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

00:00Legendary activist investor, Dan Loeb. He, of course, is the CEO and CIO of Third Point.

00:06The lost art of short selling has come back, and it's absolutely critical. It doesn't matter what you do. You have to be really selective. People talk about stock pickers market. This is a bond and credit pickers market.

00:17When we were small, our main tool was shame and humor.

00:21Dan Loeb turning up the heat on Nestle over the weekend.

00:25The shift has really been more towards a dare to be great message. Activism without proxy contest is like Catholicism without hell.

00:34You're very active on the Twitter as well. Oh, wow. You found your voice.

00:38Lot lot of emotion brewing there.

00:41Can we actually start with that? Before Twitter, you were actually quite active, but they were in very different places. I mean, you were in Wall Street Bets before Wall Street Bets existed. Can you just walk us through your evolution as a public persona?

00:56Sure. I mean, was this brand new technology that came out called the Internet. And really shortly thereafter, long before Reddit or any of these other things, were a series of chat boards. There was Yahoo, there was something called Silicon Investor, a few other ones, and people would congregate in Kebits. It was done mostly anonymously, and it was an interesting place to exchange ideas.

01:27There was it was really the wild west. People could pretty much say or do anything, but there was a lot of but there was a lot of substance there too. It's not actually that much different than from today.

01:34You did you engage at all in any trolling per se?

01:38Well, some people use the term OG. Sometimes I say I was the OT. The original troll. Yeah, no, I did. I mean, was fun.

01:48You know, I didn't know I was one day going to run institutional money and have a big fund and I was just having fun and blowing off steam and yeah, was fun. I mean, is fun and particularly on the short side. I mean, there's so much humor in it when you detect these companies, especially in the nineties. I mean, was really unsupervised. There were some incredibly fraudulent companies out there and it was just fun to uncover them and kind of taunt the management teams and ultimately prevail.

02:25You have one story above others that kind of stands out in that era?

02:31I mean, were a bunch. There was Wow. There was a company called Actrade that I remember run by a guy who was like a repeat fraudster and we uncovered it. And I know we really got under this person's skin and ultimately it was really just a factoring company trading at 5, six, I don't remember what it said, some large multiple of book value. And they had created a new technology called TADS.

03:05I don't remember what TADS stood for, but they were basically repackaging factory securities and saying that they had some special technology. They were financing refrigerators and things like that.

03:18Tell us your evolution as an investor. When you started Third Point, I mean, started with very, very little capital. Now it's almost 30,000,000,000 of AUM. You're multistrat. But you learned at Jefferies.

03:31I think, like, you learned helping people like David Tepper allocate capital. Just walk us through how you learned to invest.

03:39Well, I started really fascinated by investing and wanting to do it. I think when I I remember when I was 10 years old, my dad took me My dad was a notoriously bad investor himself, so he didn't give me any good examples. He's a great lawyer, not a great investor. But he took me to meet a broker and I started investing. And then in high school in the eleventh grade, I got a job at the branch office of Paine Webber working for a guy named Alan Crown who let me post his books and make cold calls.

04:14And I think we broke certain securities laws, but I think the statute of limitations has passed. I would trade options on Occidental Petroleum and Teledyne. There was a lot of volatility. And I think I had flurries of making money and lost all of it a couple of different times, but it was a good lesson. I continued doing it in college.

04:34And then my learning started really formally at Warburg Pincus where I really learned to value enterprises. It was my first job Private, kind of across the spectrum of private equity and venture capital. I worked at a risk arb firm, which was really invaluable. And then skipping forward, I had way too many jobs in my twenties. But I got really serious at Jefferies.

05:02I had an amazing opportunity to work on the distressed debt desk there. I started out as a research analyst. I was just like drinking out of a fire hose. There was so much activity. The securities were so cheap coming out of distressed.

05:18And it was, you know, the ten thousand hours, 10,000 reps. We would write up different things every day. There are big blocks of debt to move. And I really got that was my real learning point. And I stress this to people that, you know, everyone's kind of sees mentorship as a sort of hierarchical thing where you, you know, learn from some wise older person, but it's I learned a ton from my colleagues, from my own cohort, and I learned a ton from my customers.

05:49You know, like Eric Mindich was a boy wonder at Goldman. He was the youngest partner.

05:55Earnest partner at Goldman.

