WEBVTT - From GameStop to Meme Stocks with Ricky Sandler 0:00:02.360 --> 0:00:06.720 Bloomberg Audio Studios, Podcasts, radio news. 0:00:09.520 --> 0:00:13.480 This is Master's in Business with Barry red Holts on 0:00:13.720 --> 0:00:17.920 Bloomberg Radio. Strap yourselves in for another good one. This week. 0:00:18.000 --> 0:00:21.560 I have Ricky Sandler. He is the CEO and CIO 0:00:21.680 --> 0:00:25.079 of Eminence Capital. They're a hedge fund that's been around 0:00:25.079 --> 0:00:28.319 for twenty five years, running over seven billion dollars in 0:00:28.440 --> 0:00:32.720 both a long short format. Not a lot of successful 0:00:33.040 --> 0:00:36.800 long short hedge fund managers around. Sandler is one of 0:00:36.840 --> 0:00:40.000 those rare birds who not only is a bottoms up 0:00:40.360 --> 0:00:43.720 fundamental stock picker on the long side, but they also 0:00:43.800 --> 0:00:48.080 have a very specific methodology for hedging the downside by 0:00:48.360 --> 0:00:52.919 shorting individual names. They have a tremendous track record over 0:00:52.960 --> 0:00:56.720 the past twenty five years. This is a masterclass in 0:00:56.840 --> 0:01:01.680 how to think about allocating a capital, managing risk, and 0:01:01.720 --> 0:01:08.480 looking at how changing market structure has affected investors. Whereas 0:01:08.640 --> 0:01:14.320 David Einhorn talked about the passive side changing things, Sandler 0:01:14.360 --> 0:01:17.840 talks about how the active side has changed and it's 0:01:18.040 --> 0:01:21.280 very different than what it was like thirty years ago 0:01:21.400 --> 0:01:27.680 when fundamental investors dominated the active alongside. According to Sandler, 0:01:27.720 --> 0:01:30.600 that's no longer the case. I found this conversation to 0:01:30.640 --> 0:01:33.680 be fascinating, and I think you will also with no 0:01:33.800 --> 0:01:38.119 further ado, my discussion with Eminence Capitals Ricky Sandler. 0:01:38.040 --> 0:01:39.440 Thank you Berry. Great to be here. 0:01:39.480 --> 0:01:42.520 I've been looking forward to having this conversation. You have 0:01:42.560 --> 0:01:46.640 such a fascinating background. Let's start with college BBA in 0:01:46.680 --> 0:01:51.440 Accounting and Finance from University of Wisconsin. What was investing 0:01:51.560 --> 0:01:52.320 always the plan? 0:01:53.320 --> 0:01:54.840 No, investing wasn't always the plan. 0:01:54.920 --> 0:01:57.960 Although I have a family background that investing, and I've 0:01:57.960 --> 0:01:59.840 been around investing my whole life, I kind of thought 0:01:59.840 --> 0:02:01.280 I was going to go in a different direction. I 0:02:01.320 --> 0:02:03.760 was applying to law school at the end of college. 0:02:03.800 --> 0:02:07.800 I thought I would be more as a business operator builder. 0:02:08.040 --> 0:02:11.440 And then when I graduated, I decided to put these 0:02:11.480 --> 0:02:14.520 law school applications or these law schoo acceptances on hold 0:02:14.560 --> 0:02:17.239 and worked for a few years. I came into the 0:02:17.280 --> 0:02:19.920 investment business out of college and loved it from the 0:02:19.960 --> 0:02:21.360 first minute and never looked back. 0:02:21.520 --> 0:02:24.600 Well, you probably made the right choice. I enjoyed law school, 0:02:24.639 --> 0:02:27.000 but three years is way too long. They should really 0:02:27.440 --> 0:02:29.240 tighten that up to two years and get you out 0:02:29.240 --> 0:02:29.799 in the real world. 0:02:29.880 --> 0:02:30.079 YEP. 0:02:30.720 --> 0:02:34.800 So your first gig out of Wisconsin is an analyst 0:02:34.800 --> 0:02:39.120 at Mark Asset Management. Were you analyzing stocks or running 0:02:39.120 --> 0:02:39.920 a portfolio? Then? 0:02:39.960 --> 0:02:43.480 No analyzing stocks. I was a young young kid, good 0:02:43.520 --> 0:02:47.240 with math, you know, good with understanding businesses, but really 0:02:47.320 --> 0:02:50.040 learned the ropes at Mark Asset Management. You know, Morris 0:02:50.120 --> 0:02:53.320 Mark was a great mentor, and that was an incredible 0:02:53.360 --> 0:02:56.600 experience to be kind of very close to the portfolio. 