Invest Like the Best with Patrick O'Shaughnessy
00:53:32 · Jeremy Giffon, Patrick O'Shaughnessy
It's crudely a bit of a Walmart effect in software which is that the future looks like low gross margins, razor thin net margins, huge scale and this is probably a problem if the SaaS provider is the mom and pop shop like Walmart's coming to town. [00:53:45] S0: You have this funny view that the whole myth of how difficult it is to beat the market, however you want to define the market, is wrong. I'm curious you'd expound on that. That seems to have become post Jack Bogle one of the deeply held truths of the market is that it's extraordinarily difficult to beat the market so you shouldn't even try, you should just opt out of the battle. I think you have a very different view on this.
00:54:08 · Jeremy Giffon
[00:54:08] S2: Buffett and Munger were my kind of main teachers on investing. Buffett says that he wants his estate outside of Berkshire to be put in the S and P, that's his advice to the general public. People take that to say that Buffett saying you can't beat the market. I don't think that's what he's saying. Think he's saying for the average person you shouldn't try and beat the market. Implicit in that statement is leaving out any sort of active investor. Maybe the anecdotal side would be Buffett saying, you should put all your money into the S and P, that's the most rational thing you should do. On the other side is the sort of empirical argument, which is look, most professionals don't even beat the market after fees. This is this one two punch of the godfather of investing says don't try, seemingly the smartest people with the best incentives in the world can't do it. And then the other thing is I just think that for a professional money manager and this is sort of the paradox of the Buffett thing is that for a professional money manager it is really hard to beat the market because you have all these other factors that the average person doesn't have and this is the Peter Lynch argument. I increasingly think Peter Lynch was kind of a genius about this, which is that like yeah when you're a professional manager by and large you have all these mandates, you're running a business, you have customers that you need to keep happy, it's more difficult for the professional money manager to beat the market than like the average amateur. How many people you know who like bought Bitcoin and did really well or bought a Tesla and then they bought the Tesla stock or they bought an Apple computer and they bought the Apple stock, you can't run a hedge fund that way but they've outperformed just doing that. And so I think there's a little bit of this like weird thing where in isolation none of the advice is wrong. It's not as difficult as people think to I think outperform or do better than the average. And there's this notion that gets caught up in all sorts of other things that I think sort of sullies that view.
00:55:54 · Patrick O'Shaughnessy
[00:55:54] S0: I wanted to ask the LP's perspective, what you would do if you were an LP, what you'd be looking for?
00:56:00 · Jeremy Giffon
[00:56:00] S2: I get asked a lot by LPs where they should put their money, what managers are good or should they invest in this fund. You have to take a somewhat cynical view of these things as, and I maybe it's not actually cynical, just maybe the more realist view of these are businesses first and and you know their product is returns but like their business. You have to recognize what sort of customer you are. The question of where should I put my $500 check? You probably shouldn't put it into like marginal $5,000,000,000 growth fund, but I actually get asked that a lot. Should I put some 1 or $2,000,000 into this fund? It's probably gonna be a good fund, but could you find something much better to do with that million dollars? Probably. It sounds obvious, but in reality it's not and I think what people don't understand is that basically if you're a principal, let's say if you're a principal that can't write like sovereign or institution size checks, you're a totally different customer and the businesses are not designed to serve you as a customer. The growth fund is probably a great place if you have to park a $100,000,000 somewhere. It's probably a very very good place, but it's not a good place to park like a $500 check. If your business is set up to service sovereigns and large endowments and stuff, your product is just so different from what you're gonna serve for someone smaller and this gets into the like well okay if you have a small check what do you do? And I think this is where the emerging manager stuff is really underrated and looking for places where the managers actually most tightly aligned to returns either because returns are critical to future funds or that's actually how they're gonna make all their money.
00:57:32 · Patrick O'Shaughnessy
[00:57:32] S0: Are there features of the emerging managers situation that you find interesting or attractive one way or the other?
00:57:40 · Jeremy Giffon
[00:57:40] S2: It's probably similar to how I look at everything but I think especially for an emerging manager when you're truly just sort of underwriting the person, people still fail. They probably overweight the investing thesis and track record and stuff and underweight facts about the person. I think you and I are both big believers in the idea of how you do one thing is how you do everything and so the personal financial situation of a manager is an incredibly underrated thing to ask about. If you have a couple $100,000,000 in the bank account and you're raising a $30,000,000 fund, that's very different than someone who has a million dollars in the bank who's raising a $100,000,000 to go do a thing that they're trying to make the most money from. There's like two very different places to start from underwriting. One notion I have about this is whether someone is looking up or looking down at something and the idea is take the same $250,000,000 funds, one is from someone who has $500 in the bank and one is from someone who has $500,000,000 in the bank. Those are just like obviously gonna be treated very very differently. For the latter, for the $500,000,000 person, the $50,000,000 fund might very well do better because it's held with a looser grip, it's less on the line, you're gonna be less paralyzed by the sheer like quantities of dollars. That is generally not super recognized and you see it all the time like in new ventures, if you're helming something that is two or three zeros more than you have, there's just a sort of monumentalness to it that is a bit intimidating. You can scale this all the way up, be the husband who's worth a 100,000,000 with a $10,000,000,000 fund, it's just a big scary thing and I don't care who you are, when you're taking bets that are an order of magnitude larger than any amount of money you've ever had, there's just a psychological factor there versus when you're taking bets that are maybe sort of negligible to you.