Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy, Dan Sundheim
[00:00:00] S0: I have a 12-year-old son who's interested in investing. I think your son's interested in investing, we've talked about it before as well. What do you tell him about the future of this profession? Given these tools, surely it applies to us too, and we may be smart now. [00:00:00] S1: Elon Musk says, I think a line he's used is, “It's better to go through life being an optimist and be proved wrong than a pessimist and be proved right.” To be young and to be interested in something and be dissuaded because… [00:00:00] S0: You're just obsolete, yeah.
· Patrick O'Shaughnessy, Dan Sundheim
[00:00:00] S0: You're just obsolete, yeah. [00:00:00] S1: …AI's gonna be better than you, I think, is like a very self-defeating mindset. So, do I think that it is likely that, at some point in the future, everything that we do is arbitraged away by AI? For sure. I mean, I think that that would be naive of me to say no. Do I think that's happening anytime in the next couple years? I don't. But it's almost like, what do you tell someone to focus on? First of all, unless someone is really interested in something, they're not gonna be good at it. So it might be the case that being a plumber or being an electrician is the most moated job in the world, but if you don't want to be an electrician, it doesn't help very much. So it's hard to tell your kids, “Don't do this or don't do that because it's gonna be irrelevant.” I saw a podcast recently with a Google researcher who left and he said like, “Oh, I don't even tell my daughter to study. It's just like, go out and have a good time.” I think that's a very destructive way of going through life. You should go through life thinking that you want to achieve things and that you're interested in things, and you're curious in the same way as if this doesn't exist. And if it turns out that whatever job you envision having no longer exists, then you'll have to adjust.
· Patrick O'Shaughnessy, Dan Sundheim
[00:00:00] S0: You've talked with John and Daniel about the GameStop story. We can touch on it here too. I'm curious though, what you most learned about yourself during that period of time, when lore has it that February of ’21 – so January was GameStop – that you went to your team and basically said, look, “The way we're gonna calculate your comp this year is not gonna include January. That was just a completely insane period of time.” And so you took certain steps to create stability in the business or whatever. But in such a stressful period of returns, I'm just curious what you learned about yourself or what it was like, emotionally, to go through that time. [00:00:00] S1: It's incredibly difficult. I never want to come across as too exaggerative about my experience because there's people who go through a lot worse things in life. But as an investor, I'd say that was about as bad as it gets. We went from being top of the world, everyone thinks we walk on water to being like, everyone thinks we're gonna go out of business. I don't think I have an enormous ego, but I have a lot of pride in what I do. I don't need to be celebrated, but I also really did not like having our firm and our performance dragged through the mud. Granted, it deserved to be treated that way because the performance was very bad. It also was a bit lonely, in that like, during GameStop there's probably a… [00:00:00] S0: A couple people to call.
· Dan Sundheim
[00:00:00] S1: One or two other people who were going through the same thing you had. I found it helpful to go back and read, and listen to Ken Griffin's interviews in 2008, and the people that I respected. But it's lonely. It's a matter of testing your resilience. First of all, we never came close to going out of business. That was just nonsense. But I never was going to quit. Even though we had made some mistakes, I deeply believed that we were still good at what we did, and that we had something to offer the world, and we could be excellent again. I was confident in that. But you know, GameStop, it was the beginning of a change in the market structure on the retail side, so I knew we had to adapt to that. I didn't know exactly how that would play out. By that point, by 2021, 2022, I’d been doing the job for 20 years. I've never really had severe adversity. Probably because at some point, Andreas would just like – he was just very quick to risk manage. But I never really had that. And so I thought to myself, “Am I really gonna be the guy who quits the first time?” I think the analogies that people gave were like, one day at a time. Bill Ackman was like, “Look, every day try to do something that makes things a little bit better.” Because it's not like something that – when you have that kind of a drawdown, if I hit the ball out of the park for like three months, like investors would be like, he's just volatile and crazy. And if I slowly and methodically did it, some people would just give up because they'd say, “This was just too crazy. We don't believe in him.” So it's impossible to disprove the negative narrative in the short term. It takes a lot of time. Years. And so, acknowledging that this was not going to be something that you changed overnight – people's perception of you as an investor, people's perception of D1 as an attractive place to invest capital. That was not going to change overnight, no matter what I did. It was looking inwardly at the team, making sure that we were all on the same page of what we were trying to achieve and that, no matter how many people outside might doubt us, we were going to do it, or at least we were going to try very, very hard.
· Patrick O'Shaughnessy
[00:00:00] S0: Was there one moment in the whole experience that most stands out in your memory as particularly salient? Whether it was on the difficult side, like, you know, emotionally difficult or on the resilience side, like a decision that you were going to forge ahead. Does any one moment stand out?
· Dan Sundheim
[00:00:00] S1: There are different moments that emotionally just hit you in different ways, like news articles and friends calling you saying, “Are you going out of business?” Or a lot of that, and obviously like those things are painful and something I'd never had to deal with before. I'd never tried to be a public figure, and all of a sudden it became very public. The most important moment was – we do semi-annual investor dinners with our LPs. That's our primary form of communication. We write letters periodically, but we do these semi-annual dinners where over a period of four nights we meet with all of our LPs. It was June of ‘22, beginning of June of ‘22. Trough of our drawdown was at the end of May of 2022, and these dinners were scheduled for like June 3rd. Jeremy, the president of our firm, he said to me, he said like, “We can't do these dinners. You know this is going to be a blood bath. To me it was really clear. I said, “No. We have to do these dinners and this is the most important time to go out there and speak to our investors.” I had a message I wanted to convey. The message was that we were going to do things differently. The stock selection, all of that was going to be the same, but the portfolio construction was going to be done in a way that was much less risk prone. The analogy I gave was like, “We're gonna hit singles and doubles. It might take us longer to get back to the high watermark because singles and doubles are not fireworks.” But we felt like what we've gone through in 21-22 was tough enough that like, even if like the right positive MPV thing would be to just keep taking a ton of risk, and obviously usually the best time to take a ton of risks is when you've lost all the money – emotionally, I would not be able to go through this again. So we just said, “Look, we're gonna run the business differently. We very much understand if this is not what you signed up for here.” Although I think at that point people were not like, “Yeah I signed up for like them to take on more risk.” There was kind of like this – I think most of them were happy to hear it even if they didn't believe in it. You know, we really went about managing the firm differently, and so that was a pretty pivotal moment – just looking in the eyes of all the investors and feeling pretty horrible in every way. There is something invigorating about turnaround.