0:02:56.680 --> 0:02:58.919 It was a small firm, but we had a lot 0:02:58.919 --> 0:03:01.680 of access and so from a very young age, I 0:03:01.760 --> 0:03:05.120 was put in front of CEOs and CFOs of some 0:03:05.160 --> 0:03:08.320 of the most important companies and it was just an 0:03:08.360 --> 0:03:11.240 incredible platform and incredible experience to learn from. 0:03:11.280 --> 0:03:14.200 And then your next stop is you co found and 0:03:14.280 --> 0:03:17.239 co general partner Fusion Capital Management. Tell us a little 0:03:17.240 --> 0:03:18.040 bit about that shop. 0:03:18.240 --> 0:03:18.560 Yeah. 0:03:18.600 --> 0:03:21.560 So when I went to go work for Marris Mark, 0:03:22.040 --> 0:03:25.920 I took the job of Wayne Cooperman, who was Lee 0:03:26.000 --> 0:03:29.320 Cooperman's son. He then came back two years after business school, 0:03:29.360 --> 0:03:32.040 came back to work at Marris Mark's Mark Asset Management. 0:03:32.280 --> 0:03:34.359 We worked together for a couple of years and then 0:03:34.720 --> 0:03:37.400 at the young ages of twenty six and twenty nine, 0:03:37.920 --> 0:03:40.280 we decided to leave and start our own thing together. 0:03:40.920 --> 0:03:44.640 I think that we were both kind of young, smart analysts, 0:03:44.760 --> 0:03:47.720 probably a bit naive, and felt like. 0:03:47.680 --> 0:03:48.800 We could give it a go. 0:03:48.880 --> 0:03:51.320 The HEDGPHNT industry was still a cottage industry back in 0:03:51.760 --> 0:03:55.000 this was nineteen ninety four. We launched Fusion in nineteen 0:03:55.040 --> 0:03:58.160 ninety five, and both of us had kind of roots 0:03:58.160 --> 0:04:00.320 and history. Our fathers had worked together the other at 0:04:00.320 --> 0:04:02.680 Goldman Sachs. They knew each other, and so we had 0:04:02.720 --> 0:04:04.360 sort of family backgrounds. I would say we had a 0:04:04.360 --> 0:04:07.440 good story. We were the sons of two successful money managers. 0:04:07.760 --> 0:04:10.680 We got on some radar screens and when we did well, 0:04:11.040 --> 0:04:13.440 money sort of came to us. And so that was 0:04:14.200 --> 0:04:17.920 kind of very formative years of managing our own portfolio. 0:04:18.320 --> 0:04:21.320 And you know, Fusion Capital Management was, you know, in 0:04:21.400 --> 0:04:23.880 some ways quite similar to what we do in Eminence. 0:04:23.920 --> 0:04:26.400 On the long side, obviously we've evolved quite a bit 0:04:26.400 --> 0:04:28.400 over the last thirty years, but we were bottoms up 0:04:28.440 --> 0:04:31.520 stock pickers looking for what I would call good businesses 0:04:31.760 --> 0:04:34.800 and stocks that were value and I think, you know, 0:04:35.040 --> 0:04:38.600 we were I would say shorting as a little bit 0:04:38.640 --> 0:04:40.560 of a byproduct of what we did. That was something 0:04:40.640 --> 0:04:42.920 that changed later in Eminence, but we had a good 0:04:42.960 --> 0:04:45.440 four year run together and then at the end of 0:04:45.960 --> 0:04:48.600 nineteen ninety eight we split up and I kind of 0:04:48.680 --> 0:04:50.200 launched Eminence right out of Fusion. 0:04:50.600 --> 0:04:53.919 So what was it like raising money. You're a relatively 0:04:54.000 --> 0:04:57.200 young person. It's not like you have decades of experience. 0:04:57.800 --> 0:05:01.200 I recall the nineties as just a wild period. Did 0:05:01.279 --> 0:05:04.880 you find yourself being challenged raising capital or given the 0:05:04.920 --> 0:05:08.080 success of Fusion, it wasn't that big a lift. 0:05:08.040 --> 0:05:10.240 So I would say to start out, it was the 0:05:10.360 --> 0:05:13.400 MCI friends and family plan when we launched, but I 0:05:13.440 --> 0:05:17.799 think because we had the family backgrounds, and as I mentioned, 0:05:17.800 --> 0:05:20.200 we were on some radar screen. So as we started 0:05:20.240 --> 0:05:22.440 to do well, as we put up a good first 0:05:22.520 --> 0:05:24.880 year in a good second year, money was there. 