Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy, Martín Escobari
[00:00:00] S0: Of course he'd say, "I don't know, there's some noise. I would do my homework, or they're fine." [00:00:00] S1: For hiring, there's another hack which I learned, which is so important. So much of life is getting the right people on the bus. When you're going to do a reference on a hire and you call the person and you say, "Hey, we're considering David for this role. This role involves the following five challenges. This is a very important decision for my company because we can't get this wrong. It's also a very big decision for David because he's happy at his job, and if he gets this wrong, if we get this wrong, we've wasted time and he's out of a job. Help me assess if this is a good risk for me and David. And if you can have an honest discussion, if you don't feel comfortable engaging like this, let's not talk about it, but that's what I need the reference for." You'd be surprised. People are like, "Well, for that risk, David now, leaving there it is fine." But that is a genuine way to answer it because what I described is actually true. If this is a bad fit, David should not be taking this job. Reference calls are not, tell me about David. Is he a good guy? That's a waste of time. People say, "Yeah, he's a great guy." [00:00:00] S0: Very good guy. [00:00:00] S1: He's a great guy, very competent.
· Martín Escobari, Patrick O'Shaughnessy
[00:00:00] S1: He's a great guy, very competent. [00:00:00] S0: What have you learned about managing help manage the career success of investors, which is a very distinctive job from a career ladder in a company or something. Incentives matter a lot, I'm sure. I'm curious what you've learned about incentives. What mistakes have you made? If you think about you being responsible for other investors and you wanting them to thrive, what's the good, the bad, and the ugly that you've learned?
· Martín Escobari
[00:00:00] S1: It's an apprenticeship business. Pairing them up with different people with different skills, different styles is super important. Helping them from a very young age to make recommendations. Don't just do the task, answer the so what. And ultimately say, "What's my level of conviction in doing this investment?" Don't rely just on this more senior people. One of the tricks I used to do is I've been in three investment committees in my career on 3G, I've been in - and I would try to understand the mind of each investment committee member and predict what they're going to ask. So I would read the memo and say, "George Rapallo is going to ask this. Bill Ford is going to ask this. Juan Carlos Torres is going to ask this." And I also predict their votes. By the end of a year of doing this, I was up to 80, 90%. And what was really interesting is it forcing me not only to have my own opinion about a deal because I would read the materials, but look at it from the perspective of someone who's really good at making these kind of decisions. And my ambition was to one day be completely unpredictable when someone tried to do this with me when I became a senior person because I was capturing learnings from 30 perspectives, it's not true, I'm actually pretty predictable by now. It's learning vicariously by forcing yourself to have opinions and also putting yourselves in the minds of people who are proven investors is a way of the apprenticeship on steroids. And one of the things that we do at GA, which I'm really proud of because it was culturally very hard to do, our investment committees are open to everyone.
· Patrick O'Shaughnessy, Martín Escobari
[00:00:00] S0: The whole firm. [00:00:00] S1: The whole firm, the investment professions. So every Tuesday, 190 people sign up and there's no presenting. We come in directly to Shark Tank, just questions and it's beautiful. [00:00:00] S0: Talk me through how that meeting works. So one person like a sponsor is proposing a deal and everyone- [00:00:00] S1: So the deal team is typically a combination of sector and a GEO put together. They standardized materials with the checklist. It gets distributed by Friday. Tuesday we come in, there's no presenting the deal lead is always a deal lead. The main sponsor is there to answer questions. We have five investment committee members and the IC Robot, which also opines and we just ask you questions. [00:00:00] S0: What's the IC robot? [00:00:00] S1: We've been training the six member of the IC based on 45 years of data... So she votes on all of her deals. We've been having her do this for the last three years. [00:00:00] S0: Is she any good? [00:00:00] S1: So we've back tested her and she's much better than humans, but it turns out someone who's been trained in the past is very good at the past. We only have three years of concurrent data. [00:00:00] S0: Of sample data, yeah. [00:00:00] S1: So we need to wait another four or five years. I'm hoping that by the time we retire, I retire about 10 years, should be better than the humans.
· Martín Escobari, Patrick O'Shaughnessy
[00:00:00] S1: So we need to wait another four or five years. I'm hoping that by the time we retire, I retire about 10 years, should be better than the humans. [00:00:00] S0: If I could somehow do that exercise with you or I could predict the sorts of questions that you tend to ask about companies, what are they? What are the big ones that you find yourself constantly asking sponsors who are promoting a deal? [00:00:00] S1: Getting in the mind of the founder, his or her motivations, why this is so special and its trajectory that got to this. I try to meet the founders outside the investment community process as a sponsor. Basis of competition, so true, distinct competitive advantage and durability of the competitive advantage. And then, I try to push people on the tails both positive and negative. Six bad things happen. How bad is it and how likely is it? Or if this amazing development happens, which could be amazing, how unlikely is it and who else would benefit? I always find the tails to be the most interesting because if you look at the distribution of our returns, 10% of our best deals and we get lucky and they produce 50% of the return, so we lose money very little and then 10%, we get 5X plus and these are really important. And these, all of them are better than the upside case in our memos because good things happen that we did not see coming, but God bless and thank God. So I always find where are the lottery tickets?
· Martín Escobari, Patrick O'Shaughnessy
[00:00:00] S1: Getting in the mind of the founder, his or her motivations, why this is so special and its trajectory that got to this. I try to meet the founders outside the investment community process as a sponsor. Basis of competition, so true, distinct competitive advantage and durability of the competitive advantage. And then, I try to push people on the tails both positive and negative. Six bad things happen. How bad is it and how likely is it? Or if this amazing development happens, which could be amazing, how unlikely is it and who else would benefit? I always find the tails to be the most interesting because if you look at the distribution of our returns, 10% of our best deals and we get lucky and they produce 50% of the return, so we lose money very little and then 10%, we get 5X plus and these are really important. And these, all of them are better than the upside case in our memos because good things happen that we did not see coming, but God bless and thank God. So I always find where are the lottery tickets? [00:00:00] S0: This seems like, well first of all, incredibly important. All the data, we know how important the right tail is for investing outcomes. Well-worn truth at this point. How does one get better at assessing the option value embedded in a given business? That just seems so crucial. There's no book about that. There's no podcast about that. You've got 10 investments. How do you know which of the 10 has more embedded right tail option value?