Invest Like the Best with Patrick O'Shaughnessy
00:14:01 · Alex Sacerdote
[00:14:01] S2: We got to know the company. One of our analysts knew people in the finance group there. We had a look at the $60,000,000,000 round and we didn't know the company as well. The gross margins were negative and frankly we hadn't seen coding explode the way it had. And one thing about public markets is you get to know companies over a long period of time and you can kind of invest on your own schedule. Then I got a chance to spend some time with Dario. I started to realize these guys, their management team is excellent. The focus, the dedication, they had almost no turnover, the quality of code, and then the business plan was really starting to play out. It's one thing to grow from 100 to a billion, but it's another to do nine. And then so we reached out to the company as much as we could. They took a meeting with us. We did a 90 page PowerPoint deck where we used Claude code to scour the internet for all the feedback we could about the coding market and what their products were good at, where they might need to improve. And we also did our whole overview of what the coding market would be. They welcomed us into this round and then we stayed close with the CFO. It's been great to build a relationship with them and I think we punched above our weight in terms of the allocation. So that one was a total home run. We are in this period where the unicorn market is bigger than most stock markets in Europe, maybe even combined. It's definitely bigger than Germany. It's definitely bigger than The UK. Even before we invested in privates, the first one was 2020. We have to know these companies and you really have to know them now because sometimes they're the biggest companies in the space and have huge impact. So we do two to 3,000 face to face meetings with management teams a year, and about 10 or 15% of those are with privates. And then we kind of focus in on the companies that we really want to learn about and find ways to meet with them, get involved in the rounds. Our first one was Stripe. We had a large investment at the time. This is 2017, '18, '19, and 2020. We own Adion which is a fantastic payments company And they're a next gen cloud payments company taking from Worldpay and the cloud modern payments was 5% of total $80,000,000,000,000 market or what have you. But you can invest in Adion unless you know Stripe like the back of your hand.
00:16:28 · Alex Sacerdote
So we did tremendous amounts of due diligence, talked to 200 customers in Adyen. But when we asked them about Adyen, we asked about Stripe and we realized this is Coke and Pepsi. We said, we gotta find a way to invest. And I finally got to meet the Carlson brothers in 2019. And so that was our first one. We weren't really known for privates. I've got a friend who's involved with a venture firm that has tremendous amounts. And I talked to him about it and I said, let me know if you ever wanna sell some. And then I get a call from him during COVID in April 2020. We knew a lot about Stripe. We didn't have the full financials, but we knew enough that at that valuation, I think it was 35,000,000,000. They disclosed we had over half 1,000,000,000,000 of TPV. And we knew that Adyen's take rate was 25 or 30 bps and we knew Stripes was 40 or 50. And we knew how many employees they had so we could kinda get at the profitability. It turned out the take rate was higher, it turned out they were being modest about their TPV, it was much higher than the five fifty, it was closer to the 1,000,000,000,000. We underwrote the thing under our assumptions and it was much better, and then we were able to upsize that from the seller to a 100,000,000 block. The VCs are gonna own and then most of them are gonna sell. They like it that we'll own and own in the public market, which we did with NewBank as well. Owned it for a long period of time in the public market as well.
00:18:01 · Patrick O'Shaughnessy
[00:18:01] S0: As your business scales up, everything gets more complex, especially your compliance and security needs. With so many tools offering Band Aids and patches, it's unfortunately far too easy for something to slip through the cracks. Fortunately, Vanta is a powerful tool designed to simplify and automate your security work and deliver a single source of truth for compliance and risk. There's a reason that Ramp, Cursor, and Snowflake all use Vanta. It frees them to focus on building amazing differentiated products, knowing that compliance and security are under control. Invest like the best listeners get a special offer of 1,000 off Fanta when you go to vanta.com/invest. I know firsthand how complex the tech stack is for asset management firms. And seemingly every new tool and data source makes the problem even worse, adding more complexity, more headcount, and more risk. Ridgeline offers a better way forward. One unified platform that automates away that complexity across portfolio accounting, reconciliation, reporting, trading, compliance, and more, all at scale. Ridgeline is revolutionizing investment management, helping ambitious firms scale faster, operate smarter, and stay ahead of the curve. See what Ridgeline can unlock for your firm. Schedule a demo at ridgeline.ai. Maybe now is the right time to lay out everything you've ever learned about S curves. Obviously, firm is sort of predicated on this idea of technology adoption life cycles and investing in companies at the right time amidst a certain platform change or S curve change. I'd love you to go into the super deep detail of what you've learned since this is the lens through which you viewed markets and stocks for a long time. Bring us into like the nitty gritty fine gritty nuance detail of why s curves can be so useful for investing.