0:05:24.920 --> 0:05:27.240 There was. There was a whole industry of people. 0:05:26.960 --> 0:05:29.880 Looking to invest in young hedge funds, believing that that 0:05:29.920 --> 0:05:32.279 when firms were young, they would they did their best. 0:05:32.400 --> 0:05:36.120 So a lot of emerging manager merging matter exactly. 0:05:36.680 --> 0:05:37.240 Thank you for that. 0:05:37.640 --> 0:05:41.400 So we grew from what was twenty six or seven 0:05:41.440 --> 0:05:43.520 million when we started to about three hundred and fifty 0:05:43.520 --> 0:05:45.680 million over the four years, and I would say it 0:05:45.800 --> 0:05:49.680 was for us fortunately, because of our backgrounds and the 0:05:49.680 --> 0:05:52.640 success we had. It was not particularly challenging, and I 0:05:52.720 --> 0:05:53.680 was very fortunate. 0:05:53.400 --> 0:05:53.880 In that regards. 0:05:53.920 --> 0:05:57.160 So raising capital is easy. Let's talk about deploying capital. 0:05:57.680 --> 0:06:01.279 You know, Greenspan famously gives the rational zuberance speech in 0:06:01.440 --> 0:06:05.600 ninety six. Markets laughed off and continue to trend higher. 0:06:06.200 --> 0:06:09.440 We have the ti Bot crisis, the Asian contagion and 0:06:09.960 --> 0:06:12.240 was at ninety seven, and then long Term Capital Management 0:06:12.320 --> 0:06:15.880 ninety eight. You launch in ninety nine. What were you 0:06:16.040 --> 0:06:21.359 thinking about with regards to that investing environment. You have 0:06:21.640 --> 0:06:25.920 robust trend but stretched valuations and a lot of companies 0:06:25.960 --> 0:06:30.720 with wisps of business models and very ephemeral revenue. 0:06:31.080 --> 0:06:31.560 Yeah. 0:06:31.760 --> 0:06:35.320 So when we launched Fusion at ninety five and went 0:06:35.360 --> 0:06:38.040 through those periods, in the end of ninety eight, I 0:06:38.120 --> 0:06:40.480 launched Eminence, and you're right, this was right on the 0:06:40.480 --> 0:06:43.479 back of the long Term Capital Management kind of crisis. 0:06:43.720 --> 0:06:47.880 I think that the experience over those four years, and 0:06:47.920 --> 0:06:51.200 particularly the ninety eight crisis, convinced me that I needed 0:06:51.240 --> 0:06:54.479 to develop a real expertise in shorting. That going through 0:06:54.480 --> 0:06:57.440 a market like nineteen ninety eight with I would call 0:06:57.480 --> 0:07:02.240 it light hedges and shorting the more expensive bigger cousin 0:07:02.360 --> 0:07:06.799 to your small company was not effective hedging and strategy. 0:07:06.960 --> 0:07:09.640 And one of the things that I felt in ninety 0:07:09.640 --> 0:07:13.000 eight was the inability to lean into a dislocated market 0:07:13.040 --> 0:07:15.920 because we weren't protecting capital well enough. And this led 0:07:16.000 --> 0:07:19.200 to a lot of what has been the hallmarks of eminence, 0:07:19.200 --> 0:07:22.760 which is single stock shorting has been critical pillar of 0:07:22.800 --> 0:07:25.680 what we've done for the last twenty five years, and 0:07:25.760 --> 0:07:29.080 for both the skepticism that it brings to the longside 0:07:29.080 --> 0:07:32.360 of investing and for the ability to protect capital, or 0:07:32.640 --> 0:07:36.280 do a reasonable job protecting capital in dislocations, which allows 0:07:36.320 --> 0:07:38.280 you to be offensive. One of the things I've seen 0:07:38.320 --> 0:07:42.480 throughout my entire career is that being offensive when there's dislocation, 0:07:42.880 --> 0:07:45.440 you are planting the greatest seeds possible. 0:07:45.000 --> 0:07:45.480 At that time. 0:07:45.520 --> 0:07:48.679 Everybody else is kind of emotional throwing things out looking 0:07:48.680 --> 0:07:51.160 short term, and you get a lot of great opportunities. 