Invest Like the Best with Patrick O'Shaughnessy
00:25:28 · Alex Sacerdote
[00:25:28] S2: Andy Grove says, when you have strategic inflection points, you can't trust the data And strategic inflection points are about intuition, anecdotal evidence. I love this book called the Tau Jones Averages, a guide to whole brain investing, which is right brain and left brain. And the best investors have the right the creative side where it's visual. It's connecting the dots. We invested in the mobile video game s curve for so long. The screens were small and the phones and the processing power wasn't good. So you had all these casual games. But then I was in China and I saw this little 12 year old boy with a huge phone and he was like playing a awesome video game. I'm like, oh my god, it's now coming to the phone. So it's visual. Enterprise is hard because you can't see it. Smartphone, you can see, oh my god, I got it. It's amazing. With AI, there's some intuition there. But enterprise, you don't really get to do that. We go to the Gartner IT symposium, 30,000 American CIOs go there. We saw this happen with Splunk where that used to be an amazing database company and their room where they were explaining was like standing room only. And we saw that with VMware thirty years ago where they virtualized a server. There was standing room only and you could just see the corporate demand just beginning. And with AWS, we went there and their Grand Ballroom was completely packed. And that was a 09:00. And at 10:00, the Grand Ballroom was completely packed. 11:00. So you could see the demand exploding before it happened. We look for all kinds of clues and there's a whole pattern recognition that happens. And by the way, it's okay to be late. It's okay to miss the first one, two, three years in a lot of cases because if the top of the s curve is half 1,000,000,000,000, the growth can go on for a long time. So you don't always have to be right there. It's okay to miss the first 100%. Peter Lynch, I started at Fidelity and he loved to mentor the kids. So I got some time with him. He said, white out the chart. It's all about the future. So it's okay to miss, but what helps about the s curve is sort of how long it goes for. Then there's the slope of the s curve, which is important. And a lot of people think because we're in a modern world, everything's so fast. But there's a lot of factors that determine the pace of the adoption.
00:28:04 · Alex Sacerdote, Patrick O'Shaughnessy
And we commissioned this gentleman Horace Dedue used to work with Clayton Christensen to go look in history and we have the big s curves on our wall over the last hundred years. And the radio s curve is one of the fastest ever. It took seven years to reach like a 100% penetration. But the dishwasher s curve is like that because it needs to be plugged into the back end. B to B stuff can take a long time because it needs to be plugged into the existing systems. Consumers generally tend to go a lot faster. [00:28:37] S0: I love that. The radio and the dishwasher, the two models for adoption.
00:28:41 · Alex Sacerdote
[00:28:41] S2: I covered internet at Fidelity. My first stock was Amazon. That's a whole other story which is a lot of fun. But I also did b to b internet and there was a whole huge bull case on that. The underlying infrastructure wasn't in place for b to b to happen. Ultimately happened twenty years later with SaaS. That is a risk with AI in that these big companies are very security conscious, can be slow to move. There's a lot of cultural issues with AI where you really need a few evangelists to push it through. The top management needs to push it through, but then the IT is saying this is risky. And that happened with cloud too. That was one of the big things with cloud where everybody was afraid. It's unsecured to have your data in the cloud. And then we saw the CIA do it, and we saw Capital One, and we talked to the Capital One CIO, he said it's more secure in the cloud. And then it really started to take off. Those take offs maybe because SaaS is like the dishwasher and because cloud it's gotta be plugged in, it meant that yeah, it was growing, but it was sort of a 30 to 40, maybe a 50% growth rate. But what's amazing about AI is you just at least with consumers or even this you just open up the browser and it's there. And so that's why we're getting this straight up. And I think there's enough runway in the near term going from 10 bips of people really using it to two to five or whatever, which is gonna cause it to keep on going straight up. This one called a backwards l curve. So it's really pretty exciting.
00:30:19 · Patrick O'Shaughnessy, Alex Sacerdote
[00:30:19] S0: What have you learned about when the group that ends up being the leader separates itself from one of these competitive packs? So you're talking there mostly about overall growth of the s curve and demand. There's always multiple players fighting for it. It seems like you kind of invest after someone has separated themselves from the pack, not try to pick the winners from the pack. [00:30:41] S2: You look for the s curve, then we do an exhaustive study of everybody with exposure in that area and try and find the one with a very powerful competitive advantage. And a lot of people didn't like tech. Warren Buffett didn't like tech because he couldn't predict the future. [00:30:59] S0: Changed too fast.
00:31:00 · Alex Sacerdote
[00:31:00] S2: Yeah. And so the s curve is our map for looking in the future. Now a lot of people were worried about tech because they thought there was so much disruption you could never trust a company to be a long lived asset. What we found over the years is some of the competitive advantages within the digital world are more powerful, if not equally or more powerful than in the offline world. You've got the network effect that was so powerful for LinkedIn, Facebook, Alibaba, you name it. Then you can become an industry standard. Oracle and Bloomberg are the industry standard. Oracle charge a lot and there's free versions. There's open source Oracle, but they had all the database administrators. They had all the software that was tuned to work with them. They basically had a choke hold on the relational database market forever. You can get to scale very quickly because these s curves grow and all of a sudden Anthropic is doing 30,000,000,000 in sales, or Amazon had so much scale and they got it quickly. So they got a Walmart size scale advantage in five years versus forty years for Walmart. So you can have network effects scale. You can become industry standard. You can be a platform that people build on top of. You can have critical intellectual property, which was what Qualcomm had. You couldn't make a phone without paying them. Or ASML has critical intellectual property. You can't make a chip without their lithography. You can also have brand and brands very important because Google, Amazon, they got to grow. They never had to advertise. Elon's never had to advertise for anything and cost to acquire versus lifetime. It's the whole business model. Almost all the companies I mentioned have all of these rolled into one. Sometimes we can notice these things before the rest of the world. One of our high points was we pitched Amazon for AWS at twenty thirteen at the Robinhood investors conference. And we said the bulls have no idea what they're sitting on. Amazon's won the war before it even started. And at that time we said there's Coke and there's no Pepsi. Did turn out there was Pepsi, but it was big enough to last. And we could see they had a seven year lead. So first mover is important. Then they became a whole ecosystem and a platform. Then they got scale. So they were 10 times the size of everybody else.
00:33:26 · Alex Sacerdote, Patrick O'Shaughnessy
Nobody could invest in the R and D to catch them. But you're right that if you don't have a competitive advantage, you can be in the best s curve of all time. [00:33:36] S0: And still lose out. [00:33:37] S2: But if your name was Rim, Pong, Nokia, HEC, LG, Motorola, I can go on forever. Zero zero zero negative negative negative negative. And that's what we saw at the foundational model layer where there's like 50 companies trying to do that and they all have fallen away and two or three have emerged at the top. There's a lot of reasons to think they will continue to hold their position. [00:34:02] S0: Google's a little trickier because they have this other huge massive complex business attached to the Gemini business. But if you take Anthropic and OpenAI as pure plays, and you dig through those, and you reason through their competitive advantages, why aren't they susceptible to erosion of those things?