Dan Loeb: The Lost Art of Short Selling, and Why Stock Picking is Back

0:00Legendary activist investor Dan Loeb. He of course is the CEO and CIO of Third Point. The lost art of short selling has come back and it's absolutely critical. It doesn't matter what you do, you have to be really selective. People talk about stock pickers market, this is a bond and credit pickers market. When we were small, our main tool was shame and humor. Dan Loeb turning up the heat on Nestle over the weekend. The shift has really been more towards a dare-to-be-great message. Activism without proxy contests is like Catholicism without hell. You're very active on the Twitter as well. You found your voice.

0:38A lot of emotion brewing there. Can we actually start with that?

0:42Jason Calacanis:Before Twitter, you were actually quite active, but they were in very different places. I mean, you were in Wall Street Bets before Wall Street Bets existed. Can you just walk us through your evolution as a public persona? Sure. I mean, there was this brand new technology that came out called the internet. And really shortly thereafter, long before Reddit or any of these other things, there were a series of chat boards. There was Yahoo. There was something called Silicon Investor, a few other ones. And people would congregate and kibitz. It was done mostly anonymously, and it was an interesting place to exchange ideas.

1:27It was really the Wild West. People could pretty much say or do anything, but there was a lot of substance there, too. It's not actually that much different than from today.

1:35Jason Calacanis:Did you engage at all in any trolling, per se? Well, some people use the term OG. Sometimes I say I was the OT. The original troll. Yeah, no, I did. I mean, it was fun. I didn't know I was one day going to run institutional money and have a big fund. And, you know, I was just having fun and blowing off steam. And, yeah, it was fun. I mean, investing is fun. And particularly on the short side, I mean, there's so much humor in it when you detect these companies, especially in the 90s. I mean, it was really unsupervised. There were some incredibly fraudulent companies out there. and it was just fun to uncover them and kind of taunt the management teams and ultimately prevail.

2:25Jason Calacanis:You have one story above others that kind of stands out in that era? I mean, there were a bunch. There was, wow, there was a company called Actrade that I remember run by a guy who was like a repeat fraudster and we uncovered it. And I know we really got under this person's skin. And ultimately, it was really just a factoring company trading at five, six, I don't remember what it was, some large multiple of book value. And they had created a new technology called TADS. I don't remember what TADS stood for, but they were basically repackaging factory securities and saying that they had some special technology.

3:15They were financing refrigerators and things like that. Tell us your evolution as an investor.

3:22Jason Calacanis:When you started Third Point, I mean, you started with very, very little capital. Now it's almost 30 billion of AUM. You're multi-strat. But you learned at Jefferies, I think like you learned helping people like David Tepper allocate capitals. Just walk us through how you learned to invest. Well, I started really fascinated by investing and wanting to do it. I think when I remember when I was 10 years old, my dad took me, my dad was a notoriously bad investor himself. So he didn't give me any good examples. He's a great lawyer, not a great investor, but he took me to meet a broker and I started investing.

4:01And then in high school in the 11th grade. I got a job at the branch office of Bear Stern, sorry, of Payne Weber working for a guy named Alan Crown who let me post his books and make cold calls. And I think we broke certain securities laws, but I think the statute of limitations has passed. I would trade options on Occidental Petroleum and Teledyne. There was a lot of volatility. And I think I had flurries of making money and lost all of it a couple of different times, but it was a good lesson. and I continued doing it in college. And then my learning started really formally at Moorberg Pincus, where I really learned to value enterprises.

4:42It was my first job. Kind of across the spectrum of private equity and venture capital. I worked at a risk arb firm, which was really invaluable. And then skipping forward, I had way too many jobs in my 20s. But I got really serious at Jeffries. I had an amazing opportunity to work on the distressed debt desk there. I started out as a research analyst. I was just like drinking out of a fire hose. There was so much activity. The securities were so cheap coming out of distressed. And it was the 10 ,000 hours, 10 ,000 reps. We would write up different things every day. There were big blocks of debt to move.

5:29And I really got, that was my real learning point. And I stress this to people that everyone kind of sees mentorship as this sort of hierarchical thing where you learn from some wise older person. But I learned a ton from my colleagues, from my own cohort, and I learned a ton from my customers. Like Eric Mindich was a boy wonder at Goldman. He was the youngest partner.

