Dennis Lynch - Delivering Alpha in Adapting Markets - [Invest Like the Best, EP. 228]

My guest today is Dennis Lynch, Head of Counterpoint Global, where he oversees over $100bn in AUM and boasts one of the strongest track records of any public investor. In our conversation, we cover Dennis's unique approach to building a research team, how misclassification of companies often creates the highest upside opportunities, and how Dennis has adapted his investment process over the past 20 years. I think Dennis defines what it means to be intellectually honest, and you will hear that in his answers throughout our discussion. I hope you enjoy my conversation with Dennis Lynch. For the full show notes, transcript, and links to the best content to learn more, check out the episode page here. (for me- ) ------ This episode is brought to you by Tegus. Tegus has built the most extensive primary information platform available for investors. With Tegus, you can learn everything you’d want to know about a company in an on-demand digital platform. Investors share their expert calls, allowing others to instantly access more than 10,000 calls on Affirm, Teladoc, Roblox, or almost any company of interest. All you have to do is log in. Visit tegus.co/patrick to learn more. ------ This episode is brought to you by MIT Investment Management Company (MITIMCo), the endowment office of MIT. MITIMCo seeks to find people who are focused on achieving exceptional long-term investment returns, partner with these firms early, and stick around for the very long term. MITIMCo is also searching for an exceptional new teammate to join their internal investment team. Visit mitimco.org to learn more – click “Join” to learn more about the Global Investor Role on MITIMCo’s team or and click “Emerging Managers” to learn more about their emerging manager activities. ------ Invest Like the Best is a property of Colossus, Inc. For more episodes of Invest Like the Best, visit joincolossus.com/episodes. Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here. Follow us on Twitter: @patrick_oshag | @JoinColossus Show Notes [00:03:47] - [First question] - How he would teach potential students to be investors [00:04:26] - The Money Game [00:04:40] - Moneyball [00:05:59] - Pros and cons of volatility when investing [00:08:55] - Emotional response to volatility [00:12:44] - Training to have a better temperament [00:14:20] - What is his investing game [00:15:17] - The Ethical Algorithm [00:16:44] - How time horizon impacts their investment strategy [00:20:53] - Assessing a company’s earnings power [00:26:12] - Shifting business models vs. evolving within a business model [00:32:32] - Understanding how to invest in disruptive businesses [00:35:26] - Why he’s skeptical on Growth and Value investing strategies [00:38:42] - Expectations Investing [00:38:55] - How his view of assessing businesses has changed [00:43:56] - Defining unit economics [00:45:41] - Taking on uncertainty risk in the portfolio [00:50:38] - The business that taught him the most; Amazon [00:53:32] - Dealing with massive amounts of change [00:56:01] - The Big Short [00:59:46] - Interest in psychedelic research [01:01:02] - What has changed the most in investing from when he started [01:04:19] - Kindest thing anyone has done for him

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Patrick O'Shaughnessy?

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• 0:43Patrick O'Shaughnessy?

  Conducting effective primary research shouldn't take weeks, it should take hours. Searching for answers shouldn't be lengthy, cumbersome process. It should be easy and nearly immediate. Expert calls should not cost $1,000. Teegus solves these problems and makes primary research faster and better for professional investors. Teegus has built the most extensive primary information platform available for all investors. With Teegus, you can learn everything you'd want to know about a company in an on-demand digital platform. Investors share their expert calls, allowing others to instantly access more than 10,000 calls on Square, Snowflake or almost any company of interest. All you have to do is log in. Still want to do your own calls? Teegus has a solution. Experts that are just as good or better than what you'd find on other networks for just

• 1:26Patrick O'Shaughnessy?

  $300 per call, not the $1,000 or more that others charge. If you're curious about Teegus, call the top performing investment manager you can think of. They're probably already a Teegus customer and they'll point you in the right direction because customers, myself included, love Teegus. Visit tegus.co/patrick to learn more. To hear more about how investors use Teegus, stay tuned at the end of the episode where I talk to Elliot Turner of RGA Investment Advisors, a longtime Teegus customer. This episode is brought to you by MIT Investment Management Corporation, also known as Matimco, the endowment office of MIT. Matimco seeks to find people who are focused on achieving exceptional long-term investment returns. Partner with these firms early and stick around for the very long term.

• 2:08Patrick O'Shaughnessy?

  MITIMCO doesn't care how small, new, or uninstitutional your firm is if you have the potential to generate amazing results that supports MIT's pursuit of world-class education, cutting-edge research, and groundbreaking innovation. Despite their willingness to invest early, they do not ask for general partner economics, and they commit their initial capital for 10 years. MITIMCO is also searching for an exceptional new teammate to join their internal investment team. Visit MITIMCO.org to learn more. Click Join to learn more about the global investor role at MITIMCO's team, or click Emerging Managers to learn more about their emerging manager activities.

• 2:47Patrick O'Shaughnessy?

  Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at joincolossus.com.

• 3:13Speaker 01

  Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

• 3:38Patrick O'Shaughnessy?

  My guest today is Dennis Lynch, Head of Counterpoint Global, where he oversees over $100 billion in assets under management and boasts one of the strongest track records of any public investor operating today, and having perhaps delivered as much or more dollar alpha to his investors as anyone I've had on the show before. In our conversation, we cover Dennis's unique approach to building a research team, how misclassification of companies often creates the highest upside opportunities, and how Dennis has adapted his investment process over the last 20 years. I think Dennis defines what it means to be intellectually honest, and you will hear that in his answers throughout our discussion. I hope you enjoy this great conversation with Dennis Lynch.

• 4:20Patrick O'Shaughnessy?

  So Dennis, after our original conversation many months ago, I've been toying with how to sort of structure this conversation, which is going to be a lot of fun. I thought a neat way to do that would be to ask this question. If you were teaching a class of 10 students, let's say these students were all high aptitude, super curious, wanted to be investors, and you knew that at the end of a semester-long course, you had to hire all 10 of them to be on your team, how would you structure the syllabus of that course?

• 4:49Speaker 02

  Well, that's a good one. I think the first thing I'd like to collect a list or present a list of books that I've found useful, starting as far back as like The Money Game, which is a fun book from the 70s that sort of gives you a perspective on what it can be like to be a public investor and the volatility that goes along with that. And non-investing books as well, though. I mean, things like Moneyball is a great look at how to take a different approach or a different analytical view of what other people have conventionally already sorted through and maybe made mistakes in the process. So I would try to put together a list of the books that have resonated with us over time, both investing and non-investing.

• 5:31Speaker 02

  And that would probably include a bunch of Warren Buffett-related material as well. And that would be probably the original starting point. I think when I think my own experience at Columbia Business School, the best class I took, or actually there are really two, but the first one that jumps out really helped transfer to me, I think, a passion for investing, which was led and taught by John Griffin, who used to run a hedge fund called Blue Ridge Capital. Originally, he had been the president of Tiger, Tiger Management, under Julian Robertson. He did something very similar. He had some great readings, some great guests and great materials in that vein. But then also, we had to do a long and a short idea. And the final exam was presenting to people from Tiger and getting

• 6:13Speaker 02

  a lot of feedback. So in terms of, you know, how I would think about it, I thought that worked really well. And it helped get a sense of just the history of markets. But then also challenge you to use your analytical skills today and try to go through a process and get a lot of feedback to develop your ideas and thinking.

• 6:31Patrick O'Shaughnessy?

  One of the things I know you've thought a lot about is not just the analytical business by business breakdowns that are required for great investors, but also sort of the bigger game, the idea of volatility, you already mentioned with the money game, behavioral psychology and so on. So we're going to talk about both today. And I love the syllabus that is not just like, here's how to pick apart a business, but a wider variety of things that matter to investors. Maybe we could start with that volatility idea. So what have you learned about volatility, its pros, its cons as a longtime public markets investor, and I think also private market investor?

