The DNA Behind Good Investing with Vincent Aita

30:25What is Peloton? 97 % off its highs. And I always assumed something similar was happening with all the companies that got those giant contracts to manufacture the COVID vaccine or the variations of them. What did that space look like to you at that point? Yeah, absolutely. I think that it was probably driven by a search for any sort of thematic lens that could drive returns that had investors crowding into anybody who was helping while everybody else was being hurt. The difficulty in that investing at the time was people putting multiples of value longer term on what was inherently a short-term stopgap contracting.

31:18I mean, realistically, those contracts were really only worth the profit they generated near term. And putting a multiple on them didn't make sense because there's no annuity value to pandemic revenue. It's not permanent. Once the pig's through the python, that's it. Exactly. And so I think there was a lot of that taking place at the time, driving companies like Moderna and BioNTech and even Pfizer at that point. Pfizer trading off a multiple that is derived from a huge proportion of its revenue coming from COVID just didn't make valuation sense. Either you were betting COVID was going to stick around in a much broader way than it did and continue to drive profits, but then the rest of your portfolio has other issues.

32:00And it was sort of either we come out of it and everybody can get back to normal, but that means the pharmaceutical companies that did so well. And a lot of them began rolling over before that was obvious, right? Sure. I think there was a little bit of a realization ahead of time that this was its own type of bubble and that that was going to wind up passing. So since that point in time, we've seen all of these new weight loss drugs, the GLP-1 drugs, that not only are people talking about these as treatments for diabetes and weight loss, but it seems every day I read a different headline. this is good for alcoholism or drug addiction or, you know, go down the list of all of these things that you wouldn't have thought were somehow related to diabetes, but the biochemical mechanism that's being used to, I guess, feed more dopamine, if you can interrupt that, you create a reduction of demand for whatever that addictive substance is.

32:59Tell us a little bit about what you're seeing in the GLP space. So I think that that's correct. I think that there's two phenomenon that are going on there. One is an understanding that obesity itself is such an integral risk factor to a number of different seemingly potentially unrelated conditions that when you reduce that burden of obesity, you're reducing its impact in a number of ancillary disease states such as sleep apnea. You know, I mean, there's always thought that obesity was a risk factor that might have an increased occurrence of sleep apnea. Oh, really? But it's now demonstrated that by reducing obesity, you're actually improving sleep apnea outcomes as one vignette.

33:43Like I immediately, when I hear obesity, I immediately think blood pressure, cholesterol, cardiac, diabetes. Hey, that should be enough to do damage to most people. You're saying it goes far beyond that. There are definitely other elements of related, they call it a metabolic disorder and it's a broader stroke of things that can be positively impacted by this. I should say it's not necessarily clear that they're impacted because of GLP-1 versus being impacted because you're losing weight. Right. But the net of it is still a positive. So when you look at the GLP drugs, what are you looking at? What companies do you find interesting?

34:26What's happening in that space? Has this gotten ahead of itself or is there still plenty of runway for this to keep ramping up? So I think that by and large for the incumbents, Eli Lilly and Novo Nordisk, a lot of the easy money on this is done. They've already reached levels that in terms of both multiples and market cap that you haven't seen. I think there was a portion of time this year where Novo Nordisk had a larger market cap than the GDP of its host country. So it's impressive. and a lot of that's already kind of baked into the expectation there. What's fascinating now, if pharma does absolutely nothing else well, they're very good at being copycats.

35:12And knowing that this mechanism works and has this potential has everybody chasing a better version. And what's really interesting right now in terms of the investment world are the second generation obesity drugs that can look at how the successes of Novo and Lilly and iterate on it. And there's a wealth of that in development now, and those are really fascinating. One example of that is a company, another Danish company, Zealand Pharma, who are developing a amlin-based therapeutic, which is related in overall biology, but not quite the same target as GLP-1. and they've shown some of the first data over this past summer of weight loss levels that are comparable but with a better tolerability profile.

36:01And the goal here is going to be able to make these drugs experientially better for patients. And that's not just a vanity perspective or convenience perspective. It's going to help patients stay on these drugs longer and tolerate the whole therapy. You know, I recall it wasn't that long ago, I want to say a decade ago, there was sort of this sense, hey, all these big pharma companies, you know, they've shot their ball. Their best days are behind them. They're not developing new drugs. They don't have the new technologies. They're not into the genomics aspect. They really are being left behind by what's happening.