0:07:51.240 --> 0:07:53.400 But you can only do that if you. 0:07:53.360 --> 0:07:56.720 Have a portfolio that has protected some capital that you 0:07:56.760 --> 0:08:00.000 can kind of lean into. So I'm going through those 0:08:00.040 --> 0:08:04.200 early crises were kind of formative in our ability and 0:08:04.320 --> 0:08:08.560 my both abiliting desire to build a true long short 0:08:08.800 --> 0:08:11.760 hedge fund. That that single stock shorting was was kind 0:08:11.800 --> 0:08:13.280 of at the core of what we do. 0:08:13.320 --> 0:08:17.320 So a risk managed hedge when things are pricing and 0:08:17.400 --> 0:08:20.920 things seem to be dislocated from reality to give you 0:08:20.960 --> 0:08:24.040 some downside protection. But the flip side of that is 0:08:24.640 --> 0:08:28.680 opportunistic aggressiveness when everybody hates the market and things are 0:08:28.720 --> 0:08:29.280 selling off. 0:08:29.320 --> 0:08:31.080 Is that is that a good I think? I think 0:08:31.080 --> 0:08:32.880 that's good. And then and then even when things are 0:08:32.880 --> 0:08:35.320 going well, if you can do a good job with 0:08:35.400 --> 0:08:38.120 long short spread, you know that that shorting isn't going 0:08:38.200 --> 0:08:40.120 to hurt you nearly as much. It allows you to 0:08:40.120 --> 0:08:43.360 be levered to your lungs. So we've always run with 0:08:43.400 --> 0:08:45.920 a portfolio where our long side is typically over one 0:08:45.960 --> 0:08:48.440 hundred percent gross long. We bring that down with the 0:08:48.480 --> 0:08:51.320 short side, so you get extra leverage too long, and 0:08:51.320 --> 0:08:54.880 you could still outperform the market over the long term 0:08:55.160 --> 0:08:58.120 even while only having let's say forty percent net exposure 0:08:58.160 --> 0:09:00.920 to the market, because you can generate long short spread 0:09:01.360 --> 0:09:03.520 and you can be levered too long. So a combination 0:09:03.600 --> 0:09:07.200 of a model that allows you to do solidly when 0:09:07.240 --> 0:09:10.000 markets were good and outperform them over time, maybe not 0:09:10.080 --> 0:09:11.880 in the very very short run. If markets are going 0:09:11.920 --> 0:09:13.760 to be up twenty percent in a given year, but 0:09:14.000 --> 0:09:16.320 if the market's going to be up ten over the 0:09:16.320 --> 0:09:19.080 long term, we could outrun that but also be able 0:09:19.120 --> 0:09:21.000 to protect capital, So you can be offensive, and that 0:09:21.120 --> 0:09:23.040 was part of the way you can outperform ULL. 0:09:23.440 --> 0:09:26.320 We'll talk a little later about the specific strategies, but 0:09:26.520 --> 0:09:31.520 the three main ones are long only, long short, and 0:09:31.600 --> 0:09:35.480 then one fifty by fifty alpha extension. So it sounds 0:09:35.559 --> 0:09:39.640 like long only is obvious, Long short seems like you're 0:09:39.840 --> 0:09:44.559 somewhat hedged, but one fifty by fifty that that seems 0:09:44.600 --> 0:09:47.160 like that's on steroids. That's the most aggressive portfolio. 0:09:47.320 --> 0:09:49.280 Yes, so I think I think that will be our 0:09:49.679 --> 0:09:53.319 highest absolute return portfolio over time. You know, the roots 0:09:53.320 --> 0:09:56.000 of us are the long short hedge fund. I would 0:09:56.000 --> 0:10:01.079 call that healthy gross moderate net exposure type portfolio. Call 0:10:01.160 --> 0:10:04.680 it one thirty x eighty five kind of forty five 0:10:04.800 --> 0:10:08.480 net two hundred and twenty five two hundred and twenty gross. 0:10:08.960 --> 0:10:13.240 Use stock picking to generate good absolute returns but reduce 0:10:13.320 --> 0:10:16.960 systematic risk through shorting, and that has variable net too. 0:10:17.040 --> 0:10:19.079 So there have been times where we've been ten or 0:10:19.120 --> 0:10:21.520 twenty percent net, and there have been times like post 0:10:21.600 --> 0:10:23.480 COVID where we went to one hundred percent net. Long, 0:10:23.800 --> 0:10:26.719 so we have flexibility, and then most of the time 0:10:26.760 --> 0:10:28.200 we tend to run it pretty much in the middle 0:10:28.200 --> 0:10:31.040 of the fairway. With those exposures, one fifty x fifty 0:10:31.320 --> 0:10:34.400 is more of a long replacement. It is for the 0:10:34.480 --> 0:10:38.000 investor who's already chosen to be along. The market is 0:10:38.040 --> 0:10:41.800 always one hundred percent net long and fifty right right. 