• 7:06Speaker 02

  That's a huge difference between the private and the public, which is that you have to live through the volatility as a public investor, the mark to market each day and each week. That makes it important, it makes the temperament important. And so Warren Buffett's known for saying that it's not about how smart you are as an investor, but it's more about can you handle the temperament and the volatility that comes with the public markets? And obviously volatility has its downs and its ups. And there's some great benefits that come along with volatility long-term, but getting from point A to point B can be really challenging and emotional. That really is probably the cost of many long-term strategies or long-term oriented public strategies. It's that you have to

• 7:48Speaker 02

  live through the ups and downs. And that's something that's really hard to gauge. And you almost don't really know it until you experience what that's like. And just thinking out loud a little bit about the contrasting public versus private, would it have been as easy with some of the great private investments for people to have held and made the incredible gains that maybe some of the largest companies today have represented over the last 10 or 20 years, the Facebooks, the Googles, et cetera? Would it have been as easy if you kind of had that mark to market along the way? And maybe somewhere in between right now, I think is sort of a fascinating case study there, which is like Bitcoin. Which may or may not be a great long-term investment or speculation, but living through the ups and downs you've seen there, you know, fairly short period of time, if you think

• 8:32Speaker 02

  about the history of Bitcoin and the crashes and the persistence that you've also seen, ultimately, based on where we are today, that it's that volatility and the emotional temperament which is really challenging. And I think that there are people that are really good at handling that. And again, you don't have to be the smartest person in the world to be a successful public investor, I think, but you do need that quality. But there are also degrees. I mean, I feel it. There are some people, I think, in the industry, at least, I believe that feel it probably less. They're almost like hardwired differently, like a serial killer or something where they could really just not care. You know, that's not me and that's not our team. I think we care about emotional intelligence. It's something that's part of the culture and dealing with the feedback and deciding

• 9:16Speaker 02

  whether or not it's accurate feedback is a real challenge in public markets that you don't see in private markets. It is a cost of long-term strategy in public markets, but also something that can separate people over time.

• 9:28Patrick O'Shaughnessy?

  Can you tell almost like an emotional story for us about an episode, however long, of dealing with volatility, maybe even where you were ultimately right about an investment, which was just emotionally brutal to hold?

• 9:41Speaker 02

  Not that long ago, Facebook was certainly something we were really excited about pre-public. In fact, I think we were the first long-only, conventional, long-only team to own Facebook before it came public. We identified as a company we thought could be one of the biggest companies in the world and we were fortunate enough through getting to know some of the people involved, including David Ebersmann, who was the CFO at the time, and then ultimately Mark Zuckerberg and Sheryl Sandberg, we were able to get that investment. And we were really excited and thought we'd hit a home run just by making the investment. We fast-forward to the, you know, the IPO, which is probably about two years later. It felt like Superbowl Sunday. If you turned on CNBC, you know, there's a countdown of the Facebook IPO opening

• 10:25Speaker 02

  and all this stuff. And then subsequently, we all remember what happened next, which was really brutal from a temperament or living through the volatility standpoint. The company priced, I think, 38, wound up getting as low in the next six months, the six to nine months, to the high teens or 16, 17-ish range. As a public investor, what you have to do in that environment is first of all, check your thesis, right? I mean, obviously, you could be wrong. And that's the thing about the constant feedback is it forces you to reconsider and think about your ideas all the time. And we're constantly, you know, reevaluating based on that feedback. But then also, the other thing about being in that situation is it forces you to communicate

• 11:07Speaker 02

  a lot with clients. And part of my job during big drawdowns is to be able to do that and articulate why. In this case, a case like this one, Facebook, we were still confident that the original thesis was valid. To be fair, there were reasons to be concerned. There was a transition that was happening very quickly to mobile in terms of the whole world was kind of reorganizing around mobility. Certainly, Facebook's dominance was on desktop, and we thought that social graph very naturally lent itself to the mobile environment. And they also had a great product already in terms of embedded advertising in your stream and your newsfeed. So, we still felt confident about the long-term prospects of the company, but clearly, we were wrong. The market, the stock was down 60% in a short period of

• 11:52Speaker 02

  time. And I think S and P might have been up 20%. It was a very tough drawdown. But we did stick with the company, and we added to the position, and then articulated some of those ideas to clients. But that's what can go wrong. And it can happen at any time to any company. I think what was an interesting phenomenon there was, and something we believed was happening at the time, was because Facebook was already a fairly large company, the lockup associated with it led to a lot of liquidity, or a lot of sell-side liquidity, selling by people who wanted to book their large gains from it they had made as private investors. And so, people were kind of falling all over themselves to talk about all the bad stuff of Facebook as we got close to that six-month lockup period post the IPO. And I think you

• 12:35Speaker 02

  could probably classify that as a diversity breakdown, where they're pushing the numbers and the argument really as low as they could in order to not be in front of that liquidity event. And I think the day of that event, I remember I was presenting to a board about the very topic of Facebook. And I think the stock was up 20% or something that that first day because the market is already priced in way more than priced in the event. So that's a sort of a historical example, I think, that could be useful in understanding volatility, but it can really happen to any company at any time. And I think that that's the challenge of being a public investor is the temperament, but also the ability to stay with and have clients. And we always appreciate our clients for taking a long-term view.

• 13:16Patrick O'Shaughnessy?

  Is this something that you think you can get better at over time? Can you train yourself to have a better temperament? I'm curious, almost like down to the base human instinct, like how this has felt to you at its worst? Like, are you getting like stomach aches or back pains? Describe the bottom of this psychological cycle to us and whether or not you think you can get better.

• 13:34Speaker 02

  Super emotional and like maybe earlier, I think some people probably are hardwired to do it even better than we are, and I am for sure. The problem is, and it might depend on your, how you think about, let's say, your confidence level or how confident you get in your ideas, because the good news is having lived through a number of crises as a public investor, starting back at the internet bubble, 2008, more recently COVID, and there's certainly been a lot of other things along the way. You certainly have some experience to draw on to say, okay, I've been through this before, and I know what it's like emotionally, we can get through this. But at the same time, if you're, I think intellectually honest and open, you also have to recognize that just because last time it played out a certain way

• 14:18Speaker 02

  doesn't mean you're right this time. So just because the Facebook experience wound up being a good one, and we made the right decision under that uncertainty and adversity, I guess, to stick with, that doesn't mean the next time we're automatically right. To answer your question, it can be feel very emotional, can feel very pit in your stomach feeling, physical sometimes in nature when it's that extreme. Experience helps a little bit, but I don't think it really helps you get a lot better. At least I don't feel like that's happened for me because partly because I think you have to remain open to the idea that this time you might be wrong.

• 14:52Patrick O'Shaughnessy?

  It's interesting that for a long time I would classify you as operating fairly under the radar, you know, very quietly going about your business. Yet when I stack up against many of the famous investors, I think there's a decent chance, given your size and the extremely strong performance that you've delivered more, I'll call it dollar alpha than just about anybody operating today, which makes me wonder about how you think about the game you're playing. So investing is filled with people playing lots of different games from the quarterly earnings game to the trend following game, et cetera. How would you define you and your team's game?