36:40That turned out not to be all that accurate. It seems like the big farmers still have more than a few tricks up their sleeves. They do. And I think that the pharmaceutical industry right now in general has reached a really good balance of sourcing, of having competition for sourcing products internally and externally. And they're targeting their R &D efforts more and more in specific areas of expertise where they have previously shown successes and they have the infrastructure built and are no longer trying to be one-stop shops that do research on everything. They have internal R &D on what they're good at.

37:23And then they look externally at bringing in other products that could have the benefit of helping their growth rate and long-term value creation for their shareholders, but also really leverage their internal commercial capabilities and regulatory capabilities to aid these smaller companies in getting over the finish line. So it's a really good symbiotic relationship that's going on. So either through acquisitions or licensing, they can find new molecules, new drugs, new whatever, and build on it. So you run a long short portfolio. I'm kind of curious, given this wide berth of new technologies and companies and drugs that are coming along, first of all, do you run, you know, 120-20 or 130-30, or is it more opportunistic?

38:09How do you structure your book? So the goal at Cutter when we came out was looking at if you take the experience base that I had had previously at the multi-strategy funds that I had worked at and the industry in general, if you expand it to the Baleaznes and.72s and everybody else. There is this convergent evolution of interaction with the market that these firms have all developed to have teams of a certain size, sector specialists managing a certain amount of capital in that subsector in a market and factor aware type approach. approach. And we thought at Qatar, why not democratize that a bit and allow the broader investor community to plug and play in their portfolios one of those high-performing teams and be able to take that expertise in-house to their own personal portfolios, if you will.

39:03You may not be able to get a spot as an allocation in Citadel, but you could get a spot in allocation in someone who runs a Citadel-style equities portfolio, which is what we do. So our risk parameters, market neutral and factor neutral are very similar to what you would have inside one of those other firms, such that if you kind of dropped our strategy into one of those firms, we wouldn't have to change what we're doing. Right. So let's define some of those terms for some of the lay people may not be familiar. Market neutral means you're long half your book or some percentage. You're short. And it doesn't matter what the market does.

39:37If the market goes up, your longs go up if the market goes down, your shorts do better. And the expectation is over the fullness of times, your longs will outperform the equity market while your shorts will ultimately go in the right direction, even if it's not down as much as the market has gone up. I think that's a good description of it. I mean, what we're trying to do is really focus on this thematic style of investing that is really trying to harvest the inflection points in innovation in medicine and how that impacts the related equities to that. And take kind of market dynamics out of the mix.

40:21Take exposures to different style factors in the portfolio out of the mix. So things like momentum, things like a growth versus value bias, and et cetera, et cetera, pulling their exposures out of the portfolio and really leaning into the bets you're making on a scientific basis. So we ask the question at Cutter over the next three, six, nine months, what are the inflection points in the practice of medicine and who are the winners and losers in that? And we try to build thematic trades that will be constellations of winners and losers that allow us to kind of hedge some of those other exposures and really accentuate our exposure to the scientific driver of performance in those names.

41:08So let's talk about the difference between the long half of your book and the short half of your book. My assumption, or let me just ask you this way, on the long side, you're looking for companies that are potentially putting out a new product that you think the rest of the marketplace hasn't recognized either the likelihood of success or the potential upside. I'm reluctant to use the word value play because it really is less of a, hey, we think this drug, this technology, this new approach has this sort of commercial application and it's not reflected in stock price. Is that a fair way to describe how you think about?

41:50I think so. It's pretty close. The one thing that I'd layer on top is it's not so much, I wouldn't say that we're so much solely driven by a value mindset, so much as we're driven by recognizing the potential for upside optionality. And so sometimes companies that in their current market conditions, you wouldn't call cheap, but they have additional accelerators on performance, they have additional upside in their pipelines that could continue to have them outperform that might not be fully appreciated by the market. We'll still be interested in those names. Right. Just because something's expensive doesn't mean it can't get more.

42:29Right. And I'm always fascinated. People seem to think shorting is a mirror image of going long, but it really isn't. It's a very different sort of experience. Tell us what sort of screens you do to make downside bets. I mean, how much of it is hedging the long book and how much of it is just, hey, we think this stock is wildly misunderstood and there's a lot more downside than upside? If you'll indulge me for a moment, Cutter Capital itself is a baseball reference. I'm a big sports fan. The cut fastball is a pitch that Mariano perfected that's equally effective on left-hand hitters and right-hand hitters, depending on how he delivered it.

