Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: This is Master's in Business with Barry red Holts on
Speaker 2: Bloomberg Radio. Strap yourselves in for another good one. This week.
Speaker 2: I have Ricky Sandler. He is the CEO and CIO
Speaker 2: of Eminence Capital. They're a hedge fund that's been around
Speaker 2: for twenty five years, running over seven billion dollars in
Speaker 2: both a long short format. Not a lot of successful
Speaker 2: long short hedge fund managers around. Sandler is one of
Speaker 2: those rare birds who not only is a bottoms up
Speaker 2: fundamental stock picker on the long side, but they also
Speaker 2: have a very specific methodology for hedging the downside by
Speaker 2: shorting individual names. They have a tremendous track record over
Speaker 2: the past twenty five years. This is a masterclass in
Speaker 2: how to think about allocating a capital, managing risk, and
Speaker 2: looking at how changing market structure has affected investors. Whereas
Speaker 2: David Einhorn talked about the passive side changing things, Sandler
Speaker 2: talks about how the active side has changed and it's
Speaker 2: very different than what it was like thirty years ago
Speaker 2: when fundamental investors dominated the active alongside. According to Sandler,
Speaker 2: that's no longer the case. I found this conversation to
Speaker 2: be fascinating, and I think you will also with no
Speaker 2: further ado, my discussion with Eminence Capitals Ricky Sandler.
Speaker 3: Thank you Berry. Great to be here.
Speaker 2: I've been looking forward to having this conversation. You have
Speaker 2: such a fascinating background. Let's start with college BBA in
Speaker 2: Accounting and Finance from University of Wisconsin. What was investing
Speaker 2: always the plan?
Speaker 3: No, investing wasn't always the plan.
Speaker 1: Although I have a family background that investing, and I've
Speaker 1: been around investing my whole life, I kind of thought
Speaker 1: I was going to go in a different direction. I
Speaker 1: was applying to law school at the end of college.
Speaker 1: I thought I would be more as a business operator builder.
Speaker 1: And then when I graduated, I decided to put these
Speaker 1: law school applications or these law schoo acceptances on hold
Speaker 1: and worked for a few years. I came into the
Speaker 1: investment business out of college and loved it from the
Speaker 1: first minute and never looked back.
Speaker 2: Well, you probably made the right choice. I enjoyed law school,
Speaker 2: but three years is way too long. They should really
Speaker 2: tighten that up to two years and get you out
Speaker 2: in the real world.
Speaker 3: YEP.
Speaker 2: So your first gig out of Wisconsin is an analyst
Speaker 2: at Mark Asset Management. Were you analyzing stocks or running
Speaker 2: a portfolio? Then?
Speaker 1: No analyzing stocks. I was a young young kid, good
Speaker 1: with math, you know, good with understanding businesses, but really
Speaker 1: learned the ropes at Mark Asset Management. You know, Morris
Speaker 1: Mark was a great mentor, and that was an incredible
Speaker 1: experience to be kind of very close to the portfolio.
Speaker 1: It was a small firm, but we had a lot
Speaker 1: of access and so from a very young age, I
Speaker 1: was put in front of CEOs and CFOs of some
Speaker 1: of the most important companies and it was just an
Speaker 1: incredible platform and incredible experience to learn from.
Speaker 2: And then your next stop is you co found and
Speaker 2: co general partner Fusion Capital Management. Tell us a little
Speaker 2: bit about that shop.
Speaker 3: Yeah.
Speaker 1: So when I went to go work for Marris Mark,
Speaker 1: I took the job of Wayne Cooperman, who was Lee
Speaker 1: Cooperman's son. He then came back two years after business school,
Speaker 1: came back to work at Marris Mark's Mark Asset Management.
Speaker 1: We worked together for a couple of years and then
Speaker 1: at the young ages of twenty six and twenty nine,
Speaker 1: we decided to leave and start our own thing together.
Speaker 1: I think that we were both kind of young, smart analysts,
Speaker 1: probably a bit naive, and felt like.
Speaker 3: We could give it a go.
Speaker 1: The HEDGPHNT industry was still a cottage industry back in
Speaker 1: this was nineteen ninety four. We launched Fusion in nineteen
Speaker 1: ninety five, and both of us had kind of roots
Speaker 1: and history. Our fathers had worked together the other at
Speaker 1: Goldman Sachs. They knew each other, and so we had
Speaker 1: sort of family backgrounds. I would say we had a
Speaker 1: good story. We were the sons of two successful money managers.
Speaker 1: We got on some radar screens and when we did well,
Speaker 1: money sort of came to us. And so that was
Speaker 1: kind of very formative years of managing our own portfolio.
Speaker 1: And you know, Fusion Capital Management was, you know, in
Speaker 1: some ways quite similar to what we do in Eminence.
Speaker 1: On the long side, obviously we've evolved quite a bit
Speaker 1: over the last thirty years, but we were bottoms up
Speaker 1: stock pickers looking for what I would call good businesses
Speaker 1: and stocks that were value and I think, you know,
Speaker 1: we were I would say shorting as a little bit
Speaker 1: of a byproduct of what we did. That was something
Speaker 1: that changed later in Eminence, but we had a good
Speaker 1: four year run together and then at the end of
Speaker 1: nineteen ninety eight we split up and I kind of
Speaker 1: launched Eminence right out of Fusion.
Speaker 2: So what was it like raising money. You're a relatively
Speaker 2: young person. It's not like you have decades of experience.
Speaker 2: I recall the nineties as just a wild period. Did
Speaker 2: you find yourself being challenged raising capital or given the
Speaker 2: success of Fusion, it wasn't that big a lift.
Speaker 1: So I would say to start out, it was the
Speaker 1: MCI friends and family plan when we launched, but I
Speaker 1: think because we had the family backgrounds, and as I mentioned,
Speaker 1: we were on some radar screen. So as we started
Speaker 1: to do well, as we put up a good first
Speaker 1: year in a good second year, money was there.
Speaker 3: There was. There was a whole industry of people.
Speaker 1: Looking to invest in young hedge funds, believing that that
Speaker 1: when firms were young, they would they did their best.
Speaker 2: So a lot of emerging manager merging matter exactly.
Speaker 3: Thank you for that.
Speaker 1: So we grew from what was twenty six or seven
Speaker 1: million when we started to about three hundred and fifty
Speaker 1: million over the four years, and I would say it
Speaker 1: was for us fortunately, because of our backgrounds and the
Speaker 1: success we had. It was not particularly challenging, and I
Speaker 1: was very fortunate.
Speaker 3: In that regards.
Speaker 2: So raising capital is easy. Let's talk about deploying capital.
Speaker 2: You know, Greenspan famously gives the rational zuberance speech in
Speaker 2: ninety six. Markets laughed off and continue to trend higher.
Speaker 2: We have the ti Bot crisis, the Asian contagion and
Speaker 2: was at ninety seven, and then long Term Capital Management
Speaker 2: ninety eight. You launch in ninety nine. What were you
Speaker 2: thinking about with regards to that investing environment. You have
Speaker 2: robust trend but stretched valuations and a lot of companies
Speaker 2: with wisps of business models and very ephemeral revenue.
Speaker 3: Yeah.
Speaker 1: So when we launched Fusion at ninety five and went
Speaker 1: through those periods, in the end of ninety eight, I
Speaker 1: launched Eminence, and you're right, this was right on the
Speaker 1: back of the long Term Capital Management kind of crisis.
Speaker 1: I think that the experience over those four years, and
Speaker 1: particularly the ninety eight crisis, convinced me that I needed
Speaker 1: to develop a real expertise in shorting. That going through
Speaker 1: a market like nineteen ninety eight with I would call
Speaker 1: it light hedges and shorting the more expensive bigger cousin
Speaker 1: to your small company was not effective hedging and strategy.
Speaker 1: And one of the things that I felt in ninety
Speaker 1: eight was the inability to lean into a dislocated market
Speaker 1: because we weren't protecting capital well enough. And this led
Speaker 1: to a lot of what has been the hallmarks of eminence,
Speaker 1: which is single stock shorting has been critical pillar of
Speaker 1: what we've done for the last twenty five years, and
Speaker 1: for both the skepticism that it brings to the longside
Speaker 1: of investing and for the ability to protect capital, or
Speaker 1: do a reasonable job protecting capital in dislocations, which allows
Speaker 1: you to be offensive. One of the things I've seen
Speaker 1: throughout my entire career is that being offensive when there's dislocation,
Speaker 1: you are planting the greatest seeds possible.
Speaker 3: At that time.
Speaker 1: Everybody else is kind of emotional throwing things out looking
Speaker 1: short term, and you get a lot of great opportunities.
Speaker 3: But you can only do that if you.
Speaker 1: Have a portfolio that has protected some capital that you
Speaker 1: can kind of lean into. So I'm going through those
Speaker 1: early crises were kind of formative in our ability and
Speaker 1: my both abiliting desire to build a true long short
Speaker 1: hedge fund. That that single stock shorting was was kind
Speaker 1: of at the core of what we do.
