Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy
[00:00:00] S0: Obviously, there's tons of understanding about what the State of China wants and is trying to accomplish. But if you add up all your conversations with all the people that you met across the week, how would you sum up what the people you met and interacted with wanted, and what was their attitude towards us? It seems increasingly adversarial from our direction to them – skeptical, worried about it, et cetera. Just adding up your conversation, what was your felt sense of what the people wanted and were trying to accomplish and felt about the U.S.?
· John Arnold
[00:00:00] S1: I was struck by just how much the two countries have separated since 2019. The number of flights between the two countries is down 70%. I talked to a couple of expats in Shanghai who said that the number of Western expats was down 50% to 75%. The number of American students studying there was down 90%. I started to push on this a little bit about what was happening. Part of it was when China was starting to develop and trying to copy the West, one of the ways to do that was to bring over Western expats and teach it Western business practices, and all the aspects about how to run businesses and capital formation and allocation. Those roles, those learnings, have now been domesticated. So instead of firms paying multiples of the cost to bring over a Western professional to do it, those learnings are now domestic. It's cheaper and they have those skills. So they don't need the West anymore. That was one of the big senses I got – this confidence that's building there. Of "We used to just copy the West. Now we're world leaders in many of these things. We don't need the West coming to teach us things. We're going to teach the West."
· Patrick O'Shaughnessy
[00:00:00] S0: I'd love to rewind the clock a little bit. I mostly talk to investors on this show. I rarely have talked to some of the world's great traders through history. At a point in your career, you were probably the greatest active trader, or one of them, certainly the best in your market. I'd love you to describe what it takes to be truly excellent at that specific discipline. If you think back on the time when you were at – I’m curious, when you think it was that you were at the peak of your powers, I'd love you to take us behind the scenes a little bit of what it took for you personally to get to that stage, since I talk to so much fewer people that have done this.
· John Arnold
[00:00:00] S1: I might step back and think about my kids and what I want my kids to do. One of the big components is, do something that you're really passionate about, that you want to do, that it's not a job that you do for income. But if you can have a profession that you love, that you have this real, deep passion for. And that’s what I found with trading. I just loved the battle, the puzzle, the game of it. I would sit there from six in the morning to six at night, at the desk either staring at the computer screen or doing some analysis. Then go out with people from the industry that night and dream about the industry. In the shower in the morning, I'd be thinking about it. Just being so locked in. There were negatives associated with it. I'm not sure I was a great person, a great friend, a great partner for those times. But I think having that, dedicating your life to this craft, for a time period, was one of the things that separated me. I think there's also some downside. There are consequences to doing so. It's not the healthiest lifestyle. It's not healthy from a relationship standpoint, not healthy from a physical standpoint. It can be mentally exhausting. I think after doing that for 17 years, this one thing, and being so deeply intertwined with it, at some point, I just had to step back.
· Patrick O'Shaughnessy, John Arnold
[00:00:00] S0: If you think about the second or third best natural gas trader that was active when you were active, I'm so curious about the difference between you and them. Another way of asking – if you turn it into advice for your kids, which I like that frame on it – what does it take to be number one in something versus number two and three? [00:00:00] S1: I don't know if I thought I was the best. I felt I was among the best. I had also managed to create probably the best seat in the industry. [00:00:00] S0: Say more about that.
· Patrick O'Shaughnessy, John Arnold
[00:00:00] S0: Say more about that. [00:00:00] S1: My first job out of college was at Enron. I started there when I was 21 years old in 1995. It went bankrupt in late 2001. So then I'm coming out and I'm trying to figure out what to do. And I had a bunch of options. One is I could have stayed with the Enron trading floor, which ended up getting moved to UBS. I decided I wanted to do something that was a little bit more entrepreneurial and ended up deciding to start my own hedge fund. I had the classic hedge fund 2 and 20 structure. There wasn't an intermediary between me and the 20%. I was getting the 20%. I had the best, or as good as, economics as almost anybody in the business. Then we had very good financial returns early on. So that did two things. Number one, there was a lot of retained earnings and new investors came in. So we had a lot of risk capital. Second, we had a very good investor base that trusted the team I had built. Whenever we had a down month or a down time period, which we had, they weren't calling to redeem. They would call up and say, do you need more capital? Because we had earned their trust and we had done forced distributions along the way. I had set up this really powerful seat where I had good economics, so I could hire the best people in the business that I knew of. We had a lot of risk capital, and had a very solid and stable investor base.