Invest Like the Best with Patrick O'Shaughnessy
· 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?
· Patrick O'Shaughnessy, Martín Escobari
[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? [00:00:00] S1: Pattern recognition from having seen winning lottery tickets gives you some help. If you've seen more of these, you begin to see how you can get lucky. As important, in all those lucky scenarios, there was a spear fisherman at the top to capture an opportunity that was available to many, but they seized it, so it's a lot more about- [00:00:00] S0: Capital allocator at the top. [00:00:00] S1: The CEO, is he someone that can spearfish? And some people, it takes one to know one. Some people are really good at it, some people are not spear fishermen. [00:00:00] S0: My final investing question is to wonder how growth as a part of the complex feels relative to other styles today. I'm US centric investor, but curious globally, I'm sure at different points in your history, growth versus say venture or early stage or pre-IPO or publics has felt distinctive, cheaper, more expensive, whatever, more opportune, less opportune. How does growth specifically today feel versus the other segments? [00:00:00] S1: Best window into growth equity since 2009. [00:00:00] S0: And why?
· Patrick O'Shaughnessy, Martín Escobari
[00:00:00] S0: And why? [00:00:00] S1: Everything's on sale. There's so much pressure on GPs to post DPI that we're getting 40% growers at 15 times EBITDA. That 30 to 40% discount until the public comps. This is not normal and it has to do with four years of no IPOs. It has to do with four years with no strategic exits, so the engines of growth are undisturbed. The valuations are half or 40% discount. It feels incredibly attractive, as attractive as the post GFC was. [00:00:00] S0: What is your unfinished business professionally?