Speaker 2: So a risk managed hedge when things are pricing and
Speaker 2: things seem to be dislocated from reality to give you
Speaker 2: some downside protection. But the flip side of that is
Speaker 2: opportunistic aggressiveness when everybody hates the market and things are
Speaker 2: selling off.
Speaker 1: Is that is that a good I think? I think
Speaker 1: that's good. And then and then even when things are
Speaker 1: going well, if you can do a good job with
Speaker 1: long short spread, you know that that shorting isn't going
Speaker 1: to hurt you nearly as much. It allows you to
Speaker 1: be levered to your lungs. So we've always run with
Speaker 1: a portfolio where our long side is typically over one
Speaker 1: hundred percent gross long. We bring that down with the
Speaker 1: short side, so you get extra leverage too long, and
Speaker 1: you could still outperform the market over the long term
Speaker 1: even while only having let's say forty percent net exposure
Speaker 1: to the market, because you can generate long short spread
Speaker 1: and you can be levered too long. So a combination
Speaker 1: of a model that allows you to do solidly when
Speaker 1: markets were good and outperform them over time, maybe not
Speaker 1: in the very very short run. If markets are going
Speaker 1: to be up twenty percent in a given year, but
Speaker 1: if the market's going to be up ten over the
Speaker 1: long term, we could outrun that but also be able
Speaker 1: to protect capital, So you can be offensive, and that
Speaker 1: was part of the way you can outperform ULL.
Speaker 2: We'll talk a little later about the specific strategies, but
Speaker 2: the three main ones are long only, long short, and
Speaker 2: then one fifty by fifty alpha extension. So it sounds
Speaker 2: like long only is obvious, Long short seems like you're
Speaker 2: somewhat hedged, but one fifty by fifty that that seems
Speaker 2: like that's on steroids. That's the most aggressive portfolio.
Speaker 1: Yes, so I think I think that will be our
Speaker 1: highest absolute return portfolio over time. You know, the roots
Speaker 1: of us are the long short hedge fund. I would
Speaker 1: call that healthy gross moderate net exposure type portfolio. Call
Speaker 1: it one thirty x eighty five kind of forty five
Speaker 1: net two hundred and twenty five two hundred and twenty gross.
Speaker 1: Use stock picking to generate good absolute returns but reduce
Speaker 1: systematic risk through shorting, and that has variable net too.
Speaker 1: So there have been times where we've been ten or
Speaker 1: twenty percent net, and there have been times like post
Speaker 1: COVID where we went to one hundred percent net. Long,
Speaker 1: so we have flexibility, and then most of the time
Speaker 1: we tend to run it pretty much in the middle
Speaker 1: of the fairway. With those exposures, one fifty x fifty
Speaker 1: is more of a long replacement. It is for the
Speaker 1: investor who's already chosen to be along. The market is
Speaker 1: always one hundred percent net long and fifty right right.
Speaker 1: But now we have two opportunities to generate alpha for investors.
Speaker 1: There's the alpha on our lungs what we would do
Speaker 1: if we had one hundred percent long portfolio, and then
Speaker 1: you add a fifty by fifty almost neutral sleeve on
Speaker 1: top of that.
Speaker 3: So we can generate.
Speaker 1: Value from our long short spread because we have an
Speaker 1: extra fifty points on either side.
Speaker 3: And that's a product.
Speaker 1: As allocators have increasingly bifurcated their portfolios, they want full
Speaker 1: risk on one side and they want uncorrelated on the other.
Speaker 1: They don't want this thing as much in the middle
Speaker 1: that long short equity had been. We launched a long
Speaker 1: fun twelve years ago, alpha extension a little over a
Speaker 1: year ago, realizing that as a business, we need to
Speaker 1: give allocators a product that fits what they need. We
Speaker 1: can pick stocks and our long short hedgephone has done
Speaker 1: great over twenty five years, but it's framework.
Speaker 3: Its fees structure is something.
Speaker 1: That that allocators have increasingly said, I want something different,
Speaker 1: and so one fifty fifty it's always one hundred percent
Speaker 1: that long, and we have a fee structure where you
Speaker 1: only pay for alpha.
Speaker 3: So the fea structure.
Speaker 2: There is to define that because some people have called
Speaker 2: those pivot fees or non beta fees. So you're charging
Speaker 2: a fee over and above whatever the S and P
Speaker 2: five hundred generates. Is that the thought process, that's.
Speaker 3: The thought process.
Speaker 1: So we picked the MSCI world, which is half of
Speaker 1: it's the S and P five hundred anyway, because we
Speaker 1: do global but we charge a fifty basis point fixed
Speaker 1: fee and then thirty percent of the alpha. So if
Speaker 1: we don't beat the market, you pay us a pretty
Speaker 1: low fee fifty basis points. If we crush the market,
Speaker 1: you pay us what we're worth. It's a fair sharing
Speaker 1: of fees and a good alignment. And so there's a
Speaker 1: huge pool of capital that already wants to be long
Speaker 1: the market. Right This seventy to thirty model like a
Speaker 1: lot of full risk, and so people in that full
Speaker 1: risk want passive index they want lung only, they want
Speaker 1: private equity, they want venture. So we're playing into that world.
Speaker 1: But we can generate very significant alpha both through the
Speaker 1: long stock picking and our long short spread.
Speaker 2: So I love the business idea of that. Hey, if
Speaker 2: I don't generate anything over my benchmark, you're paying me
Speaker 2: what's essentially a mid price mutual fund fee. But we
Speaker 2: have the potential, as you've demonstrated over the years, to
Speaker 2: hit the ball out of the park, and when that happens,
Speaker 2: you're going to pay up. I'm surprised more funds don't
Speaker 2: play in that space from a business perspective. Why do
Speaker 2: you think there's so reluctance to adopt I mean, obviously
Speaker 2: you are eating your own cooking. You're like, hey, we
Speaker 2: do well when you do well. Why have it more
Speaker 2: funds embraced what sounds like something that's fair for both
Speaker 2: for both the allocator and the fund manager.
Speaker 1: It's a great question. You know, I think we have
Speaker 1: been you know, the world and markets have evolved over
Speaker 1: my thirty years in the business, and we've had to
Speaker 1: evolve in two ways. We've had to evolve the business.
Speaker 1: So to this point, I think as as allocators have
Speaker 1: changed we've said, hey, we're going to disrupt ourselves. Yeah,
Speaker 1: one and a half and twenty. Our fees are one
Speaker 1: and a quarter and twenty, but one and a half
Speaker 1: and twenty absolute fees. That's great, it's really lucrative. But
Speaker 1: if you can't get it or Allocatus wants something, you know,
Speaker 1: we could either be a smaller version of ourselves when
Speaker 1: a lot of the peers that I started in the
Speaker 1: business with are no longer managing money. I feel like
Speaker 1: I love this business. I want to do the right
Speaker 1: thing for my employees, for my investors, and keeping a
Speaker 1: strong and stable business is important, even if it's you know,
Speaker 1: less lucrative, and so were a bit disrupting ourselves, but
Speaker 1: you're moving to where the market is and keeping a
Speaker 1: business strong. So I think some of my peers maybe
Speaker 1: have felt like, I don't want to give investors something
Speaker 1: else that is lower fees than this lucrative business I have.
Speaker 1: And I think also in order to really do one
Speaker 1: fifty to fifty well, you need to have a scale
Speaker 1: shorting infrastructure.
Speaker 3: Shorting is hard.
Speaker 1: This is something we have stayed committed to in the
Speaker 1: decade after the GFC as we went into this ZERP
Speaker 1: environment shorting got hard stocks kept going straight up. Valuations expanded,
Speaker 1: valuations stopped mattering when rates were really low. Then we
Speaker 1: go into the memestock craze in twenty twenty one. You're
Speaker 1: telling me, not only does valuation not matter, but fundamentals
Speaker 1: don't matter either. In order to do this well, you
Speaker 1: need to believe that shorting adds value and you need
Speaker 1: to be committed to it.
Speaker 2: You're addressing exactly where I was going to go next,
Speaker 2: which was the general consensus about why short sellers have
Speaker 2: become an endangered species. Has not been the business model
Speaker 2: it's been. Hey, shorting has become too There's just too
Speaker 2: much capital, especially when you have zero interest rate and QE.
Speaker 2: You know, there was no alternative to equity. Fixed income
Speaker 2: was not desirable. Wait, I got nothing but downside and
Speaker 2: no yield. Of course I'm going to roll into equities.
Speaker 2: I'm going to assume that the pandemic and the shift
Speaker 2: from a monetary regime in the twenty tens to a
Speaker 2: fiscal regime in the twenty twenties change that. Are we
Speaker 2: possibly seeing a resurgence of short selling.
Speaker 1: I believe the opportunity set is great. I'm not sure
Speaker 1: that everybody's gotten back into the single name shorten, the
Speaker 1: memestock craze, the retail led rallies, the shortcovering rallies. The
Speaker 1: new market structure still makes it not easy. You need
Speaker 1: a really thoughtful portfolio construction, really thoughtful portfolio execution. It's
Speaker 1: not just about the ideas. Volatility works against the short side,
Speaker 1: it helps the alongside. If a stock goes down and
Speaker 1: you're long it, you have a small position and more upside.
