Invest Like the Best with Patrick O'Shaughnessy - David Einhorn - The Long and Short of Investing - [Invest Like the Best, EP.322]

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Starting point is 00:01:06 which is part of our Colossus network. David Senra, who hosts founders, has devoted his life to learning from history's greatest entrepreneurs, and every week he distills the lessons of a different founder. If you want an entry point, I highly recommend starting with episode 136 on Estee Lauder or episode 288 on Ralph Lauren. I hosted David on Invest Like the Best Last Summer, and it's hard not to walk away, insanely energized after listening to any episode with him. You can find a link to founders and those episodes and the show notes of this conversation. You can also search all past transcripts on our website,

Starting point is 00:01:38 join colossus.com. Hello and welcome, everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest like the best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at join colossus.com. Patrick O'Shaughnessy is the CEO and founding partner of Positive Sum and the CEO of O'Shaunacy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not

Starting point is 00:02:21 reflect the opinion of positive sum or O'Shaunacy asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of positive sum or Oshonnessy asset management may maintain positions in the securities discussed in this podcast. My guest today is David Einhorn. David is the president of Greenlight Capital, a long, short hedge fund that he co-founded in 1996. He's a prominent value investor with a reputation for rigorous security analysis. In 2002, he revealed a short position in Allied Capital, which was ultimately proven correct, and similarly in 2008, he told the Sone Conference he was short Lehman Brothers.

Starting point is 00:03:03 Over his near three decades managing money at Greenlight, he has delivered impressive returns, but it has not been without challenge. Our conversation covers both the highs and the lows, his views on the current banking issues, and how he has evolved as an investor. I'm on the planning committee for this year's Sown Conference, where David will be featured with others like Stan Drucken Miller, OpenAI CEO Sam Altman, Stripe CEO Patrick Collison, and Bridgewater, CIO, Karen, Carnial Tambor. If you've enjoyed Invest like the Best and are willing to contribute to a great cause, in this case, Memorial Sloan Kettering Cancer Center, I'd deeply appreciate you buying a ticket at the link available in the show notes, and join us in May for what will be an incredible day of business and investing presentations and interviews. Now, please enjoy my great conversation with David Einhorn. David, my first question for you is kind of a market conditions and composition question.

Starting point is 00:03:55 This may be sound like a stupid question, but I still want the answer. If you could start a fund in the pursuit of Alpha today or in 1996 as you did, when would you start it? I think I would start it in 1996. I didn't know it at the time, but it was a fabulous environment for what I like to do, which is trying to figure out what things are worth and buy them before other people figure out that they're worth so much and argue with the market about misvaluations.

Starting point is 00:04:27 And in 1996, there was a very vigorous, active debate about those kinds of things. It played really nicely into my view of things and my skill set. And things like balance sheets mattered and stuff like that. And if I could read them a little bit quicker than some other people or understood them a little bit better, I had a pretty sustainable advantage.

Starting point is 00:04:51 And sitting here today, that advantage is not there anymore. That's gone. And what eroded it? What eroded it is the way that investing is done has changed, such that back then the dominant factors in the market were either some combination of individual investors figuring things out and professional money managers who were all analyzing companies and trying to figure out what those were, you could do the same thing other people were doing. But if you did that, you had to do it a little bit

Starting point is 00:05:25 better than that. And you pick your spots and you could do well. And now looking at it, sitting here today, the amount of trading that's done based upon people trying to figure out what companies are worth, which is different from what they will trade for. Everybody who's trading as an opinion of what the trading value will be. But there's very few that are actually basing that decision based on what they think the company is actually worth. That robust debate has essentially left the building. If you think about the composition of a given company's earnings call

Starting point is 00:06:03 with a bunch of analysts on it today versus when you started, how would you compare the content of those conversations and the people on them from today versus a couple decades? go. I can't really tell for sure. I don't know how many people are on earnings calls. It used to be institutional investors would ask questions. Sometimes individuals would ask questions. And that's pretty rare these days. Now it's mostly just self-site analysts whose main function I think is to be the questioners on the conference calls. And it's very unusual for a by-side person to appear on a conference call with a question. So you don't have that flavor. My perception is, is a

Starting point is 00:06:43 is that the participation outside of the hottest areas has to be way less. The number of professionals that are paying attention to mid and small companies that are not in the sexiest areas of the market, I think it has to be down by some big percentage, but I can't prove that. When I was asking around prior to our conversation, just for fun ideas to talk about with you, one investor said that of anyone he knows, you're probably the least affected by momentum of any person, any investor that he's ever met.

Starting point is 00:07:16 You think that's true? Back to your point on what you do so well as figuring out what something is worth, but the market has been so momentum driven maybe until very recently. Do you think this assessment of your style is accurate that you're the least momentum driven investor around? Well, I tend to probably fade momentum in both directions. When the market is going down, I tend to want to buy more stuff. When it's going up, I tend to want to sell more stuff.

Starting point is 00:07:42 I tend to get less bullish when the market goes up. And I think momentum investors get more bullish when the market goes up because it validates their previous view and they figure other people are going to get on board. I was reviewing your book, which I think came out in 2010. Luckily, I kept all my Kindle notes and highlights. And there was a hilarious passage in there. As you were writing about Allied Financial, I'll just read a tiny bit of it. You said it was now clear what was going on.

Starting point is 00:08:07 the company had a qualitative method of valuation where write downs occurred only where they determined money would be permanently lost. They could hold the investments as long as they wanted to for years, perhaps, hoping they would eventually get their money back and avoid a loss. And as I was reading that, I was thinking about this hold maturity situation that's affected so many of the banks right now, we're recording on March 21st of 23. What has this year been like for you? Do the lessons that you learned in the financial crisis pop immediately back to mind, how are you thinking about companies in the market environment amidst this banking scare? I think that it's a little bit different. In the Allied case, they actually were supposed to

Starting point is 00:08:48 mark their investments to fair value. That was the accounting standard. So the point I was making at the time was they simply weren't following the accounting standard. And one can debate whether that was or wasn't a good standard and whether what's the right way to mark private investments, and there's lots of discussion about that going on in the market. What's going on with the banks and stuff like that right now, I think they're mostly following whatever the standards are. So I don't think it's a question of saying that they're lying or that they're cheating. The question is, if you buy a 10-sure treasury and it goes down 10% in value, what are the ramifications of that? And I think that's what the market is trying to rest.

