Invest Like the Best with Patrick O'Shaughnessy
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
00:47:19 · Martin Casado
[00:47:19] S1: to the... Yeah. Okay. I think venture capital early on... And I wasn't there. I just read the books. I think it believed that tech created value. I mean, often there was no business to evaluate. And I just don't see so much hand wringing about bubbles or this or that or the other thing. The market price is the market price. To me there's always this huge dissonance when I'm talking with other investors, they're always decrying the bubbles which nobody could ever predict. By definition, everybody's calling it a bubble is probably not a bubble. Like, it's almost a bubble like when everybody's investing because they think there's still upsides. And then they don't somehow think private markets are efficient. Remember I got VC canceled because I'm like, non consistent investing is dangerous. I once on Twitter was like, hey, listen, I think it's dangerous to invest against consensus because basically there's follow on capital risk. And from saying that, many prominent VCs came out and they were like, oh, like all of these deals that we've done were nonconsensus. And I think there's something very tied to the ego and the identity of investors that they have to believe that they can truffle hunt and find the nonconsensus thing. They're smarter than everybody else. But I think the reality is is certainly if you look at our portfolio, the ones that return money were actually very, competitive in general. I just think these markets are actually quite efficient.
00:48:30 · Patrick O'Shaughnessy, Martin Casado
[00:48:30] S0: I love the idea of market efficiency and private markets being one area that you disagreed with lots of well known [00:48:35] S1: Yeah. And apparently, a whole lot. [00:48:37] S0: Apparently all of them. Are there any other areas like that where you feel especially alone? [00:48:41] S1: Yes. That's another one that drives me nuts. This is my last one [00:48:44] S0: I promise.