05:56Yeah. Ran the arb desk there and he had this triumvirate or quadrumvirate, whatever the four people. I don't want to leave them out, but Amos, Maron, Dineker and some other guys. Anyway, they were great. And they really kind of brought me into their thought process, thinking about event driven investing.

06:19And then, you know, I covered some of the smartest people in the business, including David Tepper. I got to watch their thought process. And I was like a, you know, like a Chinese corporation that was like copying and reverse engineering and taking everything in and creating my database of knowledge and my own operating system kind of taking the best out of what all these different people did.

06:43And what was that style when you first started Third Point? What was that expression?

06:47That was Well, I think, you know, we call it event driven investing. It was really less focused on the quality of business, more focused on very complex transactions, takeovers, spinoffs, risk or arbitrage, bankruptcies, privatizations, demutualizations. And these transactions created unbelievable opportunities for Alpha because of the confluence of dislocation, opacity, kind of time, but also this goes and nothing changes. Now, always quote this Jesse Livermore line, there's nothing new under the sun. A real focus on management incentives.

07:26So, So in all these different kinds of transactions, management was incentivized to sandbag their numbers during a time when there was an excess supply of securities where their options were being set, And we as co investors got to come in with these depressed projections and ride along not just the Well, we got to ride along a few different things that would happen. Greater transparency and understanding of the business coverage companies that delivered a top line and margins and ROE and everything else better than expectations. So it was really a golden era for that type of investment.

08:07And from where that started to what Third Point is today, just describe that and where you want to Where do you go from here?

08:14Yeah. So, stylistically that event approach, It's still something we think about. It's in our framework. But I think what happened really when technology became a bigger force, but really everything changed is a greater focus on business quality and innovation and disruption and more thematic on the one hand, understanding of consumer trends, what's going on in financial services, what's the economic macro backdrop that's supporting all this. And of course, the big topic of this event, you know, AI is sort of the culmination of that, but all of these major technological innovations that have really happened since

09:05You could make money before by not being technology savvy in the markets.

09:10You could be technologically illiterate or just say, don't do it. And you could also be even more or less Up until the GFC, I think you could be more or less economically illiterate and make a lot of money. And now? You wouldn't want to be either one of those things. I mean, given how much more important

09:29Like the tech through line needs to be understood everywhere.

09:32Yeah.

09:33But even if you're like Blue Owl and you're trade I mean, Owl obviously is very sophisticated in tech now, but any pool of capital that used to not be correlated is effectively correlated?

09:45I mean, yes. Yeah, you could say that. And I just want to answer your questions to kind of fast forward and give people a snapshot of what we do today. Rob Schwartz is my partner and we took Campo Karate together when we were 10 years old. It was a purple belt.

10:01I think I never made it past yellow belt, but we reconnected at our twenty year reunion in I'm aging both of us. Sorry to give up your secret, Rob. In 1999, it was our twenty year reunion. And he was working as a sales rep for wireless RF components. And I said, wow, this guy'd be great to do channel checks for us.

10:27And then I asked him a couple years later, say, you meet some smart people. If you ever come across a really savvy engineer, we should invest. We didn't know what we're doing. We weren't venture capitalists, but we're getting behind a person. There was a guy named Dave Fisher, started a company called Radio Communications.

10:44They made chips. He made chips that were, I still remember, ABG compatible for WiFi base stations. And ultimately the company was sold to Texas Instruments. And, you know, we've, I won't go deep into our venture business, but that we started to do within the fund. We've done a couple of dedicated funds.

11:05So, we have that strand of activity. We can talk about a little bit more about what we're thinking and how we're seeing this. But I think what ultimately what I want you to get to is that all these things are interconnected and come together under the platform that we have today. Because we have the main hedge fund, does credit, equity long short credit is both structured credit and high yield. We have a CLO business that we acquired.

11:30We started a private credit business, Does traditional private credit, direct sponsor financing, direct lending and workouts, which is very important. So, solutions as they call it, a lot to do there. And then we started an insurance company a few years ago. It's not the first insurance company we did. We did a PNC company, but this one was wholly owned.

11:56Now we own half of it. And the insurance company captures basically the investment grade part of what we do. So private credit through structured vehicles, structured credit, whole loans, investment grade, both private and public. But we also can use our surplus capital in very interesting ways.