5:55Jason Calacanis:Youngest partner at Goldman. Yeah. Ran the ARB desk there. and he had this triumvirate or quadrumvirate, whatever, the four people, I don't want to leave them out, but Amos Morone, Dineker, and I can't think of it, some other guys. Anyway, they were great and they really kind of brought me into their thought process, thinking about event-driven investing and then I covered some of the smartest people in the business, including David Tepper. I got to watch their thought process And I was like a Chinese corporation that was copying and reverse engineering and taking everything in and creating my database of knowledge and my own operating system, kind of taking the best out of what all these different people did.

6:43Jason Calacanis:And what was that style when you first started Third Point? What was that expression? That was, well, I think we call it event-driven investing. It was really less focused on the quality of business, more focused on very complex transactions, takeovers, spinoffs, risk or arbitrage, bankruptcies, privatizations, demutualizations. And these transactions created unbelievable opportunities for Alpha because of the confluence of dislocation, opacity, kind of time. But also, this goes, and nothing changes. and I always quote this Jesse Livermore line, there's nothing new under the sun, a real focus on management incentives.

7:26So in all these different kinds of transactions, management was incentivized to sandbag their numbers during a time when there was an excess supply of securities where their options were being set. And we as co-investors got to come in with these depressed projections and ride along not just the, well, we got to ride along a few different things that would happen. Greater transparency and understanding of the business, coverage, companies that delivered a top line and margins and ROE and everything else better than expectations. So it was really a golden era for that type of investing.

8:07Jason Calacanis:And from where that started to what third point is today, just describe that and where you want to, Where do you go from here? Yeah, so stylistically, that event approach, it's still something we think about. It's in our framework. But I think what happened really when technology became a bigger force, but really everything changed is a greater focus on business quality and innovation and disruption and more thematic on the one hand, understanding of consumer trends, what's going on in financial services, what's the economic macro backdrop that's supporting all this. And of course, the big topic of this event, AI is sort of the culmination of that, but all of these major technological innovations that have really happened since...

9:05Jason Calacanis:You could make money before by not being technology savvy in the markets. You could be technologically illiterate or just say, I don't do it. And you could also be even more or less... Up until the GFC, I think you could be more or less economically illiterate and make a lot of money. And now? You wouldn't want to be either one of those things, I mean, given how much more important... Like the tech through line needs to be understood everywhere. Yeah. Even if you're like Blue Owl and you're trading, I mean, Blue Owl obviously is very sophisticated in tech now, but any pool of capital that used to not be correlated is effectively correlated?

9:45I mean, yes. Yeah, you could say that. And I just want to answer your question just to kind of fast forward and give people a snapshot of what we do today. Rob Schwartz is my partner, and we took Kenpo Karate together when we were 10 years old. It was a purple belt. I think I never made it past yellow belt. But we reconnected at our 20-year reunion and I'm aging both of us. Sorry to give up your secret, Rob. In 1999, it was our 20-year reunion and he was working as a sales rep for wireless RF components. And I said, wow, this guy would be great to do channel checks for us. And then I asked him a couple years later, say, you meet some smart people.

10:32If you ever come across a really savvy engineer, we should invest. We didn't know what we were doing. We weren't venture capitalists, but we were getting behind a person. There was a guy named Dave Fisher, started a company called Radio Communications. They made chips. He made chips that were, I still remember, ABG compatible for Wi-Fi base stations. And ultimately, the company knew it was sold to Texas Instruments. And I won't go deep into our venture business, but that we started to do within the fund. We've done a couple of dedicated funds. So we have that strand of activity. We can talk a little bit more about what we're thinking and how we're seeing this.

11:12But I think what ultimately I want you to get to is that all these things are interconnected and come together under the platform that we have today. Because we have the main hedge fund, which does credit, equity long short, credit is both structured credit and high yield. We have a CLO business that we acquired. We started a private credit business. It does traditional private credit, direct sponsor financing, direct lending, and workouts, which is very important. So credit solutions, as they call it, a lot to do there. and then we started an insurance company a few years ago. It's not the first insurance company we did.