Starting point is 00:09:30 sold true. You've said, I think, late last fall, that the market looked pretty scary from a valuation standpoint, maybe not attractive as a whole, that inflation seemed like it was going to be around for a while. How would you sum up your state of play or state of the union on the market and these major factors today? Because I know the macro environment is something that you've spent a lot of time on. The macro environment is changing in a sense, even from where it was a couple weeks ago, because a couple weeks ago, the inflation was higher than people would like or that the authorities would like or that the Fed would like, and they had to do something about it. The issue is they can tighten only until it risks financial stability because at the end of the day, they can talk about their two mandates being inflation and jobs. But the real mandate is to preserve the idea that the treasury is solvent and that the financial

Starting point is 00:10:27 system is stable. So that's actually job number one. And when you get into a situation where people become nervous about financial stability, that actually has to become the priority of the authorities. So now we're left at a point where they're probably going to have to shift or reduce how much they're tightening, but they're going to do it in the face of not yet having solved the inflation problem. What we're going to have now, I believe, is going to be whether they raise 25 dips or whatever this week or not, the overall trajectory is probably less tightening,

Starting point is 00:11:02 less inflation tightening than it was two or three weeks ago. And yet, I don't think the inflation outlook has changed at all. And so there's real risk that they will wind up slowing down, and then the inflation will resolve itself however it does. Do you describe the jelly donut theory of monetary policy? The jelly donut theory is that the relationship between monetary policy and the economy is nonlinear. At some point, the sign flips from positive to negative. The analogy to jelly donuts is the first jelly donut tastes great. The second jelly donut is pretty indulgent, but by the 12th jelly donut, you're just making

Starting point is 00:11:43 yourself sick. So you really shouldn't do that anymore. And I think the same is true somewhat with easy monetary policy. If rates are 10%, let's just say, which is pretty high, and you lower them to 8%, you're reducing borrowing costs. You're lowering the cost of capital in a material way. It's a 25% reduction in rates, but it's a full 2%. And that's going to cause businesses to build factories that they wouldn't have built when the rates were higher. It's going to cause people to buy houses, that they wouldn't have been able to afford when the rates were higher. But you get to a point where rates are low enough that businesses are going to build whatever factories they're going to do or hold whatever inventory they're going to do. And people are going to buy whatever houses and other goods that

Starting point is 00:12:27 they want. And lowering rates is not any longer going to be the key decision maker to what they're doing. So when you're lowering rates beyond that point, and as we approach the zero bound, that's certainly the case. Lowering rates from 2% to 1% really doesn't change anybody's decision-making process in the real economy. I don't mean in financial markets, but I mean it's just ordinary people and ordinary businesses making decisions. If the factory doesn't make sense with a 2% rate of interest, it's not going to make sense with a 1% rate of interest because it probably just doesn't make sense. Once you get to the point where the rate policy has helped as much as it's going to help, then it begins to hurt. And the reason it begins to hurt,

Starting point is 00:13:09 is because when you lower rates beyond a certain amount, it becomes a drag on income. The household balance sheet has $17 trillion of interest rate sensitive assets, meaning if rates go up a little bit, they get more income. If rates go down, they get less income. And they only have $5 trillion of interest-sensitive liabilities because the biggest set of liabilities are mortgages, which in the U.S. are 90% fixed. The result is you have a net of $12 trillion of asset sensitivity to short rates on the household balance sheet, which means that if you lower rates a percent, you're taking $120 billion away

Starting point is 00:13:49 from households. And if you raise rates a percent, you're adding $120 billion. What's actually happened is, is for a number of years, when they were bringing rates to really, really low levels, they were actually depressing incomes and they were actually slowing the economy. They think that they were stimulating, but they were actually slowing. And I think what's happened on the other side of that, as we've gone from 1% to 4%, they're very surprised they haven't slowed the economy more. The retail is still good. The consumer is still good. The employment is still high. And I think that's because going from 0 to 4% has basically been a stimulus. It's added probably half a trillion a year to household income. And some of that gets spent or invested or whatnot. So I think that the

Starting point is 00:14:36 tightening we've had so far hasn't really been effective because it's kind of been like finally getting off the jelly donut diet. And it's actually making the economy probably healthier and stronger. How do you think about the fiscal side of all this? Obviously, the Fed and rates and all that gets seemingly most of the attention. But the fiscal part seems really important too. What are your thoughts there? I think it's a mistake that we delegated the inflation fighting entirely to the Fed. And the Fed wants to take that on. They want to say we're responsible for the inflation. But the fiscal piece is very important. When things were really poor, like in COVID, the Fed was happy to have Congress spend a lot of money to try to keep the economy float. But you have the opposite right now.

Starting point is 00:15:20 We have really high employment. We have pretty high inflation or higher inflation than you'd like, and you have deficits that you've never seen before at a time when there's full employment. So on a structural basis, our deficit situation is far worse than it used to be, and those deficits need to be financed. And essentially, that spending is stimulative and it feeds the inflation. It's really interesting to think about portfolio positioning, even something like gold, which I've seen you talk about within the last year, let's say, how do you think about an asset like that or assets that become more relevant in a macro backdrop like the one we're facing today? I did a talk about gold. I suspect that's what you're referring at the Sone conference last year.

Starting point is 00:16:04 And essentially, the point I was making was at some point there was going to be the war to fight inflation. And it was going to run into a concern about financial stability, whether it's funding the government or some other course relating to financial stability. And now we're about nine or 10 months later, and that's, I think, exactly what's happened. We're at that point right now where fighting inflation has to be traded off against financial stability. And you see it that gold has done pretty well for the last few weeks since the Silicon Valley Bank situation to the extent that the Fed has to choose financial stability over raising rates, then gold is likely to do well. If you think about the history of Greenlight and the way that you manage the portfolio,

Starting point is 00:16:54 I'd love to understand any evolution you had in your thinking over the full period of managing the firm. Obviously, you're extremely well known as like an incredible analyst, like a securities analyst. And I think that's really what you did at the start primarily. I'm sure that's still what drives a lot of your time and investing and thinking. But how is your thinking on portfolio management, portfolio construction, overlaying things like macro bets into the portfolio. Describe how that's changed over time for you. It's actually changed a lot. I learned a tough lesson in 2008 during that financial crisis because we kind of understood what was going on

Starting point is 00:17:31 and got short a bunch of the banks and grading agencies and financial stuff because that seemed to be where the problem was concentrated. But it then turned out to have a really big impact on our long book, which didn't have any of that stuff. But it had other things that were then exposed to the tightening credit conditions and the recession that came. And I didn't really process all of that as effectively as I wanted to or I should have. And in many ways, I thought that 2008 was my worst year. We lost 18%. Other people maybe lost twice that or something like that. So everybody was very nice and said, oh, you didn't do so bad. But considering that we kind of saw it coming, I thought it was a completely unacceptable result. So I have added more macro thinking.

