Dan Loeb: The Lost Art of Short Selling, and Why Stock Picking is Back
00:00:00Legendary activist investor Dan Loebwho of course is the [music] CEO and CIOof Third Point.>> The lost art of short-selling has comeback and it's absolutely critical.>> [music]>> It doesn't matter what you do, you haveto be really selective. People talkabout stock pickers market, this is abond and credit pickers market. When wewere small, [music]our main tool was a shame and humor.>> Dan Loeb turning up the heat on Nestleover [music] the weekend.>> The shift has really been more towards adare to be great message. [music]Activism without proxy contest is likeCatholicism without hell.>> You're [music] very active on theTwitter as well.>> Oh, well.>> You found your voice.>> A lot a lot of emotion brewing there.>> Can we actually start with that? BeforeTwitteryou were actually quite active, but theywere in very different places. I mean,you were in Wall Street Bets before WallStreet Bets existed. Can you just walkus through your evolution as a as a uhpublic persona?>> Sure. I mean, there was thisbrand new technologyuh that came out called the internet.And really shortly that thereafteruhlong before Reddit or any of these otherthings, there were a series of of chatboards. There was, you know, Yahoo,there was something called SiliconInvestor
00:01:15um the a few other ones and people wouldcongregate and kibitz. It was donemostly anonymously and um it was aninteresting place toexchange ideas. There was it was it wasreally the wild west. People couldpretty much say or do anything, butthere was a lot of there was a lot ofsubstance there, too. It's not actuallythat much different than from today.>> Did you did you engage at all in anytrolling per se?>> Well, some people use the term OG.Sometimes I say I was the OT.Um>> The original troll.>> Yeah, no, I did. I mean, it was it wasfun. You know, I I didn't know I was oneday going to run institutional money andhave a big fund and, you know, I wasjust having fun. And uh and blowing offsteam andandyeah it was fun. I mean investing is funand particularly on the short side. Imean there's so much humor in it whenyoudetect these companies especially in the90s. I mean thatit was really unsupervised. There weresome incredibly fraudulent companies outthere and it was just fun to uncoverthem andkind of taunt the management teams andultimately>> prevail.>> You have one story above others thatkind of stands outin that era?
00:02:31>> I mean there werethere were a bunch. There wasuhWow. Umthere was a company called Actrade thatI remember run by a guy who was like arepeat uh fraudster and [laughter] weun- uncovered it andand umyou know I I know we really got underthis person's skin and ultimately it wasreally just a factoring company tradingatfive, six, I don't remember what it wasat. Some large multiple of book valueand they had created a new technologycalled TADs. I don't remember what TADstood for but they were basicallyrepackagingfactory securities and saying that theyhad some special technology. They werefinancing refrigerators and things likethat.>> Tell usumyour evolution as an investor. When youstarted Third Point, I mean you startedwith very very little capital. Now it'salmost 30 billion of AUM. You'remulti-strat but you learned at JefferiesI think like you learned helping peoplelike David Tepper allocate capital. Justwalk us through how you learned toinvest.>> Well, I I started um really fascinatedby investing and wanting to do it. Ithink
00:03:46when I I remember when I was 10years oldmy dad took me and dad was a notoriouslybad investor himself. So, he didn't giveme any good examples. He's a greatlawyer, not a great investor. But hetook me to meet a broker and I startedinvesting and then in high school in the11th grade, I got a job at the branchoffice of Bear Stearns sorry of PaineWebber working for a guy named AlanCrown who let me post his books and makecold calls and I think we broke certainsecurities laws but I think the statuteof limitations is past. I would tradeoptions on Occidental Petroleum andTeledyne. There was a lot of volatilityandI think I had flurries of making moneyand lost all of it a couple of differenttimes but it was a good good lesson. Icontinued doing it in college and thenummylearning started really formally atWarburg Pincus where I really learned tovalue enterprises as my first job inprivate kind of a process spectrum ofprivate equity and venture capital.I worked at a risk arb firm which wasreally invaluable.Um and then I s-skipping forward, I had a I had way toomany jobs in my 20sbut I got really serious