Speaker 2: It's easy to and the opportunity to buy in at
Speaker 2: a lower price.
Speaker 1: And if the stock goes up, you have less upside
Speaker 1: and a bigger position. It's easy to sell. The opposite
Speaker 1: happens on the short side, and so things get bigger
Speaker 1: automatically when they go against you, and risk constraints come in.
Speaker 1: So you're going to be really thoughtful about portfolio construction.
Speaker 1: So it's not easy. We have one hundred and ten
Speaker 1: short positions. You need a scaled infrastructure to have one
Speaker 1: hundred and ten alpha generating short positions. That's hard for
Speaker 1: people to do, so I think that's one of the
Speaker 1: reasons that we haven't seen quite the resurgence. But to
Speaker 1: your point, higher interest rates help in a lot of
Speaker 1: ways on the short side. So first of all, we
Speaker 1: are now discounting the future at some rate. So no
Speaker 1: longer can you tell me this company is going to
Speaker 1: do fifty billion and ten years and you could discount
Speaker 1: that at zero as if fifty billions coming tomorrow. Secondly,
Speaker 1: the higher cost of capital for businesses to actually operate
Speaker 1: make industries more rational, So no longer do we see
Speaker 1: profitless companies just destroying businesses. So it adds more rationality
Speaker 1: to the economic factors that affect busines. So that's good
Speaker 1: for fundamental investors. So now we have valuation is going
Speaker 1: to matter and fundamentals will start to come into play.
Speaker 1: And then lastly, we're now also getting short credit rebate.
Speaker 1: You know, we're getting five percent on our shorts, so
Speaker 1: you're getting paid to wait. So I think higher regist
Speaker 1: rates are good for shorting on several levels. It's not
Speaker 1: clear to me that people have come back to it
Speaker 1: with the same vigor. We still feel like a number
Speaker 1: of peers and others short indices, baskets and single name
Speaker 1: shorting scaled infrastructure. It's hard business.
Speaker 2: So let's talk a little bit about eminence. You've been
Speaker 2: around for twenty five years you've been doing bottom up
Speaker 2: stock picking, both on the longside and the short side.
Speaker 2: Tell us a little bit about your process. What is
Speaker 2: your bottom up research like?
Speaker 1: You know, I would say over the twenty five years
Speaker 1: we've been in business, we have had to you know, markets,
Speaker 1: the world business has changed a lot. I talked a
Speaker 1: little bit about how we've pivoted our business to what
Speaker 1: allocated have wanted, but we've also had to adapt our
Speaker 1: process and our approach as markets have changed over the
Speaker 1: last twenty five years. In general, we are still doing
Speaker 1: exactly the same thing we did, which is trying to
Speaker 1: buy good businesses and stocks that are cheap. And those
Speaker 1: two concepts are very important because I think we get
Speaker 1: the opportunity to make money in two ways.
Speaker 3: When we do this.
Speaker 1: We get the opportunity for the business to compound in
Speaker 1: value at above average rates, so time is our friend.
Speaker 1: And then we have some undervaluation, some discounts, something that's
Speaker 1: misperceived about it, and we get an opportunity for rerating.
Speaker 1: And over our history, our success has been typically owning
Speaker 1: things for two to three years, where we get a
Speaker 1: couple of years of value creation growth a rerating we
Speaker 1: make fifty or one hundred percent and then we turn
Speaker 1: our capital to what I call the next mispriced durable business.
Speaker 1: And I think that repeatable process is something we've always
Speaker 1: done now that has adapted and evolved as markets have changed,
Speaker 1: and we can get into the market structure changes to
Speaker 1: which I think are the most consequential theme I could
Speaker 1: talk about is how different markets are today. The price
Speaker 1: setters in markets vastly, vastly different than they've ever been
Speaker 1: and very important for fundamental investors down.
Speaker 2: So let's go there. I had David Einhorn on a
Speaker 2: couple of months ago, and he famously said markets are broken.
Speaker 2: He blamed indexers like black Rock and Vanguard for saying
Speaker 2: people aren't exercising any intelligence. They're just blindly buying indexes
Speaker 2: and putting them away for decades, and that made value
Speaker 2: investing more challenging and it deeply affected the measure of equities,
Speaker 2: although arguably you could say would not create more dislocations
Speaker 2: and more opportunities. But where do you see the change
Speaker 2: in markets? And is broken a bridge too far? Or
Speaker 2: are markets broken?
Speaker 3: Yeah?
Speaker 1: I don't think they're broken. I think they're quite different,
Speaker 1: and I think in the mid to long term they
Speaker 1: still work. I love David, he's brilliant, he's friend and
Speaker 1: a great investor. But you know, our view is that
Speaker 1: markets are very different and the people setting prices over
Speaker 1: the short run are very different than they were. You know,
Speaker 1: fifteen years ago, the marginal price setter was a bottoms
Speaker 1: up investor. So markets fifteen years ago were twenty five
Speaker 1: percent passive and seventy five percent active, and most active
Speaker 1: investors did bottoms up research. Fast forward today, that twenty
Speaker 1: five percent index is now sixty. So David's right about
Speaker 1: how big indexes have come. They are accepting prices. But
Speaker 1: the bigger change is also that the forty now relative
Speaker 1: to the seventy five is not bottoms up stock pickers.
Speaker 1: It's quantum investors. It's podshops that are trying to make
Speaker 1: money in every one, two, three week or two month
Speaker 1: period of time. It's thematic investors, it's systematic investors, it's
Speaker 1: retail investors. And so the makeup of the active investor
Speaker 1: community is significantly different. And so on most days the
Speaker 1: price action you see in a stock is being driven
Speaker 1: by somebody who is not doing bottoms up research. I'm
Speaker 1: not saying that they're throwing darts at the board. But
Speaker 1: they're doing something because it fits in a camp. This
Speaker 1: is a small cap cyclical, and now because the FED
Speaker 1: wants to cut rates, I want to buy small cap cyclicals.
Speaker 1: Or this is a large cap defensive, and I want
Speaker 1: to buy large cap defensive because the economy is slowing
Speaker 1: and they're doing things in big swaths. I don't want
Speaker 1: to own unprofitable growth, and so I'm selling all unprofitable growth.
Speaker 1: And it doesn't matter whether it's a flying taxi that's
Speaker 1: never going to make money or an eighty percent gross
Speaker 1: margin software company that is technically unprofitable because it's reinvesting
Speaker 1: efficiently in its business. We see all this investing done
Speaker 1: in kind of I call it blunt instrument investing, and
Speaker 1: people talk about like the theme da joure, we want
Speaker 1: to buy AI, the GLP one losers, the GLP one winners,
Speaker 1: Like how about a business? How about an individual company?
Speaker 1: So what I would say to you is that this
Speaker 1: creates more just location. As you said, it's different trading patterns.
Speaker 1: So it's not easy because you have to retrain your
Speaker 1: mind and your process to say what I see in
Speaker 1: the screen today doesn't matter, It doesn't mean anything. It's
Speaker 1: not a signal, it's only opportunity. The market is creating
Speaker 1: greater opportunities. But it requires investors to number one, change
Speaker 1: the mindset and recognize that the priceetters are doing things
Speaker 1: for reasons that have nothing to do. They're selling your
Speaker 1: stock because it's technically unprofitable growth, Okay, doesn't matter that
Speaker 1: the fundamentals are getting better. Doesn't matter that in eighteen
Speaker 1: months it won't be unprofitable. It only matters that it
Speaker 1: fits in.
Speaker 3: A bucket today.
Speaker 1: And you need to say you're providing no signal to me,
Speaker 1: and so I as an investment were going to take
Speaker 1: advantage of that. And so it requires mindset adjustment, It
Speaker 1: requires some portfolio construction adjustments. We have to be a
Speaker 1: little more diversified because the volatility of individual stocks is
Speaker 1: quite high, and if you run uber concentrated, you run
Speaker 1: the risk of kind of having such bad performance over
Speaker 1: short periods of time that you're.
Speaker 3: You could scare your investors.
Speaker 1: And I think it also requires higher turnover to take
Speaker 1: advantage of this market vowel or what I would call
Speaker 1: high volve that has little to do with the bottoms
Speaker 1: up fundamentals in that company. And we see it in
Speaker 1: both directions.
Speaker 2: So you're raising two really fascinating through lines that I
Speaker 2: that I want to address. So, where Einhorn was saying
Speaker 2: the passive investing side of the market has changed the structure,
Speaker 2: what you're specifically saying is don't ignore the active side.
Speaker 2: The way the active behaves has completely changed. Also, they're
Speaker 2: not fundamental bottoms up stock picker. They're this, that and
Speaker 2: the other, and it doesn't matter what it is. It's
Speaker 2: just different than what came before. Is is that a
Speaker 2: fair access?
Speaker 3: I think that's a very fair ascessment.
Speaker 2: And then the second point you bring up is kind
Speaker 2: of really intriguing. All the various new types of active
Speaker 2: you're describing, they all seem to be intensely narrative driven.
Speaker 2: It's a storyline. Whether it's AI or ozembic and alternatives
Speaker 2: or quant or you know, very short term trading, there's
Speaker 2: a story there, and if the story works out, they
Speaker 2: make money, and if the story turns out to BBS,
Speaker 2: they're out.