Starting point is 00:18:16 to what I'm doing, and I try to take a bigger view of all of the positions relating to the top down as opposed to just the bottom up. And then it's compounded on the long side of the book where just in the last couple of years, I've had the realization that with some of these stocks, nobody's ever going to care. Nobody's paying attention. Nobody's doing the work. Nobody cares what the company says. There's just nobody home. So we can't make money by trying to buy something three months or six months or a year before other long-only investors figure it out because they either aren't there or they don't have any capital or they're turning into index funds or whatnot. So we've had to reconstruct our long book in a way that is designed, at least in theory,

Starting point is 00:19:06 to earn a return based upon just what the companies are able to pay us, as opposed to relying on other investors to figure it out. Does that imply that through dividends and buybacks, things like that, return of capital, that you're going to be holding things for a lot longer on average, prospectively than you would have before? Look, there's an off chance that I'm wrong and that other people will figure it out. There's also what happened to a couple of our companies last year, which is private equity comes in and pays a big premium.

Starting point is 00:19:36 And then we have to go find something else to do. But the more likely case, I think, for a lot of our companies, is, there's X number of shares outstanding now, and a year from now, there'll be 20% fewer shares, and two years from now, there'll be 35% fewer shares. And in three or four or five years, there's going to be half as many shares or a quarter as many shares, or in some cases, there might not be any shares, and we'll own the last share, and we'll just have to see how that goes. I think it does lead to much more discipline in terms of what we're willing to pay for things or hold things at, and I think it requires probably even longer holding periods.

Starting point is 00:20:11 In addition to 2008, obviously you've had lots of great years, and I want to talk about those too, but it's also fun to zoom in on bad years because I love the lesson learned in 08. What other years or periods, I guess I should say, would you highlight as the hardest for you that taught you the most lessons, but sort of in a painful way across your career? Well, look, we had a very, very rough half decade, roughly from 2015 through end of 18 or into 2019, team, very, very difficult for us. What essentially happened was trillions of dollars moved from active management into index and passive strategies. And I didn't appreciate the importance of it. Once upon the time, I always liked passive strategies because I felt we could analyze things

Starting point is 00:21:00 better than computers. So if something was being kicked out of the S&P 500, we could buy that because it was just a machine selling. I didn't have to say, well, what is the guy who, owns this, what does he see in this company that's wrong that's making him sell, he'd say, no, it's been kicked out of the S&P 500. They have to sell. And that's an opportunity to buy. So we did a lot of stuff like that and did a lot of spinoffs where maybe the spin co wasn't part of some index. And you get all this initial selling relating to these companies. And you have really great opportunities. But what happened is the indexes went from being price takers. In other words, they're here to sell to essentially being the price maker.

Starting point is 00:21:42 They are so big, whatever they do drives the market. And when you take money from active managers who are mostly trying to buy things that are worth more, whatever it is they're buying, they think it's worth more. And if they have any sense of valuation, some of them don't care about valuation, but many of them do or did, you're taking obey money from people who care about valuation and placing it into a structure that actually, rewards overvaluation. Because if the stock is trading for twice what it's worth, when the money goes in the index fund, the index buys twice as much. What essentially happened was you had redemptions

Starting point is 00:22:18 from undervalued stocks being redeployed into overvalued stocks. And that caused a huge divergence in our entire book. And then like 2018, we couldn't get anything right. And we lost money on our long book and on our short book in big ways at the same time and simply couldn't make money doing anything. Fortunately, I think that a lot of the switching from active to passive is now behind us. I don't think passive is going away. I don't think it's going to reverse. But I think they've pretty much got done firing all the active managers that are going to get fired. I remember in periods like that in the quantitative world, especially feeling these existential crises, like after a long period of underperformance, just wondering, have I just missed a memo here somewhere?

Starting point is 00:23:03 I think I've done great work, but obviously the results are what they are. What was the psychology for you personally like during that period of time? What sorts of things were you questioning? Weren't you questioning? How'd you get through it? I've lived through that kind of hell. Curious what it was like for you. It was very, very difficult.

Starting point is 00:23:21 We weren't making money on anything. It's not like you had some winners and some losers. It's like everything was a loser. So part of it was you can say, well, how stubborn do you want to be? The only thing we really could have done better would have made it to play. liquidate the whole portfolio and go to cash or something like that. We weren't going to do that. We had large amounts of investors who left us, and understandably so because they're here because they want to make good returns, and we weren't making good returns. So your investors

Starting point is 00:23:49 one by one leave. Friends say, why are you still doing this? You've made enough net worth for yourself. Why are you fighting this battle? And I'm sitting here saying, well, what am I doing wrong? then you start saying, well, what do other people doing? So people say, well, you're not doing, is you're not doing factor analysis. That was the big thing, I think, in 2018. So we said, okay, well, let's get the factor analysis people in here. We signed a confidentiality agreement, and they analyzed our portfolio, and they come back and say, you're short the value factor.

Starting point is 00:24:22 And you say, really, how is that? And they come back and tell me that my two biggest shorts are value. and that is because they correlate with how value trades, not because they're actually value. So I look at it and go, well, these things are like 100 times earnings. How are they value? And it's like, well, we don't know, but this is what the machines tell us. And I said, well, I can't do anything with this.

Starting point is 00:24:47 If the problem is that I'm toward the value factor when I think that I'm a value fund or value oriented, this is a problem. So similarly, somebody said, well, what you really need to do is technical analysis. So I said, great, I'm going to give you 10 stocks. Five of them I'm long, five of them I'm short. I'm not going to tell you which ones are longs and which ones are shorts. Tell me what they're going to do over the next three months. Should I buy them?

Starting point is 00:25:09 Should I short them? What should I do? And he looks at the charts and maps it all out and gives me his recommendations. And three months later, he was right on exactly five of them and wrong on five of them. I don't know what to do with this. So the point is, I would open to trying to figure out better ways to like do what we're doing. but at the end of the day, this was just going to be an impossible environment for what we were doing. And frankly, the fact that we didn't double down on things and we risk managed and we covered

Starting point is 00:25:37 shorts or least proportionally as they went up, it probably saved us. We easily could have lost 100% or something like that instead of what we did. And I know that doesn't feel great or didn't feel great at the time. But in hindsight, I don't have a lot of regrets about the period. And I'm glad that maybe we've made it see the other side of it. If you think about just the core thing that you've always done, which is trying to figure out what something is worth, how do you think about changes in that process

Starting point is 00:26:07 over the period of your career with the availability of information and the speed of information, like the velocity with which a new piece of news propagates through the investing network and so on? Does it change how you decide what something is worth, just the pace and dissemination of information that exists today? It used to be like time arbitrage was a big part of what we did. The average long-only investor cared about six to 12 months. So if we could care about one year to three years, that was enough time arbitrage.