• 15:24Speaker 02

  I think in the terms that you're getting at would be more time arbitrage. And I think we're trying to win through patience and longer term holding periods. The idea that in the very short term, markets are highly likely highly efficient. Often if you tell me what the results of our company quarterly earnings are going to be, I still won't necessarily know what the reactions in the market will be. We believe that is the case. We all read a book called The Ethical Algorithm by Michael Kearns last year as part of our book club. He came in and we're talking about sort of the benefits of AI and or algorithmic approaches to the market. And there's certainly some really successful participants out there that do these things. But the point was, I think when it comes to very short windows, computers and algorithmic

• 16:08Speaker 02

  thinking is more likely to succeed because this day, the market probably resembles a lot what happened yesterday in terms of the participants in the market, the types of companies that make up the market. All the conditions are very similar day over day, but as you get further out, those things break down. It's a lot harder to win in terms of algorithmic or very mechanical thinking. So we don't really try to get that part right. It's more likely, or maybe it's even hedge funds that are focused very much on short-term trends and trying to handicap the short-term. We don't think we're going to do very well there. In fact, I'd be pretty bad at it when I follow these quarter. I'm thinking I'm usually about 50/50 on my predictions once I know the

• 16:51Speaker 02

  information. So we're trying to win by time arbitrage or having a longer time horizon and looking not at this year's earnings, but three, five years plus out, and then hopefully being able to then have the ability to stick with our positions despite the fact there's going to be certainly some ups and downs along the way. So I think ultimately it's a patience, temperament edge, we hope, as opposed to something a lot more tactical.

• 17:17Patrick O'Shaughnessy?

  So if time horizon is a unique target of yours and your teams, how does that manifest in changes to the way that you do business analysis, or market analysis, or pricing analysis relative to what your sense of the norm is in the investing community? Like, what are the manifestations of that different orientation?

• 17:36Speaker 02

  It's really embedded in our culture. We're just having this conversation the other day, and I jokingly said to someone, when was the last time I asked how the quarterly earnings were? Do we ever ask that? We really don't. We're really focused on what the earnings power of a company can be at least three to five years out. And that forces you to spend your time and build your days around a lot of very different approach than if you are more focused on the short-term. I understand why people are, you know, because it's most people, I think, when you first start off especially, you're just trying to stay afloat or stay in the investment business long enough to create a track record. And everyone wants to understand what's happening in the short-term. So it's hard not to get really focused on

• 18:18Speaker 02

  some of the short-term trends. But then, it's like any habit. If you practice it long enough, it's sort of hard to shake it. And I think the trap is, by the way, when we first started... I definitely was focused on it back in our first product launch in 1999 and very focused on that and I think we learned over the course of a few years that that was not a useful way to spend time and it was more about understanding the three, five plus year time horizon. So we are spending our time with companies talking about long-term profitability, long-term trends, not at all ever trying to tease anything else out of the equation. We're also spending a lot of time, not just with the companies specifically, because a company is going to tell you everything

• 19:00Speaker 02

  from their vantage point and that can be really useful and our time with companies, spent with companies is very useful. But I think you also need to add to that a perspective that might cause you to question some of those ideas. So while we have people on the team and most of the team, we have 30 investors and researchers, the vast majority of our resources are conventional in the sense that they're expert-driven and somebody who, like Jason Young's our healthcare investor for 20 years and he's spending time on healthcare or Sam Shinani is spending time on internet as examples, we also have some people that spend time on other things like disruptive change research and we want them and what they bring to the equation is additional questions

• 19:43Speaker 02

  or ideas that might not fit the narrative of how the company sees the world or vantage point and might challenge that. That's really healthy and as sort of a long-term example that, I remember when we first started our disruptive change research effort 16, 17 years ago, we owned a lot of radio station companies, so companies that looked like, just looking backward and in the moment, felt really rock solid and sort of almost Warren Buffett-esque in terms of their local dominance and regulatory barriers to entry in terms of there's only so much bandwidth and there was also a really good argument that time spent in radio was not being monetized or it could be when you looked at the actual revenues per user time spent.

• 20:24Speaker 02

  And that all made a ton of sense and they were also considered really rock solid and leverageable from a financial standpoint. So those companies had certainly a lot of debt or have had a lot of debt. And meanwhile, all of a sudden, this internet advertising unit came along as an alternative and changed the equation. And it wasn't the radio station person or analyst that's had already spent 10 years of their life getting that knowledge base and expertise that were able to easily say, you know what, this expertise is not useful anymore. Or someone who's running these radio station type businesses. It was all about why the internet advertising alternative wasn't going to work out or wasn't that great. So I think to answer your question, I think you have to spend time trying to deeply understand

• 21:07Speaker 02

  the companies. But to the degree you can create resources or have resources that also help you not get stuck in the conventional expertise that comes along with a lot of those discussions. I think that's a really good way to balance the equation and not get too caught up in the plumber with the wrench trying to solve every problem the same way.

• 21:25Patrick O'Shaughnessy?

  With so much attention on quarterly results and information advantages in the short or near term, it sounds very refreshing to have you and your teams focused beyond mid to long term, you said earnings power. And I want to dive into earnings power. I think disruptive change research is, I want to hear about that process too. I'm sure the two are somewhat related. But when assessing a company's earnings power over, let's say, a three to five year or longer period, what does that look like? What are the inputs to that process that you found to be effective? And how has that improved? Your assessment of that earnings power been able to improve over time?

• 21:59Speaker 02

  I mean, well, certainly every company to some degree has a certain business model and we can use both historical and current analogies to try to get an idea of at scale, what the company's profitability can look like. So we spend a lot of time trying to understand what's exactly the right way to think about the business and what is it compared to. Huge part of that really is more qualitative, which is handicapping what we call uniqueness, other people call it moats or competitive advantage. It's all pretty much the same thing. But like, what's the underlying advantage that's sustainable here? And if we really get to the point where we think a company is highly unique, then what model does it currently have? And how does that compare to ones we've seen historically and currently? But I think one of the key things there too is that

• 22:44Speaker 02

  Often, the biggest mistakes probably get made in this regard by poor classification or misclassification. And what I mean by that is, look, human beings have to make decisions every day, and we put things in the buckets and classify things in order to get there. When it comes to analyzing a company, same thing. And often, the first question people have for something that's a little bit different and or new is, what bucket do I put you in? So like when Google came public in the early 2000s, the big question was, are you a tech company? Are you a media company? And part of that underlying question was really like, who's going to follow the stock? Which experts are going to follow the stock? And often, when you can't quite put a company into a bucket that easily, it tells you something

• 23:29Speaker 02

  that there might be something unique happening. And probably our greatest successes over time have been cases like that where it wasn't so obvious. Obviously, Google uses technology to create an amazing service that we've all benefited from, but ultimately, they were selling advertising. And so it didn't quite fit either place. A, we're all prone to that, and so our team tries to be very self-aware about how we're going to go about the evaluation and what are the true, what's the true comparability to other models we've seen. But I do think that that's the one that can be structurally, has been historically a structural issue. And you've seen it like, for example, S and P and MSCI, rather, have this partnership called GIX where they put companies into buckets. That's what they do ultimately.

• 24:10Speaker 02

  In fact, investment managers actually outsource that judgment, essentially, when they show their portfolios and what sectors or industry companies belong in, they're usually almost always using the GIX as a default. And so it was pretty wild a few years ago, actually, and nobody really, I thought it was wild, but maybe no one else cared as much. But when GIX actually took part of technology, what they consider the technology sector, and create a whole new area called communication services, and it was full of companies like Google and Facebook, and had sort of this media, ultimately, end market of advertising, had created these really unique business models. If you take a look backward and think, okay, 10, 15 years ago, they were considered technology

• 24:54Speaker 02

  by that same group. And if you're a portfolio manager and you're trying to decide what companies am I going to own the portfolio and to what degree I'm diversified? And let's say you're looking at your technology bucket at back at that point, that would have included company like Google. It would probably also included Salesforce.com. It would also have included Visa and Mastercard. Think to a degree, at least our team, most managers usually manage a portfolio in relation to the benchmark at some level when they think about diversification. So if you're saying, yeah, I'm going to use this designation to build my portfolio around, and it's that flawed. Maybe you should just jettison the whole sort of framework. And that's kind of how we did it.