Speaker 1: It's add investing like give me, give me a narrative,
Speaker 1: and I know versus like I'm gonna do the hard work.
Speaker 1: I'm gonna do three weeks of research. I'm gonna rip
Speaker 1: through the financials. I'm gonna build a model. I'm gonna
Speaker 1: go out and talk to the whole ecosystem. I'm gonna
Speaker 1: find interesting field research contacts. I'm gonna interrogate management. I'm
Speaker 1: gonna look at the footnotes, old school stuff. Investors don't
Speaker 1: do that anymore, and and that creates a great opportunity
Speaker 1: assuming you've made these adjustments to how the market is.
Speaker 2: You know, it's so funny you call it a d
Speaker 2: D investing. We had that big dislocation in the beginning
Speaker 2: of August, and I'm home recovering from having some new
Speaker 2: parts put in, and I'm just flipping around the channels
Speaker 2: and it's hilarious because, gee, what caused that giant correction. Well,
Speaker 2: it was the be non fine pay or report. No way,
Speaker 2: it's the PSALM rule and we're in recession. No way,
Speaker 2: it's Japan and the end of the character. Oh no, wait,
Speaker 2: it's the unwines of the Trump trade and we're not
Speaker 2: gonna get a fifteen percent corporate discan. No no, it's
Speaker 2: the vix complacency and it's been too and nobody wants
Speaker 2: to say, hey, it's kind of random, and there's a
Speaker 2: lot of moving parts. Oh no, the FED is behind
Speaker 2: the curve and it's the add investing is exactly what
Speaker 2: the pundits are talking about.
Speaker 1: And to your point, the add investing is also add
Speaker 1: with my P and L. If I start to lose
Speaker 1: P and L, I move, So this is not eminence.
Speaker 1: But other investors have no tolerance for pain. They are
Speaker 1: all these risk triggers. So on top of the I'm
Speaker 1: moving to where the narrative is, I also know that
Speaker 1: even if that narrative isn't what I believe, if my
Speaker 1: P and L starts to do something that triggers me
Speaker 1: to do something I do risk I delever and so
Speaker 1: you have on top of people investing in ways that
Speaker 1: are narrative driven, they're also backward looking to their own
Speaker 1: P and L. So if I have a bad month,
Speaker 1: that means that I might have to do something differently.
Speaker 1: When I'm telling you all the stock prices are moving
Speaker 1: for non fundamental reasons, we realize we have to absorb volatility,
Speaker 1: and that is part of the new market structure.
Speaker 3: We have to be comfortable if.
Speaker 1: They're willing to live with it and then lean into it.
Speaker 1: We have the advantage of twenty five years of investing,
Speaker 1: seeing a lot, having built a lot of credibility with investors,
Speaker 1: so I don't have to make money every month. Maybe
Speaker 1: a newer manager doesn't. Or if you're at a platform shop,
Speaker 1: you know, five percent draw down and they cut your
Speaker 1: capital in half, another five percent draw down, you're out
Speaker 1: of a job. So that creates, on top of the
Speaker 1: narrative behavior that's almost trigger driven and exacerbates this volatility.
Speaker 2: That's kind of fascinating. And I can't help but notice
Speaker 2: you mentioned the twenty five year track record. Your first
Speaker 2: decade arguably is the lost decade. Markets peaked March two thousand.
Speaker 2: You guys launch late ninety eight, early ninety nine, The
Speaker 2: main indices don't get back over that level till what
Speaker 2: is it thirteen years later, twenty thirteen. So how formative
Speaker 2: was that first decade? How did it affect how you invested?
Speaker 2: What were you guys doing during the two thousands.
Speaker 1: So the two thousands I would call the golden age
Speaker 1: of long short This is when the product really showed
Speaker 1: its metal, because while the indexes didn't do a lot,
Speaker 1: underneath the surface, there were a bunch of winners and
Speaker 1: a bunch of losers and what I always say about
Speaker 1: the short side and alongside is I don't care what
Speaker 1: happened this year. Twenty percent of the companies really underperformed
Speaker 1: and twenty percent of the companies outperformed.
Speaker 3: Right, it's not so.
Speaker 1: Easy to find them, and I'm not making easy. But
Speaker 1: you can't tell me shorting is hard when I can
Speaker 1: show you the twenty percent of the companies and underperformed, Okay,
Speaker 1: you just didn't find them, and that's a separate issue.
Speaker 1: So I think those were the formative years that showed
Speaker 1: me that the power of long short, of stockpicking, of
Speaker 1: finding things that can outperform and underperform, and in many
Speaker 1: ways bred the opportunity.
Speaker 3: To have a real business.
Speaker 1: Now to your point, after the lost decade, we go
Speaker 1: into the opposite environment, the SMP becomes the single best
Speaker 1: shop ratio possible from twenty twelve to COVID.
Speaker 2: Well fourteen percent a year something like that. That's a
Speaker 2: great decade with Lovall right on top of that. So
Speaker 2: this is why investors started to move away from long short,
Speaker 2: because any hedging was not helpful.
Speaker 3: It was harder to outperform the market.
Speaker 2: I heard it called expensive insurance, and I'm like, is
Speaker 2: that is that really what it is, because you're kind
Speaker 2: of missing the points of long short.
Speaker 1: I don't want to call it a moment in time
Speaker 1: because it was long in that, but it was a cycle,
Speaker 1: it was a period.
Speaker 3: And that's what.
Speaker 1: We've seen over time is markets go through phases and
Speaker 1: then everyone says, this is it.
Speaker 3: Now you have to just buy indexes.
Speaker 1: And so we're this phase right now where everybody's convinced
Speaker 1: that the SMP or the QQQ, like, just buy that
Speaker 1: and don't worry about anything. I would tell you that
Speaker 1: the last ten years, which has been dominated by that,
Speaker 1: is probably not gonna be the same as the next
Speaker 1: ten years. So to your point on higher interests in
Speaker 1: a different world, I think we're gonna go back to
Speaker 1: a place where stock picking matters a lot. All this
Speaker 1: history has shown me is both markets go through cycles,
Speaker 1: and investors, whether you like it or not, are backward looking,
Speaker 1: return looking animals.
Speaker 3: They rarely look forward.
Speaker 1: And so it's like this work for the last three years,
Speaker 1: just keep doing it even if the world looks different
Speaker 1: going forward. And so this is human emotion. This is
Speaker 1: why computers are never going to take over for markets.
Speaker 1: While we can get the benefit of quantum computers. Human
Speaker 1: emotion is backward looking, and let's just do more of
Speaker 1: what worked in the past.
Speaker 2: That muscle memory is really tough to break. Let's stay
Speaker 2: with that idea that your job is to identify the
Speaker 2: twenty percent of stocks that are going to shoot the
Speaker 2: lights out and really beat the indices, as well as
Speaker 2: that bottom twenty percent that's gonna soil the bed and
Speaker 2: do a terrible job. Is it the same process to
Speaker 2: identify both groups of stocks or is it a differ
Speaker 2: instead of research and analysis to pick the winners versus
Speaker 2: the losers.
Speaker 1: It's a different set of research and analysis. There are corollaries,
Speaker 1: but shortening is not just the inverse of a long
Speaker 1: Because of the nature of shorting and what you need
Speaker 1: in the form of catalyst and recognition, it's a little
Speaker 1: bit harder.
Speaker 3: You can be.
Speaker 1: Patient on alongside, and so for us alongside I described
Speaker 1: this durable business or good business and mispriced stock as
Speaker 1: the repeatable process that we're.
Speaker 3: Trying to do.
Speaker 1: So our research team of twenty people, we have thirteen
Speaker 1: sector based analysts and pms that are really know their
Speaker 1: sectors and tend to look amongst those sectors for businesses
Speaker 1: that are durable, and then the opportunity to buy them
Speaker 1: when they think there's a misperception out there. And I
Speaker 1: think that means that a lot of things we do.
Speaker 1: We're researching companies and we say, well, it's not the
Speaker 1: right time. This is a good company, it's a good CEO,
Speaker 1: but it's fairly priced. There's nothing wrong with it. So
Speaker 1: I'm not just looking to buy good companies. I want
Speaker 1: to make sure that I'm delivering value to my investors
Speaker 1: in that I'm buying that good company when it's mispriced
Speaker 1: so I earn outsize returns. So I think our team
Speaker 1: is doing lots of research across these sectors, identifying the
Speaker 1: right kinds of businesses, and then through different events that happen,
Speaker 1: there are things that create miss pricings. Short term company
Speaker 1: goes through a disappointment. Everyone gets short term and no
Speaker 1: one wants to look out twelve or eighteen months. Maybe
Speaker 1: there is a turnaround story and a business that have
Speaker 1: been underperforming, Maybe there is a hidden asset that's going
Speaker 1: to start to show. So things that fundamental investors could
Speaker 1: could create miss pricings. On top of that, the new
Speaker 1: market structure that I talked about is creating new sources
Speaker 1: of miss pricings. So this is everybody's doing one thing.