12:20So what's the role of the human? What's the role of Dan Lobe in running Third Point ten years from now? Like ten years before, Dan Lobe was 100% of Third Point. Uh-huh. And then there's now there's agents, there's AI, there's all this learning, there's all of this data.

12:39Where do you see the role of the human? Where do you see the role of systems making decisions, allocating capital, managing risk?

12:47I mean, so first of all, investing now, like, first of all, my time is spent primarily on managing the hedge fund, which for now is the biggest capital pool and the most important business that we're in.

13:02Yeah.

13:02The human element, and I think this is true for everyone you have here, like the element of social component, the human network of knowing people, being able to capture opportunities, work with people, interact, like that's never going away. Like you never Maybe you can theorize that there will be agents that will sit at Andreessen Horowitz and whoever else your funds. But I think the human will always have to be there because people like to, you know

13:35You want to know who's making or losing the money.

13:37Yeah. And there's a there's a thing that I think the agents they have will never really be able to look in your eye and assess all the

13:44You've things that your philosophy of investing in companies from cheap cattle, cheap securities with catalysts is I think how you described it on a podcast recently. And now you're very concerned about moats, defensibility and just the quality or the brittleness as Chamath likes to remind us of the revenue. So maybe could you tell us how you evolve that core thinking about the quality of companies and then maybe give us some examples of the companies that now fit through that filter where you feel they have a moat, you feel they have durability.

14:20Obviously that's everything right now. Chamath talks about the time bounded value of companies and I think that's essential. Are the companies that are going to be around seven to ten to twenty? Like what are the real moats that exist out there? And it is harder now.

14:42I don't think we can I don't know that we can really go out, you know, ten or twenty years ago? By the way, I think we deluded ourselves earlier because I think if you ask people about the moat around, you know, IBM or, you know, some of the other companies AOL. AOL, Yahoo, you know, you'd say the same thing. I mean, we're investing outside of tech into companies that have, you know, some great Well, first of all, it also comes back to the management because we can't really just look at a product or a technology and say, Oh, this is going to be it forever. So we really look for a management team that we think will be adaptable.

15:32And just like you guys were saying last night, you don't want to be on boards of companies. These are things that they should be doing. So I think that's a huge part of it. Like finding management teams that you really believe in that a proven ability to stay ahead of.

15:46Is that quantifiable or is it still very much a subjective

15:50Sorry, is what?

15:50Is it quantifiable assessing the management team? No. Have you built a rubric for doing that? No, it's still very subjective qualitative.

15:57I think it's one of those things after thirty years, there's like a pattern recognition and Yeah. You

16:02Let me ask a question on screening. You know, think you've said recently publicly that there's a lot of opportunities on the short side in the market right now for the first time in a long time. How do you start top down? Is top that down or is it an opportunistic, something comes across the wire and you guys jump on it in kind of an event driven way? Or do you guys have kind of a systematic top down approach to looking at the market and finding those opportunities?

16:32Yeah, there's no one approach to it. I think one thing that we've avoided is kind of a valuation, a solely valuation based approach. I've seen too many people get run over by shorts that have dumb valuations, but they get captured on, you know, Reddit or one of these other things and they just get there, you know, or like some of these space companies right now that there's no rhyme or reason. We had a really strong view on homebuilders from last year that there were two things going on. It just rates, mortgage spreads that were depressing housing prices.

17:20The home building industry was first structurally impaired because of the way that they were all pretending to be NVR, is they all pretending to be asset light, but they had massive commitments to these land pools, which in things that they said were options, but they were really very committed in the capital and that that value was going on. But that the home building industry was really the last industry that had this post COVID hangover of inventory disruptions and pricing that really made no sense. You know, had all those prices went up to unsustainable levels, but so did building costs went up and buyers are no longer able to pay those prices at the current financing environment, but they've also gotten squeezed by inflation and costs. So that's been something, so we've been short on things related to that.

18:25Let me bring Sax into the discussion here, Sax. We've learned a little bit about distribution of public security as your famous indie all in theme song of this great quote, Let Your Winners Ride. I'm curious when you hear Dan talking about this, how you think about as a private market investor, to navigate distributing equities and how you've sharpened your blade about, you know, which ones have brittle or, you know, more robust revenue.

