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

Legendary activist investor Dan Lope. He of course is the CEO and CIO of Third Point. >> The lost art of shortselling has come back and it's absolutely critical. >> Doesn't matter what you do, you have to be really selective. People talk about stock pickers market. This is a bond and credit pickers market. >> When we were small, our main tool was a shame and humor. Dan Loe turning up the heat on Nestle over the weekend. The shift has really been more towards a dare to be great message. Activism without proxy contest is like Catholicism without hell. >> You're very active on the Twitter as

well. >> Oh wow. >> You found your voice. >> Lot a lot of emotion brewing there. >> Can 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 as a uh public persona? >> Sure. I mean, there was this brand new technology uh that came out called the internet. And really shortly that thereafter uh long before Reddit or any of these other things, there were a series of of chat boards. There was, you know, Yahoo,

there was something called Silicon Investor, um a few other ones. And people would congregate in kibbitz. It was done mostly anonymously and um it was an interesting place to exchange ideas. There was it 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. >> You uh did you engage at all in any trolling per se? >> Well, some people use the term OG. Sometimes I say I was the OT. Um >> the original troll. >> Yeah. No, I did. I mean, it was it was

fun. You know, I I didn't know I was one day going to run institutional money and have a big fund and, you know, I was just having fun and uh and blowing off steam and and uh yeah, it was fun. I mean, investing is fun and particularly on the short side. I mean, there's so much humor in it when you detect these companies, especially in the '9s. I mean, that the it was really unsupervised. There were some incredibly fraudulent companies out there and it was just fun to uncover them and kind of taunt the management teams and ultimately uh prevail. >> You have one story above others that kind of stands out in that era. I mean,

there were there were a bunch. There was uh wow. Um, there was a company called Act Trade that I remember run by a guy who was like a repeat uh fraudster and we uncovered it and and um you know I I know we really got under this person's skin and ultimately it was really just a factoring company trading at five six I don't remember what it some large multiple of book value and they had created a new technology called TADS I don't remember what TAD 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.

>> Tell us um your evolution as an investor when you started Third Point. I mean, you started with very very little capital. Now it's almost 30 billion of AUM. your multistrat, but you learned at Jeffre, I think, like you learned helping people like David Ter allocate capitals. Just walk us through how you learned to invest. >> Well, I I started um 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 was 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 11th grade, I got a job at the branch office of Bear Stern, sorry, of uh Payne Weber working for a guy named Allan Crown who let me post his books and make cold calls. And I think we broke certain securities laws, but I think the statute of limitations is passed. I would trade um options on accidental petroleum and teladine. there was a lot of volatility and um I think I had flurries of making money and lost all of it a couple of different times but it was a good good lesson. I continued doing it in college and then um my learning started really formerly at Warberg Pinkis where I really learned

to value enterprises as 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. Uh and then skipping forward I had I had way too many jobs in my 20s. Uh but I got really serious at Jeffre. I had a amazing opportunity to work on the distress debt desk there. I started out as a research analyst and I was just like drinking out of a fire hose. There was so much activity. the securities were so cheap coming out of distressed and um it was you know the 10,000 hours 10,000 reps we would write up uh

different things every every day there were big blocks of debt to move and I really got that that was my real learning point and you know I stress this to people that you know everyone's kind of sees mentorship as this sort of hierarchical thing where you you know learn from some wise older person but it's I I I learned a ton from my colleagues, from my own cohort, and I learned a ton from my customers, you know, like Eric Mindic was a um boy wonder at Goldman. He was the youngest partner. >> Youngest partner at Goldman. >> Yeah. Ran the ARB desk there and he had this triumvirate or quadrumbate, whatever the four four people. Uh I don't want to leave them out, but Amos

Dker and um can't some other guys. Anyway, they were great and they really kind of brought me into their thought process thinking about event- driven investing and then, you know, I covered some of the smartest people in the business, including David Ter. 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. >> And what was that style when you first started Thirdp Point? What did you what

was that expression? >> That was well I think that 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 spin-offs risk risk or arbitrage bankruptcies privatizations demutralizations. 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. I always quote this Jesse Livermore line, there's nothing new under the sun. A real focus on management incentives. 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 um well we got to ride along a few different things that would happen. greater transparency and understanding of the business coverage uh companies that that delivered a topline and margins and roe and everything else better than expectations. So it was really a golden era for that type of investment >> and from where that started to what third point is today just describe that and where you want to where do you go from here?

