Invest Like the Best with Patrick O'Shaughnessy
00:43:28 · Patrick O'Shaughnessy, Martin Casado
[00:43:28] S0: I heard this story recently that someone asked Larry Page how much of compute will be orbital and he said five nines and the reason was it's just physics. Eventually it's all gonna be in space. [00:43:38] S1: The actual space thing actually pencils out but the reason it makes the most sense is just regulatory. [00:43:43] S0: Just because it skirts it? [00:43:44] S1: Yeah. There's 500 proposed legislations to stop data center building in The United States alone including Texas, right? Like if you can't build a data center in Texas, I don't know what we're doing anymore. If that regulatory pressure continues and you actually can't break ground and I've heard from many of the top data center people like it's very tough to break ground right now, then either you go international or you [00:44:03] S0: go into space. Your comment on these software companies growing 60% reminds me to ask about prevailing valuations in the market. And as a productive investor that's focused on disruptive assets being created, even if the disruptive asset is truly incredibly valuable and great, every one of those has a price that will ruin the return of investing in it if it's too high.
00:44:03 · Patrick O'Shaughnessy, Martin Casado
[00:44:03] S0: go into space. Your comment on these software companies growing 60% reminds me to ask about prevailing valuations in the market. And as a productive investor that's focused on disruptive assets being created, even if the disruptive asset is truly incredibly valuable and great, every one of those has a price that will ruin the return of investing in it if it's too high. [00:44:25] S1: So this is another one of my bugaboos. I don't know how you can be a VC and not believe tech creates value, which is the first conversation I had. Now I'm gonna have a second conversation which is I don't know how you can be a VC and not believe markets are efficient. What are we doing? Like, we're capitalists. You have to believe markets are efficient. I think private markets are very efficient and private markets figure out the price. And so I just don't try and bet against the market. I think a lot of people think that private markets aren't efficient and so you can find the deal and find a non consensus deal and all of those deals were incredibly competitive. And I didn't win by looking for a deal or whatever. I pay the market price and maybe I'll get a little discount for negotiating or whatever, but I never really worry about that. And so as a productive investor, I just trust that the markets are actually pretty smart. And I trust that the markets will value it given the risk adjusted and I believe that my diligence reduces that risk for me. I don't do it on market value. I'm not trying to find a better price. I'm just trying to find a less riskier asset.
00:44:25 · Martin Casado, Patrick O'Shaughnessy
[00:44:25] S1: So this is another one of my bugaboos. I don't know how you can be a VC and not believe tech creates value, which is the first conversation I had. Now I'm gonna have a second conversation which is I don't know how you can be a VC and not believe markets are efficient. What are we doing? Like, we're capitalists. You have to believe markets are efficient. I think private markets are very efficient and private markets figure out the price. And so I just don't try and bet against the market. I think a lot of people think that private markets aren't efficient and so you can find the deal and find a non consensus deal and all of those deals were incredibly competitive. And I didn't win by looking for a deal or whatever. I pay the market price and maybe I'll get a little discount for negotiating or whatever, but I never really worry about that. And so as a productive investor, I just trust that the markets are actually pretty smart. And I trust that the markets will value it given the risk adjusted and I believe that my diligence reduces that risk for me. I don't do it on market value. I'm not trying to find a better price. I'm just trying to find a less riskier asset. [00:45:22] S0: Doesn't it follow though that then the approach would be to actually try to index the private markets? Like you just try to own literally the market weights of...
00:45:22 · Patrick O'Shaughnessy, Martin Casado
[00:45:22] S0: Doesn't it follow though that then the approach would be to actually try to index the private markets? Like you just try to own literally the market weights of... [00:45:29] S1: Oh, I would love to but you can't. I would love to, of course. Yeah. So this is right. So this is where this all lends to. And this is kind of how we think about investing. Of course, if I have an index of every competitive... Like literally my my dream would be I get 5% [00:45:42] S0: cognition when you buy Cursor.
00:45:44 · Martin Casado
[00:45:44] S1: I... I've got 5% in every competitive... Like I really believe private markets are super efficient. I do and I think that the consensus is actually smart because I'm a capitalist and I believe in markets. And so if I could have 5% of every competitive deal where you've got legit investors in it, I'd be happy. But you simply cannot do that. You can't do that for competitive reasons. You can't do that for capacity reasons. So as an investor, you have to come up with how do I not run the the competitive bus hub, even more importantly, how do I not run out of our ability to keep track and help these companies? Because I do take the boards. I do get very involved, very involved. That's just impractical. So the way that we think about it, which you've heard before, but I'll restate it, is for every legitimate sector, and by that legitimate sector, we define it as there's good founders in it because we don't second guess founders. If they're risking their futures and the opportunity cost and their family's wealth, then it's a good sector. We do the work to try and decide for every good sector which is the top company. And that means you look at the team, you look at the tech, and you look at the monetization potential, you look at the market growth potential, you look at all of that stuff, and then we choose the best one and then we assume that the market is efficient. That's kind of the approach. It's kind of an index but we're actually segmenting it by market. Sometimes we get it right and sometimes we get it wrong but that way you're indexing the interesting markets.
00:47:00 · Patrick O'Shaughnessy
[00:47:00] S0: Yeah, there's this thing in indexing called stratified sampling. It's my old quantitative base. You can buy a small subset of the index and have your tracking error to the index be very low because actually literally what you're describing is effectively stratified sampling. Get exposure to the best, biggest, whatever per category and that will perform similar