18:54I mean, I'm sure you guys share this. It's one of the most vexing questions. We were private investors in Palantir and I think we sold all our stock in the twenties, Huge mistake.

19:08Gosh. I missed the 10x after going public. Yeah. Or 8x or something.

19:12We were private. We led the B round in Upstart. That was one I think we learned not to go on boards anymore because it restricts your ability to be liquid. But we're also early investors in N phase. And we sold some stock on the IPO and then took a tax hit.

19:35And I think sold it under a dollar and the stock, I think had we stayed on, would have made $4,000,000,000. So I am not claiming to have any great expertise in knowing how to best distribute our

19:45Dude, markets are brutal.

19:47It's so hard. Mean, this is why I

19:50bring it up. We've all struggled with this. Sax, wherever you wound up.

19:53I think it's case by case. I mean, there's some companies where, like I was on a board and you can't sell and you end up regretting that. And then there's others where the best thing to do is just hold on to that stock forever.

20:06Examples in your portfolio, where you've We're made great

20:10not going talk about the ones that didn't do so well, no, I mean, look, I've owned Meta and Palantir as a as a venture investor, as an angel investor.

20:22And you sold?

20:23And the question Well, I sold some and held onto some. Obviously, in hindsight, you take Meta. I think Meta IPOs, Facebook back then, IPO 50 Got you, billion 50,000,000,000 now it's

20:38you imagine how the alternate universe

20:41Like 400, right?

20:42Chamath never sold his Facebook, Or how insufferable he'd if Freiberg never sold his Google, Freiberg would be worth 10,000,000,000.

20:50I wouldn't be nearly as What's that? I wouldn't be nearly as good. It's like It's an

20:54analyst because it created tension. Not real. It's not earned.

20:59So back in those days, ten years ago, we thought a $100,000,000,000 market cap company was pretty much as big as anything could get. Yeah. And so Facebook at 50 or whatever, it's like the upside was to a 100. Things are just totally different now. We have multi trillion dollar companies.

21:15The market's so much bigger and changes.

21:18I mean, that's a rub against Nvidia, which is a $5,000,000,000 company and people feel like it's sort of a ceiling on it. I think we'll look back at some point in time and say that was a foolish way to think about NVIDIA given its dominant position and its valuation relative to the other Is it undervalued right now? Yeah, absolutely. On earnings over the next two or three years.

21:39And is it because people are having a hard time processing the largest entity that's ever existed in human

21:45I think that and the narrative that the Well, first of all, technically there's all this other stuff that's growing faster and going up more. People are, and the long short pods are structured such that they have to be short something. So Nvidia feels like a safe short. By the way, Google was a safe short. Amazon was a safe short.

22:07So, I mean, this just happens and sometimes they'll languish at a valuation and they break out. I think that'll eventually happen with Nvidia.

22:15But there's probably some boundary condition discount to that, right? Like we've never seen a valuation like this. You can't over bet that.

22:22I want to shift topics for a second, just want to talk society and culture before we run out of time with you. There was this incredible thing that you told me, which I relate to these guys, which is you're very passionate about criminal justice reform and specifically you were a key person to get the pardon of Ross Ulbricht. Tell us your views on criminal justice, why it hit such a nerve, and then why Ross Ulbricht? What happened there that said, I must fight for this guy?

22:53Well, let me take a step back and just talk about my framework for philanthropy, which is, I think not unlike Brad Gerstner and many people in the room here, that I care, I would say everybody up here, I care deeply about income inequality. I care deeply about making sure that as many people have opportunities to the incredible things that we've all had here. So my interest in criminal justice reform really started earlier with an interest in education and education reform. And I was very lucky to get on the to start supporting, get on the board, ultimately be chairman of Success Academies, which is a charter school network in New York. And I do think nobody talks about it, but the thing that's hiding out in plain sight for everybody is that the problems with income inequality isn't that, you know, Jeff Bezos is going to be a trillionaire or all these other people are gaining wealth.

23:53It's that we're not equipping children and particularly the most vulnerable children with the intellectual tools that they need to succeed and compete. And it's not because poverty is this intractable thing that can't be overcome. We've proven that it can be. The problem is that the unions and the basic principles that we all use in business, which is accountability and merit and cultivating talent is set aside for the benefit of adults who are part of these unions. It's a systemic thing.

24:26It's not a lack of money. It's really a lack of it's just a broken structure.

