Invest Like the Best with Patrick O'Shaughnessy
· 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.
· Patrick O'Shaughnessy
[00:00:00] S0: You end up at Viking, you were there for a long time. You were the CIO, you've got an incredible track record while you're there. If you think about the moment that you decided to go start D1 – bring us back to that moment to go hang your own shingle and build this thing.
· Dan Sundheim
[00:00:00] S1: I started out as a banks analyst. That's what I did for the first couple years. I still had a value bent. I think most investors who love investing start out with a deep value bent. If you want to read about great investors historically, most of them were deep value investors. Ben Graham, Buffett. I was working for somebody named Tom Purcell, who's an amazing investor. I realized that Tom was an awesome mentor, but I realized that Tom was very well equipped to generate returns and financial services for Viking. And so if I wanted to grow in my career, I had to move it to other areas. Gradually, I took on other sectors, starting with healthcare, industrials, TMT. And the nature of those companies was different than banks. That was a learning process. It was years of covering different companies in different industries. The deeper you got into like, what created value in TMT was different than what might create value in industrials or healthcare. So to me, if you love investing, my time at Viking was amazing because I was able to get exposure to every industry almost. By 2016, I was managing just over half of Viking’s capital. Somewhere like 55-something percent of Viking’s capital. And I had started out in 2002 being an analyst with no portfolio. I'd gone from no portfolio to a portfolio, to eventually CIO, to managing more than half the firm's capital, which was an abnormal percentage historically for Viking. Viking’s usually more diversified. It was pretty clear to me that, from a business perspective, it was not in Andreas' best interest to have one person manage more than half the capital. I don't think that would be even good for LPs. And so, I kind of recognized that I had pretty much achieved what I could achieve at Viking. Over time, I'd be probably managing a smaller percentage almost regardless of how well I did. I've always had a mindset of like, “I want to grow, I want to get better. I want to achieve new things.” And I kind of felt like there wasn't that much more for me to achieve at Viking. And I was 40. I started a fund relatively late in life. And I kind of recognized that at some point you just wouldn't have the energy to go do something like starting a fund – you know, obviously it's a big endeavor. I felt like I had the energy and so everything kind of came together.
· Patrick O'Shaughnessy, Dan Sundheim
[00:00:00] S0: What interests you about art? It's something that obviously you care a lot about and you've devoted some time to understanding. What is it that attracts you? [00:00:00] S1: I've always had more of a leaning towards humanities than STEM, which is unusual in certainly tech, and somewhat finance. That is why I perhaps look at my job as more art than science. The science is very simple. The DCF I could learn how to do 25 years ago and doesn't change. The humanities side interests me. And art is certainly one aspect of that. And I am particularly interested in aesthetics. I like design, I like architecture, I like art. To me, it's just beauty. You go to the beach and watch the waves, that's beauty. There's beauty in the world and art is one example of beauty. There's usually a story behind it, and there's people behind art. Art is important because it's created by people. And I think the bull case in art would be – as everything else is automated and in infinite supply because it's being created by AI, art created by people reflects emotion, and oftentimes what's happening in that moment in the world when they're making that piece of art, or what's happening in their life. [00:00:00] S0: If you apply the same aesthetic idea, the beautiful idea – what is the most beautiful business you've ever seen? Just like, the best business you've ever seen.
· Patrick O'Shaughnessy, Dan Sundheim
[00:00:00] S0: If you apply the same aesthetic idea, the beautiful idea – what is the most beautiful business you've ever seen? Just like, the best business you've ever seen. [00:00:00] S1: I think that the best businesses are usually low-cost producers of something that's very durable. And I think people underestimate the ability to provide a given product or service sustainably at low cost, and where there's a positive feedback loop of like, low cost drives more volume, which drives low cost. And I think that – I could say a bunch of businesses which are really great, like Moody's or S&P, those are great businesses, don’t get me wrong. But something where the cost advantage is so substantial and so impenetrable, like SpaceX with launch or Costco with groceries. To me it's like the only way to win in most businesses is to provide a great product at a low cost. Businesses that do that at scale and build a moat around it are amazing. Amazon's e-commerce business is amazing. So many amazing businesses. Very few monopolies, and when they are a monopoly, usually what happens is they tend to get lazy and the returns aren't as good. [00:00:00] S0: What parts of the world do you think are underappreciated right now? When I look at your top 10 holdings, I actually didn't recognize a number of the companies. Lots of them are not in the US, they're international. Where's your eye right now that you think the world is not paying enough attention to?