Starting point is 00:26:40 Now it's extended in a weird way. Nobody cares about six to 12 months anymore. That's not even a thing. We can't buy things the way we did. We used to be able to buy things and say, well, this is an okay company. and it's at 11 times earnings, but I think that the earnings are going to be 10% more over a year or two or maybe 20% more, and it'll get re-rated then to 15 times earnings because people will see that it's better than they thought. So the stock will go up 60 to 80% over a couple of years,

Starting point is 00:27:09 then it'll be fully appreciated and we'll move on to the next thing. The problem now is if you buy that thing, even if it plays out the way it does, if it started at 11 times earnings, in two years, it's very likely instead of being at 15 times earnings, feels like it's going to be at seven times earnings, or basically at the same price with earnings up 40% over a couple of years. And you're not really going to make any money because there's nobody who is appreciating what is going on and analyzing it. It just gets lumped into a bucket. So we need to have that story combined with, well, instead of paying 11 times earnings, we're going to pay four times earnings. And we're going to pay four times earnings, and there's going to be a 20% buyback going on.

Starting point is 00:27:52 And I think if we're able to do that, and we can do that because there's really nobody paying attention. So there's plenty of companies that are actually that cheap. Like you say, well, where do you find companies that are that cheap? They actually are companies that cheap in unpopular areas that don't even necessarily have bad businesses. And I think we're going to earn our returns off of buying things at much, much lower values and holding them until the capital has been fully returned.

Starting point is 00:28:17 In the book, you talk about this three-step process, basically understanding the real economics of a business, comparing those to reported earnings or reported financial statements, and then sort of making sure that there's alignment between the company, its management, and investors. Is that very simple framework still hold true for you as the way that you're approaching? Let's say you've never heard of a company or a stock before and you're approaching it for the first time. Is that the way that you're going through a new business? It's still the first step in the third step, but I would take out the second step. out. We are trying to figure out what they're worth, and we are trying to figure out the alignment of the decision makers to make sure that the value is going to be maximized for the stakeholders. But we're no longer really focused that much on the differences

Starting point is 00:29:02 between the economics of a business and what the financials say, because I don't think anybody is paying any attention to this. It becomes sort of irrelevant. If you think back on every company you've studied, is there one or a few that stand out as the businesses that taught you the most about investing? And I could say it's stock or company. I'm using those interchangeably. What stand out as investigations that really leveled up your understanding of the world or of investing? There was a company early on. Back then, we were really focused on the economics of businesses. I learned that you have to ask the right questions. Because if you don't ask the right questions, you don't necessarily get to the right answers. There was a company that

Starting point is 00:29:42 was in the business of lending against subprime credit in auto. So I wanted to reconstruct the economics of the business. So you say, well, how much interest do you get? How long do you get that interest? And then what are your losses? And your losses should be, how many cars do you repossess? And how much do you lose each time there's a repossession? So we got all those figures and I did my calculations and I figured, well, this is a pretty good business. And then a quarter or two later, it was much worse than I thought. And we lost a bunch of money. We went back to the company and said, well, why were there so many losses? We thought you were getting this many repossessions and losing this much on each repossession. And they said, yeah, but sometimes we try

Starting point is 00:30:24 to repossess the car and we can't find it. And it doesn't count as a repossession. And we have 100% loss. So there was a whole other lost piece that I had missed in the analysis because I hadn't thought of it. And I didn't know to ask the right question. It's very important to figure out when you're analyzing businesses, what are the actual economics? And can you ask the right questions and get the right information that actually lets you discern that? Can you tell the story of when you invested in Apple, I think, pretty much near its cash value? Like, that's always such an interesting company in stock because it's been so high, so low, such interesting history itself. What was your history with Apple?

Starting point is 00:31:04 We bought Apple a number of years ago. I forget exactly when. but it was trading around cash, and it was right before Steve Jobs joined the company again. And we bought it, and the stock went up 30 or 40 percent for reasons we couldn't figure out pretty quickly, so that it was well above cash, but nothing had obviously improved and we sold it. It was probably the worst sale of my entire career. If we just kept that Apple stock at that value, because we were literally talking about the $1 billion company or something like that, we probably owned a couple percent of it. That would have been really awesome if we just kept it.

Starting point is 00:31:37 that. But I made my 30 or 40% quickly and moved on. I mean, that was before they even had the music player. iPod, yeah. The iPod, yeah. So in any case, a few years later, after the phone was out, there was a view that Apple was a one-hit wonder, that it was going to turn into the next Blackberry, that Samsung was going to commoditize it. And if you looked at the margins, they were too high, because if you just took apart all the components of an iPhone and commoditized, them, Apple was just earning too much and they were over-earning and so the whole thing was going to collapse from all the competition. And our observation was, is that Apple was much stickier than that. It wasn't just a bunch of hardware, but it was also a software and ultimately also it was

Starting point is 00:32:23 services and that the devices worked well with each other. So once you had the music player, you wanted the phone. And once you had the phone, maybe you prefer the computer. Ultimately, other devices that they've now sold, the watch and the AirPods, those weren't even part. of the game at that point. But the point was, is once you had one Apple device, it was complicated to switch, and you would tend to renew, and you were getting a value, not just hardware, but also software. So some of the margin should be a software margin, and some of the margin is a hardware margin, which means that the margin should be much more sustainable than people thought. And ultimately, that story proved right. We sat there for about five or six years, with our largest

Starting point is 00:33:06 position. Some days it traded at six times earnings, some days it traded at nine times earnings. But we looked at it and thought, wow, this is like really a high quality consumer brand. And it should really get a recurring multiple that suggests a much higher level of sustainable profits. And ultimately, the market has re-rated. I think today Apple probably trades it 25 times earnings. And that doesn't seem wrong to me. But we no longer hold the stock because I think everybody sees it the same way now. Obviously, like Apple's been an incredibly high-quality business, arguably one of the best businesses of all time, if not the best. How do you think about the notion of quality in business? Is that concept something you spend a lot of time thinking about or caring about?

Starting point is 00:33:47 How would you define quality? Keep in mind, when we owned Apple, the consensus was it was a low-quality business. It was a one-hit wonder that the founder died somewhere in the middle of our holding period and wouldn't be replicated, that the market. would be competed away and that the company would essentially disappear. Literally, when you're buying company at four times or five or six times earnings, and if you took the cash out, sometimes the value is even less, this was not considered to be a high quality company. So what we want to do is we want to buy companies that are better quality than the market perceives. But we don't want to pay the price that high quality companies go for at the time when everybody agrees

Starting point is 00:34:31 that they're high quality companies because I'm not sure what the point of that is. So the notion, though, of quality itself, so you've got, let's say, a varying perception on quality relative to the markets, but still, what does quality mean? If you had to define that word to a business school class or something, how would you define a quality business? It's interesting because a lot of people think that the quality has to do with low volatility, like highly predictable. But quality, businesses or companies that are able to earn eye returns on capital on a sustained basis. Simple as that.

Starting point is 00:35:04 You don't need to get more complicated. What about on the short side of your investing career? You wrote about a couple of years ago, the, I guess now infamous Delhi in New Jersey, where a company owned a single deli and its market cap was like $113 million or something. And sometimes there's just these preposterous stories like this on tens of thousands of dollars of earnings where it just seems so obvious like, oh, you should short this thing. And you've also very famously shorted a big bucket of very expensive stocks, things like Chipotle and Amazon that have, I think, probably since then, done quite poorly.