24:31Accountability is I think what I'm hearing. Yeah.

24:33So I spent a lot of time on that. I'll just leave it at that. I then became aware, and it was interesting, was looking for issues that conservatives you know, it was great to see Fetterman and McCormick up here. Like what are issues that conservatives and liberals, progressives can agree on? Hopefully, can agree that we want young people to be better educated.

24:54I think we can also agree that whenever you put the government in charge of something, they'll it up one way or another. I I want to give you guys a shout out though for not up this private public partnership with the investments in the private sector. Because I think this administration has done an enormously good job at backing companies, let's put that aside. It's one of the rare instances where I've seen that.

25:18Can you give an example of that that's standing out in your mind?

25:20We have a company in our portfolio called Atom Computing that with many other quantum companies has gotten money from the government. And we were just super impressed that they how they contracted with us to engage with them in cryptography and to meet the government's needs, but also in the financial component, they drove a really tough bargain. The government, the taxpayers are going to make a ton of money on this and their involvement also will contribute meaningfully to the value of this business. It's just like a win all So they're

25:58an investor and a customer.

25:59Right. And they are capturing part of that value as a customer for the American people, which they, I think everybody deserves.

26:09Okay. So back to the

26:10So criminal justice reform, first of all, there's a lot of bad people in jail. I'm not one of, you know, I think the criminal justice movement has been undermined by folks who see it as an opportunity to not prosecute, not deal with bad people that are out there. But there's also a lot of people that are rehabilitated. Well, there's really three different categories. There's people who are falsely convicted.

26:40There are people who have shown contrition and rehabilitation. And there are those who just had a really disproportionate sentence relative to what they did. There's a case right now of a guy named John and Grobman, who was dealt in gray market diapers and formula. He got an eighteen year sentence for dealing these goods. In the case of Ross Ulbrich, I was approached by someone and this just seemed Ross, as people may know, probably this room knows, he was sort of a folk hero because he had this sort of cat and mouse game with the government.

27:21He ran Silk Road. Silk Road was one of the first crypto based exchanges. He acknowledges that he did things that were illegal that he should have done. He regrets it. Drugs were dealt on the exchange.

27:37But that's what he was accused of. The government later said that there were murder for hire incidents. That was never prosecuted for that. And he denies that that ever happened. But in any case, he was sentenced to a double life double life plus forty years.

28:00Who knows how he got the extra forty years on there and how he would spend that after he'd been there for two lifetimes. And there's a woman I met through Intel named Riva Tez who alerted me to this. She's friends with Olaf Carlson Wee and sort of the crypto insiders. And I thought about it, it's like, this guy's got no way out. There's no recourse through the system to get someone with a life sentence out of jail.

28:31This will only work with a presidential pardon. And we worked on it. We had some familiarity with the pardon process, worked on it. Then I approached Charlie Kirk about this. And Charlie really embraced this and embraced this individual as someone who had been falsely, or not falsely, but unfairly sentenced.

28:55He took it to the president. Charlie also had an attorney named David Warrington, who's currently the White House Counsel. White House Counsel. I just found out a couple of days ago because I was talking to him that he was his lawyer for a decade. So I'm not taking credit for this.

29:12I'm not saying Charlie does. It takes a village, but David had been working on it. And on the last day of Trump's forty fifth term, we were certain that he was going to get out and the justice department for whatever reason said, if you commute his sentence, we're going to go after you to the president. And so he, as I understand, he withdrew the commutation. So four years went by and really Charlie took the lead on this.

29:50This was his only ask of the president and the president had to libertarians and to the crypto community promised to deal with this. And not only was his sentence commuted, but he was pardoned. Today, Charlie is married Not Charlie, sorry. Ross is married, is having a child and living a free life after spending a decade, which is probably argue whether that was the right amount or not.

30:18And you feel like you should Is there a role for you to play in doing more of this? Was this a

30:23lot Yeah, of I continue to work on cases. There's an organization called Aleph and we work constantly on different people. And I think it's I feel like as philanthropists, it's great to work with organizations. And there's a lot of great organizations I work with. I do a lot fighting antisemitism and supporting Jewish identity also.

30:52But I also think that we can help people one at a time. I think it just really nurtures the soul and I think it just a good All thing to

31:01right, let's give it up for Dan.

31:02Dan Lodgen.