• 25:37Speaker 02

  We actually had higher quote unquote technology because we didn't consider those companies the same exposure. You had internet advertising, you had consumer spending in the form of card payment companies. And you had software sales in the case of Salesforce. But I think that was a pretty big disservice. And then two years ago, they kind of just created this new bucket. It was like, no big deal. But actually, it was a pretty big deal if you had built your whole framework saying plus or minus the benchmark by 500 basis points or whatever it would be. So I think it sort of gets back to, I think you have to have a willingness to be different and sometimes get to the root of things, first principles, et cetera. And I think that willingness to be different is probably the thing that really defines a public market investor.

• 26:19Speaker 02

  Because you can look so stupid for long periods of time on the road to success.

• 26:24Patrick O'Shaughnessy?

  It's amazing to me how much things like GIX, GIX specifically, but other classification systems like that influence what portfolios look like. From the outside looking in, I don't think people would kind of be shocked by the degree to which those act as like risk proxies. And we sort of, as an industry, just outsource our work to those third party services. It's crazy. It brings up another really interesting question. So you mentioned this idea of kind of looking forward three to five years, earnings power. And I love this idea, which I'll summarize as living between categories, stuff that doesn't quite fit in one or the other. How much in your history have the most successful investments? Change their source of their business model in the way that like, I know you're a huge Amazon shareholder.

• 27:09Patrick O'Shaughnessy?

  AWS is the idea that comes to mind where maybe you're analyzing them as a retailer and then all of a sudden, primary driver of their success is something that from the outside looks completely unrelated to their core business. How often is it like a business change that drives amazing results versus an evolution of an existing model that just is maturing into better unit economics, et cetera?

• 27:30Speaker 02

  Well, look, I think the very, very big ideas like Amazon particularly, it is the company through culture and through long-term thinking, continue to experiment and that leads to very big outcomes. We're completely unknowable at the outstart of the investment. So we were fortunate to buy Amazon back in 2003 and it was more from an e-commerce, it was solely really an e-commerce thesis. And the following the company through that ownership, clearly the investment that they made to evolve the business into what it's become through AWS and beyond. Also, that was a case where the thesis did evolve and it became more about that over time, the AWS

• 28:12Speaker 02

  portion of things. And it's a fine line in the business because you know, I think it's generally sound advice to say, you know, you want to have an investment thesis. You want to stick with an investment if it's generally following that thesis. But if it changes and evolves, most people consider that a warning sign, any kind of change. But there can be very positive changes and that would certainly be an example. But I think it is a little bit more of an anomaly. I think in most other cases, it's been hard for other companies to find those second and third acts like Amazon. It's not impossible, but when I think about our success, and there have been many successes that we don't, haven't owned, where the companies have had great second and third acts. We, in our case, it's been a lot more about one primary thing and it playing out over a long period of time.

• 28:56Speaker 02

  The thesis sort of continuing down that path. But I do think you're right. Well, if I did think about our best company specific investments over time, it has been always these hard to put into a category or there's something where that maybe the analysis might be flawed. I mean, many years ago, we owned Monsanto as it had gone from being more of a commodity chemicals producer to more of a, almost like a pharmaceutical type business. And those have very different dynamics and should probably be valued differently. And there was several years before I think people even figured that out because of that compartmentalized specialty expert-driven model that the whole industry follows. And so if you take a step back and you think about that, experts are really useful when

• 29:39Speaker 02

  the world is not stationary, when it's not dynamic, and companies fit very closely into the bucket that they follow. But when it becomes non-stationary, actually expertise can become a negative. And yet, we all defer to experts generally in life, and there's really good reasons for that. Like, I would definitely defer to the pilot flying the plane over me, because I don't know how to fly a plane. But when you're dealing with markets, which are more dependent on human behavior, it's important to have experts, but also recognize that most industries built around them. A lot of the expertise is compartmentalized, and there can be advantages to either having non-experts on the team, that their role is just literally to float from area to area. There's also value in our structure, I think,

• 30:21Speaker 02

  in having products that span the globe. We have something that tends to do small-cap growth. Don't get me started on growth value, but just smaller companies that we think can be much bigger in the US. And then we also have international funds that do large companies that we think can, that have durable businesses and that are priced in a reasonable manner. So, people on our team have the ability to express themselves regardless. Like, they don't come to work every day saying, "I need the best new large-cap tech or healthcare idea. Get it for me." You know, it's more, if I'm Jason Young as our healthcare person, where's the most interesting things happening in healthcare, whether they're private, public,

• 31:02Speaker 02

  or whether they're small US or large international? Like, it runs the gamut. And once we identify that what we think's really interesting, we have a home for it. So at the end of the process, the portfolios reflect those ideas. Most of the industry in some way, shape, or form is set up around, "I am a large-cap manager in the US. I need to only own those companies." And while I might have a little bit of awareness beyond that part of the world, I really don't have a whole lot of perspective, because I don't have skin in the game. You're not going to deeply follow a company if you can't also own it. And our structure is set up in an interesting way where I can't tell you how much time I spend on any individual product each week, or Nor can Jason, or some of the other key people on our

• 31:45Speaker 02

  teams, but, but we all have our money in each of our products and we care, we have skin in the game, and we're just looking for great ideas. And we think that perspective is something that actually benefits us in a world where most people are compartmentalized in their ability to express their investment ideas, or in their specific expertise.

• 32:02Patrick O'Shaughnessy?

  So let me make sure I understand this, because it is backwards, I think, from the traditional approach, which is that I would manage a large-cap value fund, which means I go look at value names and I buy some. What you're saying is you've got a whole bunch of different products, or funds, or whatever, and you don't really care where a name ends up. You're just trying to find the most interesting things. And then, once you say this is something we want to own, then you figure out where it goes at the end of the process, not at the start.

• 32:27Speaker 02

  Totally. And, and the positive of that, I think, especially in a world that tends to be set up the opposite, is hopefully, we have a perspective then that other people don't, because of our ability to do that. The other side, every strategy has its strength and weakness. If I'm a client, somebody could say, well, wait a minute, how much time are you spending on the product where I have my money? And we're very open about how we do things. I think ultimately, there's been knock-on-wood success in setting things up this way. But I think because the rest of the world's set up the other way, I think there's a big advantage doing it this way. One could argue that if the world was a bunch of generalists, and nobody had specialty funds, then maybe you want to get more specific. And that's probably how we ended up here to begin with.

• 33:05Patrick O'Shaughnessy?

  If you could describe the success of the Disruptive Change Research Group, and maybe the way to think about this would be like, if you were teaching a course on how to set one of these up for other investors, or even for other businesses, that wanted to be mindful of ways the world is changing rapidly, what has worked there and what hasn't? How would you advise other people harness the power of this idea that you've, something you've done for a long time?

• 33:26Speaker 02

  First of all, my first reaction is always that it's sort of helped us focus really our resources as much as anything else. And what I mean by that is, we do have thirty people, and that's certainly a substantial amount of people to do what we're talking about here. But at the same time, our goal is not to cover every area all the time. One could look at the job of a public manager as starting with a benchmark and trying to win each small battle in every area. Like, we have a certain number of energy companies, that we're going to win that battle, and by owning the right ones. And a company has a certain weighting in the benchmark, and we have to have an opinion if it's big. We don't approach things that way. We approach it much more just from a pure investing standpoint, and less benchmark

• 34:10Speaker 02

  sensitive standpoint. So, having disruptive changes sort of helped us think, okay, are there areas we're going to be a little less focused on going forward? And it probably helped us avoid areas like we discussed earlier, or just avoid areas like maybe parks and conventional media that really got disrupted once the internet advertising solution became clear. And maybe being a little bit ahead on that, or maybe it's understanding how the software area changed pretty dramatically in the last decade, based on software as a service solutions route versus the old license and maintenance business model. So I think it's helped us kind of avoid things. It's provided some supporting evidence for

• 34:52Speaker 02

  why we might want to own specific companies, like a Google post-IPO. The nuance here is that I think you have to be careful about being too thematic. It's very user-friendly for me to explain some of our ideas in a thematic manner to a client, because it's easier to understand. But at the same time, there can be really powerful themes without there being great ideas. And if it's from those themes, sometimes those themes just benefit society. I think that what disruptive change has done is always provide extra perspective for our more conventional expertise, sometimes in a contrarian or supportive manner. Helps us make sure that we have good resource base, but we want to focus it on areas where we think we can win, or there might be a lot of dispersion.

