Invest Like the Best with Patrick O'Shaughnessy
Jeremy Giffon - Special Situations in Private Markets
Tue Jul 11 2023Description
Teagas is a modern research platform for investors that provides access to qualitative insights through expert call transcripts. The episode focuses on esoteric opportunities in private markets and how misaligned incentives create special investment situations. It covers topics such as solving coordination problems, dislocation in financing situations, unique opportunities in venture capital, investing insights and decision-making, lazy investing and finding fulfillment, taking time off and finding your passion, envy, finding your calling, and business insights, recruiters, social presence, and negotiation, resilience, hard-to-kill organizations, and alpha, motivations, career trajectories, and audiences, venture capital, holding companies, and unique investments, taking action and avoiding procrastination, alternative funding options and mentorship, cultural differences and ethical judgments, resentment, partnerships, and intellectual pursuits.
Insights
Teagas: A Modern Research Platform for Investors
Teagas is a modern research platform for investors that provides access to qualitative insights through expert call transcripts.
Esoteric Opportunities in Private Markets
The episode focuses on esoteric opportunities in private markets and how misaligned incentives create special investment situations.
Solving Coordination Problems in Private Markets
Buying software businesses often involves solving coordination problems and unjamming log jams. Technical due diligence may not be necessary if a business is already successful. Having a clear explanation for investment decisions can help mitigate risk.
Dislocation in Financing Situations
Dislocation in a financing situation can create interesting opportunities. Understanding VC's economic incentives can unlock potential transactions. Ghost ship companies have no financial outcome due to capital structure misunderstandings.
Unique Opportunities in Venture Capital
The amount of venture capital in the system creates a unique opportunity for investment. Building a pipeline to see investment opportunities involves outreach and reputation building. Being willing to act quickly and offer cash upfront is key in buying companies.
Investing Insights and Decision-Making
Understanding the buyer's perspective and what they're getting out of a business is important in negotiations. Asking simple questions about the product, its value, and how it makes money can provide an advantage in investing. Recognizing when a decision is taking too long can indicate that it may not be a good investment opportunity.
Lazy Investing and Finding Fulfillment
Investing in enduring businesses that you understand is less risky than the stock market. Avoid bad deals by having a visceral hurdle rate and only pursuing opportunities that excite you. Taking time to think about how you want to spend your time is crucial for fulfillment.
Taking Time Off and Finding Your Passion
Taking a sabbatical and spending time thinking about how you want to spend your time is underrated. It can be a painful process as you realize things about yourself and the life you thought you wanted. Setting a high quality bar and not settling early is important.
Envy, Finding Your Calling, and Business Insights
Envy is a sign that you haven't found your calling. Hiring a new CEO is challenging because businesses reflect the founder's personality. Business is often simpler than people think, it's about solving problems reliably and diligently.
Recruiters, Social Presence, and Negotiation
Good recruiters can be found despite previous bad experiences. Having a large social presence on platforms like Twitter is underrated and underpriced. Being patient in negotiations can lead to better outcomes.
Resilience, Hard-to-Kill Organizations, and Alpha
Going through a fall can lead to depression and a loss of control. Being hard to kill is valuable in the investing context for downside protection. There's a distinction between brute force and cleverness in approaching challenges.
Motivations, Career Trajectories, and Audiences
Many investors are motivated by money. Some successful career trajectories involve becoming the right-hand person to a billionaire. Having an audience is incredibly underpriced and offers social mobility and commerce opportunities.
Venture Capital, Holding Companies, and Unique Investments
Venture capital is overpriced. Holding companies are becoming overrated. The most interesting investments are often the ones that are not talked about.
Taking Action and Avoiding Procrastination
Consuming information without taking action is just procrastination. Many people are preparing for a battle that may never come. Venture funding should have a very good reason.
Alternative Funding Options and Mentorship
Raising venture capital has become a default path for startups. Convertible notes and safes are often underutilized by founders. Meeting mentors and heroes is doable and valuable.
Cultural Differences and Ethical Judgments
Americans have a certain optimism and unbridled abundance mindset that is unmatched. Canada and Europe have a more cautious and conservative approach to success. Picking managers in investing is an art.
Resentment, Partnerships, and Intellectual Pursuits
Partnerships should have no resentment or ill will. Many co-founders have resentment towards each other. Don't get lost in chasing money or status in business.