11:52We did a PNC company, but this one was wholly owned. Now we own half of it. And the insurance company captures basically the investment grade part of what we do. So private credit through structured vehicles, structured credit, whole loans,

12:13investment grade, both private and public. But we also can use our surplus capital in very interesting ways.

12:20Jason Calacanis:So what's the role of the human? What's the role of Dan Loeb in running Third Point 10 years from now? Like 10 years before, Dan Loeb was 100 % of Third Point. And then there's now, there's agents, 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 systems making decisions, allocating capital, managing risk? I mean, so first of all, investing now, like, well, first of all, my time is spent primarily on managing the hedge fund, which for now is the biggest capital pool and most important business that we're in. The human element, I think this is true for everyone you have here.

13:06Like the element of the social component, the human network of knowing people, being able to capture opportunities, work with people, interact, like that's never going away. Like you never have, maybe you can theorize that there will be agents that will sit at Andreessen Horowitz and whoever else, your funds. But I think the human will always have to be there because people like to.

13:35Jason Calacanis:You want to know who's making or losing the money. Yeah, and there's a thing that I think the agents will never really be able to look in your eye and assess all the things that... You've expanded your philosophy of investing in companies from cheap securities with catalysts, is I think how you described it on a podcast recently. And now you're very concerned about moats, defensibility, and just the quality or the brittleness, as Chamath likes to remind us, of the revenue. So maybe could you tell us how you evolved that core thinking about the quality of companies, and then maybe give us some examples of the companies that now fit through that filter where you feel they have a moat, you feel they have durability.

14:20Yeah, obviously that's everything right now. Chamath talks about the time-bounded value of companies, and I think that's essential. what are the companies that are going to be around 7 to 10 to 20? What are the real moats that exist out there? And it is harder now. I don't think we can, I don't know that we can really go out 10 or 20 years ago. By the way, I think we deluded ourselves earlier because I think if you ask people about the moat around IBM or some of the other companies. AOL. AOL, Yahoo, you say the same thing. I mean, look, we're investing outside of tech into companies that have some great...

15:16Well, first of all, it also comes back to the management, because we can't really just look at a product or a technology and say, oh, this is going to be it forever. So we really look for a management team that we think will be adaptable. And just like you guys were saying last night, you don't want to be on boards of companies. These are things that they should be doing. So I think that's a huge part of it, like finding management teams that you really believe in that have a proven ability to stay ahead of.

15:46David Friedberg:Is that quantifiable or is it still very much a subjective? Sorry, is what? Is it quantifiable assessing the management team? No. Have you built a rubric for doing that? No, it's still very subjective, qualitative. I think it's one of those things after 30 years, there's like a pattern recognition. Let me ask a question on screening. I think you've said recently publicly that there's a lot of opportunities on the short side in the market right now for the first time in a long time. How do you start top down? Is that a top down or is it an opportunistic? something comes across the wire and you guys jump on it in kind of an event-driven way?

16:25David Friedberg:Or do you guys have kind of a systematic, top-down approach to looking at the market and finding those opportunities? Yeah, there's no one approach to it. I think one thing that we've avoided is kind of a valuation, a solely valuation-based approach. I've just seen... I've seen too many people get run over by shorts that have dumb valuations, but they get captured on Reddit or one of these other things and they just get there. Or like some of these space companies right now that there's no rhyme or reason. We had a really strong view on home builders from last year that there were two things going on.

17:11It wasn't just rates, mortgage spreads, that were depressing housing prices, that home prices, that the home building industry was first structurally impaired because of the way that they were all pretending to be NVR, which is they all pretending to be asset light, but they had massive commitments to these land pools, which in things that they said were options, but they were really very committed in the capital and that that value was going on, but that the home building industry was really the last industry that had this post-COVID hangover of inventory disruptions and pricing that really made no sense.

17:58You know, all those prices went up to unsustainable levels, but so did building costs went up, and buyers are no longer able to pay those prices at the current financing environment, but they've also gotten squeezed by inflation and costs. So that's been something, so we've been short for things related to that. Let me bring Sachs into the discussion here. Sachs, we've learned a little bit about distribution of public securities. You're famous in the all-in theme song of this great quote, let your winners ride. I'm curious when you hear Dan talking about this, how you think about as a private market investor, how to navigate distributing equities and how you've sharpened your blade about which ones have brittle or more robust revenue.