• 35:34Speaker 02

  As opposed to areas where it's more commodity like in nature. It also has helped support, I think, overall our culture, which is continued learning, having a learning environment where people want to know what's going on in the world and not, they don't want to just be experts and get lost in sort of the weeds only. I think we try to keep a constant perspective as part of our weekly meetings and weekly interactions.

• 35:59Patrick O'Shaughnessy?

  You mentioned that you don't want to go there with growth and value. I think you've answered the reasons why that it creates this sort of false universe classification. Any other observations on growth versus value that you think are silly in terms of how the industry approaches that topic?

• 36:13Speaker 02

  Low multiple stocks have a good publicist because they're called value and high multiple stocks are called growth and that just sounds scarier. So I think way too many people have already made these arguments successfully and you probably don't need to hear them from me, but in back with, starting with Warren Buffett. But basically what our industry means when they say that is high multiple versus low multiple. And if it's high multiple, you probably wouldn't want to buy every high multiple company out there. Because on average, if you look backward, that's usually been a bad strategy or vice versa. There's arguments that you should buy all the low multiple companies. And if you had to do one or the other, maybe you'd still do the low multiple. But again, part of that is sort of how the industry likes to try to create algorithms

• 36:55Speaker 02

  and rules of thumb that are very easy to sort of digest. And if really what you're trying to do is make individual decisions about a smaller group of things. I don't know that there's a lot of value to understanding that mostly high multiple is bad and mostly on average low multiple is good. In fact, it can get dangerous, I think. Michael Mobison, who's joined the team a year and a half ago, he once showed in one of his research pieces that generally high cost mutual funds are bad. But if you're going to pick one mutual fund as a decision, the impact of whether it was high cost or low cost really had no significant predictive power over the next three years. And the whole industry does this. It focuses on filtering of, take a big idea and filter it.

• 37:38Speaker 02

  And maybe that works for some people and maybe it depends on your process, I guess. But to me, it's almost like a bad thing because it forces people to think, okay, I can't own any companies that have that one characteristic. It's like a vantage point and, but the vantage point is so powerful to those people that they can't think on an individual basis about the individual investment because of that belief. And maybe that's why there's been some ability to win in companies that have done well in the last decade that happened to have had high multiples going into that period of time. Turned out the multiples weren't as high as people thought, but the point is that I think we always have to be careful about treating things with a broad brush and getting really dogmatic about it because especially if what you do is make individual

• 38:22Speaker 02

  companies or very individual type decisions. We're all human and we're all like susceptible to that. I think if you ask, I remember when I was in business school, taking one of those Michael Mobison type classes, they said, if you ask everyone in the class, this is a wisdom of crowds kind of thing. Like if you ask everyone in the class, how many miles it is from the earth to the moon, this is your answer. I of course, I have no idea right now. I don't know the answer, but they could ask everyone that question. But then if you ask the same question, but you wrote up the number 30 or something on the board and it was a completely irrelevant observation or data point, it would actually change all the guesses, even though it wasn't really relevant. A lot of the dialogue in our industry, whether it's inflation's taking off, or the market's expensive, or growth value, I don't

• 39:07Speaker 02

  know that it helps you to make good individual decisions. In fact, it might even harm your ability to do that, even though it's trying to do good.

• 39:14Patrick O'Shaughnessy?

  I was just reading the latest update to Michael's book, Expectations Investing, which was so fun for me because it was actually literally the first investing book that I read that I would consider of consequence that started to shape my worldview 15 years ago. And the brilliant idea is of course, like if you get a business right, but the rest of the market has the same view as you, yeah, it's a great business, but it may not be a market beating investment. So I'm always fascinated by this mix of business quality. You want great businesses, of course, especially if you're holding for the long term, but you also want ones that maybe the market's assessment of that business's quality aren't as good as yours. How has your view on assessing business quality changed over time? Like what does that term mean to you now? Is that materially different than 10 years ago, 20

• 39:59Patrick O'Shaughnessy?

  years ago?

• 40:00Speaker 02

  I remember going to Columbia and graduating in 1998 and being exposed to that content, those ideas about ROIC, you know, EBA and free cash flow generation.

• 40:11Speaker 02

  I was surprised when I then joined the industry and there really wasn't a whole lot of discussion about any of those things. It's a lot more P E centric, very P E centric, actually. And I would ask people who'd been around a while for those kinds of metrics about companies that they've followed and they didn't even really know them. And it's all, wow, this feels like it's almost not an arbitrage, but there's something here that's like the newer vantage point that people are missing. It did seem like early on that focusing on some of those metrics for me in my career were where there was less acknowledgement of potential value and the people weren't thinking in those terms. I think not soon thereafter, maybe in the mid 2000s, Joel Greenblatt wrote a book called,

• 40:52Speaker 02

  you know, Little Book That Beats The Market, that was sort of a very basic R O I C type of calculation or sorted large population stocks based on like R O I C-esque calculation and a, some sort of free cash flow-esque metric. And basically it just showed that if you follow those populations of companies that you would succeed. And I think in the subsequent period of time, and especially between 2000 and 2010, there's a lot of success to what is now considered quality investing in companies that are really great companies and usually it shows up in these metrics, which now getting back to your question. But everyone reflects that too much, then maybe some of that loses its power. And I think being a successful public investor over a long period of time requires an evolutionary mindset.

• 41:36Speaker 02

  What you do is too much about one ratio or several ratios you use to filter the world differently than everyone else, it's going to get figured out. And in addition, likely the computers and algorithms will do it even better than you will do it. So when I look today and I move forward to, from past like 2010 and sort of in the last decade, one thing we did, I think, was start getting more interested in companies probably five years ago that weren't short-term profitable, didn't have the R O I C yet, you know, to study unit economics and try to understand the businesses and, and see that they could be a lot bigger or that they had the potential to be. And that maybe people were missing that because they had become so enamored of some of those quality type metrics.

• 42:18Speaker 02

  And more recently, I think some of the success in the markets have been in companies like that, that have sort of intangible capital investments that make their short-term profitability not as compelling from ROI, C free cash flow base. Today, I think we felt like we had some really high-quality companies with strong cultures, management, founders, tons of skin in the game, that had unit economics that were really compelling and it could be a lot bigger. And that's sort of where we gravitated to more recently. But that's a very big evolution from where we started. And I think we will continue to try to do that. And so back to your question, I mean, it's always about expectations as well as understanding the quality of business. If you're going to try to own them for many years like us, we are going to focus on what

• 43:00Speaker 02

  we think of as quality, which really is going to come down to that assessment of what we call uniqueness. But you also have to be mindful of expectations and what's investing, what's built into the price. And from time to time, some of those companies can become too well-priced and that forces you to ask yourself questions of perhaps that we should diversify, perhaps we should make some changes at the portfolio level to sort of offset that development. And the trickiest part about that most recently is that it's hard to find companies that we would define as quality, whether it was earlier-stage or later-stage companies, that are really compelling from a prospective return standpoint. Possibly and probably it's because real rates are what, negative point eight eight?