0:10:42.120 --> 0:10:45.679 But now we have two opportunities to generate alpha for investors. 0:10:45.800 --> 0:10:48.560 There's the alpha on our lungs what we would do 0:10:48.600 --> 0:10:50.800 if we had one hundred percent long portfolio, and then 0:10:50.880 --> 0:10:53.920 you add a fifty by fifty almost neutral sleeve on 0:10:53.960 --> 0:10:54.440 top of that. 0:10:54.559 --> 0:10:55.960 So we can generate. 0:10:55.720 --> 0:10:57.840 Value from our long short spread because we have an 0:10:57.880 --> 0:10:59.840 extra fifty points on either side. 0:11:00.040 --> 0:11:00.800 And that's a product. 0:11:01.040 --> 0:11:05.600 As allocators have increasingly bifurcated their portfolios, they want full 0:11:05.679 --> 0:11:08.640 risk on one side and they want uncorrelated on the other. 0:11:08.880 --> 0:11:10.760 They don't want this thing as much in the middle 0:11:10.800 --> 0:11:13.439 that long short equity had been. We launched a long 0:11:13.480 --> 0:11:15.920 fun twelve years ago, alpha extension a little over a 0:11:16.000 --> 0:11:19.360 year ago, realizing that as a business, we need to 0:11:19.640 --> 0:11:23.160 give allocators a product that fits what they need. We 0:11:23.240 --> 0:11:25.960 can pick stocks and our long short hedgephone has done 0:11:25.960 --> 0:11:28.720 great over twenty five years, but it's framework. 0:11:28.800 --> 0:11:30.439 Its fees structure is something. 0:11:30.160 --> 0:11:33.640 That that allocators have increasingly said, I want something different, 0:11:33.920 --> 0:11:36.760 and so one fifty fifty it's always one hundred percent 0:11:36.760 --> 0:11:38.560 that long, and we have a fee structure where you 0:11:38.600 --> 0:11:39.440 only pay for alpha. 0:11:39.720 --> 0:11:41.080 So the fea structure. 0:11:40.640 --> 0:11:42.760 There is to define that because some people have called 0:11:42.760 --> 0:11:47.480 those pivot fees or non beta fees. So you're charging 0:11:47.559 --> 0:11:50.360 a fee over and above whatever the S and P 0:11:50.520 --> 0:11:53.040 five hundred generates. Is that the thought process, that's. 0:11:52.880 --> 0:11:53.600 The thought process. 0:11:53.640 --> 0:11:56.480 So we picked the MSCI world, which is half of 0:11:56.520 --> 0:11:58.600 it's the S and P five hundred anyway, because we 0:11:58.640 --> 0:12:01.880 do global but we charge a fifty basis point fixed 0:12:01.880 --> 0:12:05.080 fee and then thirty percent of the alpha. So if 0:12:05.080 --> 0:12:07.280 we don't beat the market, you pay us a pretty 0:12:07.280 --> 0:12:10.040 low fee fifty basis points. If we crush the market, 0:12:10.160 --> 0:12:11.880 you pay us what we're worth. It's a fair sharing 0:12:11.880 --> 0:12:14.560 of fees and a good alignment. And so there's a 0:12:14.640 --> 0:12:17.640 huge pool of capital that already wants to be long 0:12:17.679 --> 0:12:20.160 the market. Right This seventy to thirty model like a 0:12:20.200 --> 0:12:22.400 lot of full risk, and so people in that full 0:12:22.480 --> 0:12:25.800 risk want passive index they want lung only, they want 0:12:25.800 --> 0:12:28.600 private equity, they want venture. So we're playing into that world. 0:12:28.600 --> 0:12:31.000 But we can generate very significant alpha both through the 0:12:31.080 --> 0:12:33.080 long stock picking and our long short spread. 