>> Yeah. So stylistically that event um approach it's it's it's still something we think about it's in our um it's in our framework but I think what happened really when technology became a bigger uh force but really everything changed is a greater focus on business quality and um innovation and disruption and more thematic on the on hand understanding of consumer trends what's going on in financial services what's the economic macro backdrop that's 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 these major technological innovations that have really happened since

>> you could make money before by not being technology savvy in the markets >> you could be technologically illiterate or just say I don't do it and you could also be even more or less e you know up until the GFC I think you could be more or less economically illiterate and make a lot of money >> and now I you wouldn't want to be either one of those things I mean given how much how much more important >> like the tech through line needs to be understood everywhere >> even if you're like blue owl and you're trading I mean blue owl obviously is very sophisticated in tech now but >> any pool of capital that used to not be correlated is effectively correlated

I mean, yeah. Yes. Yeah, you could say that. And I just want to answer your question just to kind of fast forward and give people a snapshot of what we do today. >> Rob Schwarz, who's my partner, and we took Kempo Karate together when we were 10 years old. >> It was a purple belt. I think I never made it past yellow belt, but um we reconnected at our 20-year reunion in I'm we're a I'm aging both of us. Sorry to give up your secret, Rob. uh in 1999. It was our 20-y year reunion, and he was working as a a sales rep for wireless RF components. And I said, "Wow, this guy'd

be great to do channel checks for us." And then I asked him um a couple years later say, "Hey, 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 were getting behind person. There was a guy named Dave Fischer started a company called radio communications. They made chips. He made chips that were I still remember ABG compatible for Wi-Fi base stations. And ultimately the company was sold to Texas Instruments. And you know we've I won't go deep into our our our venture business, but that we started to do within the fund. We've done a couple of dedicated funds. So we have that strand

of activity. We can talk 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 which does credit equity long short credit is both structured credit and high yield. We have a CLO business that we acquired. We started a um a private credit business. Uh it does traditional private credit, direct uh sponsor financing, direct lending and workouts which is very important. So credit solutions as they call it. A lot to do there. And then we started an

insurance company uh a few years ago. It's not the first insurance company we did. We did a PNC company, but this one is was wholly owned. Now we own half of it. And the insurance company um captures basically the investment grade part of what we do. So private credit through structured vehicles, structured credit, whole loans, um uh investment grade both private and and and public, but we also can use our surplus capital in very interesting ways. So >> So what's the role of the human? What's the role of Dan Loe in running thirdpoint 10 years from now? Like 10 years before Dan Lo was 100% of thirdpoint

>> and then there's now there's agents, there's AI, there's all this learning, there's all of this data. Where do you see the role of the human? Where do you see the role of systems making decisions, allocating capital, managing risk? I mean it's a so first of all investing now like first of all the my time is spent primarily on managing the hedge fund which for now is the biggest capital pool and most important business that we're in. >> Yeah. the human element. I think this is true for everyone you have here like the the element of uh the social component that the the human network of knowing people being able to to capture

opportunities work with people interact like that's never going away. like you're never had going to maybe maybe you can theorize that there will be agents that will sit at Andre and Horowitz and who whoever else your funds but I think the human will always have to be there because people like to you know >> you want to know who's making or losing the money. >> Yeah. There's a there is a thing that I think the the the agents of the AI will never really be able to look in your eye and assess all the things that >> you you've expanded your philosophy of investing in companies from cheap catal

uh cheap securities with catalyst is I think how you described it on a podcast recently um and now you're very concerned about moes defensibility and just the quality or the brittleleness as Chimath likes to remind us of the revenue so maybe could you tell us how you evolved that core thinking about the quality of companies and then maybe give us some examples of the companies that now fit through that filter where you feel they have a moat, you feel they have durability. >> Yeah, obviously that's everything right now. Chimath talks about the time bounded value of companies and I think that's essential. um what what are the companies that are going to be around

seven to 10 to 20 like what what what are the real moes that exist out there and it's it's it is harder now I don't think we can I I don't know that we can really go out you know 10 or 20 years ago by the way I think we deluded ourselves earlier because I think if you ask people about the moat around you know IBM or you know some of the other companies >> AOL >> AOL Well, Yahoo, you know, you say the same thing. I mean, look, we're we're we're we're investing >> outside of tech into uh companies that have uh 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 and just like you guys were saying last night, you don't want to be on boards of companies. These are things that they should be doing. So I think that's a huge part of it like finding management teams that you really believe in that have >> have a proven ability to stay ahead of. >> Is that quantifiable or is it still very much a subjective um >> sorry is what >> is it quantifiable assessing the management team? Have you built a rubric for doing that? No, it's still very subjective qualitative. I I think it's one of those things after 30 years