Speaker 1: You're in the GLP one loser bucket. And you know what,
Speaker 1: Goldman Sachs decided that, and Morgan Stanley decided that, and
Speaker 1: they put you in in this basket of losers. Okay,
Speaker 1: that is not necessarily the most rigorous process.
Speaker 3: It doesn't mean that.
Speaker 2: But all explaining GLP one verse is the winners and
Speaker 2: the losers. Briefly, for people who are are not market junkies.
Speaker 1: Yeah, so so GLP one they are the diabetes drugs
Speaker 1: that are helping people lose weight. This is ozempic, this
Speaker 1: is manduro go, and will go VI is ozempic just
Speaker 1: a stronger version.
Speaker 3: It is an existing.
Speaker 1: Class of drugs applied to a new use and is
Speaker 1: applied to weight loss. And then there are a lot
Speaker 1: of downstream effects to weight loss. So a lot of
Speaker 1: the comorbidities or the co issues we have in the
Speaker 1: health system come from people who are overweight, so heart
Speaker 1: disease for an example, or other procedures. If people are
Speaker 1: healthier or we're gonna have less of these other things.
Speaker 1: So you could be a GLP one loser because you
Speaker 1: help patients that have heart disease.
Speaker 2: So this can be anything from healthcare to I saw
Speaker 2: people talk about brands and McDonald's.
Speaker 1: So you're eating, so you're you're eating habits or less,
Speaker 1: you snack less, and so there's the potential that we
Speaker 1: consume less food.
Speaker 3: I think it's.
Speaker 1: Moderate but accurate. I mean, today we have relatively small
Speaker 1: percentage of the population on these things, but people projecting
Speaker 1: out to when we have ten or twenty percent of
Speaker 1: the population, and they might eat ten or twenty percent less.
Speaker 1: So alcohol is another one. There's no craving for alcohol.
Speaker 1: People who are drinking less. That's a GOLP one loser.
Speaker 1: And then some of these healthcare things could be GLP
Speaker 1: one losers. People throw you in this bucket and then
Speaker 1: doesn't matter that you have a new product, it doesn't
Speaker 1: matter that you're gaining market share, it doesn't matter that
Speaker 1: you're going to grow your earnings at extra y. They're
Speaker 1: just selling you because you're in this basket that Goldman,
Speaker 1: Sachs and Morgan Stanley told you about that is creating
Speaker 1: other sources of mispricing, throwing companies into the unprofitable growth basket.
Speaker 1: So back in twenty twenty two, people said you know,
Speaker 1: you don't want to own unprofitable growth rates were going up, right,
Speaker 1: they and again they treat everything as one. Uber was
Speaker 1: a perfect example of a stock that was technically unprofitable,
Speaker 1: but it was fundamentally profitable at its core, and it
Speaker 1: was unprofitable because they were growing in uber eats and
Speaker 1: they were growing in new markets. And what we've seen
Speaker 1: happen over the last two years is Ubers all of
Speaker 1: a sudden become profitable. And point being, they're selling it
Speaker 1: because I classified it as something but having nothing to
Speaker 1: do with both the micros of that company or how
Speaker 1: that classification might change in eighteen months, And so that
Speaker 1: creates other sources of mispricing. So, getting back to your question,
Speaker 1: we are trying to find durable businesses and mispriced stocks,
Speaker 1: and there are more mispricings coming from investors because it's
Speaker 1: not just fundamental investors now, it's this new market structure,
Speaker 1: this thematic type of stuff on the short side you
Speaker 1: also asked about.
Speaker 2: Yeah, that's so I'm fascinated by the short side because
Speaker 2: you know, short sellers have become an endangered species, and
Speaker 2: I always thought short sellers kept the market. Honest, we're
Speaker 2: the first buyers in the crash, and you know, losing
Speaker 2: shorts is not a good structural thing for the market.
Speaker 3: It's not a helpful thing.
Speaker 1: And I think we've had a number of kind of
Speaker 1: media and regulatory pushback on short selling and stuff as
Speaker 1: if for the evil Empire, because you know, stocks only
Speaker 1: go up and people on stocks and we're like betting
Speaker 1: against it.
Speaker 3: The truth of the matter is.
Speaker 1: Short sells do better research because the risks are skewed
Speaker 1: the other way. I can only make one hundred percent,
Speaker 1: I can lose thousands of percent. I better be really
Speaker 1: good and really accurate, do really good research. I think
Speaker 1: it's an important part of being a skeptical investor. I
Speaker 1: think it's an important part of portfolio construction, and I
Speaker 1: think it's an important source of value add to our investors.
Speaker 1: And so for us, we are typically looking for both
Speaker 1: an overvalued stock and a reason why that overvaluation will correct.
Speaker 1: So we need to understand what is going to happen
Speaker 1: so it's fundamentally worthless and something is going to drive
Speaker 1: that to happen. That could be an earnings miss, that
Speaker 1: could be a business that's over earning that supply is
Speaker 1: coming on to it, It could be a company that
Speaker 1: has a poor accounting or a fraud, it could be
Speaker 1: a fad. Lots of different baskets of overvaluation, and then
Speaker 1: you also need to understand what is going to change
Speaker 1: that's going to cause investors to value this the right
Speaker 1: way in a reasonable time. It may not be tomorrow,
Speaker 1: but it can't be five years because you can lose
Speaker 1: a lot of money between now and then.
Speaker 2: Huh, really interesting stuff. So let's talk a little bit
Speaker 2: about what's going on in the market today. You said
Speaker 2: something that I found fascinating. We were talking about shorting earlier.
Speaker 2: You said, the mother of all short squeezes is no
Speaker 2: longer valid. Today. Short interest was at one point thirty
Speaker 2: percent of the float today it's well under ten percent. Explain.
Speaker 1: So that was a tweet about Game Stop specifically because
Speaker 1: we obviously had the original Game Stop episode of twenty
Speaker 1: twenty one, and then more recently Roaring Kitty had come
Speaker 1: back and kind of created a new short squeeze in
Speaker 1: game Stop, and admidst that short squeeze, the company issued
Speaker 1: three billion dollars of equity, massively increased the float, and
Speaker 1: a number of short sellers had covered and the thesis
Speaker 1: behind being long Game Stop for any of these retail investors,
Speaker 1: is the market's rigged. The short cells are gonna have
Speaker 1: to cover, you know, just hold the stock.
Speaker 2: If we malls are coming back in a big way.
Speaker 1: If we if we corner the market on game Stop
Speaker 1: shares and nobody and we never sell, then the short
Speaker 1: cell is are screwed.
Speaker 2: And which turned out to be fairly accurate for that
Speaker 2: one stuff.
Speaker 1: For that one s in the original period, right when
Speaker 1: the short interest was probably eighty or ninety percent. After
Speaker 1: this more recent episode, I tweeted, I said, I don't
Speaker 1: know what the thesis is now if the company just
Speaker 1: massively increased the float, so your short interest is a
Speaker 1: percenter of the float went down and other short cells covered.
Speaker 1: So so now your short interest is nine percent. Like
Speaker 1: that's fairly low as as far as short interests go.
Speaker 1: So you don't really have a thesis if your thesis
Speaker 1: is mother of you know, moass with rocket ships right.
Speaker 2: To the moon, to the moon. So to me, the
Speaker 2: whole original Game Stop thing was so fascinating because I
Speaker 2: started on a trading day in the nineties and we
Speaker 2: had the Yahoo message boards. I remember the Iomega fans
Speaker 2: driving to the factory on a Sunday night and seeing
Speaker 2: the parking lot full of cars and Wall Street didn't
Speaker 2: get it. They're running triple shifts and they're going to
Speaker 2: blow numbers away. This seems like very much a throwback
Speaker 2: to what took place in the early days of the Internet.
Speaker 2: How different was Roaring Kitty and Game Stop with what
Speaker 2: happened during the dot com boom.
Speaker 1: So I think that the fundamental differences are we now
Speaker 1: have much greater access for retail investors to the market.
Speaker 1: So we have access on our phones.
Speaker 2: We have free trading, Robinhood absolutely Robin Hood swab for free.
Speaker 1: So all of a sudden, the ability and access for
Speaker 1: retail investors to be meaningful players in the market is
Speaker 1: even bigger than it was back in nineteen ninety nine.
Speaker 1: And then I would say the other change is that
Speaker 1: no longer is this just creative research that that some
Speaker 1: sort of savvy individual did. Let's say, on a stock
Speaker 1: like Iomega, this is actually bullying. This is coordinated efforts
Speaker 1: to all come in and try to buy the stock
Speaker 1: at the same time. We'll drive it up and then
Speaker 1: it'll cause short sellers to have to cover and other
Speaker 1: investors who get triggered by price movements to buy, and
Speaker 1: so we're going to create the price action that's going
Speaker 1: to create further price action.
Speaker 2: So this isn't even the nineteen nineties dot com. These
Speaker 2: are the nineteen twenties syndicate buyers. Yes, right, talk about
Speaker 2: everything old being new again. It's a century ago.