0:12:33.160 --> 0:12:36.440 So I love the business idea of that. Hey, if 0:12:36.520 --> 0:12:40.000 I don't generate anything over my benchmark, you're paying me 0:12:40.679 --> 0:12:44.720 what's essentially a mid price mutual fund fee. But we 0:12:44.800 --> 0:12:48.160 have the potential, as you've demonstrated over the years, to 0:12:48.679 --> 0:12:51.240 hit the ball out of the park, and when that happens, 0:12:51.600 --> 0:12:55.080 you're going to pay up. I'm surprised more funds don't 0:12:55.240 --> 0:12:58.400 play in that space from a business perspective. Why do 0:12:58.480 --> 0:13:02.560 you think there's so reluctance to adopt I mean, obviously 0:13:02.640 --> 0:13:05.480 you are eating your own cooking. You're like, hey, we 0:13:05.559 --> 0:13:07.880 do well when you do well. Why have it more 0:13:07.880 --> 0:13:11.560 funds embraced what sounds like something that's fair for both 0:13:11.800 --> 0:13:14.000 for both the allocator and the fund manager. 0:13:14.559 --> 0:13:16.480 It's a great question. You know, I think we have 0:13:16.600 --> 0:13:20.079 been you know, the world and markets have evolved over 0:13:20.120 --> 0:13:22.320 my thirty years in the business, and we've had to 0:13:22.360 --> 0:13:24.959 evolve in two ways. We've had to evolve the business. 0:13:25.280 --> 0:13:28.280 So to this point, I think as as allocators have 0:13:28.360 --> 0:13:32.040 changed we've said, hey, we're going to disrupt ourselves. Yeah, 0:13:32.320 --> 0:13:34.160 one and a half and twenty. Our fees are one 0:13:34.160 --> 0:13:35.240 and a quarter and twenty, but one and a half 0:13:35.240 --> 0:13:38.880 and twenty absolute fees. That's great, it's really lucrative. But 0:13:39.960 --> 0:13:42.840 if you can't get it or Allocatus wants something, you know, 0:13:43.040 --> 0:13:45.200 we could either be a smaller version of ourselves when 0:13:45.240 --> 0:13:46.760 a lot of the peers that I started in the 0:13:46.760 --> 0:13:50.640 business with are no longer managing money. I feel like 0:13:50.840 --> 0:13:52.679 I love this business. I want to do the right 0:13:52.720 --> 0:13:55.480 thing for my employees, for my investors, and keeping a 0:13:55.520 --> 0:13:58.040 strong and stable business is important, even if it's you know, 0:13:58.320 --> 0:14:01.440 less lucrative, and so were a bit disrupting ourselves, but 0:14:01.480 --> 0:14:03.720 you're moving to where the market is and keeping a 0:14:03.720 --> 0:14:06.600 business strong. So I think some of my peers maybe 0:14:06.960 --> 0:14:09.480 have felt like, I don't want to give investors something 0:14:09.520 --> 0:14:12.959 else that is lower fees than this lucrative business I have. 0:14:13.440 --> 0:14:16.000 And I think also in order to really do one 0:14:16.040 --> 0:14:18.760 fifty to fifty well, you need to have a scale 0:14:18.800 --> 0:14:19.760 shorting infrastructure. 0:14:19.800 --> 0:14:20.720 Shorting is hard. 0:14:21.040 --> 0:14:23.640 This is something we have stayed committed to in the 0:14:23.800 --> 0:14:26.320 decade after the GFC as we went into this ZERP 0:14:26.440 --> 0:14:31.320 environment shorting got hard stocks kept going straight up. Valuations expanded, 0:14:31.400 --> 0:14:35.160 valuations stopped mattering when rates were really low. Then we 0:14:35.280 --> 0:14:37.840 go into the memestock craze in twenty twenty one. You're 0:14:37.840 --> 0:14:40.400 telling me, not only does valuation not matter, but fundamentals 0:14:40.440 --> 0:14:42.720 don't matter either. In order to do this well, you 0:14:42.800 --> 0:14:44.880 need to believe that shorting adds value and you need 0:14:44.920 --> 0:14:45.800 to be committed to it. 0:14:46.040 --> 0:14:48.840 You're addressing exactly where I was going to go next, 0:14:48.880 --> 0:14:53.520 which was the general consensus about why short sellers have 0:14:53.640 --> 0:14:57.520 become an endangered species. Has not been the business model 0:14:57.600 --> 0:15:01.720 it's been. Hey, shorting has become too There's just too 0:15:01.800 --> 0:15:05.880 much capital, especially when you have zero interest rate and QE. 0:15:06.880 --> 0:15:10.040 You know, there was no alternative to equity. Fixed income 0:15:10.200 --> 0:15:13.200 was not desirable. Wait, I got nothing but downside and 0:15:13.200 --> 0:15:15.440 no yield. Of course I'm going to roll into equities. 