Chapters
- Teagas: A Modern Research Platform for Investors
- Esoteric Opportunities in Private Markets
- Solving Coordination Problems in Private Markets
- Dislocation in Financing Situations
- Unique Opportunities in Venture Capital
- Investing Insights and Decision-Making
- Lazy Investing and Finding Fulfillment
- Taking Time Off and Finding Your Passion
- Envy, Finding Your Calling, and Business Insights
- Recruiters, Social Presence, and Negotiation
- Resilience, Hard-to-Kill Organizations, and Alpha
- Motivations, Career Trajectories, and Audiences
- Venture Capital, Holding Companies, and Unique Investments
- Taking Action and Avoiding Procrastination
- Alternative Funding Options and Mentorship
- Cultural Differences and Ethical Judgments
- Resentment, Partnerships, and Intellectual Pursuits
Teagas: A Modern Research Platform for Investors
00:00 - 06:42
- Teagas is a modern research platform for investors that provides access to qualitative insights through expert call transcripts.
Esoteric Opportunities in Private Markets
00:00 - 06:42
- The focus of the podcast episode is on esoteric opportunities in private markets and how misaligned incentives create special investment situations.
- Jeremy Jafan, the guest, was the first employee and general partner at Private Equity Firm/Holden Company, Tiny.
- Jeremy discusses his view of the perfect business, which involves getting paid a tremendous amount of money for advice without requiring capital.
- He also talks about organizations that have both selection effects and treatment effects, which help individuals throughout their careers.
- Jeremy's perfect investment would be one where he can understand the circumstances and incentives without needing to know anything about the business or talk to anyone involved.
- In private markets, many opportunities are coordination problems that can be solved by unjamming log jams.
Solving Coordination Problems in Private Markets
06:22 - 12:50
- In the private markets, buying software businesses often involves solving coordination problems and unjamming log jams.
- Technical due diligence may not be necessary if a business is already successful and people are paying millions of dollars for it.
- When investing, it's important to consider why a particular opportunity has come to you and whether you have a unique advantage.
- Having a clear explanation for your investment decisions can help mitigate risk.
- Understanding special situations in the market can present opportunities for solving coordination problems and benefiting both founders and VCs.
- Many companies that over-raised face challenges due to their capital structure, but VCs may not have an incentive to advise shutting down.
- Brokering deals between founders and VCs can be mutually beneficial and relieve both parties from difficult situations.
- Wasting time on a failing venture can be detrimental for founders, and VCs may prefer them to give up and start anew.
Dislocation in Financing Situations
12:30 - 18:58
- Dislocation in a financing situation can create interesting opportunities.
- Understanding VC's economic incentives can unlock potential transactions.
- Ghost ship companies are those with no financial outcome due to capital structure misunderstandings.
- Top-tier VCs may offer better deals as they prioritize reputation over returns.
- Recaps and cost-cutting can make businesses profitable and increase growth.
- Venture capital spending often falsely attributed to growth due to misaligned incentives.
- Misaligned incentives in acquisitions can lead to divestments of valuable assets.
- Bankruptcies and failed startups can present opportunities for acquiring assets or marketing businesses.
- Wasteful behavior in venture capital may eventually normalize as returns become more balanced.
Unique Opportunities in Venture Capital
18:29 - 24:53
- The amount of venture capital in the system creates a unique opportunity for investment.
- Wasteful behavior will eventually go away as returns normalize.
- Best opportunities are often found with the best venture capitalists.
- Building a pipeline to see investment opportunities involved outreach and reputation building.
- Tiny received inbound deals after building a reputation.
- Tiny saw unique and weird opportunities that other firms couldn't or wouldn't take risks on.
- Being willing to act quickly and offer cash upfront is key in buying companies.
- Ignoring your gut feeling is the biggest mistake when buying private businesses.
- Understanding the trustworthiness of the seller and why they are selling is crucial in evaluating a deal.
- Sellers often lack experience and knowledge compared to buyers, making it challenging for them to negotiate effectively.
Investing Insights and Decision-Making
24:29 - 30:44
- Understanding the buyer's perspective and what they're getting out of a business is important in negotiations.
- Sellers should have a clear understanding of why and how buyers are valuing their business.
- Pattern recognition plays a role in investing, allowing investors to focus on what matters and what doesn't.
- Insecurity can lead to asking complicated questions to appear knowledgeable, but simplicity is key.
- Asking simple questions about the product, its value, and how it makes money can provide an advantage in investing.
- A great investment should be easy to understand and pitch to others.
- Recognizing when a decision is taking too long can indicate that it may not be a good investment opportunity.
- Having the ability to say no and let go of difficult investments is crucial for success.
- Minimum rates of return or hurdle rates should be compared to previous deals as a benchmark for new investments.