Speaker 1: This is the essence of what we're not allowed to do,
Speaker 1: which is act as a group. But you know, the
Speaker 1: SEC doesn't do anything about retail investors. If if thirty
Speaker 1: percent of the company all got together and they were
Speaker 1: retail investors and they did something that's illegal as per
Speaker 1: SEC rules, but nobody goes after the retail investor. And
Speaker 1: that's okay. This is the sandbox we got to play,
Speaker 1: and I'm not complaining about it. It's a new phenomenon.
Speaker 1: It goes back to this new market structure that I
Speaker 1: talked about, because I mentioned retail investors are a big
Speaker 1: piece of this new market structure. And one of the
Speaker 1: things that's happened that people don't appreciate is how significant
Speaker 1: they are as a player in the market, even in indices.
Speaker 3: In the last six.
Speaker 1: Months, they have been putting a billion dollars a day
Speaker 1: into s and P and a.
Speaker 3: Day at retail investors.
Speaker 1: You want to know why a month ago the market
Speaker 1: was at a high even though the economy was slowing.
Speaker 1: It's because the retail investors are just giddy buying the indexes,
Speaker 1: and until we get a trigger to make stocks go down,
Speaker 1: other investors aren't selling, and so they are a real
Speaker 1: factor in the market. We have to both respect them
Speaker 1: and then ultimately take advantage of them, because I don't
Speaker 1: think they're the most sophisticated savvious investors. Some of them
Speaker 1: may very well be, but as a class, I would
Speaker 1: say they tend to be following themes and chasing things
Speaker 1: that are going up, rather than doing what you described
Speaker 1: in Iomega, which is kind of good bottoms up fundamental research.
Speaker 2: Well, obviously, what we saw in the first go round
Speaker 2: with game Stop was the stock when to the moon
Speaker 2: and a lot of people bought in very late. It
Speaker 2: was a ton of money loss by let's call it
Speaker 2: an unsophisticated retail investors. Let's talk about what took place
Speaker 2: in twenty twenty four with Gamestock and Roaring Kitty. This
Speaker 2: time the SEC said, hey, we are investigating because this
Speaker 2: looks like blatant manipulation. What are your thoughts on that.
Speaker 1: I'd love to have some hope and trust that the
Speaker 1: SEC and the government's gonna get to the right place,
Speaker 1: but I don't necessarily have that belief. It's nice to
Speaker 1: see that they looked at some of the actions and suggested,
Speaker 1: you know, are you misrepresenting, are you committing fraud?
Speaker 3: You know?
Speaker 1: The size of Roring Kitty's position was about one hundred
Speaker 1: and fifty million dollars. From what people understood, Roaring Kitty
Speaker 1: had made thirty million dollars in the first go around
Speaker 1: in game Stop. People are unsure of where he got
Speaker 1: one hundred and fifty million dollars to buy more GameStop.
Speaker 1: He was also buying Chewy. The ultimate beneficiary of Roaring
Speaker 1: Kitty was games Stop itself. They raised three billion dollars
Speaker 1: at prices that are well in access to what the
Speaker 1: company's worth. They bought themselves a hugely. They could try
Speaker 1: anything they That company will not run out of money
Speaker 1: for the longest period of time. It is a money
Speaker 1: losing bad business that's historically that is going down. But
Speaker 1: now it's like a spack with a couple of billion
Speaker 1: dollars and a fame CEO named Ryan Cohen, who you know,
Speaker 1: people want to believe in. And so the company really
Speaker 1: benefited from what Rooring Kitty did here, which is get
Speaker 1: retail to come back in and try to buy the stock.
Speaker 1: Get professional investors who had PTSD who are like, oh
Speaker 1: my god, here it happens again. I better get out
Speaker 1: of the way. Last time it hurt me. And so
Speaker 1: that created a situation where a stock went from like
Speaker 1: eighteen to like fifteen in a couple of days. The
Speaker 1: company raised a bunch of money. The stock is back
Speaker 1: to twenty again. So they don't affect the long term
Speaker 1: of it, but but they create a lot of and
Speaker 1: l pain, a lot of emotion, and in this case
Speaker 1: allowed the company to raise three billion dollars.
Speaker 2: So let's talk a little bit about Chewy and Ryan Cohen.
Speaker 2: Full disclosure, I occasionally order from Chewy for treats and
Speaker 2: stuff for our dogs. Mostly Amazon, but very often. Chewy
Speaker 2: is very competitive price wise and tends to have stuff
Speaker 2: in stock which Amazon doesn't always. You and I both
Speaker 2: have mixed it up with Ryan Cohen on Twitter. You know,
Speaker 2: again to be even handed, Ryan, if you want to
Speaker 2: come on Master's in Business and talk about Chewy and
Speaker 2: talk about game Stop. I'd love to have you. But
Speaker 2: he blamed naked short sellers for trashing game Stop and
Speaker 2: all the garbage we heard about the decade before with
Speaker 2: overstock and other companies that turned out to be frauds.
Speaker 2: Blaming naked shorts tends to be a red flag that
Speaker 2: something on told is going on. That said, Chewy is
Speaker 2: a real company. It's the second incarnation of pets dot Com,
Speaker 2: only timed right, funded right, and executed right. Why does
Speaker 2: Ryan Cohen care about game Stop? It seems so bizarre.
Speaker 3: It is a little bizarre.
Speaker 1: I've asked myself if this is this decade's version of
Speaker 1: Eddie Lampert, who made it a wonderful trade buying Sears when
Speaker 1: it was on the verge of bankruptcy, putting it together
Speaker 1: with Kmart, and like you know, in the short run,
Speaker 1: saving that company.
Speaker 2: I was told he's a real estate genius. Does that
Speaker 2: turn out not to be true.
Speaker 1: I won't appine on that, but I will say he's
Speaker 1: not a chief merchant of seers and Kmart. So he
Speaker 1: ultimately put an enormous amount of his fund into this.
Speaker 1: He ultimately went and ran the company and tried to
Speaker 1: turn around or make a failing business successful. This goes
Speaker 1: back to the Warren Buffett quote, you know, you show
Speaker 1: me a good executive and a bad business, and I
Speaker 1: think that the reputation of the business is gonna win out.
Speaker 1: I think Ryan Cohen putting himself in a CEO of
Speaker 1: game Stop, I think he's going to ruin whatever reputation
Speaker 1: he has as a businessman, because this is a business
Speaker 1: that is going to be really hard to turn around.
Speaker 1: That's my opinion. Maybe he's going to develop something. I'm
Speaker 1: going to be surprised, But when I look at where
Speaker 1: the world is going GameStop as a physical retailer selling
Speaker 1: computer equipment that you can buy online games that actually
Speaker 1: will have no physical component you can download them, it
Speaker 1: strikes me that this is a dead end. And to
Speaker 1: the credit of Roaring Kitty, he now is cash and
Speaker 1: he's gonna have to go try to reinvent the company.
Speaker 1: But ultimately I think that's going to be a failed
Speaker 1: attempt and he's going to ruin what reputation he got
Speaker 1: through through Chewy.
Speaker 2: So can GameStop pull what Netflix did? I mean, DVDs
Speaker 2: through the mail was not the most compelling business model,
Speaker 2: but online streaming. They became a dominant, giant, wildly successful company.
Speaker 2: Is that the future of game Stop following the Netflix model?
Speaker 1: So I think that Netflix in certain ways got lucky
Speaker 1: early on and capitalize that. When I say lucky, the
Speaker 1: movie studios gave Netflix certain rights to online streaming that
Speaker 1: they didn't think we're all that valuable. They had a
Speaker 1: Disney contract that allowed them to offer this product. The
Speaker 1: gaming companies are never going to allow this to happen.
Speaker 1: So I don't think it's possible for game Stop to
Speaker 1: do what Netflix did. They tried NFTs for a while,
Speaker 1: They've tried kind of collectibles and a few different things,
Speaker 1: and you know, at the end of the day, it's
Speaker 1: a physical retailer with leases in malls that are dying.
Speaker 1: But he's got three billion dollars in cash now, So
Speaker 1: we'll have to watch.
Speaker 2: You'll see what happens. And for purposes of full disclosure,
Speaker 2: how did you guys trade around games now?
Speaker 1: We lost only a little bit of money the first
Speaker 1: time around in twenty twenty one. We have been short
Speaker 1: game Stop for most of the post twenty post meme
Speaker 1: stock craze period of time.
Speaker 2: So that has to be a giant winner.
Speaker 3: It has been a good winner.
Speaker 1: Twenty twenty one, we made back more than for losses
Speaker 1: that we lost in January twenty twenty one. Having said that,
Speaker 1: it hurt us in the second quarter and we lost
Speaker 1: about about one percentage point shorting game Stop we're still
Speaker 1: short of today. It's come back down, and the portfolio
Speaker 1: construction changes that we've made post the memestock craze and
Speaker 1: how we ran out of the portfolio allow us to
Speaker 1: ride through things like this. This is one sort of position.
Speaker 1: It hurt us in one period of time, but ultimately
Speaker 1: I still think that game stopers are short here. But
Speaker 1: it will not go broke. It will not go as
Speaker 1: far down as I ultimately originally thought out. Blockbuster well,
Speaker 1: oh they are Blockbuster, but they've three billion dollars in cash.