• 43:44Speaker 02

  They're up a whopping 21 basis points since the beginning or the bottom, even though you've heard a lot about it, on a real basis, they haven't looked a lot. And at the end of the day, I think it's hard to say we're in a high-return environment in the public market. Part of being invested in public markets, if you're mostly or fully invested or close to fully invested, is you have to make a decision, what I'm going to sell and then what am I going to do with the money? Sure, you can own some more cash, which might be a little more tactical, but at the end of the day, it's not typically how we're thinking. And it is hard, it has been hard to find in the recent past, you know, quality or prospective quality businesses that really look compelling. Although more recently, we're in a drawdown as we speak, and I think return profiles are rising.

• 44:28Patrick O'Shaughnessy?

  This may be a really dumb question, but how do you define unit economics for your team?

• 44:34Speaker 02

  It might depend on what you're looking at. I mean, if you want to just really simplify it, because every business is a little different. If you're a retailer and you have one unit, you can attribute to that unit or get to the point of how much does it cost to open the unit? How much revenue and operating profit can you generate from that unit in relation to the amount of cost to set it up? That's the kind of building block you're trying to create. It's a little, it's very, much easier when, when you're dealing with something like that because it's a little more tangible. When you're dealing with companies that don't have a physical investment, you're looking at estimates of people LTV to CAC or long-term value to customer acquisition cost type of analysis. And what can go wrong with either?

• 45:17Speaker 02

  Of course, early cohorts may not match later cohorts and trying to understand how big the markets can be and knowing that along the way that that consistency or inconsistency can really throw things off. We certainly have had cases where we got that wrong and right. So trying to learn from those experiences as we look at incrementally new ones. So really understanding at the base level, does it make sense or not? Not just looking at the aggregated financial statements and saying, okay, here are the numbers that get spit out of all the activities going on at this corporation. If you just drill down to its most essential activities, do they make sense? Does it work? Then from there, trying to figure out how big that activity can be and how sustainable it is. Of course, it's really tricky. There's

• 46:01Speaker 02

  a lot going on in whether it's understanding those unit economics, but then also all that qualitative competitive part. All those things kind of need to go right in order to hit on something that maybe other people are missing.

• 46:14Patrick O'Shaughnessy?

  Is there a right amount in your experience of, I'll call it uncertainty risk that you like to take in the portfolio? Meaning, everyone uses this example on unit economics of like a DoorDash where it's all on how you define the unit. So maybe on a per-delivery basis, it's not positive unit economics, but on a per-hour of the delivery person's time it is, or per-street or something like this. Is there enough uncertainty or is there an amount of uncertainty that you're willing to tolerate? In the portfolio, meaning you just have no idea what's going to happen.

• 46:44Speaker 02

  Well, I could think of a few versions of that. One would be biotech is a case where, okay, if this works, we think we know what the economics will be, but we don't know that it works. Especially really on Twitter has this many users and yet they don't really make a lot of money at our Facebook. Are we willing to bet that there it's reasonable to assume that there can be a certain amount of monetization? And where could that lead to in relation to other services that are similar? And finally, another one could be something like Bitcoin, which is not an intrinsic value investment, but I would call speculative value investment, intrinsic value investment being more of a trying to predict what kind of cash flow an asset can generate and then buying it at a certain price

• 47:25Speaker 02

  where you can earn a reasonable return versus a case where it's not a cash flow productive asset, but you're betting on the adoption of it as a sort of a new standard or some form of standard, which would then lead to it having some sort of value. And then you mentioned a company that might or might be debatable depending on certain vantage point. So the answer is yes, we do do some of that. I think it's the vast minority of the portfolio. And it really, position sizing is what becomes really important in those cases. In a case where we felt that we think that unit economics work, but we understand the other side of it. We also think the business can be really much bigger and that the culture and the management team is excellent.

• 48:10Speaker 02

  And there's tons of optionality beyond that simple current unit economics. Then it owns some of that, but only so much of that as a position in terms of its individual sizing. So I think your question is, is some of the portfolio allowed to be in things with less certain huge upside? Absolutely. You have to size according to the individual, both merits and negatives in those cases.

• 48:35Speaker 02

  And another one actually that would fall into that category is what balance sheet uncertainty. There are some companies that are early in their life cycle, but there is capital intensity, at least in the initial part, that's going to possibly require them to be back into the market for raising money. And for a very long time, thinking back about the internet bubble, which we lived through, my first lesson was never own a company that's going to need capital because most of them went bust. The one that I lost the most money in or the area back at that point was the tower business. So we owned a lot of American Tower, Crown Castle and SBA, and they all almost went bankrupt.

• 49:15Speaker 02

  And thing we got wrong, and this is literally 20 years ago, at that time, look, the unit economics were amazing. There was customer concentration, but there was a symbiotic need for each other. And then your customers initially were these blue chip Verizon types of the world where you could really count on them, which is great. And you also had, of course, the awesome price escalation built into the long-term contracts that the tower companies sign with those carriers. But then slowly debt creeped into the entire, maybe not too slowly at the end, but suddenly there are a lot of new alternative carriers and the tower companies were buying portfolios of towers at higher prices, but they were sort of justified by maybe incremental customer

• 49:56Speaker 02

  needs of companies that weren't AAA or weren't blue chip highest quality anymore. And so that might've been what you represented as thesis creep and what we got wrong. And when the whole funding cycle really stopped, those companies almost didn't make it. And they wound up being really good purchases that when it was clear they didn't, they weren't going to go bust. But I guess my point is that experience for a long time made me think you want to have like a zero tolerance to that. And more recently, I think that you just have to manage that. We have probably like a mid-single-digit percentage of the portfolio in companies that might need capital at some point. But the opportunity is so great, we're willing to have a little bit of that risk. So really long-winded answer, a way of just getting back to your question, which is.

• 50:39Speaker 02

  Individual sizing matters so much when you're dealing with something where there might be one little thing missing, whether it's confirmation that your biotech product works, or whether it's adoption of Bitcoin, or whether it's will the unit economics hold ultimately? And I think you want to deal with that on a company by company basis and then have an idea how big it is in the portfolio, and it really should be the vast minority of what you do, because it's worth it maybe as an expected value standpoint, but it certainly there's a lot more risk and uncertainty versus maybe the rest of what you're doing.

• 51:11Patrick O'Shaughnessy?

  If we were to set aside investing for a second, so set aside the prospective return part of the equation and think just about business, if you think back on all the businesses that you've studied in depth, what business taught you the most about business and what did it teach you?

• 51:28Speaker 02

  I have to be a little obvious here, but just studying Amazon over a long period of time has certainly opened my eyes to what a public company can do and how they can do it. Maybe if you were going to take the other side of that more recently and be a skeptic, you'd say, well, too many companies are trying to be the new Amazon, and maybe there's a little bit too much credit being given to making investments in the long term today and foregoing current profitability as a result of that example. I mean, I think that's not totally illegitimate either, but I do think that what Amazon did so well, and maybe there's been a few other companies that did something similar, but not many, was redefine what it was like to be a public company, and they'd sort of basically

• 52:10Speaker 02

  forewent the idea of having to pay a dividend, having to have a certain amount of short-term profitability in order to go at light speed towards their end game potential, which initially, as we talked earlier, was e-commerce centric and now is much greater than that. If you're a private investor, that's exactly what you want. If you're investing in a private company, you don't say, is this a growth stock or a value stock? Or you don't say, what's your dividend yield? When are you going to start being cash flow positive? And what Amazon did said, even though we're public, we're going to act like a private company and then we'll just get the shareholders we deserve. And for many years, that was to their detriment, and now more recently, it's become a huge strength. And maybe the big difference today is there's some of the end markets because of

• 52:55Speaker 02

  digitization and the internet and mobility, they're so large that I think you want companies that are still in the first or second inning to be redeploying as much money into the business as possible. You're trying to grow and get and maximize your end game potential. But obviously, there's a whole other point of view that a lot of people historically followed, which is public companies. If you're public, it's sort of back to the whole discussion around categorization, like, public company can't do that. So I think Amazon gave us an appreciation of that. Hopefully, it's not an over appreciation of that because just because it worked for Amazon is de facto, I mean, it works for everyone else. But it showed that there can be a different path to being public and a different emphasis. And hopefully, if you get the right constituency to back you, then companies like that are

• 53:40Speaker 02

  more likely to succeed. And it showed the power of culture and I think the willingness to invest and make experiments and fail along the way. And I think those are the kind of investments that are more likely to lead to really big, long tail, or very big outcomes over a long period of time, which ultimately, if you can get a few of those in this business, it does really help drive your investment record.

