Invest Like the Best with Patrick O'Shaughnessy
· 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.
· Patrick O'Shaughnessy
[00:00:00] S0: One of the things that you do for your portfolio is host this group chat that's just full of your thinking on what's going on in markets. And one of the things that struck me the most about this is just how prolific you are in it. You're just thinking and writing about this shit at all hours, all the time. Clearly, this is the thing that you just love and are passionate about. What has been the impact of that – constantly communicating with the people that you care about, about markets? I ask the question because I just want to give examples to encourage other people to do the same. It can be so powerful.
· Dan Sundheim
[00:00:00] S1: When you're investing in a company privately, there is obviously a financial aspect to it, that's the driver. But there's also a relationship part of it, in that you are signing up to hopefully help that person grow their business, be with them through ups and downs. When you're doing the initial investment, you spend a lot of time together. But then, I find that it's very easy for me to go months without communicating with the CEO on the private side if nothing's happening. I don't like that. If we have something that we can offer people and they can just opt in, they can either read the stuff I write or not read the stuff I write. It is a way to broadcast, communicate with people that I want to be in touch with, and I want to know us better as a firm. Know me better as a person, know us better as a firm. I find that now, even if I haven't spoken to a CEO in like three months and I call them, it's almost like they feel like they talk to me every day. It's the same way like when you meet someone on Zoom during COVID, you don't realize you never met that person in person. I know that being a founder is lonely, going through all kinds of issues. And so being around other founders – almost universally, the feedback I get is that founders like to be around other founders because they’re the only people that can actually sympathize and understand everything that they go through. And so by having a bunch of them together in a chat – it's helpful to us from a business perspective. But I think it's also just – group therapy would be too strong of a word, but I think it's nice for them to know that these other people are part of this community that they're in, and if they want to reach out to these people, they can, and they hear these people's perspective. And some of these people are world leading experts in areas like AI that are going to be impactful to companies that are not experts in AI. So just getting that input I think is really helpful. We have a network of a lot of companies, a lot of industries, being able to share the insights, not just my insights on markets, but having companies share insights with each other and seeing how the world is impacting companies.
· Patrick O'Shaughnessy, Dan Sundheim
[00:00:00] S0: Do you care whether or not D1 has enterprise value as a business? Is that something you think about? [00:00:00] S1: It's something I've started to think about more recently. I think the answer is no. Money to me is the scorecard. I want to have the best score. It is a really great positive externality of being a good investor. And maybe I will just be so intellectually interested by the idea of being a CEO, that I want that to go from being 10% of my job to 30-40% of my job, and that's how you create enterprise value. I'm just not there right now. I want to deliver amazing returns, and that'll be financially more than compensatory. Maybe one day. But I don't think hedge funds are a good business. Objectively, our business is horrible. It's amazing cash flows but has no terminal value. I tell this to my companies I invest in. I'm like, “You have no cash flows and tons of terminal value. I have tons of cash flows, no terminal value.” So somehow we’re good together, we can kind of arbitrage that. But I think there's other businesses within asset management that have value. I definitely do not ever aspire to having hundreds of employees or something like that, and that's kind of what you need to do to have enterprise value. [00:00:00] S0: Why do you care so much about the scorecard? Where does the competitive drive come from?