Starting point is 00:35:35 But shorting is just this terrifying thing to me. I've never been a short seller. I'm curious how you think about the role of shorting in an investing portfolio for you personally and how you've changed over the years in your view on this. I think shorting has helped us over time. What it does is you're selling things probably for more than there. worth where you think that there's a negative risk-adjusted return. And then second, you get a market hedge without having to explicitly hedge. So if the market goes down, your shorts go down,

Starting point is 00:36:08 your longs go down, you essentially preserve capital when things are working well, and you become more liquid. Because if you're short a dollar and long a dollar and you have no cash, let's say, and it all goes down 10%. Well, now you're a long 90 cents and short 90 cents and you have 10 cents of cash. And that new cash, then you can use to buy more of your longs or buy new longs or something like that, which we tend to do when the market goes down. I like to buy things when the market goes down. And Schwartz provide new capital in order to do that. And then also, sometimes you actually make money because the company really was overvalued and the market figures that out. How do you think about concentration both on the long and the short side? Again,

Starting point is 00:36:51 parking back to the book, which of course is 13 years old. I think you said, you want to be concentrated, but you heated Greenblatt's lesson that passed, say, 15 or 20 holdings, you've sort of gotten the benefits of diversification. So you're willing to let a position be 20% or so or even more of the portfolio. Talk to me about portfolio construction, concentration, your philosophy on these topics. We're looking for situations where we have a very, very different opinion. And we think we're going to make a very good risk-adjusted return. And it's hard to have a lot of those. So when we actually get something where we have a high level of conviction. We need to put ourselves in a position where we can get paid adequately for

Starting point is 00:37:29 that insight. So we want to take relatively bigger positions when we have a good deal of confidence. Do you think that there's any scenario where you trend towards, I'll call it like a more Buffett-like approach where I think he said recently he made 12 good decisions in 60 years and that basically explains his history, kind of like you're saying, these insights are hard to come by? Do you think that the turnover, let's say, of your portfolio has trended or will trend downwards over time based on that concept, that these insights are rare? We've sometimes had long holding periods for things even from the beginning. The very second stock that I bought in the fund in 1996, we held until 2007. That's a relatively long time.

Starting point is 00:38:12 I don't think that the ideal holding period for stocks for us is forever. I think we should buy securities with a view that eventually they're going to reach a value where we don't find them to be exciting and we should sell them and find other things that we think are exciting. I don't believe that the ideal holding company is forever, but our holding period probably is going to be longer than most similarly situated peers. You wrote your thesis on investing in airlines or the airline industry. I'm really curious to hear about not only airlines, but other places where you think there's just something structural going on, whether that's regulatory or otherwise, that just puts it in a too hard pile

Starting point is 00:38:52 or it doesn't make sense pile or something like that. What did you learn studying airlines all those years ago? What I learned from airlines is there's just competing interests. And the competing interests are having airline companies that make enough money that investors want to invest in them so that we have air service. And the other side of that is consumers want ubiquitous air service. that doesn't cost too much. So what happens is you have a cyclical back and forth

Starting point is 00:39:18 where airlines make money for a while and then the authorities make it hard for airlines to continue making money. So then they lose money for a while and they all go bankrupt and then the authorities make it easier for airlines to make money because we actually want to have airlines.

Starting point is 00:39:34 And as I've observed, I think that cycle has lasted. I still think we have back and forth. When I say they allow airlines to make money, they allow things like mergers and stuff like this, or they allow slots because it's a constrained industry in a lot of airports. They make it more possible for monopoly flights from here or there, at least in part of a route network, so that airlines can make adequate returns. When they start making too much money, then everybody complains, and the authorities make it harder.

Starting point is 00:40:06 And so that just goes back and forth, and it makes it a very difficult industry. degree to invest in. I'm sure that there's others. I have generally found trying to figure out whether bio-fetched companies are going to succeed in their clinical experiments isn't a very good skill set for us. And every time I stick my toe into that area, I wind up losing two toes. I've learned a more painful way on that. But science stuff is tough. Another area of investing that I'm fascinated by is the value of sports franchises. It was recently spending some time with someone who owns, I think, the largest team in the IPL, the Cricket League. And talking to him about the value of a franchise is so fascinating. And I know you're a big baseball fan and a sports fan.

Starting point is 00:40:49 How do you think about the value in sports franchises as a unique and interesting asset? It's almost like a rare collectible. I don't believe that sports franchises are valued based upon the cash flows that the teams throw off. In fact, they probably mostly don't throw off cash flows. but people sometimes decide that things are desirable to own for one reason or another. Some people buy art. And if you buy art, it's not because you like the value of the canvas and the value of the paint or even necessarily the impression, but there's a whole market for this. And people pay higher and higher amount because certain paintings or painters or whatnot are considered desirable. So it's kind of worth in the eye of the beholder. And owning a sports team or part of a sports team

Starting point is 00:41:37 has other interesting kind of things. Who are you going to meet? What is that life experience? Do you want to have an opinion as to who the center fielder is going to be so on and so forth? And that has life experience value to people. So the values of these sports franchises keeps going up. I think because people see that as a positive experience that they would like to have part of. And then eventually they sell to somebody else at a higher price who wants to have that experience. Are you still interested in that world in potentially owning sports franchises? I think it's unlikely that I'm ever really going to own a big part of a sports team. Speaking of games and experience, how did you get so good at poker so quickly? It seems like you kind of went from not being a poker player to being a very good one.

Starting point is 00:42:22 I don't know how quickly that happened, but pretty quickly. What was the backstory there? Was it just something that came naturally? Was there some other deliberate work or intention behind it that made that possible? I was always a game player and a card player and stuff like that. And this goes back to my childhood with my parents and my grandparents and stuff like this. And I played bridge pretty seriously for eight or 10 years. And I got pretty good at that. But Bridge went away when my first child was born. And there just wasn't time for weekend bridge tournaments. And then I got invited to a poker charity thing. And I knew how to play poker, but I didn't know how to play it well. And I went to this charity event. And I had a great time. And I did remarkably well. And I saw a friend who was there.

Starting point is 00:43:05 And he said, oh, you're interested in poker. I said, well, not really? And he said, well, why don't you? So he gave me a couple books to read. And then I started playing a little bit more. And at the time, it was legal to play online. Months, I played a little bit online. I was hanging out with my friend at his house.