- A great enduring business with operating leverage and pricing power can outperform the stock market over time.
- Risk can be simplified as the potential loss of capital. If there's little risk of losing money, it's considered low risk.
Lazy Investing and Finding Fulfillment
30:16 - 36:14
- Investing in enduring businesses that you understand is less risky than the stock market.
- The goal is to find a great deal on a good enduring business without excessive debate.
- Lazy investing involves finding businesses that are so good they compel action.
- Avoid bad deals by having a visceral hurdle rate and only pursuing opportunities that excite you.
- When hiring CEOs or making investments, consider whether they energize or drain you.
- Many people spend their time on things they don't like due to fear and societal expectations.
- Not knowing what one truly desires leads to dissatisfaction and wasted potential.
- Taking time to think about how you want to spend your time is crucial for fulfillment.
Taking Time Off and Finding Your Passion
35:45 - 41:54
- Taking a sabbatical and spending time thinking about how you want to spend your time is underrated
- Society makes it difficult to not be doing anything, but low status things can become high status
- Taking time off allows you to see what gives you energy and what feels right
- It can be a painful process as you realize things about yourself and the life you thought you wanted
- Setting a high quality bar and not settling early is important
- Being curious about people and understanding the world through talking to different people is something worth doing
- Laziness is not the right word, it's about finding what you're not lazy about
- In sports, children are tested early which allows those who find their fit in sports to push hard from an early age
- Everyone has something they're not lazy about, but it's hard to find that thing
- The reward for good work is more work, finding what that means for you is important
- As you get closer to doing the work that you're called to, envy decreases
- Putting down everything around you to justify your ambition is a terrible way to live
Envy, Finding Your Calling, and Business Insights
41:32 - 47:52
- Envy is a sign that you haven't found your calling
- People who have found their calling are not envious of others' success
- Hiring a new CEO is challenging because businesses reflect the founder's personality
- Not every company needs the best talent in the world, sometimes finding someone with relevant experience is enough
- Business is often simpler than people think, it's about solving problems reliably and diligently
- Opportunities in simple businesses with low risk and experienced leadership persist because they are difficult to execute
- Buying an insurance company like Buffett does seems simple, but finding a genius prodigy to run it is hard
- Most people don't want the difficulty of repetitive work or being bored all the time, they prefer variety over riches
- The enduring edge in business comes from being willing to be low status or operate differently in exchange for long-term success
- Sourcing and negotiating with CEOs or business sellers can be slow and requires looking at many options
- Good recruiters can be valuable for finding talent, social presence like Twitter accounts can also help
Recruiters, Social Presence, and Negotiation
47:27 - 54:04
- Good recruiters can be found despite previous bad experiences
- Having a large social presence on platforms like Twitter is underrated and underpriced
- Sourcing companies with prior success in a specific area is an effective strategy
- Negotiation requires getting out of your own head and thinking creatively
- Being patient in negotiations can lead to better outcomes
- Categorizing people as pre or post fall can provide insights into their capacity for suffering and resilience
- The concept of pre or post fall is not necessarily related to the severity of hardship experienced
- You can often tell if someone is pre or post fall by looking into their eyes
- Being post fall may be more advantageous when considering business partnerships or investments, especially in high-stress situations
- Personal experience of going through a fall can result in depression and loss of control
Resilience, Hard-to-Kill Organizations, and Alpha
53:45 - 1:00:13
- Going through a fall can lead to depression and a loss of control.
- Coming back from a fall can make someone feel like they can handle anything.
- Being hard to kill is not the same as being easy to kill.
- A hard-to-kill founder is likely to create a hard-to-kill organization.
- Goldman Sachs built their building with generators during Hurricane Sandy, showing their resilience.
- Being hard to kill is valuable in the investing context for downside protection.
- Relentlessly resourceful is more about being proactive, while being hard to kill is more reactive.
- There's a distinction between brute force and cleverness in approaching challenges.
- Some people thrive on outworking others, while for others it's terrifying and requires too much effort.
- Favorite interview questions include asking people what they want until they break down and finding out if they are money-driven or puzzle-driven.
Motivations, Career Trajectories, and Audiences
1:05:47 - 1:12:26
- Many investors are motivated by money, whether as a score or means to an end.
- Some successful career trajectories involve becoming the right-hand person to a billionaire, known as the 'boy'.
- The 'boy' is held in high regard and has access to resources and mentorship.
- Working for someone else may set you on a path to be a number two rather than an entrepreneur.
- Staying off the org chart and being favored by the principal can help you succeed in an organization.