43:08For us, that represents our research process, which by doing the same type of analysis over and over, emerging from that are opportunities where we find events as they are reflected in the underlying equities to be either indexed to overenthusiasm or underappreciated. And when there's overenthusiasm in a situation when equities are reflecting fully an expectation that this innovation is going to work, that provides you an opportunity to find shorts because if that doesn't work out and everybody's got to change their view on the opportunity, those equities are going to suffer. How do you deal with the timing and the technicals of shorts?

43:48Because you could be right and a little early and it's very painful on the short side. No, absolutely. That's why I think part of the style of investing we have looks at individual investment opportunities through more of a thematic lens, where we will then look at constellations of winners and losers and put them together in one trade. So our trades are often three, four positions that are combinations in a particular therapeutic class, incumbents, innovators, fast followers that are all going to have different varying levels of their value influenced by these news events. And by pairing them up long and short, you're hoping that while you're waiting for that event to play out, you're hedging some of your market exposure.

44:37So to put it your way, if that short is the short, which is the key to the trade, is going up with the market, hopefully your longs are protecting you and making enough on the upside while you wait to get paid for the short. Are you restricted to only the healthcare sector? Or like when I first started reading about GLPs, what immediately came to mind was Yum! Brands and McDonald's and Dunkin' Donuts and, hey, how are supermarkets going to deal with this? The food in the perimeter of the supermarket, meat, poultry, fish, fruit, vegetables, dairy, their lowest profit margin stuff, all the junk in the middle that GLP users are not going to be consuming.

45:20Hey, does this mean Kroger's is a GLP downside play? And I have no idea, but it just, it's a fascinating thought process. So I would say we stick to our domain expertise and we have a team that's highly specialized and focused in their career history and path to be healthcare specialists. And so we prefer to kind of stick to where we have that level of domain expertise. And then beyond that for a second, I would just say that the GLP-1s are an exciting introduction to the broader investment world into what we do in healthcare every day. But it's relatively few and far between the type of drugs that have such an impact on a macro level that you could thematically bet outside the sector on their impact.

46:07So, you know, we have a preference to remain in the healthcare world. So you also like to play in European pharmaceutical and healthcare stocks. Generally speaking, over the past couple of years, European values were much cheaper in the United States. And hey, if you were betting on that mean reversion 10, 15 years ago, we're still waiting. How do you look at the way things are priced in Europe? And are the same discounts that we see in banking and other areas in Europe, are they taking place in the healthcare sector? So I think what's interesting about investing in Europe for us might not necessarily be directly related to a view we have on the discounted valuations there.

46:53Although what I would say about that is, by and large, U.S. investors tend to be more speculative at earlier stages of development, being more willing to credit companies for future cash flows well in advance of the realization of whether those products will come to market or not. Meaning American investors tend to be more speculators and gamblers than their European counterparts? They tend to be more aggressive in their willingness to price in early data as proof of concept. I mean, there was even a time period during the height of the, you know, kind of low rate biotech boom where, you know, we used to sometimes joke that, you know, proof of concept was having a concept.

47:40You know, these things just ran as soon as companies announced they were working on things. European investors, by and large, a generalization, but European investors generally want to have a more solid proof of concept before they start pricing in those opportunities to those equities. And so there is interesting opportunity there for you to get ahead of that curve and bring a little bit of US-style speculation to European biotech and look at some of those names. So that's an interesting reason to be in Europe. Another quick vignette on why it's interesting to be in Europe is in the US, particularly for the market neutral world where we're living, there are times where, whether you want to call it positioning or crowding in names or unwind regime, however you want to describe it, where US equities tend to act together in a de-risking kind of mode.

48:35And it's based on what's popularly owned by the major hedge funds and they're de-risking themselves. Europe in general doesn't behave in the exact same lockstep with the U.S. So if you have a relatively robust European book, it allows you to hedge yourself from some of the U.S. crowding exposure because you're in a different world of investors and a different mindset and different drivers of those equity markets. So it provides a little bit of diversity to the approach and portfolio. Let's talk about another difference. What is the regulatory environment for new drugs, new procedures, new ways of applying the science to healthcare in Europe versus the U.S.?

49:18How do they compare and compare? So it's interesting. The way I described the U.S. equity markets and the earlier speculation and success that we see here, I almost see an analogy in the way the regulators think on the drug approval process because the US FDA in recent years has become much more active in allowing drugs to get approved based on so-called surrogate markers of efficacy. In the past, for a drug to be approved, you had to demonstrate against a tangible clinical endpoint that your drug worked. And now we're moving more and more in the interest of getting drugs to patients faster to approve drugs based on predictive markers of efficacy and confirming they work later in follow-up studies.