there's like a pattern recognition and you >> let me ask a question on um on screening you know in the I think you've said recently publicly that there's a lot of opportunities on the short side in the market right now for the first time in a long time how do you start top down is that a top down or is it an opportunistic an you know something comes across the wire and you guys jump on it in kind of an event- driven way or do you guys have kind kind of a systematic top- down approach to looking at the market and finding those opportunities. >> Yeah, there's no one approach to it. I think one thing that we've avoided is

kind of a valuation a solely valuationbased approach. There's a I've just seen 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 their, you know, or like some of these space companies right now that there's no rhyme or reason. We had a a really strong view on homebuilders from last year that uh there were two things going on. It wasn't just it wasn't just rates, mortgage spreads that were depressing housing prices. that home prices that that the home building industry was first structurally um impaired because of the way that they

were all pretending to be NVR which is say all pretending to be asset light but they had massive commitments to these land pools which in in things that they said were options but they were really very committed in the capital and that that value was going on but but that the the home building industry was really the last industry that had this postcoid hangover over of inventory disruptions and and pricing um pricing that really made no sense. You know, all those prices went up to unsustainable levels, but so did um building costs went up and and buyers are no longer able to pay those prices at the current current um uh in the current financing environment.

But that the but there have also gotten squeezed by by inflation and costs. So that's been you know something so we've been short on things related to that. >> Let me bring Saxs into the discussion here. Sax we've learned uh a little bit about distribution of public securities. You're famous in the all-in theme song of this great quote let your winners ride. I'm curious when you hear Dan talking about this um how you think about as a private market investor how to navigate distributing equities and and how you've sharpened your blade about you know which ones have brittle or you know more robust revenue. >> I mean that's I'm sure you guys share this. It's it's one of the most vexing

questions. We were um we were private investors in Palunteer and I think we sold all our stock in the 20s. Huge mistake. >> Gosh, I missed a 10x after going public. >> Yeah. >> Or up 8x or something. >> We were um private. We led the B round in in Upstart. Uh 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 in Nphase and we um sold some stock on the IPO and then took a tax hit and I think sold it under a dollar and the stock I think had we stayed on would have made $4 billion. I am not claiming to have any great expertise in knowing

how to best distribute our >> dude markets are brutal. >> It's so hard. I mean you're >> No, this is why I bring it up. We've all struggled with this. Sax, where did where have you wound up? >> I I think it's case by case. I mean, there's some companies where, like I was on a board and you can't sell and you end up regretting that. And then there's others where the best thing to do is just hold on to that stock forever. >> Examples in your portfolio where you made great decisions. >> I'm not going to talk about the ones that didn't do so well, but um but no, I

mean, look, I've I've owned um Meta and Palunteer as a private, you know, as a venture investor, as an angel investor. And you sold >> and the question well I sold some and held on to some obviously in hindsight you take Meta I think Meta IPOs Facebook back then IPO 50 billion >> 50 billion now it's went down to 18 now it's >> can you imagine how alternate universe >> 400 right >> Chamath never sold his Facebook how insufferable he'd be or if Freeberg never sold his Googleberg would be worth 10 billion >> I I would be nearly as What's that? >> I wouldn't be nearly as good. >> It's like a like an analyst

>> because it created tension. >> It's not real. It's not It's not earned. >> So back in those days, 10 years ago, we thought a hundred billion dollar market cap company was pretty much as big as anything could get. >> Yeah. >> And so Facebook at 50 or whatever, it's like the upside was to 100. And things are just totally different now. We have multi-trillion dollar companies. The market's so much bigger. And that that changes. I mean, that's a rub against Nvidia, which is a $5 billion company, and people feel like it's sort of a ceiling on it. 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 >> Is it undervalued right now? >> Yeah, absolutely. On earnings over the next two or three years. >> And is it because people are having a hard time processing the largest entity that's ever existed in human? I I think that and and the narrative that 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 um Amazon was a safe short. So I mean this just