00:05:01at Jefferies. Ihad a amazing opportunity to work on thedistressed debt desk there. I startedout as a a research analyst and it wasjust like drinking out of a fire hose.There was so much activity.The securities were so cheap coming outof distressed.Andit was you know the 10,000 hours, 10,000reps. We would write up different thingsevery every day. There were big blocksof debt to move and I really got thatthat was my real learning point and youknow I stress this to people that youknow everyone kind of sees mentorship asa sort of hierarchical thing where youyou know learn from some wise olderperson but it'sI I learned a ton from my colleagues,from my own cohort and I learned a tonfrom my customers. You know, like didEric Mindich was aum boy wonder at at Goldman. He was theyoungest partner>> Youngest partner at Goldman.>> Yeah, ran the arb desk there, and he hadthis triumvirate or quadrumvirate,whatever the four four people. UhI don't want to leave them out, butalmost Marrone, uh Dinakar, and umcan't think of some other guys. Anyway,they were great, and they really kind ofbrought me into their thought process,thinking
00:06:16about event-driven investing.And then, you know, I covered some ofthe smartest people in the business,including David Tepper. I got to watchtheir thought process. And I was like ayou know, like a Chinese corporationthat was like copying and reverseengineering and taking everything in andcreating my database of knowledge and myown operating system, kind of taking thebest out of what all these differentpeople did.>> And what was that style when you firststarted Third Point? What did you Whatwas that expression?>> That was Well, I think that you know, wecall it event-driven investing. It wasreallyless [snorts] focused on the quality ofbusiness, more focused on very complextransactions, takeovers, spin-offs, riskrisk or arbitrage, bankruptcies,privatizations, demutualizations. Andthese transactions created unbelievableopportunities for alpha because of theconfluence ofdislocation,opacity,kind of time, but also this goes andnothing changes. You know, I alwaysquote this Jesse Livermore line, there'snothing new under the sun.A real focus on management incentives.So, in all these different kinds oftransactions, management wasincentivized to sandbag
00:07:32their numbersduring a time when there was an excesssupply of securities where their optionswere being set, and we as coinvestorsgot to come in with these depressedprojections and ride along not just theWell, we got toride along a few different things thatwould happen. Greater transparency andunderstanding of the business,coverage,companies thatthat delivered a top line and marginsand ROE and everything else better thanexpectations. So, it was really a goldenera for that type of investing.>> From where that started to what ThirdPoint is today,just describe that and where you want tolike where do you go from here?>> Yeah, so stylistically that eventapproach, it's it'sit's still something we think about.It's in ourumit's in our framework, but I think whathappened really when technology became abiggeruh force, but really everything changedis a greater focus on business qualityandum innovation and disruption and morethematic on the one hand understandingof consumer trends,
00:08:47what's going on infinancial services, what's the economicmacro backdrop that's that's supportingall this. And of course, the bigtopic of this event, you know,AI is sort of the culmination of that,but all thesemajor technological innovations thathave really happened since>> You could make money before by not beingtechnology savvy in the markets.>> You could be technologically illiterateor just say I don't do it. And you couldalso be even more or less ac-You know, up until the GFC, I think youcould be more or less economicallyilliterate and make a lot of money.>> And now?>> Uhuhyou wouldn't want to be either one ofthose things. I mean, given how much howmuch more important>> Like the tech through line needs to beunderstood everywhere.>> Yeah.>> But even if you're like Blue Owl on yourtrade I mean, Blue Owl obviously is verysophisticated in tech now, butany pool of capital that used to not becorrelated is effectively correlated.>> I mean,yes. Yeah, you could say that. And Ijust want to answer your question justto kind of fast-forward and give peoplea snapshot of what we do today.Rob Schwartz is my partner, and we tookKempo Karate together when we were 10years old. He was a purple belt. I thinkI never made it past yellow belt,
