Invest Like the Best with Patrick O'Shaughnessy
· 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.
· Dan Sundheim, Patrick O'Shaughnessy
When you're going through something like GameStop and the world’s collapsing and there's nothing you can do, that's a very uncomfortable position. Even if things are really bad, when you have a plan and you believe in that plan, it changes the perspective entirely. And I really did believe in the plan and I believed in the team. And so all of a sudden I felt like, “Okay, everybody else may doubt us, but I believe it and we are now at the start of the mission to dramatically improve our returns, improve our firm, and earn back our reputation as being great investors.” [00:00:00] S0: Assuming some did, what do you think of the people that redeemed from D1 during that time? [00:00:00] S1: I don't harbor any ill will. I mean, the act of redeeming is like – to some extent we deserved it. I mean, obviously I appreciated it much more when people stayed. I always start out these dinners – even though it was the worst time, I say like, “Ask me anything. Criticize me. It is my job to deliver for you. If I don't do it, it's on me.” I ultimately think that when you screw up in business, capital follows returns. And when you deliver poor returns, capital will leave. We had a lot of great investors that stuck through it, and I deeply appreciate that more than I resent people redeeming. It's pretty asymmetric.
· Dan Sundheim, Patrick O'Shaughnessy
[00:00:00] S1: I don't harbor any ill will. I mean, the act of redeeming is like – to some extent we deserved it. I mean, obviously I appreciated it much more when people stayed. I always start out these dinners – even though it was the worst time, I say like, “Ask me anything. Criticize me. It is my job to deliver for you. If I don't do it, it's on me.” I ultimately think that when you screw up in business, capital follows returns. And when you deliver poor returns, capital will leave. We had a lot of great investors that stuck through it, and I deeply appreciate that more than I resent people redeeming. It's pretty asymmetric. [00:00:00] S0: What's interesting about the story is – when you ask around, most people would say that you have an incredibly calm – like, your resting heart rate is very low. You're always between a four and a six. Like, you're never overly excited when things are going well or overly despondent when things are going poorly. And I'm curious how much you think that disposition matters for great investing. Can you do great investing, in your experience meeting others, without having a pretty narrow band of excitability versus despondency?
· Patrick O'Shaughnessy, Dan Sundheim
[00:00:00] S0: What's interesting about the story is – when you ask around, most people would say that you have an incredibly calm – like, your resting heart rate is very low. You're always between a four and a six. Like, you're never overly excited when things are going well or overly despondent when things are going poorly. And I'm curious how much you think that disposition matters for great investing. Can you do great investing, in your experience meeting others, without having a pretty narrow band of excitability versus despondency? [00:00:00] S1: For better or worse, I've always – from the first day I got the job – had a lot of confidence in what I was doing. I never stepped in and said like, “I'm just better than everyone else.” That was never it, but when it came down to looking at a company and making a decision, I felt confident in it. And when I feel confident in the analysis, I generally am pretty balanced. Is it possible for somebody to have a very volatile personality but train themselves to deal with the ups and downs of markets? I think the answer is yes. I think there are some hedge fund managers that have been truly generationally great. And you hear the stories that early on they were just throwing things at people on the trading floor and yelling. And ultimately they ended up being great. But you have to be able to not let that emotion influence your trading.