Speaker 3: Now.
Speaker 1: To Ryan Cohen's credit, when this squeeze happened, he came
Speaker 1: out and sold a bunch of stock for the company.
Speaker 2: He's savvy.
Speaker 1: If we happened to be in that situation, good for him.
Speaker 1: He's he's maybe saving the company long term from being bankrupt.
Speaker 1: That doesn't mean that.
Speaker 3: This is a successful business.
Speaker 2: There needs to be a pivot. Let's talk about a
Speaker 2: different type of gaming Eminence took a hefty steak in
Speaker 2: and tain a UK gambling group. You're re eluctant to
Speaker 2: that board. Tell us a little bit about n Taine.
Speaker 2: Is this really a sort of activist play? How does
Speaker 2: this fit within your overall strategies?
Speaker 1: Yeah, in Taine is a global online gaming company. They
Speaker 1: own brands like Ladbrooks and Coral oh UK. They own
Speaker 1: half of bet MGM in the US, so that partners
Speaker 1: with MGM. They have businesses in the UK, Australia, Italy, Brazil.
Speaker 3: The industry is growing.
Speaker 1: They have been a leader across many markets and it
Speaker 1: is fundamentally a good growing business. MGM tried to buy
Speaker 1: the company in late twenty twenty and then DraftKings tried
Speaker 1: to buy the company in mid twenty twenty one. Over
Speaker 1: the three subsequent years or two and a half years
Speaker 1: to that point, in Tane lost its way. It had
Speaker 1: a terrible CEO, it had a board that was not
Speaker 1: informed and unable to make the the appropriate changes, and
Speaker 1: over three period of time really underperformed. We have followed
Speaker 1: the company, we've owned it for this period of time
Speaker 1: in various sizes and recognizing it is both a really
Speaker 1: good business and a leader, and it had a CEO
Speaker 1: that was absent Tee completely taking the company down the
Speaker 1: wrong path and making poor capital location decisions. We decided
Speaker 1: there needed to be changed there. I would say just
Speaker 1: taking a step back. In general, activism is not our strategy.
Speaker 1: While we get called activist investors in the press, we
Speaker 1: are not activist investors. We never go into a situation
Speaker 1: expecting to be activists. What happens from time to time
Speaker 1: is you go into situation you think management's a B,
Speaker 1: maybe a B minus, and it turns out you're wrong,
Speaker 1: there're a D or an F, and your choices sell it,
Speaker 1: move on, which we often do, or push for change.
Speaker 1: In this case, because it is such a strong strategic asset,
Speaker 1: we felt stepping in and trying to make changes was
Speaker 1: the right thing. I've been on the board now for
Speaker 1: seven or eight months. We've made great strides. The interim
Speaker 1: CEO has done a terrific job. We just named a
Speaker 1: permanent CEO a couple of weeks ago, Gavin Isaacs, who
Speaker 1: a lot of US investors know, and I think that
Speaker 1: the capital allocation decisions have been significantly better. We are
Speaker 1: in the past to turning around this company. I think
Speaker 1: This is a terrific growth business. It's a company that's
Speaker 1: a leader across many markets, and it's a company with
Speaker 1: so much opportunity because they had been so poorly executed
Speaker 1: and managed for three years prior to the last six
Speaker 1: or eight months. That's the opportunity here. And I'm at
Speaker 1: this point trying to make a difference on the board,
Speaker 1: and I think we've been We've been very effective. I've
Speaker 1: been I've been very pleased and surprised by how receptive
Speaker 1: it's been for me on the board. This is not
Speaker 1: a traditional activist where we're fighting with people. I think
Speaker 1: they saw the errors of the company's ways and believe
Speaker 1: that that I and our agenda are breath of fresh air,
Speaker 1: and so we're making really good progress. You know, time
Speaker 1: will tell how this works out.
Speaker 2: So last question before we get to our favorite questions
Speaker 2: that we ask all of our guests, a little bit
Speaker 2: of a curve ball. You serve on the Board of
Speaker 2: Directors of the University of Wisconsin Foundation. Not only are
Speaker 2: you a member of the Development Committee, but you're also
Speaker 2: a member of the investment committee. Tell us a little
Speaker 2: bit about University of Wisconsin Foundation.
Speaker 1: I'm actually only on the Investment Committee today. I used
Speaker 1: to be on the broader board of University of Wisconsin,
Speaker 1: Miyama Mada. I do a lot there. I teach a
Speaker 1: class there, I host interns, I built the whole Badgers
Speaker 1: and Finance community, and I am on the investment committee.
Speaker 1: So I commit a lot of my time. It's a
Speaker 1: passion project. I feel great about helping kids in the
Speaker 1: things we do across the university. With respect to the
Speaker 1: investment committee, you know, this is a traditional foundation runs
Speaker 1: a bit over three billion dollars allocating capital, and this
Speaker 1: is an opportunity for me to do two things. One
Speaker 1: is help this foundation with our perspectives, help evaluate how
Speaker 1: should we allocate the money, How should think about evaluating
Speaker 1: this manager, How should we think about evaluating this strategy,
Speaker 1: How should we be a probably diversified, how should we
Speaker 1: be opportunistic in times of dislocation? And secondarily, it's an
Speaker 1: opportunity for me to see investment committees and foundations from
Speaker 1: the other side of the table. Obviously, people like the
Speaker 1: University Wisconsin are significant investors with me. Wisconsin is not
Speaker 1: an investor or a main fund, but we have similar
Speaker 1: institutions and so it gives you a perspective for how
Speaker 1: endowments work, how committees work, and some of the same
Speaker 1: things that I've said about investors are also true about committees.
Speaker 1: Very sophisticated people coming together on committees looking backward looking
Speaker 1: returns often don't ask the rigorous questions about how did
Speaker 1: you deliver those returns? Are they repeatable? Was this a cycle?
Speaker 1: How much risk did it take in there? And so
Speaker 1: it's been a really good exercise for me to be
Speaker 1: able to understand our investors in the investment community around
Speaker 1: and it's been a great experience on both scorts and
Speaker 1: helping the school, and they have a wonderful CIO, and
Speaker 1: I think that we've done a good job of not
Speaker 1: falling prey to the issues that could happen with a
Speaker 1: committee managing an investment team. But it's also allowed me
Speaker 1: to see things from the other side.
Speaker 2: And University of Wisconsin always showing up on the lists
Speaker 2: of top non IVY League schools. That has to be
Speaker 2: very rewarding for you to do your work with them.
Speaker 1: Yeah, humble, hard working Midwestern kids every bit is capable
Speaker 1: as the kids that go to IVY leagues, but with
Speaker 1: better attitudes. And I think that there's a lot of
Speaker 1: this going on in the working world that I think
Speaker 1: the working world is realizing that I don't just need
Speaker 1: the kids from the best schools in the country. I
Speaker 1: need good kids that meet a certain standard of intelligence
Speaker 1: and capabilities. And then what I really want is the
Speaker 1: kids with the right attitudes and kids that go to
Speaker 1: schools like Wisconsin, Midwest, humble, hungry public school kids. They
Speaker 1: have a different attitude than maybe kids that might come
Speaker 1: from some of these Ivy League schools that have an
Speaker 1: expectation that the path is laid for them and that
Speaker 1: they just are going to be CEO within the next.
Speaker 2: Six fundamental mispricing of an IVY League education. Yeah, absolutely,
Speaker 2: all right, So let's jump to our favorite questions we
Speaker 2: ask all our guests, starting with what's been keeping you entertained?
Speaker 2: What are you watching or listening to these days?
Speaker 1: In the podcast land, I tend to listen to a
Speaker 1: number of what I would describe as business and health
Speaker 1: and fitness podcasts. So I listened to The Founder's podcast,
Speaker 1: I love Understanding kind of prior successful people invest like
Speaker 1: the Best Your podcast. These are kind of interesting market
Speaker 1: oriented podcasts. I also listen to a lot of health
Speaker 1: oriented stuff so Peter Atia the Drive Huberman podcast compu
Speaker 1: Tea is.
Speaker 2: The longevity It wrote the book on longevity I live.
Speaker 1: Yes, really interesting, tremendous, really thoughtful. There's so much we've
Speaker 1: learned in the last twenty years about health, longevity, wellness.
Speaker 1: And he's a big believer in medicine three point zero,
Speaker 1: which is really us doing things preventatively versus medicine two
Speaker 1: point zero, which is like, you get sick, your hip hurts,
Speaker 1: you go for surgery. Well, what do we do to
Speaker 1: prevent that ahead of time? What do we do to
Speaker 1: prevent heart disease ahead of time? What do we do
Speaker 1: to keep us strong and living greater health span not
Speaker 1: just lifespan.
Speaker 2: I read something this morning. It's so fascinating. Three point
Speaker 2: zero still comes back to all the things we knew
Speaker 2: fifty years ago. Don't be overweight, exercise, manage your stress,
Speaker 2: and be proactive in how you respond to any sort
Speaker 2: of infirmity or challenge.
Speaker 3: Yeah.