00:10:03but umwe reconnected at our 20-year reunion inI'm we're age I'm aging both of us.Sorry to give up your secret, Rob.Uh in 1999.It was our 20-year reunion. And he wasworkingas a sales rep for wireless RFcomponents. And I said, "Wow, this guy'dbe great to do channel checks for us."And then I asked himuma couple years later, "Say, you meetsome smart people. If you ever comeacross a really savvy engineer,we should invest." We didn't know whatwe were doing. We weren't venturecapitalists, but we're getting behindperson There was a guy named DaveFisher. Started a company called RadioCommunications. They made chips He madechips that were I still remember ABGcompatible for Wi-Fi base stations. Andultimately the company was sold to TexasInstruments. And you know, we've I won'tgo deep into our our our venturebusiness, but that we started to dowithin the fund. We've done a couple ofdedicated funds. So, we have that strandof activity. We can talk about a littlebit more about what we're thinking andhow we're seeing this, but I think whatultimately what what you get to is thatall these things are interconnected andcome together under the platform that we
00:11:18have today cuz we have the main hedgefund which does credit, equity longshort. Credit is both structured creditand high yield.We have a CLO business that we acquired.We started aum a private credit business.It doestraditional private credit, directsponsor financing, direct lending, andworkouts, which is very important. So,credit solutions, as they call it. Lotto do there.And then we started an insurance companya few years ago. It's not the firstinsurance company we did. We did a P&Ccompany, but this one is was whollyowned. Now we own half of it. And theinsurance companycaptures basically the investment gradepart of what we do. So, private creditthrough structured vehicles, structuredcredit, whole loans.Uminvestment grade, both private andpublic. But we also can use our surpluscapital in very interesting ways. So>> So, what's the role of the human? What'sthe role of Dan Loeb in running ThirdPoint 10 years from now?Like10 years before Dan Loeb was 100% ofThird Point.>> Uh-huh.>> And then there's now there's
00:12:33agents,there's AI, there's all this learning,there's all of this data.Where do you see the role of the human?Where do you see the role of systemsmaking decisions, allocating capital,managing risk?>> I mean, sofirst of all, investing now like firstof all, my time is spent primarily onmanaging the hedge fund, which for nowis the biggest capital pool and mostimportant business that we're in.>> Yeah.>> The human element, I think this is truefor everyone you have here. Likethe element ofthe social component that the humannetwork of knowing people, being able toto capture opportunities, work withpeople, interact. Like that's nevergoing away. Like you're nevergoing to maybe maybe you can theorizethat there will be agents that willsit at Andreessen Horowitz and whoeverelse your funds.But I think the human will always haveto be there because people like to>> You want to know who's making or losingthe money.>> Yeah, there's a there is a thing that Ithink that itthe agents that they have will neverreally be able to look in your eye andassess all the things that>> You've expanded your philosophy ofinvesting
00:13:48in companies fromcheap cattle cheap securities withcatalysts is I think how you describedit on a podcast recently.Um and now you're very concerned aboutmoats, defensibility, and just thequality or the brittleness as Chamathlikes to remind us of the revenue. Somaybe could you tell us how you evolvedthat core thinking about the quality ofcompanies and then maybe give us someexamples of the companies that now fitthrough that filter where you feel theyhave a moat, you feel they havedurability.>> Yeah, obviously that's everything rightnow. Chamath talks about thetime-bounded value of companies and Ithink that's essential.Umwhat what are the companies that aregoing to be around7 to 10 to 20 like what what what whatare the real moats that exist out there?And it's it's it it it is hardernow. I don't think we canI don't knowthat we can really go out, you know, 10or 20 years ago. By the way, I think wediluted ourselves earlier because Ithink if you ask people about the moataround, you know, IBM or, you know, someof the other companies that>> AOL>> AOL, Yahoo, you know, you say the samething. I mean, look, we're