0:15:16.000 --> 0:15:20.200 I'm going to assume that the pandemic and the shift 0:15:20.600 --> 0:15:24.320 from a monetary regime in the twenty tens to a 0:15:24.360 --> 0:15:27.960 fiscal regime in the twenty twenties change that. Are we 0:15:28.160 --> 0:15:30.880 possibly seeing a resurgence of short selling. 0:15:31.160 --> 0:15:33.920 I believe the opportunity set is great. I'm not sure 0:15:34.200 --> 0:15:37.480 that everybody's gotten back into the single name shorten, the 0:15:37.520 --> 0:15:41.520 memestock craze, the retail led rallies, the shortcovering rallies. The 0:15:41.600 --> 0:15:44.520 new market structure still makes it not easy. You need 0:15:44.560 --> 0:15:48.960 a really thoughtful portfolio construction, really thoughtful portfolio execution. It's 0:15:49.000 --> 0:15:53.360 not just about the ideas. Volatility works against the short side, 0:15:53.520 --> 0:15:56.600 it helps the alongside. If a stock goes down and 0:15:56.640 --> 0:15:59.320 you're long it, you have a small position and more upside. 0:15:59.400 --> 0:16:01.560 It's easy to and the opportunity to buy in at 0:16:01.560 --> 0:16:02.240 a lower price. 0:16:02.280 --> 0:16:04.520 And if the stock goes up, you have less upside 0:16:04.520 --> 0:16:07.480 and a bigger position. It's easy to sell. The opposite 0:16:07.480 --> 0:16:10.120 happens on the short side, and so things get bigger 0:16:10.240 --> 0:16:13.280 automatically when they go against you, and risk constraints come in. 0:16:13.280 --> 0:16:15.720 So you're going to be really thoughtful about portfolio construction. 0:16:15.840 --> 0:16:18.760 So it's not easy. We have one hundred and ten 0:16:18.800 --> 0:16:22.040 short positions. You need a scaled infrastructure to have one 0:16:22.120 --> 0:16:25.280 hundred and ten alpha generating short positions. That's hard for 0:16:25.320 --> 0:16:26.960 people to do, so I think that's one of the 0:16:27.000 --> 0:16:29.760 reasons that we haven't seen quite the resurgence. But to 0:16:29.800 --> 0:16:32.560 your point, higher interest rates help in a lot of 0:16:32.560 --> 0:16:34.640 ways on the short side. So first of all, we 0:16:34.680 --> 0:16:37.440 are now discounting the future at some rate. So no 0:16:37.520 --> 0:16:39.280 longer can you tell me this company is going to 0:16:39.320 --> 0:16:41.920 do fifty billion and ten years and you could discount 0:16:41.960 --> 0:16:45.440 that at zero as if fifty billions coming tomorrow. Secondly, 0:16:45.680 --> 0:16:48.520 the higher cost of capital for businesses to actually operate 0:16:48.800 --> 0:16:52.080 make industries more rational, So no longer do we see 0:16:52.280 --> 0:16:57.640 profitless companies just destroying businesses. So it adds more rationality 0:16:57.680 --> 0:17:00.840 to the economic factors that affect busines. So that's good 0:17:00.960 --> 0:17:04.359 for fundamental investors. So now we have valuation is going 0:17:04.400 --> 0:17:07.000 to matter and fundamentals will start to come into play. 0:17:07.040 --> 0:17:09.560 And then lastly, we're now also getting short credit rebate. 0:17:09.720 --> 0:17:12.399 You know, we're getting five percent on our shorts, so 0:17:12.920 --> 0:17:15.920 you're getting paid to wait. So I think higher regist 0:17:15.960 --> 0:17:19.040 rates are good for shorting on several levels. It's not 0:17:19.160 --> 0:17:21.240 clear to me that people have come back to it 0:17:21.280 --> 0:17:23.720 with the same vigor. We still feel like a number 0:17:23.720 --> 0:17:28.120 of peers and others short indices, baskets and single name 0:17:28.160 --> 0:17:30.840 shorting scaled infrastructure. It's hard business. 