Starting point is 00:43:20 We said, in a year, why don't we go play in the World Series of poker, like as a bucket list kind of thing? Let's train for it. So we practiced a bit. We went to a couple more local smaller tournaments and stuff like that. And then in 2006, it was time for this bucket list one time. event at the World Series, and so I entered the main event, and I had the most incredible run of great luck that I will ever have in my life playing cards, and I somehow finished

Starting point is 00:43:48 18th out of, I don't know, 8,500 people, and it was really amazing, and I guess from there, I kind of knew I'm going to spend the rest of my life trying to replicate that. So I play a bunch of poker, and I have a good time with it. What do you think separates great from very good? in poker. What are the attributes that allow someone to get great? There's a lot of players who are a lot better than I am. Now you've got computer training. There's all this game theory and studying hand combinations and stuff like that. Many of the top pros are technically way better players than I am. So you have to recognize where your strength is and what you're doing at the table and how they're going to perceive you.

Starting point is 00:44:30 And when I play against top pros, they generally perceive me probably to be pretty weak. my advantage is that I care less. This for me is a hobby. For them, it's their livelihood. So I can be relaxed, and I'm going to make my best decision. And if it doesn't work, it doesn't work. And then I'll be done with my vacation and I'll go back to my day job. So that's fine.

Starting point is 00:44:51 For them, like in the main event of the world series, that's their validation. If I do well in that event and I'm a pro, this proves that I'm a great pro. Or it proves me versus my peers. So they have a lot of pressure. They have a lot of pressure on them. And you can take advantage of that in a poker game. If you can feel the pressure that the other person is under, because then they're going to make inferior decisions. That's what my edge is, which isn't as good as their edge, but it allows me a punch your shot.

Starting point is 00:45:22 Speaking of hard games, if you play a game where you imagine that the entire stock market was shrunk down to assets being priced by a small group of investors, and obviously you're competing with the average price. What kinds of investors, specific investors, would most make you say, I don't want to play this game anymore? Another way of asking, what investors that are out there or have operated that you've seen operate, do you think do the best job, maybe that you've learned from, at fundamentally pricing securities and assets? The trend is so far against that.

Starting point is 00:45:55 Why I'm asking? There's fewer and fewer of those. And I don't see any sign of that changing. You know, I just got this random email from some kid in Europe who's doing some kind of an academic thing. And he's asking me, well, why isn't value investing in the Graham and Dodway even taught in business schools anymore? And do you think it should be? These are questions that he's asking me that I'm contemplating my answers to. And I look at it and say, yeah, that's the way the world is headed. It's headed away from traditional Graham and Dodd type valuation. people who have done other things are perceived to have done better over a sustained period of time.

Starting point is 00:46:38 So I just don't see the pipeline of people coming into the industry who are trying to do things in a traditional way, the way that V value companies. So I actually think that the opportunity field for me in a lot of ways, you asked it was better to start then or start now. It was probably better to start then, but I'm benefiting. from hindsight. I actually think we're moving into a period where we're so alone out there that we don't even have to be all that contrarian, and I think we can keep it pretty simple, and I think we'll wind up doing okay. Even in face of all that, as you think about the

Starting point is 00:47:17 landscape of investing and the business of investing, I'm really curious about your relationship with limited partner investors, with your investors, and what your career has taught you about doing that part of this business well. I asked because you've had the benefit of so many cycles. I'm sure you probably met just about every limited partner that exists out there. If you were giving advice to a young analyst that was starting today, what would you tell that young investor about that side of this world and this business? The first is nobody ever comes into your office and says, I'm thinking about investing your fund, but you should know that I'm a short-term fickle investor. Never happens. They all are going

Starting point is 00:47:56 to tell you whatever they're going to tell you. and it's not worth your time to try to sort out who the good investors are and who the bad investors are. It's better to have a diversified group of investors. So you have a lot of decision makers making their own decisions. And if there's a particular thing, you don't want money from this type of political orientation or something like that, I get that. But in terms of sorting out institutions and individuals and which ones are better and which ones are worse, despite whatever they tell you, at the end of the day, they want to just do well. And if you do well, they're going to be happy. My goal for a long time was to just never be anybody's biggest problem.

Starting point is 00:48:38 And if we'd managed that, we probably wouldn't have had the redemptions that we had. But unfortunately, we had two or three years where we actually were the biggest problem, probably for some investors, and we're the biggest problem in their portfolio. So then they redeemed. That's the nature of things. And what about on the team side, what have you learned about hiring well, training well, mentoring well, the young investors at Greenlight that you work with? I've learned that research analysts are very valuable, but they're also a turnover from time to time. You get very few that are going to want to do this in this exact spot for a very long period of time. If they're really good, a lot of them are going to want to go do this themselves and put their name on the door and start.

Starting point is 00:49:25 And we've had many Green Line analysts who've gone out and started their own funds. Many of them have been quite successful doing it. And others, after a number of years, if you paid them a whole bunch because they've contributed so much, decide that they don't really like the stock market and they don't really like this job. And what they really want to do is move to Maine and make Apple cider or something like this. want to do something like that. So analysts, they don't last forever, but they're very good. And it's important to hire people of high raw intellect and critical thinking ability and integrity and that you want to see every day. And that's really what we kind of look for here, because

Starting point is 00:50:07 among other things, I have to work with everybody. I want to work with people that are going to be nice to work with. What is the style of that interaction that you found best for you? Do you tend to hire people that can just be left alone and you interact with every so often? Or do you try to push people hard? Do you try to challenge them hard? Do you think there are more or less effective ways of being the senior person on top of a group of analysts? I try to adapt to them more than make them adapt to me. They are going to communicate what they're going to communicate. We don't have a lot of standard procedures. I hire people that I think are talented and then I let them do their thing and I supervise them as I see they need.

Starting point is 00:50:45 Sometimes they do need to be reminded to work harder or turn over things faster. And other times, they do stuff really well. And the communication is not consistent across the endless platform because they have their different styles and it's easier for me to adapt to them than it is to try to get them to do everything my way. I'm curious about the source of drive and the source of joy in the investing. process for you at this stage of your career. What aspect of it brings you the most joy still after a long time doing this? I get the most fun out of figuring something out. I'm probably

Starting point is 00:51:25 happier the day I'm making the investment than the day that the investment succeeds. The day I'm making the investment is the day that I think I understand something. And then you see what happens. Then you see if you're right or you're wrong. And that actually, I mean, it's very interesting, but it's somewhat less interesting. So much emphasis is on the buy decision. How do you sell? Is there a good reason that you've discovered is the right way to sell a security for you?

Starting point is 00:51:49 Well, first way, we don't have to sell all. You can always just sell some. So if something goes your way and you're not really sure why it's your way, it's probably good to sell some. If it's gone to a value that you think reflects everything, then it makes sense to sell some. And if you think you're wrong,

Starting point is 00:52:06 because the facts have changed or your analysis was wrong, or you changed your mind, then it's usually good to sell all of it. And that's kind of the way I approach it. Is there a situation you can remember where you invested a lot of time in trying to understand something, but ultimately did not understand it? It's happened many times. What's the most visceral example that comes to mind?

