Invest Like the Best with Patrick O'Shaughnessy
· 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?
· Patrick O'Shaughnessy, Dan Sundheim
[00:00:00] S0: Why do you care so much about the scorecard? Where does the competitive drive come from? [00:00:00] S1: This is what I've devoted my life to, right? And so, anything you devote your life to, you want to be great at, or at least having an impact that is tangible and measurable. I could be a family office right now, and there's plenty of positive things about being a family office. The drawback is like, you're not in the arena. And I'm very collaborative with other investors, it's not like I'm sharp-elbowed. But being out there and being able to prove that we can be great – and not just me, our firm can be great – is invigorating. I think I'd be kind of bored if I was just investing my own money. [00:00:00] S0: Going back to some of the history, something I've never heard you talk about publicly, is the early writing you did in Value Investors Club, and specifically the Orthodontic Centers of America short case that you wrote about. I'd love to just hear the origin story of how you found VIC, and why you started doing it. I'm very interested in this idea of how much can come if you do some great posting online. This was a very early version of this, so maybe just tell us the story of VIC and that early passion for stocks.
· Dan Sundheim
[00:00:00] S1: It was 2002. I was working at a private equity group within Bear Stearns. I always had an interest in stocks, but he only way to really get exposure to investment ideas written up by hedge fund managers or investment managers was this site called Value Investors Club. You had to send an idea. I applied, and every week you'd have tens of ideas posted by people anonymously. You could read them. I would just consume everything. So it was like long ideas, short ideas. Every week they paid $5,000 to the best idea. I just got inspired by all the stuff I was reading and decided to try to find some of my own ideas. After maybe 6 to 12 months, I had a portfolio of things I'd written up on Value Investors Club and I decided I wanted to go work at a hedge fund. First thing hedge funds ask you to do is talk about an investment idea, and so I had all these investment ideas. One of the hedge funds I went to interview at – it was a spinoff of SAC that did healthcare. And they said to me, “We want you to do a case study for the interview. The company is called Orthodontic Centers of America.” So I – for me, this was not like a task, it was actually a thing I was really excited to do, because I had never had my work given to somebody who was a professional. I went home and I spent hours and hours going through the financial filings and trying to build a model. I was pretty good at accounting. I really tried to get deep into the financial statements. And I realized nothing reconciled, nothing made sense. It hit me that what they were doing was the simplest form of accounting fraud, which is just capitalizing expenses that should have been expensed, in a big way. There are other things too, but that was the most egregious. I was able to effectively prove that. It wasn't incontrovertible proof, but it was pretty close. Just by building up all the unit economics as they said they were, comparing them to the unit level economics that you could actually decipher by going through their financial statements. And it was clear. I did a writeup that was about six pages long. It was good. It was well done. Before I went back to do the follow-up interview where I presented my case study, I was like, “I think I'm onto something here. Let me post it online first and I'll get some feedback.” I wasn't allowed to trade stocks because I was working at an investment bank.
· Dan Sundheim
So I wasn't short the stock, I wasn’t long the stock. Value Investors Club is done anonymously, with a tag name. So I posted it online. Within a few hours, the stock started to go down. I was like, that's cool. People are noticing, there's a couple comments online. The market closed a few hours later, whatever. I'm watching online, there's some more posts being like, “This is really interesting. Has anyone double-checked these numbers?” There's people commenting. Next day, stock starts to crater. Stock’s down like 20, 30%. I started getting calls from people working at mutual funds who owned the stock. Because even though I was anonymous online, I had told friends of mine at hedge funds – I'm like, “You should look at this stock and short it, I think it's a fraud.” And they had told other people and so I started getting calls at Bear Stearns, from people at T. Rowe Price and Fidelity. But you're working at an investment bank. The last thing you're trying to do is to be posting about companies that are fraud. I was like – I didn't even know if they were a client. The stock just got halved. I went back into the interview to present the case study. At this point, they were just like, “What did you do?” And I was like, “Look, you told me to look at this. I thought it was a fraud.” They're like, “Did you tell anyone that we told you to do this?” I was like, no, no. They're like, you sure? And I'm like, yeah, yeah, yeah, yeah. Nobody knows. They're like, “We basically thought you were gonna come back and tell us that they were going to miss earnings. I didn't want to do healthcare, so I didn't work there. But I now had this writeup that could go around to different hedge funds, and most of them already knew about it, because they would short it after the writeup. That's how I got my job.