Invest Like the Best with Patrick O'Shaughnessy
00:35:12 · Patrick O'Shaughnessy, Cliff Sosin
[00:35:12] S0: What about replacing price as the organizing principle and signal that coordinates economic activity. [00:35:20] S1: Price is a miracle because it's a signal wrapped in an incentive. [00:35:23] S0: What does that mean? [00:35:24] S1: Price is an incentive. It causes you to want to buy more or less of something because it goes up or down. And it's also a signal cause it says something about the relative value of something and the scarcity of something and the cost to produce something. It's a miracle of a mechanism to coordinate things. And I think you'd be really hard pressed to find a better system even with unlimited intelligence. It'd be pretty hard.
00:35:24 · Cliff Sosin, Patrick O'Shaughnessy
[00:35:24] S1: Price is an incentive. It causes you to want to buy more or less of something because it goes up or down. And it's also a signal cause it says something about the relative value of something and the scarcity of something and the cost to produce something. It's a miracle of a mechanism to coordinate things. And I think you'd be really hard pressed to find a better system even with unlimited intelligence. It'd be pretty hard. [00:35:43] S0: Maybe another way of asking the question is kind of like investing. If ubiquitous intelligence gets so much better and so much cheaper, and in some way, it can replicate what you do, and you're really good at pricing risk. A friend of mine, Dan, was saying there's three levels to this. There's I put in a prompt and I get something back. That's level one. Level two is I set up a watchtower. My instinct every night runs like a set of tasks and it happens in the background on a schedule. And level three, which produces the most use of intelligence is it's just always on proactive, figuring out its own way to use its own intelligence. And that just goes on forever, and it's unlimited in how much it can do. If I think about that level three applying to everything, what things should be priced, efficiencies, optimization Sure. All this kind of stuff. Does that add something interesting to the price? Sharpens markets.
00:36:32 · Cliff Sosin
[00:36:32] S1: There's a lot of stickiness to prices. It's a well known macroeconomic phenomenon, this price stickiness. There's a lot of lazily priced stuff. Think about deposits and such. I mean, it's a really competitive world out there, but it's actually not as competitive as in theory it could be. So I think if everyone has agents who are working on their behalf, and constantly optimizing, I think the price of garbage collection will move around a lot more. As all the input costs of garbage collection evolve, and every garbage collecting company is constantly rerunning its financials and trying to figure out its true marginal cost, and bid every customer where it could serve for more than marginal cost. And every agent is switching to lowest cost provider. You won't just pay $60 a month for twelve months and then have the guy come back to and say it's a 5% increase, maybe 63 next year, and you don't even notice they're spicking up your garbage. Your garbage collection will vary by day, and one week it'll be whatever. There'll be all this interesting, much more accurate, much more rapidly moving prices, I would imagine.
00:37:27 · Patrick O'Shaughnessy
[00:37:27] S0: Have you seen anything interesting in capital markets innovation? There's this awesome economist story talking about the behemoth that is American capital markets and how good it is at adapting to new stuff and creating new instruments, new ways of financing things, and that that's been as much a part of the American story as the technology innovation. Sure. There's this amazing interrelationship between Wall Street and Silicon Valley would be one way of thinking about it. Anything interesting percolating for you in markets, in capital markets, in ways of financing things, things like this?
00:37:59 · Cliff Sosin
[00:37:59] S1: Well, I mean, it's fun to take a moment to pause and maybe congratulate ourselves as capital markets for what we're doing with AI. People were worried about this decline in American dynamism. I think we just redeployed, what is it, 3% of GDP right into this highly speculative venture basically on the turn of a dime. Just this remarkable thing. Of course, who knows? Maybe it should be two, maybe it should be six. But it is amazing that we can redeploy resources at this scale, this quickly, and there's no one else in the world that's been able to do it. And certainly, the inability to move investment and productive resources can be a binding constraint on productivity growth, even with, especially with rapid technological progress. And so at least with regards to capital, and obviously, we talk about capital, that the capital investments are tied to people doing different things. Americans are doing different things today. Every day, people are waking up and going to some place in, I don't know, Pennsylvania and building a data center. And that wouldn't be happening if it wasn't for this whole infrastructure we have that's somehow been able to move this enormous amount of capital. It's incredible. As deep innovation, I think the fundamental idea that people are taking risk on speculative ventures and slicing up the pie in different ways is irreducible. I think people come up with lots of different names for essentially the same things over time. I don't think that's deeply different, but it is incredible. I should also note that I'm sure we'll discover all kinds of fraud and bad behavior and stuff eventually when the water goes out. But I think given the magnitude of this, I suspect it's so clean. It's amazing. If you read about the railroad build out or something, the amount of waste and fraud, And invariably, there is some. But there's a lot of people trying to basically do the right thing here. And the governance parts that we just take for granted, it's incredible. America's capital markets, and the capital markets in general, I think are just incredibly underappreciated.
00:39:51 · Cliff Sosin, Patrick O'Shaughnessy
The idea that any person can buy a $100,000 of stock and get a portfolio of well run, well motivated teams, building companies that are doing mostly the right things, and do it basically instantly and at basically no cost, and then sell it as soon as they're done is amazing. And then the fact that all those companies and other ways people invest can then allocate society's resources pretty well in the scheme of things is just incredible. The whole system is just very underrated. [00:40:17] S0: Why has America so dominated this, do you think? [00:40:21] S1: My pet theory, and everyone has their own theories, is some sort of interplay between genetics, cultural evolution, and institutional evolution. So basically, the people who came to The United States were the subset of people who were most interested in taking risk, because going to The United States was very risky. And I think that risk taking has a meaningful genetic component. And so I think that tendency is just more common amongst Americans. When you're in a place where risk taking is more the norm, there's also a whole bunch of other things that come from that. It's more the norm. And then that leads to buildups of cultural institutional things that reinforce that. It's understood that people can take risk and fail. That leads to bankruptcy laws that make sense. That leads to labor laws that support that. That leads to venture capital that supports that, and all of those things reinforce that. And then that leads to success stories, get this whole soup. But that's my pet theory.