00:15:03we're we'rewe're investingoutside of tech into uhcompanies that haveuhyou know, somegreat Well, first of all, it also comesback to the management because we can'treally justlook at aproduct or a technology and say, "Oh,this is going to beit forever." So, we really look for amanagement team that we think will beadaptable. And just like you guys weresaying last night, you don't want to beon boards of companies. These are thingsthat they should be doing. So, I thinkthat's a huge part of it. Like findingmanagement teams that you really believein that havehave a proven ability to stay ahead of>> Is that quantifiable or is it still avery much a subjective>> Um sorry, it's [clears throat] what?>> Is it quantifiable assessing themanagement team? Have you built a rubricfor doing that? No, it's still verysubjective, qualitative.>> I I think it's one of those things after30 years there's like a patternrecognition and you>> Let me ask a question on um onscreening. You know, in the I thinkyou've said recently publicly thatthere's a lot of opportunities on theshort side in the market right now forthe first time in a long time.How do you start top down Is that a Isthat a top down
00:16:19or is it anopportunistic you know,something comes across the wire and youguys jump on it in kind of anevent-driven way? Or do you guys havekind of a systematic top-down approachto looking at the market and findingthose opportunities?>> Yeah, there's no one approach to it. Ithink one thing that we've avoided iskind of evaluationa solely evaluation-based approach.There's a I've just seenI've seen too many people get run overby shorts thathavedumb valuations, but they get capturedon you know, Reddit or one of theseother things and they just get there,you know, or like some of these spacecompanies right now that there's norhyme or reason. We hada really strong view on homebuildersfrom last yearthat uhthere were two things going on.It wasn't justit wasn't just rates, mortgage spreadsthat were depressing housing prices,that home pricesthat the home building industry wasfirst structurallyumimpaired because of the way that theywere all pretending to be NVR, which isthey're all pretending to be assetlight, but they had massive
00:17:34commitmentsto these land pools, which in in thingsthat they said were options, but theywere really very committed in thecapital, and that that value was goingon. But but that the um the homebuilding industry was really the lastindustry that had this post-COVIDhangover of inventory disruptions andand pricingumpricing that really made no sense. Youknow, you had all those prices went upto unsustainable levels, but so did umbuilding costs went up, and and buyersare no longer able to pay those pricesat the current current umuhin the current financing environment,but that the but they've also gottensqueezed byby inflation and costs. So, that's been,you know, something so we'vebeen shorting things related to that.>> Let me bring Sachs into the discussionhere. Sachs, we've learned uh a littlebit about distribution of publicsecurities. You're famous in the All-Intheme song of this great quote, "Letyour winners ride." I'm curious when youhear Dan talking about this,umhow you think about as a private marketinvestor how to navigate distributingequities and and how you've sharpenedyour blade about
00:18:49you know, which ones have brittle or,you know, more robust revenue.>> I mean, that's I'm sure you guys sharethis. It's it's one of the most vexingquestions.We wereumwe were private investors in Palantir,and I think we sold all our stock in the20s. Huge mistake.>> Gosh, so you missed a 10x after goingpublic.>> Yeah.>> Or 8x or something.>> We were um um private. We led the Bround inin uh Upstart. Uhthat was one I think we learned not togo on boards anymore because itrestricts your ability to be liquid. Butwe're also early investors in inEnphase. And we umsold some stock on the IPO and then tooka tax hit and I think sold it under adollar and the stock I think had westayed on would have made $4 billion. SoI am not claiming to have any greatexpertise in knowing how to bestdistribute our>> Dude, markets are brutal.>> It's so hard.>> I mean, you're>> is why I bring it up. We've allstruggled with this. Sachs, where didWhere have you wound up?>> I I think it's case by case. I mean,there's some companies whereuh like I was on a board and you can'tsell and you end up regretting that. Andthen there's others where the best thingto do is just hold
00:20:04on to that stockforever.>> Examples in your portfolio where youmade great decisions.>> I'm not going to talk about the onesthat didn't do so well, but um but no, Imean, look, I've I've owned um Meta andPalantir as aprivate, you know, as a ventureinvestor, as an angel investor.>> And you sold>> And the question Well, I sold some andheld on to some.Obviously, in hindsight, you take Meta.I think Meta IPOs Facebook back then.IPOed at a $50 billion market>> Yeah.>> $50 billion. Now it's>> went down to 18.>> Yeah. Now it's>> Yeah.>> Can you imaginehow the alternate universe>> It's 400, right?>> Chamath never sold his Facebook, howinsufferable he'd be.>> Or>> if>> I would>> Reid Hoffman never sold his Google. ReidHoffman would be worth $10 billion.>> No, I I wouldn't be nearly as good.>> What's that?>> I wouldn't be nearly as good.>> Like a I'm like an analyst.>> Because he created tension createdtension.>> Not real. It's not It's not earned.>> So back in those days, 10 years ago, wethought a $100 billion market capcompany was pretty much as big asanything could get.>> Yeah.>> And so Facebook at or whatever, it'slike the upside was to 100.And things are just totally differentnow. We have multi-trillion dollarcompanies. The market's so much bigger.And that that changes.>> that's a rub against