50:12Whereas Europe is still kind of old school and wants to see more proof of clinical benefit before the government payer starts doling out cash to pay for these things. So there's actually, I think, a little bit more willingness to be speculative in the approval process here in the U.S. than there is in Europe. So it sounds like you're suggesting private insurance is allowing the FDA to be a little more aggressive in, hey, maybe this saves some people, let's try it, versus you have a government saying, we don't want to pay for this unless we know it's safe and effective. And so far, you haven't demonstrated that.

50:53A hundred percent. And in the past, that was FDA's mandate also. And I would imagine if you have FDA administrators in front of you, they would try to insist that's still their mandate. But as a matter of just observation, there are more and more drugs that are getting approved on the basis of predictions of their efficacy rather than proof of their efficacy. What about all of the off-brand approvals we see at the beginning, which really is what the GLP began, right? The most famous example is Viagra was supposed to be a cardiac medicine or a blood pressure medicine. How does that play into what the FDA is doing in terms of, hey, let's get it out there?

51:33At least if it's safe, we'll find out if it's effective only after it's out there for a while. Right. It's an interesting part of, I think, just the cultural differences between America and Europe and kind of how we embrace certain levels of freedoms here that we talk about as Americans. And one of them is the concept that once drugs are approved by FDA, hey, physicians have the ability to use them in ways that they think are appropriate. Whereas in Europe, you know, to really be able to use a drug outside of its prescribed usage is going to be difficult because the government's not going to pay for it.

52:10Question on Qatar. You know, when we look at out in hedge fund lands, we know allocators tend to buy brand. There's safety in numbers. I'm looking at big shops like not just Millennium and Citadel, but go down the list of Oak Tree or Bridgewater or whoever you want to think of that's a large, reputable shop. You were previously at a multi-manager shop. Now that you're on the other side, outside of Citadel, how are you managing dealing with the consulting worlds and the institutional investors as a single strategy manager? One of the things I think when I embarked upon that was an unknown to me that I've been somewhat pleasantly surprised to the upside of as now a launched manager is there's a relatively robust infrastructure of support that has developed around emerging managers such as us to provide a lot of the tools, a lot of the operational infrastructure that you're accustomed to at one of those larger firms.

53:15as third-party vendor services. And so while we are independent of, you know, what is a well-developed infrastructure at one of those larger firms, we were able to replicate substantive portion of that, enough to have a robust investment process through identification of other vendors who realize the value of providing that service and provide it to a much broader community. So it hasn't been as bad as I first feared when we came out. Really fascinating stuff, Vince. Let's jump to our favorite questions that we ask all of our guests, starting with what's keeping you entertained these days? What are you either watching or listening to?

53:57In terms of streaming content, I just wrapped up season three of The Bear, which is a terrific show. I actually lived for a few years in Chicago, so that kind of pulls at my reminiscences of being there. Even if it was season three wasn't as good as season two, it was still terrific. No, it was still terrific. Yeah. I thought some of the reviews kind of missed the point. They missed the point of what it is. It really was a year of just delving into the background of these characters in a richer way than most shows spend the time doing. That's right. And so right now, working our way through Bad Monkey, which is - Oh, really?

54:29You know, I think sometimes you need a little bit of lightness and levity in terms of what you're watching. Vince Vaughn on Apple TV. That's right. And it's just a really easy watch. I mean, there's nothing fascinating about it. It's just a very easy watch. And I'm looking forward to season two of Pachinko. It speaks a little bit to my Korean heritage. Season one was just a fascinating immigrant story of a Korean family based on a terrific book. I saw that go by in previews and I never got around to seeing it. Strong endorsement. Yeah, worth the watch for sure. Really, really interesting. I'm going to definitely check that out.

55:06You hinted but didn't really dive into a lot about your early mentors. Tell us who were some of the people who helped shape your career. Sure. So I think that probably one of the most talented healthcare investors the world hasn't heard of is Jeff Green, who I spent years with at HealthCore and who was my first portfolio manager at Citadel. And what Jeff brought to me was this ability to really appreciate the power of the rate of change in a story, the second derivative of movement in a narrative. And he had the ability to look at very, very complicated stories, very complicated topics, complicated drug development studies, and kind of point out, if you understand this, it's the key that unlocks the view of the whole trade.