00:19:37 · Alex Sacerdote
[00:19:37] S2: We have an investment framework. It's s curve, competitive advantage, and then underappreciated earnings power. And when you get the right part of the s curve, you get exponential unit growth. If you have a very strong business model, which in tech there's so many of those for so many different types of moats, your earnings don't grow linearly, they grow exponentially. And that's the last piece. Invest when there's underappreciated long term earnings power. And very often the earnings can grow from $1 to $10, and it happens way more than you think. And it allows you to buy some of the best companies in the world for extremely low PEs. When we were buying Nvidia in 2023, we were paying four times earnings. When we bought Tesla in 2019 for the car s curve, we were paying five times earnings. When we were owning Apple, we were paying four times earnings. When we bought Amazon for AWS, we were getting it for free. The world doesn't think exponentially and they're so focused on the next year, the next quarter, very few people believe you can accurately predict two, three, four years out. But if you follow and understand the s curve, you know the motes and you know how to model, you really can predict these great things. So let's go to the s curve. So the s curve is crucial because every technology follows this pattern where it comes out. The smartphones were out ten years before the iPhone. The internet was out twenty years before Netscape. AI has been out hidden inside of these companies, but it wasn't until ChatGPT took it public and ignited what it was. So electric vehicles, Tesla went public fifteen years before 2019 when it went vertical because there were so many barriers to adoption. The first smartphones, they were clunky. They didn't have touch screen. There wasn't a wireless data system, and then they were too expensive. They were 5 or $600. Steve Jobs got the price to 200. There was AT and T at a three g network. It was touchscreen. It was so easy. Your grandmother can do it. And he built an ecosystem and made it simple. So all the barriers to adoption were eliminated. And then you rocket when those barriers are removed, that's the tornado of demand that everybody in the world knows they need this right away. And so that's the flip that happens. It happened with electric vehicles. The price was too high. Elon got the price to 40,000.
00:22:15 · Alex Sacerdote
Range anxiety was there. He got the range to 300 miles. The supply chain was finally in place so he could churn out millions of these things. That triggers the inflection. Now the other nuance it's not just, oh, it's taken off now. It's how big is this s curve, how tall it is. So you know when to sell, how long to hold on, because we're underwriting out two or three years. We have to know what the growth looks like thereafter. And these s curves can be dynamic. So when Amazon had AWS and it was a hidden line item inside of Amazon covered by retail Internet analysts, we realized the TAM for this, it was the largest TAM in enterprise IT ever. Because previously the TAM was routers, memory, storage, Dell, EMC, but they were doing it all. You wanna know how tall the s curve is. So we figured out they were addressing 600,000,000,000 of IT systems directly addressing that. And then we said, it's probably gonna be 50% deflationary. And then therefore, we're one or 2% penetrated. But then over time we realized it actually wasn't deflationary if you talk to anybody now. Let's say if you build it yourself, it's about the same price. So that means the TAM was so much bigger. There's mega s curves and there's sub s curves. We've been lucky that we've had Internet one point o, mobile, cloud, e commerce, and now AI, which we can confidently say is the biggest. And all these things build upon one another. With the electric vehicle s curve, you have to pay attention too because we thought probably maybe 40 to 50% of the cars will go electric, but it did hit a big wall at at 10 or 15%. Usually, the s curves go kind of all the way, but in this case for a variety of reasons, it didn't. So you have to adjust and you have to stay on top of it. And generally when something gets to sort of 40% penetrated then you stop having exponential growth which means the sell side catches up and there's no longer big beats.
00:24:24 · Patrick O'Shaughnessy, Alex Sacerdote
[00:24:24] S0: And is that when you sell? [00:24:25] S2: Generally, we like the high growth and it was a mistake with Apple because in the first five or six years of Apple, it was awesome. I mean, was our largest position and we'd go up 70% a year except for o eight. And then we sold in 2012 when it got to sort of 50% of The US had a smartphone. And with Apple, they maintain their leadership position. It had a couple years of underperformance and then the multiple got low and they added several ancillary things and then they also got to play in the application because they get 30% of the app. So they were able to compound very nicely say 20%, but the big years were in zero to 50% part of the curve. [00:25:07] S0: I'm so fascinated by this sometimes decade plus long flat line at the beginning of one of these curves, which makes me wonder what you've learned about the right moment to buy or even start paying attention before you buy. How do you measure that? Is it always different? What are the pitfalls that you've fallen into? How do you know when to start thinking about buying one of these things?