00:21:19Nvidia, which is afive-billion dollar company and peoplefeel like it's sort of a ceiling on it.I think we'll look backat some point in time and say that was afoolishway to think about Nvidia given itsdominant position andits valuation relative to everythingelse.>> right now?>> Yeah, absolutely on earnings over thenext two or three years.>> And is it because people are having ahard time processing the largest entitythat's ever existed in human>> I I think that and and the narrativethat that the Well, first of all,technically, there's all this otherstuff that'sgrowing faster and going up more. Peopleare it'sand the long short pods are structuredsuch that they have to be shortsomething. So, Nvidia feels like a safeshort. By the way, Google was a safeshort. UmAmazon was a safe short. So, I mean,this just happens and sometimes thelanguage should have a valuation andthey they break out. I think that'lleventually happen with Nvidia.>> But there's probably some boundarycondition discount to that, right? Likewe've never seen a valuation like this.You can'toverbet that. I want to shift topics fora second. I just want to talk societyand culture before we run out of timewith you.There was this uh incredible thing thatyou told me which I relate to theseguys, which is um you're very passionateabout criminal justice reform.
00:22:35And specifically, you were a key personto get the pardon of Ross Ulbricht. Tellus your views oncriminal justice, why it hit such anerve, and then why Ross Ulbricht. Whatwas what happened there that said, "Imust fight for this guy?">> Let me take a step back and just talkabout my framework for philanthropy,which is I think not unlike BradGerstner and many people in the roomhere is that I care I would sayeverybody up here I care deeply aboutincome inequality. I caredeeply aboutmaking sure that as many people haveopportunities to do the incrediblethings that we've all had here. So myinterest in criminal justice reformreally started earlier with an interestin education.And education reform and I was verylucky to get on theto start supporting get on the board andultimately be chairman of SuccessAcademies which is a charter schoolnetwork in New York. And I do thinknobody talks about it but it the thingthat's hiding out in plain sight foreverybody is that the problems withincome inequality isn't that you knowJeffBezos is going to be a a trillionaire or
00:23:51all these other people are gainingwealth is that we're not equippingchildren and particularly the mostvulnerable children with theintellectual tools that they need tosucceed and compete. And it's notbecause poverty is this intractablething that can't be overcome. We'veproven that it can be. The problem isthat the unions and the basic principlesthat we all use in business which isaccountability and merit and cultivatingtalent is set aside for the benefit ofadults who are part of these unions.It's a systemic thing. It's not a lackof money. It's really a lack of it'sjust a broken structure.>> Accountability is I think what I'mhearing, yeah.>> So spend a lot of time on that justleave it at that. UmI I then became aware and it wasinteresting that I was looking forissues that conservatives you know itwas great to see Fetterman and McCormickup here. Like what are issues thatconservatives and liberals progressivescan agree on? Hopefully they can agreethat we want young people to be bettereducated. I think we can also agree thatwhenever you put the government incharge of something, they'll it upone way or another.I I want to give you guys a shout-outthough for not up this privatepublic partnership with the