55:56If you understand this portion of the income statement, this portion of the TAM. And so he was able to go from story to story and really kind of hone in on all other things being equal. This is what you need to know. And so I learned a lot from working with him. More recently in the launch of Cutter, I have to say that a mentor for me is actually my fiancee who runs her own business. and who in times where I faced a little bit of self-doubt or challenges about going down this path, had this relentless attitude of where failure was not an option. And, you know, pick yourself up and carry it the next day because you're going to do this.

56:36No tapping out. No. Yeah. And she's terrific at that. Let's talk about books. What are some of your favorites? What are you reading right now? So right now, I'm reading Marshall Goldsmith has his book, The Earned Life. He is a life coach for a number of executives. He's written a ton of books just kind of about, you know, the whole self-discovery process. I think he incorporates some takes from Buddhist philosophy that I kind of feel speak to me. And in particular, it's about defining your own success. We're in a world where you can get very, very much focused on, you know, what certainly what other people make or what other people's performance are, or just in general, comparing yourself to other people in this field.

57:26And I feel like it's important to have perspective on the definition of success being something you define for yourself and being satisfied, you know, in terms of your own personal journey, which is unique to everyone. So that's really fascinating. In terms of prior books that I read that I have to discuss that are influential, Annie Duke's Speaking of Bets is really one that I think spoke to me in terms of resonating with our investment process, understanding that for her and her career in poker, there was really nothing to be gained from just dwelling on bad beat stories. And there's really nothing to be gained from kind of worrying about success and failure of an individual hand.

58:06It's really about the process. Right, resulting is failure. You have to, if you're only looking at the outcome, she's great at that. So that's terrific. Thinking in bets is really tremendous. And yeah, thinking of bets. And I'd have to say the last book I would mention, which I know has been mentioned numerous times in this podcast, but there's a reason for that, is if you're in this business, it's almost like a cult need to read reminiscences of a stock operator. It comes up over and over and there's a reason for it. It was one of the first things I read when I began on a trading desk. And it really, arguably, was the first behavioral book because it was not about buy this, sell that.

58:43It was about here's how traders go wrong. It's really fascinating. And it still holds up a century later. Absolutely. All right. Our final two questions. What sort of advice would you give to a recent college grad interested in a career in health care investing? I would say, and I'd broaden this for a moment to whatever type of avenue you'd want to go down, it really helps to spend time at this point of your life speaking to a college grad to become more of a domain specialist in whatever area that really fascinates you. You can pivot into the finance world later. The finance skill sets are the basics you'll have to learn.

59:23Their training is very, very fungible and almost commoditized to kind of know what it takes to be informed on the underpinnings of finance. But really, your expertise is going to come from finding something you're passionate about and learning as much as you can about it, immersing yourself in that world. And coming out of that, you'll think better about how to make investments in something you have that level of domain expertise in. And our final question, what do you know about the world of investing today you wish you knew 20, 25 years ago when you were first getting started? I would say 30 years ago, I would tell myself that the idea that a good, successful investor leans in on conviction and intuition as their guideposts is kind of like false idolatry.

1:00:13I think if you take any talented investor in general and you ask them to give you your 10 best ideas for the next year, if they get 7, 8 correct, terrific. But then if you tell them to rank order them, it's not eight, nine, and 10 that fail. All up your conviction scale, you fail. So I think I would tell myself previously, it's much more important to develop a robust set of guideposts in investing, a robust process of investing, rather than just worshiping this idol of like, look, I need max conviction on an idea that's going to be career setting. Quite fascinating. Vince, thank you for being so generous with your time.

1:00:50We have been speaking with Vince Aida. He is the founder and chief investment officer of Cutter Capital Management. If you enjoy this conversation, well, check out any of the previous 500 or so we've done over the past 10 years. You can find those at iTunes, Spotify, YouTube, wherever you find your favorite podcasts. And be sure and check out my new podcast, At The Money, short 10-minute discussions with experts about issues that directly affect your investing and your money, earning it, spending it, and most importantly, investing it. At The Money in the Masters in Business feed or wherever you find your favorite podcasts.

1:01:35I would be remiss if I did not thank the crack team that helps us put these conversations together each week. Stephen Gonzalez is my audio engineer. Anna Luke is my producer. Sean Russo is head of research. Sage Bauman is head of podcast here at Bloomberg. I'm Barry Ritualz. You've been listening to Masters in Business on Bloomberg Radio.

1:02:08Thank you.