happens and sometimes they'll languish at a valuation then they they break out. I think that'll eventually happen with Nvidia. >> Well, there's probably some boundary condition discount to that, right? Like we've never seen a valuation like this. You can't overbet that. >> I want to shift topics for a second. I just want to talk society and culture before we run out of time with you. There was this uh incredible thing that you told me which I relate to these guys which is um you're very passionate about criminal justice reform and specifically you were a key person to get the pardon

of Ross Albrook. Tell us your views on criminal justice, why it hit such a nerve and then why Ross Albert? What was what happened there that said I must fight for this guy? >> Let me take a step back and just talk about my framework for philanthropy, which is I think not unlike Brad Gersonner and many people in the room here is 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 uh to start supporting get on the board and ultimately be chairman of successmies 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. It'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. And it's a systemic thing. It's not a lack of money. It's really a lack of it's just a broken structure. Accountability is I think what I'm hearing. Yeah. >> So, I spent a lot of time on that. Just leave it at that. Um I I then became aware and it was interesting. I was looking for issues that conservatives, you know, it's great to see Federman and McCormack up here like what are issues that conservatives and liberals,

progressives can agree on. Hopefully, they can agree that we want young people to be better educated. I 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 noting up this private public partnership with the investments in the private sector because I think this administration has done enormously good job at backing companies. But let's put that aside. It's one of the rare instances where I've seen that. But um >> can you give an example of that that's standing out in your mind? We have a company in our portfolio called Atom Computing that with many other quantum

companies um has gotten money from the government and we were just super impressed that they uh 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 the the uh government the taxpayers are going to make a ton of money on this and their involvement also has will contribute meaningfully to the value of this business. It's just like a win all. >> So they're an investor and a customer, >> right? And they are capturing part of

that value as a customer for the American people which they I think everybody deserves. >> Yeah. >> Okay. So back to the >> So 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 uh uh movement has been undermined by uh 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. Uh well, there's really three different categories. There's people who are falsely uh convicted. There are people who have shown uh contrition and rehabilitation

and those then there are those who just had a really disproportionate sentence relative to what they did. There's a case right now of of a guy named John John Grubman who was uh dealt in gray market diapers and formula. He got an 18-year sentence for dealing these goods. Uh in the case of Ross Olrich, I was approached by someone and this just seemed Ross as people may know uh probably this room knows he was sort of a a folk hero because he had this sort of cat-and- mouse game with the government. He ran Silk Road. Silk Road was a one of the first like crypto-based exchanges. He acknowledges that he did things that were illegal that he should have done. He regret it

regrets it. uh drugs were were dealt on the exchange. Um but that that's that's what he was accused of. The government later said that there were murder for for hire uh incidents that was never that wasn't in he was never prosecuted for that and he denies that that ever happened. But in any case um he was sentenced to a double life double life plus 40 years. who knows how he got the extra 40 years on there and how he would spend that after he'd been there for two lifetimes. And um there there's a a woman I met through Intel named Rivetz who alerted me to this friends with Olaf Carlson Wii and uh sort of the crypto insiders. And um I I thought about this like this guy's got

no way out. There's no there's no recourse through the system to get someone with a life sentence out of jail. This this will only work with a presidential pardon. And we worked on it. We had some familiarity with the pardon process. Worked on it. Um 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. He took it to the president. Um Charlie had a also had an attorney named David Warrington who's currently the uh >> White House counsel. >> White House counsel. I just found out a couple days ago because I was talking to

him that he was his lawyer for a decade. Um so I'm not taking credit for this. I'm not saying Charlie does it. It takes a village. But David had been working on it. And on the last day of Trump's 45th term, we we were we were certain that he was going to get out. And the Justice Department, for whatever reason, said, "If you if if you if you commute his sentence, we're going to go after you to to the president." So he as I understand um he uh withdrew the commutation. So four years went by and um really Charlie took the lead on this. This was his only ask of the president and the president at a uh to libertarians and to the crypto community promised to uh deal

with this and not only was sentence commuted but is pardoned and today Charlie is married. Not Charlie, sorry. Um, Ross is married, is having a child, and uh living a free life after spending a decade, which is probably argue whether that was the right amount or not. Um, >> and you feel like you should is there a role for you to play in doing more of this? Was this a >> No, I continue I I continue to work on cases. is there's an organization called Olive uh and we work you know constantly on different people and I think it's you know look it's I I feel like as philanthropists it's great to do to work with organizations

and there's a lot of great organizations I work with I do a lot fighting anti-semitism and um supporting Jewish identity also but 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 good thing to do. >> All right, let's give it up for Dan. Dan Logan.