult, and that could be everything from Yes Software, but maybe perhaps even Home Depot or John Deere, things that are not obvious in the AI crossfire. So that leads you to a question of should multiples be actually lower across the board. And I don't think I've experienced a question like that in my career, where you question multiples based on macroeconomic variables like, oh, inflation's higher, rates are higher, therefore multiple should come down, or some version of. This is very different. You're literally saying the future is so unpredictable that how can I possibly place some higher multiple on something? So that is a really fascinating question because it comes against the backdrop of possibly very favorable macro, which historically would have just had higher multiples. It can come against the backdrop of an expanding economy. Another way to put it is, you will likely have trillion dollar companies in 2030 that currently don't exist, and you probably have trillion dollar companies or many $100,000,000,000 companies that will not exist. We're starting to see that. We're starting to see therefore more volatility. So that's the next extension of that is there's a multiple question. Now you also have potentially structurally higher volatility. You combine that with some of the tactical stuff like perhaps the SEC will not require quarterly earnings. And so you can make an argument that volatility is just gonna be structurally higher going forward. The other part of that is everything I've talked about for now is through the equity lens. In the credit space, same concepts apply.
00:53:30 · Vlad Barbalat
Am I worried about four year paper in most of the software names? Probably not. I mean, they're contracted out. This is not a four year issue. That paper should be money good. Would I be worried about holding thirty year credit on Salesforce or Oracle or any of these things? I just think that it's a much much riskier proposition, and so it would feel like that should drive steepness in credit curves. If that's a structural shift that takes place, that will change capital market behavior. I go back to the fact that I have not experienced a framework or a time in my career, and I can't really go back through history and identify something similar where it's not really the macro conditions per se, although you can maybe call this macro, that are driving potential repricing of equities, and long duration credit, and volatility, all because it's just uncertain as to how this technology will evolve and change the fabric of the economy. You've had things that changed the fabric of the economy, but it would be slow burn. It would not be something that you need to think about today. Things like Salesforce, this is a company that is embedded in the vast majority of large companies in The United States and globally. The first question was, are people just gonna vibe code their own CRM? No, of course not. I sit in a large enterprise, that's absurd. That's not the question. The question is, is the company, that trillion dollar company I mentioned before, that isn't even around today, that's still an idea somewhere, will they ever use Salesforce as part of their ecosystem? And if the answer is no, that should absolutely be a massive headwind to the valuation of Salesforce, even though every Fortune 500 company may use Salesforce into perpetuity. You know, it's a different business, it's a cash cow business, deserves a different multiple. And that's what I think the markets are wrestling with in the public sphere, which has its own cascading effects into the private sphere.
00:55:23 · Patrick O'Shaughnessy
[00:55:23] S0: Yeah. Was gonna ask that specific question. If we've got this rise and fall, a new mag seven is emerging or something like this, the question of public versus private seems really important. This is an important question no matter what. There's the three or four biggest companies in private markets, if they go public this year or next year, will be three of the 10 biggest companies in public markets. That's never happened before. What is this debate like internally of how you should allocate to the public part of the market versus privates, especially interested in
00:55:50 · Vlad Barbalat
[00:55:50] S2: the equity piece? So public markets are substantially more difficult to hold than private markets. Many parallels to this. You don't think about the value of your house every day, even though it changes arguably every day, but if you own a public REIT, real estate, you'll probably look at it every day and have some kind of feelings from it. But fundamentally, equity exposure is equity exposure. So we don't think about moving between the two based on this dynamic. It comes back to what do we own in private markets, and I think the more significant reason private markets have evolved the way they have in the past decade is, you went public historically for very specific reasons. You needed to raise a certain amount of capital that was simply unavailable in private markets. They were just not robust enough, and if you wanted to grow your business, you would have to go to the public markets. There was a clear element of prestige with going public. So that was a milestone in a company's history to go public, that was a thing. And the trade offs would be you give up a significant amount of control, the ability to make decisions for longer horizons and sit through difficult moments because public markets punish you, shareholders react, boards react. Private markets have more or less addressed those challenges. You can now raise gigantic amounts of capital, so the capital need has been solved. The prestige and milestone thing, that's kind of gotten diluted. These companies have grown so large, we all know what they are. And now the cost of being public is actually quite high, whether that is a literal cost of the amount of compliance required, to people being really careful about saying, do I want the kind of pressures that are naturally present in public markets in in the way I'm gonna run my company. And what is it that my company does? Can I operate on a more of a quarter to quarter or maybe year to year basis? Or is my business really going to suffer if I have to operate that way? I really need that three to five year window which public markets very rarely give. That's what's driven the growth of private markets and some of those things may mean revert, so maybe regulatory burden reverts, that's at least fixable. But the main reason of capital being available to you as a private company, I think that stays and so this balance will persist.
00:58:01 · Vlad Barbalat, Patrick O'Shaughnessy
I think if you are an equity investor, you should look at the equity risk first and then decide what is the best way to get it. We have not stopped by any means investing in the private markets. There are other reasons why our balance sheet specifically is probably not best suited for public market exposure that is specific to our balance sheet. Doesn't mean we don't participate, doesn't mean we don't take opportunities when they look particularly compelling, but we will continue to largely focus in the private space [00:58:30] S0: for our equity exposure. You and your senior team came from Goldman, what cultural crossover happened there? What did you take with you? What did you leave behind? [00:58:39] S2: Goldman is one of these places where when you're there, you're amongst such talented and driven people. It's a hard place to be and it's a thrilling place to be, but you're particularly actually appreciated once you're not in it because of all the things that you didn't know you were learning, but you were in fact learning. I think we brought a drive for excellence. I find it implausible to just sit still, to take something and say this is good enough, why should we do this? This involves risk. It's just this motor that I think people that come and have been reasonably successful in other organizations that it's inherent to them that they are always pushing forward even though another person may look at that and say why do you bother? [00:59:20] S0: What is it about excellence that's fun or enjoyable or rewarding?
00:59:24 · Vlad Barbalat
[00:59:24] S2: I think about this a lot. First of all, I clearly don't know the answer to it. But I think as I've gotten older, I think about this in a very existential way. When you have a family, when you think about the incredibly important lens that provides, particularly through the lens of your kids, you could split your identity in so many different ways. And if you over swing to one or the other, something suffers. Everybody's got their own equilibrium. But I've continued to find that I get an incredible amount of personal satisfaction from building and being part of an organization that is making progress, that is making things better. By things I mean that can mean product, I can mean customer experiences, I can mean the careers of the people that are in my vicinity. My god, it's one the most satisfying things in the world to have you help other people progress through their careers. You don't think about that when you're younger, but it is truly satisfying. I've gotten more comfortable through time with spending more of myself at work than I have before. Before I would be very wary of that because I didn't want to have somehow my kids see less of me because I am a workaholic. But my whole frame around that has evolved. I don't think I'm a workaholic, but I am obsessed with making things better and being part of this organization and team. It's not about you, it's about the organization as a whole, and how it can continue to get better. Gives me real satisfaction. I have three boys, so inevitably I want to set an example for them best I can through my experience of what it means to be a productive human being, what it means to be a good father, unbelievably important, what it means to show them love in support and care, try to do that best I can every single day. I think they would find that they get a healthy balance, And that balance moves through time. My 17 year old, my first born, literally needs a lot less of me today than he did 10 ago. I think that's less of something he thinks about because it's so natural. It's something that I think about and I grapple with, is it okay that we interacted for ten fifteen minutes? It was maybe a high quality interaction but it's all was ten to fifteen minutes. I go to bed thinking about that sometimes but I also think about this is a forever thing.