18:54I mean, I'm sure you guys share this. It's one of the most vexing questions. We were private investors in Palantir, and I think we sold all our stock in the 20s. Huge mistake. Gosh, I've missed a 10x after going public. Yeah. Or 8x or something. We were private. We led the B round in Upstart. That was one, I think we learned not to go on boards anymore because it restricts your ability to be liquid. But we're also early investors in end phase. And we sold some stock on the IPO and then took a tax hit. And I think sold it under a dollar. And the stock, I think, had we stayed on, would have made $4 billion.

19:40So I'm not claiming to have any great expertise in knowing how to best distribute our...

19:45David Friedberg:Dude, markets are brutal. It's so hard. I mean, you're probably... No, this is so brutal. I bring it up. We've all struggled with this. Saks, where have you wound up? I think it's case by case. I mean, there's some companies where, like I was on a board, and you can't sell, and you end up regretting that. And then there's others where the best thing to do is just hold on to that stock forever. Examples. In your portfolio, where you've made great decisions. I'm not going to talk about the ones that didn't do so well. But no, I mean, look, I've owned Meta and Palantir as a private, as a venture investor, as an angel investor.

20:22And you sold it. And the question, well, I sold some and held on to some. Obviously, in hindsight, you take Meta. I think Meta, IPO, it was Facebook back then. IPO at a$50 billion. $22 billion. $50 billion. Went down to$18 billion. Yeah. Can you imagine how alternate universe, if Chamath never sold his Facebook, how insufferable he'd be? Or if Freeberg never sold his Google, Freeberg would be worth$10 billion.

20:50Jason Calacanis:I wouldn't be nearly as good. What's that? I wouldn't be nearly as good. It's like an analyst. Because it created tension. I mean, it would have been nice. It's not real. It's not earned. So back in those days, 10 years ago, we thought$100 billion market cap company was pretty much as big as anything could get. Yeah. And so Facebook at 50 or whatever, it's like the upside was to 100. And things are just totally different now. We have multi-trillion dollar companies. The market's so much bigger. And that changes. I mean, that's a rub against NVIDIA, which is a$5 billion company, and people feel like it's sort of a ceiling on it.

21:24I think we'll look back at some point in time and say that was a foolish way to think about NVIDIA, given its dominant position and its valuation relative to everyone Is it undervalued right now? Yeah, absolutely. On earnings over the next two or three years. And is it because people are having a hard time processing the largest entity that's ever existed in human history? I think that and the narrative that, well, first of all, technically, there's all this other stuff that's growing faster and going up more. People are, and the long short pods are structured such that they have to be short something.

22:00So NVIDIA feels like a safe short. By the way, Google was a safe short. Amazon was a safe short. So, I mean, this just happens. And sometimes they'll languish at a valuation and they break out. I think that'll eventually happen with NVIDIA.

22:14David Friedberg:But there's probably some boundary condition discount to that, right? Like we've never seen a valuation like this. You can't overbet that.

22:22Jason Calacanis:I want to shift topics for a second. I just want to talk society and culture before we run out of time with you. There was this incredible thing that you told me, which I relate to these guys, which is you're very passionate about criminal justice reform. And specifically, you were a key person to get the pardon of Ross Ulbricht. Tell us your views on criminal justice, why it hit such a nerve, and then why Ross Ulbricht? What happened there that said, I must fight for this guy? Let me take a step back and just talk about my framework for philanthropy, which is, I think, not unlike Brad Gerstner and many people in the room here, is that I care, I would say everybody up here.

23:06I care deeply about income inequality. I care deeply about making sure that as many people have opportunities to the incredible things that we've all had here. So my interest in criminal justice reform really started earlier with an interest in education and education reform. And I was very lucky to start supporting, get on the board, ultimately be chairman of Success Academies, which is a charter school network in New York. And I do think nobody talks about it, but the thing that's hiding out in plain sight for everybody is that the problems with income inequality isn't that, you know, Jeff Bezos is going to be a trillionaire or all these other people are gaining wealth.