Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy
[00:00:00] S0: Can you compare and contrast the work ethics of the two countries? I'm especially curious at the very highest end. If you took America's most productive people—maybe in the technology sector, working all the time to build AI companies or whatever—and compared them to a similar set in China, how do the two compare and contrast, especially at the very high end?
· Dan Wang
[00:00:00] S1: Yeah. So if we're taking a look at, let's say, the top 0.01% of entrepreneurs, I feel like there's a lot of similarities. When I chat with people who interact with their counterparts—Silicon Valley folks chatting with their counterparts in Beijing—they tend to respect each other and look upon each other as peers. I think there are some ways in which the Silicon Valley folks are a little bit more philosophical; they're a little bit more engaged with policy and trends, and with the impacts their companies and technologies have on society—often because the employees make them. Maybe the Chinese entrepreneurs are a little bit more involved with thinking about political trends, often because the Communist Party makes them. But at a work ethic level, I think they’re probably pretty comparable. If we broaden it out a little bit more—let’s say the top 10% of workers—maybe here again, there are more similarities than dissimilarities. I would suspect that the Chinese are putting in more hours and just trying to work harder. And if we take a look at the median engineer or median worker between the U.S. and China, I strongly suspect the Chinese are putting in much, much more time relative to the median in the U.S. In California, we love to make fun of the Google offices, which clear out by 3 p.m. on a Friday. Everyone’s at the yoga studios again and not working super hard, in particular because it’s Google. That sort of thing is pretty unimaginable in China, which invented this phrase “996”—working from 9 a.m. to 9 p.m., six days a week. I think inspiration is really important. Working smart is really important. But I think working hard is also very, very important. According to statistics that are out there, it takes an automaker from the U.S., Japan, or Germany roughly six years to conceptualize a new model and actually get it on the road. In China, it’s something more like 18 months to two years. So, at a first approximation, they’re probably working at least three times faster than the Americans. There’s some founding mythos of companies like Meituan. I visited Meituan with my friend Yujin Wei, who is also a big fan and who has been on this show. We went to visit their offices in Beijing in 2018.
· Dan Wang
Part of the story that Meituan tells about itself is that it survived 5,000 other competitors who were all Groupon clones that started around the same time, in something like 2015 or so. Meituan was a big company back then, and it’s now one of China’s biggest tech companies. Just imagine how ruthless and cutthroat the executive team has to be to survive this battle royale of 5,000 companies. I think there are some ways in which maybe inspiration is still better here—maybe the sparks are still better here—but I often feel that the Chinese are comprehensively outworking the Americans in some big ways. Maybe that doesn’t matter for technologies like AI, but for pretty much everything else, it pays to work at much faster cycles and learn much more.
· Patrick O'Shaughnessy
[00:00:00] S0: I'd love to ask some investing questions. This is an investing audience. If I were to shrink down the investing debate about China to a single common debate, it would be around ByteDance, because it’s a company that produces crazy amounts of free cash flow. Its equity trades at a tiny fraction of that free cash flow in terms of a multiple than it would if you took the exact same financials and put them in America—it might be, I don’t know, ten times more valuable or something like that. So people use this as an example of: what do you think about ByteDance, when they’re really asking, what do you think about the opportunity to invest in China? Maybe this is the right time to talk about the sort of kneecapping that happened several years ago around some of the Chinese internet giants—what happened, why it happened, and what that tells us about the Party and beyond. But I’d love just your general framing on how to think about these companies—which sound really interesting and fantastic, which have produced lots of free cash flow in some cases—as investment opportunities, or not. Or maybe they just belong in the “too hard” pile for American investors.
· Dan Wang
[00:00:00] S1: As a former technology analyst at Gavekal Dragonomics, this question was on our minds every day. Our clients were endowments, pensions, hedge funds, and asset allocators of all sorts—from a strictly macro perspective. So I never said anything about buying or selling particular stocks, but we thought deeply about these broad trends in China. There are several paradoxes. The first paradox is that Chinese companies are really capable, and China’s economy has grown by an average of something like 9% over the past 20 years. And what has been happening to China’s stock market? It’s been essentially flat. The Shanghai and Shenzhen exchanges have not risen very much—nothing commensurate with 9% growth. There are a variety of structural factors that make it really difficult for China’s stock markets to grow at large. That’s one component of the valuation puzzle with a big company like ByteDance or Alibaba. Alibaba is listed and still relatively cheap. I think another paradox here is that, yes, a company like Alibaba or ByteDance could be throwing off so much cash, but the nature of their businesses sometimes entangles them with the Communist Party. The Party, as I think about it, resembles something like the God of the Old Testament—very generous sometimes, but it can also randomly smite you because it’s trying to pursue some sort of values-driven belief system. In 2018, when I was living in Beijing, ByteDance was humiliated by the government after officials said that one of its suite of apps had violated “core socialist values” because it contained a lot of jokes the Party didn’t like. The founder of ByteDance, Zhang Yiming, wrote a totally self-flagellating letter saying, “We are so sorry that we did not uphold core socialist values, and I am at fault.” It’s just impossible to imagine any tech CEO in America writing something like that. Alibaba, most famously, was founded by a loudmouth named Jack Ma, who shot off his mouth one too many times in 2020 when he launched a blistering broadside against financial regulators, saying that they were behind the times. Shortly after that, the Communist Party smashed Ant Financial and prevented it from going public—which is still the case today. Ant Financial is still not public.
· Dan Wang
Soon after, the Party started taking the scalps of companies beyond Alibaba, including online education and e-commerce firms, with antitrust actions across the entire sector. That part is real as well. Then there’s a third component of these risks that investors have a hard time putting to bed: the suite of geopolitical issues particular to China. American investors aren’t even buying Alibaba directly—they’re buying from a Cayman Islands entity that has contractual relationships with ByteDance. Are we really sure we’re getting something real here? It’s hard to lay that fear to rest. China has capital controls, and that has deterred a lot of investment, including portfolio flows from many investors. Probably the biggest geopolitical puzzle for most people is that Beijing is very clear it intends to seize the island nation of Taiwan one day. If it does so, it’s likely to face very hard sanctions from the U.S. government and probably all Western governments. We saw what happened in 2021 when Russia decided to move on Ukraine: a lot of central bank reserves in Russia were frozen, American portfolio managers could no longer invest in Russia, and even McDonald’s Corporation had to leave Russia because of sanctions. Can anyone really be sure that a few years from now—or even a few months from now—Beijing won’t initiate some sort of action against Taiwan? This is not really my expectation that they will do something. But none of us can be sure that they won't do something. And so long as that fear is present, I think that goes some length to explaining why it becomes pretty unappetizing.