00:25:06investmentsin the private sector cuz I think thisadministration has done an enormouslygood job at backing companies, but let'sput that aside. It's one of the rareinstances where I've seen that. But, inthe current>> Can you give an example of that that'sstanding out in your mind?>> We have a company in our portfoliocalled Atom Computing that with manyother quantum companies umhas gotten money from the government,and we were just super impressed thattheyuhhow they contracted with us to engagewith them in cryptography and to meetthe government's needs, but also in thefinancial component, they drove a reallytough bargain. The The The uh governmentThe taxpayers are going to make a ton ofmoney on this.And their involvement also has willcontribute meaningfully to the value ofthis business. It's just like a win allthe way around.>> and a customer.>> Right. And they are capturing part ofthatvalue as a customer for the Americanpeople, which theyI think everybody deserves.>> Okay, so back to the>> So, criminal justice reformFirst of all, there's a lot of badpeople in jail. I'm not one of you know,I think the criminal justiceuhuh movement has been undermined byuh
00:26:21folks who see it as an opportunity tonot prosecute, notdeal with bad people that are out there.But, there's also a lot of people thatare rehabilitated.UhWell, there's really three differentcategories. There's people who arefalsely uh convicted. There are peoplewho have shownuh contrition and rehabilitation.And those then there are those who justhad a reallydisproportionate sentence relative towhat they did. There's a case right nowof of a guy named John Jonathan Grobmanwho was a dealt in grey market diapersand formula. He got an 18-year sentencefor dealing these goods.Uh in the case of Ross Ulbricht, I wasapproached by someone and this justseemedRoss's people may knowuh probably this room knows he was sortof auh of a folk hero because he had thissort of cat and mouse game with thegovernment. He ran Silk Road. Silk Roadwas a one of the first like crypto-basedexchanges. He acknowledges that he didthings that were illegal that he shouldhave done. He regretted it regrets it.Uh drugs were were dealt on theexchange. Um
00:27:37Uhbutthat that's that's what he was accusedof. The government later said that therewere murder for for hireuhincidents. That was never that wasn't inthe He was never prosecuted for that andhe denies that that ever happened. Butin any case,um he was sentenced to a double lifedouble life plus40 years. Who knows how he got the extra40 years on there and how he would spendthat after he'd been there for twolifetimes.And umThe therethere's aa woman I met through Intel namedRivatez who alerted me to this. She'sfriends with Olaf Carlson-Wee and uhsort of the crypto insiders. And umI I thought about this like this guy'sgot no way out. There's nothere's no recourse through the systemto get someone with a life sentence outof jail. This This will only work with apresidential pardon.And we worked on it. We had somefamiliarity with the pardon process.Worked on it. Um then I approachedCharlie Kirk about this. And Charliereally embraced this and embraced thisindividual as someone who had beenfalselyor not falsely,
00:28:52but unfairly sentenced.He took it to the president.Um Charlie had aalso had an attorney named DavidWarrington, who's currently the uh>> White House counsel.>> White House counsel. I just found out acouple days ago cuz I was talking to himthat he was his lawyer for a decade. Umso I'm not taking credit for this. I'mnot saying Charlie does. It would Ittakes a village, but David had beenworking on it and on the last day ofTrump's45th termwe we were we were certain that he wasgoing to get out and the JusticeDepartment for whatever reason said, "Ifyouif if you if if you commute hissentence, we're going to go after you."To to the president. So heuh as I understand um he uh withdrew thecommutation. So 4 years went by and umreally Charlie took the lead on this.This was his only ask of the presidentand the president had a uh twolibertarians and to the crypto communitypromised to uhdeal with this and not only was hissentence commuted, but he was pardonedand today Charlie is married Oh, notCharlie, sorry. Um
00:30:07Ross is married, is having a child, anduhliving a free life after spending adecade, which is probablyargue whether that was the right amountor not. Um>> And you feel like you should Is there arole for you to play in doing more ofthis? Was this a one-off or a>> I I continue to work on cases. There'san organization called Alephuh and we workyou know, constantly on different peopleand uh I think it's you know, look,there's I I feel like asphilanthropists, it's great to doto work with organizations.and there's a lot of great organizationsI work with.I do a lot fighting anti-Semitism andsupporting Jewish identity also, but Ialso think that we can help people oneat a time. I think it just reallynurtures the soul and I think it justamazingAll right, let's give it up for Dan. DanLowen.>> [music]
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