Invest Like the Best with Patrick O'Shaughnessy
00:39:08 · Patrick O'Shaughnessy
[00:39:08] S0: If in some sense some of these jobs maybe are made up and actually people will be happier not ushering bits from one place to another on a screen or something. I'm curious how you think about searching for one's vocation. You texted me one time something that stuck in my head, is that we all have some sort of moral duty to steward our gifts. If you agree that that's true, curious for you to expound on that. But that that then reframes success and failure in a cool way that maybe cuts through this priestly class thing of like looking to others to tell us what to do versus looking internally. Can you expand on that?
00:39:50 · Jeremy Giffon
[00:39:50] S2: I think there's something even just aesthetically bad about waste. One of the worst things you can waste is your gifts, your skills, attributes, things that you're uniquely good at, things that you can do for others that you might be able to do that others can't. For me one of the great challenges has been trying to understand how to best, first of all figure out what they are, is easier said than done. And then figure out how you can use them. There's kind of two modes, guess one is that you use them in a very pure and unadulterated way and you don't try and integrate your work with how you use your gifts and this would be the person who has a day job in order to support their craft or something. And then the other perhaps more ambitious version is trying to integrate commerce and their work with their gifts. This gets into the like, should you pursue your passion thing and it's really difficult but you said something to me which is the thing that you are spending most of your time on really ought to spark and utilize your sort of genius and gift and if you're not doing that like it's obviously not the thing that you should be spending most of your time on. There's proxies for this, people who are having a lot of fun at their job or like it's a very strong indicator that you've combined the two well.
00:41:12 · Patrick O'Shaughnessy
[00:41:12] S0: What do you think the future of finance looks like? The 80s and the last era was built by those people from KKR and leveraged buyouts whereas those firms are obviously really important and really big but they were started a long time ago and in many cases they're still run by people that were the founder or close to the founder getting up there in age. What do you think the next wave of finance look like?
00:41:36 · Jeremy Giffon
[00:41:36] S2: The founder is incredibly important, the founding act is incredibly important in any business or country or organization really. I do think that it's notable that the current paradigm in which we live, the largest and most important finance firms come out of a culture of leveraged buyout which first of all is a debt driven idea, it's financial engineering, it's extractive insofar as the primary goal is to make a thing more profitable and I'm not trying to disparage leveraged buyouts. I don't think they're like as evil as people say, but the core idea behind it is like using debt and financial engineering to make a lot of money in a way that the quality of the business itself is maybe ancillary to the core trade. And those are what the founders and the founding acts of these large firms today are. Now that the Apollos and Blackstone's and KKR's of the world, I think in a lot of cases the leveraged buyout is a very small part of what they do today, but I still think it's still in the core culture. One thing that we've pondered about before is what does the next twenty or thirty years look like when the largest financial firms in the world, their founding action was seed investing. It's equity driven, it's power law, it's hugely optimistic, it's largely qualitative. What would a Blackstone and Apollo look like if that was the core seed at the start of the inception of the firm? It's notable in the same way that equity financing is a far newer idea than debt financing and equity financing is obviously a far more optimistic idea. It's uncapped to the upside and so there's all these sort of philosophical ideas around equity versus debt and debt is far more ancient and debt obviously has very controversial past about whether it's morally good at all and there's this idea of like what if the crux of finance is with these kind of wildly optimistic people versus people who might be more conservative, concerned about the downside, more concerned about maybe one way of looking at it is a shift from the quantitative to qualitative.
00:43:38 · Patrick O'Shaughnessy
[00:43:38] S0: What other differences are interesting to you between East Coast and West Coast finance? The people doing it, the optimism versus not pessimism, realism or dollar orientation. You straddle these two in an interesting way.
00:43:50 · Jeremy Giffon
[00:43:50] S2: I don't think one's better than the other. There's truth to the caricature, which is East Coast is extractive, pessimistic, downside oriented, West Coast is naive, unsophisticated. That is true to some obvious extent. And I think they're merging now. It's no coincidence that the West Coast is definitely eating the East Coast. Venture capital has created the biggest businesses in the world and private equity has not and where private equity has, it's largely been through acquisition and financial engineering and so it's sort of inarguable that venture capital is this sort of much better force for the world. It's a tiny little asset class that has produced all the most important things in the world. It's also this civilizational technology which is you're willing to give young people millions of dollars to try a very speculative idea with basically no retribution or downside if it doesn't work. So it's clearly this amazing force. I think there's been a very interesting like flip in compensation between East and West and so when I was growing up my understanding was that Wall Street is where you would get paid huge amounts of cash on a yearly basis. You would have no enduring equity value but you would get paid a lot of liquid cash And the West Coast was this idea where you would be rich on paper, would have equity that would maybe be this enormous payoff in some distant future, and I would argue that those have started to flip now, whereas like Wall Street, because all these businesses have gone public, you know, on Wall Street you're comped on RSUs and you're thinking like a firm and you're less worried about the carry in any one fund and you're more worried about the stock price and performance of the firm as a whole and interestingly in Silicon Valley, it's almost moved towards a annual cash basis, but given how these markets, know, companies staying private creates these sort of mature secondary markets that sort of de facto yearly tenders becoming almost a parallel liquid marketplace. You're actually paid huge amounts of cash in Silicon Valley and I think we've seen that with the AI stuff and even you know venture capital firms getting acquired and GPs leaving their firms and all that sort of stuff where it actually is becoming more liquid, more mercenary.