0:17:31.040 --> 0:17:33.919 So let's talk a little bit about eminence. You've been 0:17:33.920 --> 0:17:37.520 around for twenty five years you've been doing bottom up 0:17:37.720 --> 0:17:41.920 stock picking, both on the longside and the short side. 0:17:42.200 --> 0:17:44.720 Tell us a little bit about your process. What is 0:17:44.760 --> 0:17:46.119 your bottom up research like? 0:17:46.560 --> 0:17:49.040 You know, I would say over the twenty five years 0:17:49.080 --> 0:17:52.200 we've been in business, we have had to you know, markets, 0:17:52.240 --> 0:17:55.320 the world business has changed a lot. I talked a 0:17:55.359 --> 0:17:59.080 little bit about how we've pivoted our business to what 0:17:59.480 --> 0:18:03.320 allocated have wanted, but we've also had to adapt our 0:18:03.520 --> 0:18:05.920 process and our approach as markets have changed over the 0:18:06.000 --> 0:18:08.800 last twenty five years. In general, we are still doing 0:18:08.920 --> 0:18:10.960 exactly the same thing we did, which is trying to 0:18:10.960 --> 0:18:14.000 buy good businesses and stocks that are cheap. And those 0:18:14.040 --> 0:18:17.679 two concepts are very important because I think we get 0:18:17.800 --> 0:18:19.960 the opportunity to make money in two ways. 0:18:20.119 --> 0:18:20.760 When we do this. 0:18:21.040 --> 0:18:23.720 We get the opportunity for the business to compound in 0:18:23.840 --> 0:18:26.480 value at above average rates, so time is our friend. 0:18:26.720 --> 0:18:30.400 And then we have some undervaluation, some discounts, something that's 0:18:30.400 --> 0:18:32.760 misperceived about it, and we get an opportunity for rerating. 0:18:33.200 --> 0:18:37.439 And over our history, our success has been typically owning 0:18:37.480 --> 0:18:40.840 things for two to three years, where we get a 0:18:40.840 --> 0:18:44.080 couple of years of value creation growth a rerating we 0:18:44.119 --> 0:18:46.120 make fifty or one hundred percent and then we turn 0:18:46.160 --> 0:18:49.240 our capital to what I call the next mispriced durable business. 0:18:49.760 --> 0:18:52.600 And I think that repeatable process is something we've always 0:18:52.680 --> 0:18:56.960 done now that has adapted and evolved as markets have changed, 0:18:56.960 --> 0:18:58.720 and we can get into the market structure changes to 0:18:59.359 --> 0:19:03.360 which I think are the most consequential theme I could 0:19:03.400 --> 0:19:06.640 talk about is how different markets are today. The price 0:19:06.680 --> 0:19:09.960 setters in markets vastly, vastly different than they've ever been 0:19:10.640 --> 0:19:12.840 and very important for fundamental investors down. 0:19:13.119 --> 0:19:15.399 So let's go there. I had David Einhorn on a 0:19:15.400 --> 0:19:19.400 couple of months ago, and he famously said markets are broken. 0:19:19.880 --> 0:19:24.080 He blamed indexers like black Rock and Vanguard for saying 0:19:24.200 --> 0:19:29.160 people aren't exercising any intelligence. They're just blindly buying indexes 0:19:29.200 --> 0:19:32.560 and putting them away for decades, and that made value 0:19:32.600 --> 0:19:39.080 investing more challenging and it deeply affected the measure of equities, 0:19:39.680 --> 0:19:43.720 although arguably you could say would not create more dislocations 0:19:43.760 --> 0:19:46.639 and more opportunities. But where do you see the change 0:19:46.640 --> 0:19:50.040 in markets? And is broken a bridge too far? Or 0:19:50.400 --> 0:19:51.440 are markets broken? 0:19:51.800 --> 0:19:52.000 Yeah? 0:19:52.000 --> 0:19:54.280 I don't think they're broken. I think they're quite different, 0:19:55.080 --> 0:19:56.960 and I think in the mid to long term they 0:19:57.040 --> 0:20:00.920 still work. I love David, he's brilliant, he's friend and 0:20:01.000 --> 0:20:04.160 a great investor. But you know, our view is that 0:20:04.400 --> 0:20:07.520 markets are very different and the people setting prices over 0:20:07.800 --> 0:20:10.359 the short run are very different than they were. You know, 0:20:10.440 --> 0:20:15.160 fifteen years ago, the marginal price setter was a bottoms 0:20:15.200 --> 0:20:18.880 up investor. So markets fifteen years ago were twenty five 0:20:18.920 --> 0:20:21.840