Starting point is 00:52:27 I think sometimes you get into situations that are too hard. I highlight certainly anything relating to, like, is a drug going to succeed through a clinical study. You study the preliminary results. You might call the doctors, you might call people in the field. You try to see what the excitement is around it. And at the end of the day, it's a double-plined study, and you're going to get what is almost a random result. And I don't think making 100 more calls or having more knowledge is going to help. Maybe if you were truly a scientist and you could understand the chemical makeup of the drug, maybe you'd have some ability there, but I don't think we've had any success in figuring stuff like that out.

Starting point is 00:53:10 It winds up in the too hard. We pretty much put the entire emerging markets into the too hard bucket as well. Because there you're dealing with local operators, local exchanges, local market participants. Unless you have feet on the ground and you're really becoming insider, it's really hard to understand why you're going to have an advantage in figuring out security that's trading in India or China or something like that. Since we don't have those kind of operations and I'm not really interested in creating them, we just tend to stay away.

Starting point is 00:53:43 What's the opposite of biotech for you? Like an episode where the click of understanding was the most satisfying in your memory? We do really well with financial institutions. The balance sheets are complicated. The financials are complicated. The economics are tricky. And people aren't interested in spending the time. So we often have our best edges in understanding.

Starting point is 00:54:06 the financials of financial institutions. That being said, most of the time these days, nobody cares. So we've actually focused much more of our portfolio. Well, we still have a bunch of financial institutions, but a lot of it is in much more basic businesses that are just disliked for reasons that don't make sense to us. I was just studying Markell and some of the history of insurance. And it's always so interesting how old so many of the insurance companies are, the dominant ones were started pre-1950 or something. What have you learned about within financial institutions insurance and reinsurance specifically? Because obviously that's a place that you've built and studied a lot. We have a reinsurance company. I'm the chairman of it, which doesn't mean I'm the underwriter.

Starting point is 00:54:50 I don't actually write the policies, but I've watched our teams battle with this for the last decade and a half. And I have to admit that it's been far more difficult than I thought. I think we've run into numerous examples, which are essentially analogous to the what happens when you don't repossess the car type of analysis. And losses have sometimes appeared in places that were never even contemplated in underwriting. And I have found it to be a very, very difficult way to make positive risk-adjusted returns. I used to think initially we could figure out the stuff maybe better than other people. So we wrote a concentrated portfolio of things that were mostly proprietary deals where we had the whole deal. And the first two or three times,

Starting point is 00:55:40 it worked spectacularly. And that led to a lot of confidence. But ultimately, I don't think that that turned out to be a sustainable advantage for the company. So we've had to shift entirely where it's a much more diversified mix. And even then, we've had fewer blowups, but it's still been a real challenge. Currently today, management is very, very optimistic that the market has finally gotten good. And so we should make some money for a while. So that would be fantastic if it actually materializes. I'm more in the I'll believe it when I see it, yeah, which doesn't mean I disbelieve them. It's just that this isn't the first time. And it's been a far more difficult operation than I imagined it would be when we started it.

Starting point is 00:56:27 Was your motivation the lessons of Berkshire and the power of insurance and float for getting into that world? Partly. And I also felt at the time that there were some bad incentives within the reinsurance industry that we could take advantage of because they wanted to make all their money in insurance and not really care much about investment income. So they were investing in three-year duration double a rated bond portfolios. I felt like we could make excess returns by investing in it better than that. And I felt that if we could make enough money on the investment returns, then we didn't need to do the traditional story of growing your top line of reinsurance every year.

Starting point is 00:57:08 So I felt we could maybe slow down in a bad market and accelerate into a good market and be motivated more by the economics than the way that peers who are much more beholden to what Southside analysts were telling them to do, like grow your premium by 11% every year and stuff like that. I think that theory would have worked out, but we haven't been able to execute it successfully enough. As you apply your sort of understanding of financial institutions to today's market, you mentioned earlier that the comparison with Allied's not right because All right was actually flying in the face of accounting convention. That's not necessarily the case here, but it still is the case that some of these balance sheets

Starting point is 00:57:49 look kind of off sides if you just read the headlines. What's your assessment of the system, its health, the risks, how that makes you think about the markets and the economy? I think the current banking situation is super interesting. I don't really know how it's going to sort itself out. It seems to me that banking 101, like when I first started in the business, one of the first things I did was we were investing in these demutualizations. So you'd have these mutual banks and they'd have a prospectus. And if you had a deposit in the account, you could buy in the deal.

Starting point is 00:58:22 So you had to analyze the prospectus of banks. And there's two risks that banks basically have. They have interest rate risk and they have credit risk. So you have to analyze the credit risk. But you also have analyzed the interest rate risk. And the main thing there was, is there a mismatch between the assets and the liabilities in terms of the duration. And there always was disclosure about this. I think it's kind of like banking 101 is manage your interest rate risk. And what you have here is you've had a select number of financial institutions that have badly mismanaged their interest rate risk. So they have upside down balance sheets where they've basically lent out money at low rates for long periods of time. In the cases of mortgage back securities, periods of time that extend

Starting point is 00:59:04 as rates go fire, and they're funding it in short term. And then as the short rate goes up, You have to pay more and you're not earning more because you've locked in your asset return, so you kind of go upside down. So there's been a real problem from it. It's a risk management failure by some of these banks. On the other side of that, you have the idea that we've long held. And it may not be a good idea, and it may be an idea that's going to change, which is that large, sophisticated parties, meaning people who have a lot of money or companies

Starting point is 00:59:37 that have a lot of money, don't benefit from FDA. I see insurance. So they put money in above a certain amount. They're at risk if the bank doesn't succeed. And there was a thought for a long time that sometimes banks would be in trouble, and then they'd have to pay more interest, higher rates, because they were a little bit riskier, and sophisticated financial people could figure out, do they want that extra risk that comes from investing in a riskier bank versus a less risky bank?

Starting point is 01:00:06 I'm not sure if that is a practice these days. I think we just had an enormous failure by corporate treasurers. The corporate treasury function is to make sure that your cash is invested safe. And I think there were other agendas that some of these corporate treasurers have, maybe their personal mortgages or their venture capitalist's personal mortgages that were causing them to not do the treasury function to make sure that the cash of the company was invested safely. because there's always been safe alternatives. You can just buy a treasury. The problem is that the treasuries are now up in yield,

Starting point is 01:00:41 and the banks have been sticky and slow in raising it because they don't want to give away their profits, and they're just hoping depositors stay at low rates. You have a lot of moving pieces here, and you've had a lot of failures. So then the question is, what is everybody going to do about it? And some people are calling for everybody to be protected, that depositors shouldn't have to figure out what deposits are worth. And maybe there's some merit for that, but it seems to me that some of this is people just wanting

Starting point is 01:01:08 free FDIC insurance without paying the premium to the FDIC. And I'm not sure of changing the rules after the fact to reward. That is so great. I doubt that this is actually a systemic crisis. I think this is a few banks that have gotten out of line and risk managed poorly. And in a capitalist system, they and their investors should lose money. That's kind of like what's supposed to happen. Whether that actually happens, I don't know.