Speaker 1: I mean the truth is you boil down all of
Speaker 1: this longevity stuff to a few key things. Move, eat
Speaker 1: less and eat healthy, get sunlight, have meaningful work and
Speaker 1: meaningful relationships, some strength training Like that's it, you know,
Speaker 1: you read the blue zones and you look at you know,
Speaker 1: there's all this data and it's not that complicated, but
Speaker 1: I think kind of distilling it down, there are things
Speaker 1: that have really helped me change small things about my life,
Speaker 1: my morning routines. Things like that that you know, switching
Speaker 1: from cardio and getting on a treadmill or a bike
Speaker 1: to strength training, significant improvement to longevity and the things
Speaker 1: we need to do, getting out in sunlight, walking, just
Speaker 1: basic stuff.
Speaker 2: Let's talk about your mentors who helped shape your career.
Speaker 1: I think there was a handful of people. Most importantly
Speaker 1: my father, who ran a hedge fund. He was a
Speaker 1: Goldman Sachs analyst up until the early nineteen eighties and
Speaker 1: then early hedge fund founder, ran a hedge fund. Always
Speaker 1: been around markets, and you know, he was a mentor
Speaker 1: in sort of understanding the power of good businesses and growing.
Speaker 1: My first boss, Marris Mark, also another great mentor, a
Speaker 1: brilliant investor who's still at it today in the age
Speaker 1: of eighties and going back to longevity, continuing to work
Speaker 1: in our life is important. A gentleman named David Harrow,
Speaker 1: who runs the Oakmark International Fund. He was someone I
Speaker 1: met when I went to school in Wisconsin. He was
Speaker 1: working at the State of Wisconsin Investment Board, brilliant value investor.
Speaker 1: He's been a terrific mentor to me on the business side.
Speaker 1: And then you know, there is a whole community of
Speaker 1: peers and people who have done this before I did that.
Speaker 1: I think I've used little bits and pieces of I'm
Speaker 1: a big believer that investing's about finding your own compass,
Speaker 1: but I'm not reinventing a complete wheel. I might take
Speaker 1: a little bit from Warren Buffett, I might take a
Speaker 1: little bit from a David Tepper, I might take a
Speaker 1: little bit from what Julian Robinson did at Tiger or
Speaker 1: some of the Tiger cubs. And you build what works
Speaker 1: for you. And so I think there's been a whole
Speaker 1: community out there that have been mentors to me, friends
Speaker 1: and peers and colleagues.
Speaker 2: Let's talk about books. What are some of your favorites
Speaker 2: and what are you reading right now?
Speaker 1: I would say, similar to the podcast, my books come
Speaker 1: into a couple of different flavors. So some of the
Speaker 1: business books that I'm a big fan of, the Ray
Speaker 1: Dallio book Principles, I think is terrific that David Rubinstein
Speaker 1: book on leadership just came out. Lessons of the Titans,
Speaker 1: another good business book. So handful of business books.
Speaker 3: I think. There's longevity and health books. I think Outlive.
Speaker 1: We mentioned Peter Atilla Life Force by Tony Robbins, terrific book.
Speaker 3: I tend to read.
Speaker 1: Some stuff on politics, like Understanding our System so the
Speaker 1: Politics Industry, a terrific book around the duopoly we've handed
Speaker 1: to these two political parties and how we change it back.
Speaker 1: And then some fun books that I tend to like
Speaker 1: around people, sports characters or other that that I think
Speaker 1: are great. Open by Andrea Agassi, so good. And a
Speaker 1: recent book that I read, The Gambler Billy Walters, a
Speaker 1: terrific book about maybe the most prolific sports gambler of
Speaker 1: our time. That's a great listen. I would also say,
Speaker 1: I talk about reading books, but I listened to them.
Speaker 2: Now did you have you watched, listened or read Shoe
Speaker 2: Dog Phil Night? Really really interesting, the same source one.
Speaker 2: It's amazing how these incredible companies, all these little places
Speaker 2: along the way, could have just made one other wrong decision.
Speaker 2: We never would have heard of them. It's fascinating, all right.
Speaker 2: Our final two questions, what sort of advice would you
Speaker 2: give to a recent college grad interested in a career
Speaker 2: in finance.
Speaker 1: A couple of things that would give One is this
Speaker 1: concept of finding your own investing compass. Don't try to
Speaker 1: be just like me, or just like Buffet, or just
Speaker 1: like any one person. The benefit of taking all this
Speaker 1: information in is to build your own investing compass, because
Speaker 1: what's really important investing is consistency and confidence. So when
Speaker 1: things go wrong, you've got to be confident in what
Speaker 1: you're doing. We can't chase the latest trends. We can't
Speaker 1: try to buy the value investor when the market's value
Speaker 1: investing and the growth investor. Otherwise we're going to be
Speaker 1: chasing everything. So build your own compass that will build
Speaker 1: consistency and will build something that you believe in, So
Speaker 1: that'd be one. I think the other thing that I
Speaker 1: would say is manage your rolodex really proactively. At an
Speaker 1: early age, you start to get access to people who
Speaker 1: can be really helpful to you, and I think we
Speaker 1: often get that access and then don't cultivate it and
Speaker 1: harness it as we move on in life. And I
Speaker 1: would say, this is a mistake that I made. I
Speaker 1: had this tremendous access when I worked for Marris Mark.
Speaker 1: I was twenty four years old meeting with CEOs. I
Speaker 1: could have done a better job of cultivating these relationships
Speaker 1: and using them ultimately over time. I've probably come back
Speaker 1: to some of them and have used them. But we
Speaker 1: don't get anywhere in life all by ourselves. We need advice,
Speaker 1: We need perspective. Somebody that you meet might know a
Speaker 1: lot about a particular industry and that's not all that
Speaker 1: relevant today, but in twenty four months when you're doing
Speaker 1: research on another company, it could be very relevant. Being
Speaker 1: able to go back to that, I think is really important.
Speaker 1: So being proactive about that, sending people a note every
Speaker 1: now and like, don't just call them when you want
Speaker 1: something from them. Hey, I read this article and it
Speaker 1: made me think of you and your company.
Speaker 3: And what you're doing.
Speaker 1: Just keep in front of them, categorize your rolodex so
Speaker 1: that you can come back to that over time and
Speaker 1: use that as a powerful way to get smarter or
Speaker 1: quicker around a range of things.
Speaker 2: Really interesting, and our final question, what do you know
Speaker 2: about the world of equity investing today? You wish you
Speaker 2: knew thirty years or so ago? When you were first
Speaker 2: getting started.
Speaker 1: I think the biggest thing that I wish I knew
Speaker 1: was how individual motivations create decisions by executives and boards
Speaker 1: that might not be the most beneficial. I think I
Speaker 1: think when I start in the business, I think I
Speaker 1: understood human emotion about investing, fear and greed, and how
Speaker 1: investors behave. But I think I took what executives told
Speaker 1: me and board members told me at sort of face value,
Speaker 1: like this is right, this is what it is. The
Speaker 1: truth is that they have their own perspective, their own motivations.
Speaker 1: They might be trying to deceive you. As we moved
Speaker 1: on in time, we've come to ask different types of
Speaker 1: questions of executives. I'll do my own research on the business.
Speaker 1: I'm not going to rely on you to tell me
Speaker 1: what the company is going to do next year. I
Speaker 1: want to know how you think. I want to know
Speaker 1: how you allocate capital.
Speaker 3: I want to know what you're going to do.
Speaker 1: I want to make sure that you're a person that
Speaker 1: I can trust to make the right decisions. I'll do
Speaker 1: my research on the company, and I think I did
Speaker 1: quite appreciate that executives don't know what's going to happen
Speaker 1: next year, the world changes, there are things that they
Speaker 1: can be blind to. They could have their own poor
Speaker 1: motivations that may be getting the stock up in the
Speaker 1: short run, but not good for the business. And I
Speaker 1: think that that whole area around understanding humans and why
Speaker 1: they tell you things and being skeptical is probably something
Speaker 1: I wish I knew thirty years ago.
Speaker 2: Really fascinating stuff. Ricky, thank you for being so generous
Speaker 2: with your time. We have been speaking with Ricky Sandler,
Speaker 2: CIO and CEO of Eminence Capital. If you enjoy this conversation,
Speaker 2: well check out any of the previous five hundred or
Speaker 2: so we've done over the past ten years. You can
Speaker 2: find those at iTunes, Spotify, YouTube, wherever you find your
Speaker 2: favorite podcast, and be sure and check out my new
Speaker 2: podcast At the Money, short ten minute conversations with experts
Speaker 2: about information that relates directly to your money, earning it,
Speaker 2: spending it, and most importantly investing it at the Money,
Speaker 2: wherever you find your favorite podcasts, or in the Master's
Speaker 2: in Business podcast feed. I would be remiss if I
Speaker 2: did not thank the track team that helps us put
Speaker 2: these conversations together. John Wasserman is my audio engineer. Attika
Speaker 2: of Valbron is my project manager. Anna Luke is my producer.
Speaker 2: Sage Bauman is the head of podcasts at Bloomberg. Shan
Speaker 2: Russo is my researcher. I'm Barry Rittolts. You've been listening
Speaker 2: to Masters in Business on Bloomberg Radio.