- Currying favor with decision makers is more important than doing good work in many companies.
- Having an audience is incredibly underpriced and offers social mobility and commerce opportunities.
- Audiences can be leveraged to monetize through various means, including selling products or services.
- The distribution and serendipity of audiences are underrated and unrecognized.
- Podcasts will shift away from ad reads towards organic product or service endorsements by creators with audiences.
- Long-form content and repeated exposure through social media are effective in building affinity with audiences.
- Despite the current low status perception, podcasts provide access to influential people and offer significant opportunities.
- Money is undervalued as it can creatively solve a wide range of problems and provide access to exclusive experiences.
- Real estate, boats, and other luxury assets still hold value due to their ability to impress and create shock-and-awe effects.
- Venture capital is questionable in terms of its pricing as there is no evidence that exceptional companies will increase over time.
Venture Capital, Holding Companies, and Unique Investments
1:12:05 - 1:18:36
- Venture capital is overpriced because there is no evidence that the number of exceptional companies created per year will increase over time.
- Holding companies are becoming overrated as more people want to start profitable holding companies, but it doesn't provide superior returns and there is a fixed amount of good businesses available.
- The most interesting investments are often the ones that are not talked about, such as trading electricity futures or giving loans to charter schools.
- People often prefer to do something unique or contrarian rather than pursuing the best returns.
- General advice is unreliable because it's based on personal experiences and can be contradicted by counterexamples.
- Advice questions are often unserious and seek quick fixes rather than genuine guidance.
- Consuming advice can be addictive but may not lead to real productivity.
Taking Action and Avoiding Procrastination
1:18:12 - 1:24:45
- Consuming information without taking action is just procrastination.
- Advice can be addictive and make you feel productive when it's actually just entertainment.
- Hyper fixation on routines and performance can indicate a lack of conviction.
- Optimizing sleep or performance without knowing what you want to do is a waste of time.
- Many people are preparing for a battle that may never come, diluting themselves in the process.
- The one call everyone needs to make is often known but not acted upon for years.
- Being honest about what's not being said and addressing it can solve coordination problems.
- Venture funding should have a very good reason and most businesses can be bootstrapped.
- Raising venture capital has become a default path without careful consideration.
- Convertible notes or safes are underutilized in fundraising.
Alternative Funding Options and Mentorship
1:24:25 - 1:31:11
- Raising venture capital has become a default path for startups, but it's actually a niche product that serves a specific type of business.
- Convertible notes and safes are often underutilized by founders, even though they can be a viable alternative to raising venture capital.
- Founders often don't understand the financial and lifestyle costs of raising venture capital if it's not necessary for their business.
- Venture capitalists prefer funding companies that truly need capital to get off the ground, rather than those with smaller outcomes.
- Returning capital or running high-margin businesses can be seen as taboo in the startup world, but it can be a smart decision in certain cases.
- Meeting mentors and heroes is doable and valuable, but mentorship is often talked about by those who don't have mentors themselves.
- In-person meetings with mentors provide valuable insights into their decision-making processes and lifestyles.
- Exposure to different people and situations can teach valuable lessons about business and the world.
- The Beatles' five-year run of success was an underrated phenomenon that permanently changed music history.
- Doing something really well for a short period of time can lead to significant accomplishments and lasting impact.
- Walking away on top, like the Beatles did, is important but difficult to do in practice.
- There are notable differences between the business environments in Canada and the US.
Cultural Differences and Ethical Judgments
1:30:53 - 1:37:21
- Americans have a certain optimism and unbridled abundance mindset that is unmatched.
- Canada and Europe have a more cautious and conservative approach to success.
- Americans are more generous with equity compared to Canadians.
- Raising money in America is advised for Canadian startups.
- Picking managers in investing is an art similar to pre-seed investing or stock picking.
- There is alpha in looking at things that society deems unimportant or taboo.
- Inherited attributes can provide insights into someone's life philosophy.
Resentment, Partnerships, and Intellectual Pursuits
1:36:56 - 1:42:31
- Keep ethical judgments limited and view most things as neutral.
- Eye color blue is overrepresented in US presidents.
- Resentment is the core basis for long partnerships.
- Partnerships should have no resentment or ill will.
- Avoid pulling one over on the other person in deals.
- Many co-founders have resentment towards each other, especially around equity.
- Co-founder conflicts can lead to expensive buyouts.
- A teacher gave a book called 'On Liberty' which emphasized the importance of allowing people to be themselves and do weird things for societal progress.
- Don't get lost in chasing money or status in business; do it for intellectual or inherently satisfying reasons.