Starting point is 01:01:39 We have a lot of regulatory interference and a lot of shrill people calling for bailouts. And sometimes the squeaky wheel gets the oil. And that very well may be the direction of what we go. You've obviously studied home builders and have a large exposure to stocks or at least the one position in the home building world. Is that a big important trend in your mind for the country? And if not, what are the big important trends that you're watching? that you're interested in that may or may not impact your investing? Housing is a basic thing.

Starting point is 01:02:10 Everybody needs to live somewhere, whether it's a rental or whether it's a owned house. We need housing. We've had a housing shortage for a good long time, particularly in markets where people are moving to. I happen to be the chairman of a home builder, and we're in Atlanta and Dallas and Florida and Colorado, and these are places where people are moving to. And so there's a steady demand for new housing. And there's been a shortage. There was probably too much housing built in 2006 and 2007 and bubble. And that actually was a bubble. But since then, the build rates have come down a lot and they've stayed well below the long-term trend. Population keeps growing. From my perspective, it's a very lumpy business, but it's a very high-quality business. And the market perceives it as a

Starting point is 01:02:58 low-quality business because it is true that depending on macroeconomic circumstances, you don't really know what the profits are going to be a year from now or two years from now or even necessarily six or nine months from now, which makes it challenging for investors. But on the other hand, the company we're involved with the screen break partners. We earned over a 30% return on equity last year. This year, people think it's going to be worse and have our return on equity according to the analysts at 15%. So it seems to me, though, if you can make 30% in a good year, or 15% in a bad year, that's a pretty good situation. And yet, we trade a little bit over book value and nine times this year's consensus

Starting point is 01:03:39 or something like that, and five times what we made last year, to me, that seems like a very good place to be invested. It's the old comment, you want to smooth 8% or 6% or a lumpy 15%. This is the lumpy 15%. As a value-oriented person who's always seeking to understand what something's worth, how do you approach new major trends in technology? And obviously I'm thinking about today, mostly around AI and how that will affect existing companies.

Starting point is 01:04:08 Is that something that you watch patiently? Is it something that you get all over when there's a new explosion in a market like that? How do you approach these big technology changes? Because you've seen a bunch of them. If the goal is to try to figure out who is going to have the best AI solution, that's outside of our competence. We're not going to figure out who has the next breakthrough.

Starting point is 01:04:28 in AI that is going to leapfrog everybody else's AI. There's people who specialize in that or have more technical knowledge. So what we have to do is we have to think more broadly how are businesses that were involved with likely to be impacted by AI if you can't figure out who the leader in AI is going to be. There are some businesses. We have a couple things that we're short, that we think their fundamental business is going to be destroyed by AI essentially replicating what it is that they're doing and taking away their profit pool. And on the long side, you think, well, is this going to be something that's going to have a long-term negative impact or positive impact on these businesses? And in most cases, our long book is so

Starting point is 01:05:20 far away from this at this point. It's generally not really a factor. But we're we would think about it if something occurred to us. Is there anything else happening in the world that we haven't talked about that has your curiosity and attention, whether that's a trend or really anything that we haven't discussed? I pay attention to a lot of things, like who's leading the country and how the country is doing. And on my philanthropic side, I have a lot of interest in everything from early relationship health to bridging differences and being able to talk through and deal with people. people who are different from you. I'm very concerned about the division in the extremes within the politics of the country. I spend a fair amount of time reading and thinking about that too. What have you learned about early relationship health? That sounds interesting.

Starting point is 01:06:11 We have a program that we have been funding. It's really fascinating. And what it essentially shows is if you can create a co-regulation relationship with your parents from a very early age, It helps you adjust to people probably throughout your life. And what we have found is that it's very important for mothers and fathers, but more mothers than fathers, without getting myself into too much trouble, to actually just hold their children, physically touch and get used to the smell and so forth. And if you actually do that, you find it very calming. You can go through a calming cycle. And if you can learn to calm your baby, and if your baby can learn to be calmed by your parent, it enables them to become regulated in their relationships for a long, long period of time.

Starting point is 01:07:02 We've funded a whole bunch of research that is essentially proved out over a sustained period of time, what we're saying. And now we're trying to figure out how to implement this as like a standard training for new parents, whether it's with pediatricians or in the birthing center and so on and so forth. And what about the bridging of relationships between parties that disagree with one another? That sounds incredibly productive. We would all get some training in that. We started an operation that we called a new pluralist. The pluralist essentially accepts that we're going to sometimes agree to disagree and we're going to get on with our lives together despite disagreeing.

Starting point is 01:07:44 So what we've done is we've created a funding collaborative, where we've basically gotten together more than a dozen sophisticated philanthropists, some of whom come from the politically far right, some of whom come from the politically far left, some of whom are in the center and so on and so forth. And what we do is we're pooling our money and we have hired professional staff and we are finding things that we can collectively fund. that are actually going to make differences in communities in terms of bridging differences. David, this has been so much fun. I mean, so many interesting topics, the investing world's changed so much in the time that you've been doing this. I really appreciate your time.

Starting point is 01:08:29 I ask everybody the same traditional closing question. What's the kindest thing that anyone's ever done for you? That is an awesome question. My third grade teacher one day grabbed me by the arm as we were, getting ready to go to recess. And she said to me, you're probably smarter than everybody else in this class, but you'd be better if you didn't tell them that.

Starting point is 01:08:56 And that really stuck with me. What was her name? Do you remember her name, teacher's name? Yeah, it was Mrs. Olson. He called herself the Purple Witch. Why? That was just her nickname. What did that change?

Starting point is 01:09:09 How did that change you? It created a self-awareness that I didn't previously. have. How do I come across to other people and how do you behave in the sandbox? It kind of shook me a little bit, but it was really, really kind of her to point that out. And she did it in a nice way where I was able to hear it. That's particularly important. How do you relate to humility as an investor? What role does that play? Well, the market teaches you humility every day. Most days, something is wrong. Something's not going your way. Sometimes the whole portfolio isn't going

Starting point is 01:09:44 your way. And you just realize that this is really tough. And we didn't sign up for easy and we're here to start to battle it out every day. But we make so many mistakes. There are so many times that we buy something and then it goes down and we know that we're wrong and then we have to sell and take our loss. It reminds you for the next time. You're just not going to be right all the time. A really nice closing story and closing thought and closing lesson. David, thanks so much for your time. Thanks so much. If you enjoy this episode, check out join colossus.com. There you'll find every episode of this podcast complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big

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Invest Like the Best with Patrick O'Shaughnessy - David Einhorn - The Long and Short of Investing - [Invest Like the Best, EP.322]

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