• 54:04Patrick O'Shaughnessy?

  I think we probably agree that the only constant in business and investing is change, and that you already talked about the role of the Disruptive Change Research Group that you've set up, and you clearly have a very humble approach to markets and a deep respect for change. How do you deal with the craziest kinds of change? So something like a cryptocurrency, something like we've even talked before about UFOs or some crazy, something that seems like even bringing it up kind of sound nuts, especially if you do so early enough, but can often be massive change agents in business and investing. How do you approach those kinds of topics?

• 54:37Speaker 02

  I mean, those are our favorite topics because you have to be mindful of what's out there and how things can completely change. And cryptocurrency may or may not actually play out in a positive way, but we've been following it for many, many years at this point. And I do think in that case, there's some interesting qualities that a crypto, you know, in a very small manner, as we discussed, if you size it correctly, you can bet small to win big. But in a way that could have, and it's not definite, but could be act as a counterbalance to everything else you're doing. So if you're managing money on behalf of clients and their wealth is represented by dollars, one of the things that can go wrong is suddenly the unit of measurement, the way that people keep score changes.

• 55:21Speaker 02

  And maybe there's some reasons that that can happen that are more macro in nature. So I think it's interesting to follow the tail and the fringe ideas. And most of them probably aren't going to play out, but I think spending time on them is really healthy. We try to set up the team and have an environment where we do that. And so it's not a reactionary thing, it's more an anticipatory thing. With Bitcoin specifically, I also think that it has the potential. You think about the anti-fragile framework of the scene, Taleb, and you know, I really like that. It shows the power of language too. In that book, he talks about the fragile and what people think. If you ask someone what the opposite of fragile is, and it's robust. And of course, the opposite is not robust.

• 56:05Speaker 02

  And the word anti-fragile needed to be coined by him in order to represent things that gain from disorder. When I think about what you just mentioned, like the super big possible change, it's good to have a healthy sense of things and look for things that can gain from disorder, which he calls anti-fragile. But the problem with anti-fragile investing, because I'm definitely fascinated by it, is often it is very domain-specific and duration-dependent. If you think about The Big Short, which is an awesome story and awful time, but people certainly enjoy the story behind the willingness to be different of the people like Michael Burry, et cetera. The reality is they made a very specific bet and they were totally right.

• 56:48Speaker 02

  And it deserved to be to benefit, but if you'd been different on the duration by a little bit in terms of when some of the option and contracts expired, it could have been a very different outcome. Anti-fragile investing is very interesting because usually it is like betting on one thing and it's just like an out of the money option, right? It comes and it goes and it's about that one thing or not. And I think what's kind of interesting about, one of the things that's interesting about Bitcoin is that to me it has anti-fragile potential. It's not guaranteed in the same way that now the money put option might be very specific, but it has the ability to benefit in multiple disorder, volatile types of events. Could displace gold or could go beyond that and it could maybe be adopted more in a scenario

• 57:32Speaker 02

  where there's crisis than when there's not crisis. But there's also no duration. It doesn't expire. I mean, it can expire in a day. It has a different risk, which is maybe the government can outlaw that. It doesn't actually have a period of time where it just ceases to be like an options contract. So I think it actually brings an interesting possible counterbalance to portfolio, but not in a way that says, well, now that we have this, we're going to go make all these other bets. It's more of a, I would call it like a speculative insurance, but you're not counting on it to win or to leverage that. You're not leveraging it in a way that's going to harm you. You can only lose what you put in. So bottom line is I think it's very healthy to think about the tail possibilities and the extreme change because in hindsight, it's kind of our job.

• 58:15Speaker 02

  And back to your point about UFOs and things like, talking about UFOs still feels like you're a dummy or there's something wrong with you. But guess what? We're about to get a report on June 1st, I think, which from the government where we might learn a lot more about what 60 Minutes just talked about this week. And we need to be open on what is that? And I don't know what the implications are, but it definitely is something new and different and we want to be mindful of that. And I think you need to have that open mindset in the investment business because anything can happen and you got to accept that. Our job is to try to anticipate as much as we can, but if you are too knee deep in your expertise or in your day to day routine or whatever it is and you're not exploring things that seem kind of wacky, then you're probably going to get hit hard by something out of nowhere.

• 58:59Speaker 02

  And what I would say is, you know, in the financial business, it's often people's job to sound smart in the moment. We all spend time in meetings and after the meeting or after the podcast, you'll say, oh, well, that was great. You sounded smart. And it kind of comes and it goes. But really, in the investment business, your job is to look smart three years from now in hindsight. And usually that requires you to have some opinions or do some things in the short term that make you look a little crazy, like owning Facebook at seventeen, post the IPO, or talking about Bitcoin. So culturally, from our team's standpoint, that connotes or that's like this willingness to be different. I know Jeff Bezos always says, you know, you don't want to be a contrarian, because usually the crowd's right. And that's

• 59:41Speaker 02

  sort of the whole wisdom of crowds thing. But in order to really succeed, you still have to be willing to be different from time to time. You don't want to just default to be different. And I think that that is part of that investment temperament and DNA that we talked about a little bit earlier. I shouldn't say DNA, because I maybe I've found it hard to improve some of my temperament. I think maybe I've gotten incrementally better at some things. I wouldn't want to rule it out for someone else. But you do, I think, have to have that. And I think most people want to look smart in the short moment they're in, the meeting that they're in, whatever. And the easiest way to do that is to say something like, not too controversial, and back it up conventionally.

• 1:00:19Patrick O'Shaughnessy?

  And in addition to UFOs, which I'm curious kind of your take there, what are the other categories or areas of learning that feel the most fringe to you today? Crypto is not allowed to be on the list either.

• 1:00:30Speaker 02

  So one area in therapy that's, I think, also make people look at you funny in the moment, would be psychedelics and the use of psychedelics for therapeutic reasons. And I know there's a lot of research happening there. And I think you can see historically of that, why that would be the case, because of what happened in the 60s, and there's sort of a very quick adoption of something that became very demonized. But if you look at the merits of some of the qualities of psychedelics, which are, they don't really fit a class one drug that should be controlled in the way it does. There really is no long term harm that can come to you. There certainly is harm that can come to you if you're unmonitored and it's not done in a professional, controlled environment, some of the testing that's currently

• 1:01:15Speaker 02

  happening. But there's a lot of research happening there. I think it sounds very interesting. I'm open to learning more about it. We've got, it's one of our disruptive change topics right now. But at the same time, I guess, is a lot of people are going to have sort of that visceral reaction of, not going to kind of drive me insane, or isn't that something that's just bad or evil?

• 1:01:34Patrick O'Shaughnessy?

