Invest Like the Best with Patrick O'Shaughnessy
· Dan Sundheim
[00:00:00] S1: Thesis was that EVs were going to dominate the auto market and that EVs were an entirely different kind of automobile, in that they were software. And it was the equivalent of the iPhone versus Motorola and Nokia. The same way Motorola and Nokia were not able to move into smartphones because that was like hardware, not software – there'd be few companies that would be able to do this successfully. Ultimately, autos are a bad business. It could be software autos, hardware autos. It’s a bad business, and it's a really tough business to scale. Very capital intensive. The manufacturing didn't go as smoothly as it could have, and the cost of delays in manufacturing when you're ramping up and burning a lot of cash are quite significant. The technology I think was always good. And not getting up the manufacturing curve very quickly meant you didn't get to scale fast enough. And I really believe that scale in EVs is gonna be important, which is why Tesla's – one of the reasons why Tesla's won. You know, at the IPO, it was great. It looked like a great investment. But ultimately, I don't know what our ultimate return was on Rivian, but it wasn't what we planned for when we made the investment. The bad ones tend to be more obvious faster. The great private tech investments, I think, are sometimes slower to prove how great they are. Because you have these amazing founders who are just constantly making decisions which take the business in one direction or another. And ultimately, the compounding of those decisions takes time, but leads to great outcomes. SpaceX was pretty obvious to me that the launch business, at a minimum, was going to be a very good business. And what they had achieved I thought was, just from an engineering perspective, insane. So to me, if I could buy a company that had achieved the most amazing engineering feat I'd ever seen, at some multiple of revenue with very little cash burn at that point. I didn't know what was going to come, I just knew that the skew was very good. If they had achieved that, then like, who knows what they could do in the future?
· Patrick O'Shaughnessy, Dan Sundheim
[00:00:00] S0: What do you think about that business today? So much has changed since you first invested. What's your updated prognosis for it, or thoughts about it? [00:00:00] S1: The initial prognosis was just always that they were going to be a low cost provider of launch. I think the success of Starship – I wouldn't say we're fully there, but I think we're pretty much there. To prove full reusability and scale, yeah okay, there's more to come. Starship is a game changer, which we knew about fairly early on, but didn't know if it would work. And what that means, very simply, is that the cost of launching everything goes down dramatically. 97 or whatever percent. And the engineering that they've done with the satellites to harness solar power and be able to deliver really high-speed bandwidth has surprised me to the upside. And there's a lot of software that goes into that too, just given these networks of satellites are all communicating. The ramification of that, I think, is that the telecom market globally is now the TAM. They've come so far down the cost curve, I think that in a relatively short amount of time – months, a few years, they're going to be dramatically cheaper than any other form of delivering broadband. [00:00:00] S0: You said how much you love shorting stocks. What is it about it that you like? Because you just don't meet that many people that are focused on this, or are really that good at this anymore.
· Patrick O'Shaughnessy, Dan Sundheim
[00:00:00] S0: You said how much you love shorting stocks. What is it about it that you like? Because you just don't meet that many people that are focused on this, or are really that good at this anymore. [00:00:00] S1: My wife begs me all the time to stop shorting stocks. It's a bad business. You really have to be intellectually stimulated by it. Most people in the market are just not fundamentally based, period. And even if they are fundamentally based, they're not interested in shorting. Or they pretend like they're shorting and they kind of short indices or whatever. Very few people are doing it. There are tons of people investing in things that are just based on stories, like because of social media and because of Robinhood. And there's just endless amounts of shorts if you have duration and if you take a fundamental view. [00:00:00] S0: Why do you think markets are less efficient now?
· Dan Sundheim
[00:00:00] S1: I think it's just the people transacting in the market, or the nature of the institutions transacting in the markets. If you go back 10, 20 years ago – mutual funds, long-short hedge funds, they were a big part of the market. Now, it is a lot of passives, a lot of retail investors. People who are making investment decisions that are not based upon long-term considerations of intrinsic value. Quants, even multi-manager long-short funds – while they are focused on fundamentals by necessity, they're short-term oriented. If you're focused on trying to get an edge in the short term, that is extremely efficient, and it's a game I just don't play. You have firms which are incredibly sophisticated, using amazing quantitative methods to go through alternative data. There's absolutely no edge there. Once you go beyond any kind of short-term event and you start to think about – what is the business worth, what are the long-term cash flows, what are the Porter's Five Forces attributes of the company – that’s when I think that the competitive set gets pretty thin. And frankly, the more people focus on the short term, the more opportunity there is to arbitrage that and have a medium-term view. I don't think anyone knows what's going to happen past three years for most companies, and for the economy as a whole. It's hard to predict. So, I don't consider myself to be an investor that just buys and holds things for five or 10 years. But we do focus entirely on "what is a company worth", and a quarter may or may not impact what we feel the long term value is. The majority of the time, the moves you see in the short term exaggerate the true change in intrinsic value of the company, which makes for a less efficient market.
· Patrick O'Shaughnessy
[00:00:00] S0: One of the things that interests me a lot about you is – I'll use the word loyalty. So, Jeremy's been your partner, he’s your one of your best friends from growing up. The guy that runs your family office, your director of research, lots of your key partners, you've known a really long time and are good friends of yours. I think you met your wife in college, I did too so that always perks me up when I hear that example. Can you say a little bit about how you feel about loyalty, and kind of the role that all those data points suggest?
· Dan Sundheim
[00:00:00] S1: There's a few things to consider. I know these people the best, and so I've just dealt with them through so many different things in life, and I have a lot of confidence in their competence. So to me, there's a lot of people that I love in life for different reasons, and are wonderful people and would be loyal. But they have to be really competent do to the job. This is a very intense job. The bar is extremely high, and the people that I've hired that are friends of mine forever, I'm just confident clear that bar by a lot. But when you are able to find people that you know for a long time, and liked you before you had any money or any signs that you'd ever have any money – that is a different kind of relationship. For me at this point, I don't know. Are they nice to me because they think I can do something for them? There are a group of people in my life that have always been there and that they will be close to me for the rest of my life. And to the extent I can work with those people, great. But as I said, they have to be excellent.