  We've talked a lot about the past. One of my favorite quotes ever from Isaac Asimov is this idea that past glories are poor feeding. You've had a lot of past glories, but I'm sure that the future is really what you're interested in and focused on. If you think back across your career and thinking towards the future, what is most different about today in markets than when you started professionally investing as a portfolio manager? Like, what is the change in how markets work that you think deserves the most respect for those that want to outperform in the future?

• 1:02:06Speaker 02

  Michael Mobison has the whole idea of markets being a complex adaptive system. I definitely see it that way as well. And it's been a great contribution for me, just learning that from him way back when. And what that means is that markets really are a learning machine and it's constantly updating its process, its aggregated process from all the individual participants. And I think what that means is actually applies the opposite answer to your question, which is it's always getting harder, not easier in some ways, or it feels that way because certain strategy or certain area of the market was underappreciated, or a certain company or type of company, often the market a year, a few years down

• 1:02:46Speaker 02

  the road suddenly has incorporated that into the equation. And as I think I mentioned earlier, when I look at the prospective returns today of companies we like, we also have a pretty wide purview. We don't have to own certain types of companies generally, and we have the ability to look from small cap US all the way to large cap international. So we really can look at just about anything. But it's hard to find things that appear right now to us as really compelling. And again, that's probably has something to do with where the opportunity cost is today, the risk-free rate and the fact that real opportunity cost continues to be negative. But if we do our jobs right, we will continue to try

• 1:03:28Speaker 02

  to figure out what comes next. And if there was a transition, at least from our vantage point of ROIC, free cash flow yield into companies not as currently profitable with big, kind of long end game growth potential, it's up to us to find that next interesting area. I think that one general area in the market where that could come from right now is within healthcare and I think specifically within genetic research.

• 1:03:54Speaker 02

  Where you're really starting to see, it's been talked about for many years, but I think you're starting to see the cost of experimentation and the cost of sequencing and just general analysis of the genome is at the point where you could see some massive, interesting new businesses created and solutions and therapies. It's really keeping an eye on some of those areas that have that potential big change quality that is probably where I would try to spend my time as opposed to figuring out whether this retailer is going to do better than that retailer.

• 1:04:30Patrick O'Shaughnessy?

  I think it's a fascinating position to be in and it's been so fun talking to you today because of the wide variety of markets that you've seen. And if I could sum up this conversation, it's, it's sort of like the classic, it depends. There's no black, there's no white in investing. It's just like, look, every situation's different, things change, you have to do the work over and over again, you have to be humble and do the work and update your model of the world. I ask everybody the same closing question, which is to ask, what is the kindest thing that anyone's ever done for you?

• 1:04:57Speaker 02

  About four years ago, our family found ourselves suddenly in a health crisis. And the first thing you find out when you're dealing a lot with the healthcare system is that there are just so many really great, well-intentioned people, whether they're doctors or nurses or people that are working at hospitals, et cetera. That's generally an uplifting thing. But the second thing you also find when you're dealing with the healthcare system in a really urgent and regular manner is that it's a big system and there's a lot going on. And despite all the well-intentioned people involved, it's up to you to take some ownership about your situation.

• 1:05:40Speaker 02

  And so maybe because of my background, analyst-type background investor, my role in this situation really quickly became to be kind of patient advocate, trying to make sure we understood everything happening and why it made sense and making sure the right things happened each time we were dealing, interfacing with the healthcare system. And In that process, I wound up cold emailing or cold calling a person who was working on a national protocol for a new trial or treatment for what we were dealing with. And this person had no incentive to, and she wound up being way across the country

• 1:06:21Speaker 02

  geographically and we had no relationships in common. I didn't know this person. They didn't know me or anything like that. So she wound up getting back to me very quickly and then spending just an enormous amount of time helping me as an analyst type to understand the situation and help me feel comfortable with all the decisions we needed to make. And there was zero incentive for her to do that, other than that she cared about people. And she's certainly in the right field. And I think when you can find people that do the right thing regardless of incentive, you've discovered something very special. So Dr. Karen, I just would want to shout out to her for her support

• 1:07:02Speaker 02

  and counsel. But it is also symbolic of so many of the other people that we've experienced in the wider healthcare effort and system.

• 1:07:10Patrick O'Shaughnessy?

  Great answer. So amazing what people will do for others. Probably the most common theme of those answers is something like that. Just unnecessary, above and beyond, answering the bell. This has been so much fun today. I've learned a ton. I feel like your attitude towards investing in markets is one that we can all kind of emulate, learn from. So I appreciate you doing this with me. Great to talk again. Thank you for your time.

• 1:07:31Speaker 02

  Thank you.

• 1:07:32Patrick O'Shaughnessy?

  This episode was brought to you by Tegus. In this five-part mini-series, I sit down with Elliot Turner, the managing partner at RGA Investment Advisors, to talk about how he discovered Tegus, how Tegus helps him with his investing process, and how Tegus has made him a better investor. In this week's episode, Elliot and I discuss RGA's investment philosophy and how RGA uses Tegus today.

• 1:07:54Patrick O'Shaughnessy?

  So Elliot, maybe a great place to begin would be with just some background on RGA. Before we talk about Tegus, it's good to understand the firm that's using it and why it's useful. So tell us the brief history of your firm, sort of your investment philosophy and approach.

• 1:08:05Speaker 03

  Sure, yeah. So the firm is myself and my analyst Ari. We are what you'd call GARC investors. And what that means is we're always looking to have some degree of growth and value in an investment we make. Beyond that, we're on mitigating about insisting on quality. And then above and beyond what we're looking for is some degree of change. A company that's a strategic asset in and of itself and some optionality. And we're looking at companies in the $2 to $10 billion market range. So have a mandate to go above and below that. And Tegus is incredibly valuable in both understanding first and foremost, the customer's intent, while we're not intimately familiar with it, and understanding the stakeholders in an ecosystem involved in a business.

• 1:08:48Speaker 03

  So we want to know how the business relates with its vendors and suppliers, how the business interacts with its customers and get a sense of management and who management cares about, what they care about, what drives them, how they treat their employees and what sort of long-term strategic vision they might have. So Tegus is, in that sense, one of the most important resources we have in getting started with any business. We added Tegus to the mix about three years ago, and I think it was one of the most important changes we made to our process. We had been far more involved in sourcing our network and relying on people we know. And I think it's helped push outward our circle of competence and having a better sense for places we want to invest.

• 1:09:28Patrick O'Shaughnessy?

  Maybe give us a traditional steps of the research process. Let's say you're approaching a new company that you haven't explored before. You're getting to know it for the first time. What are the major steps and in what order do you tend to do them in that initial coverage?

• 1:09:42Speaker 03

  Sure, yeah. So there are many ways we might come to initially take interest in a given investment. And depending on where exactly it's sourced, the first step might be a little different. But I think I'd point out one interesting way we've gotten new companies on our list is working on an adjacent company through a Tegus transcript and hearing and seeing something that might be interesting. And that just plants the seed of an idea. So once the seed of an idea is planted, we tend to hunt in areas where we've spent some background time, like getting familiar with the environment, the industry, the landscape. Who the key players are, do an industry overview, understand the hierarchy of where profit pools are divided in an industry. And then diving into a company, we'll start with backing into implied expectations from the market.

• 1:10:26Speaker 03

  So we want to understand what the key drivers are of the business and be able to simplify and isolate on one or two key variables that are going to be deterministic and what a risk reward setup looks like. Once we isolate on those one or two key variables, that's where we know a direction we want to take with doing our own calls or reading calls that might be in the tigus vault and understanding exactly what the levers are, what the puts and takes are about those one or two variables and how the company themselves thinks about it.

• 1:10:57Patrick O'Shaughnessy?

  If you enjoyed this episode, check out joincolossus.com. There you'll find every episode of this podcast, complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.