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

he forced the CEO and CIO of third point. The lost art of short selling 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 in credit pickers market. When we were small, our main tool is a shame and humor. Dan Loeb, turning up the heat on Nestle over the weekend. The shift has really been more towards a dare to be great message.

Activism with our proxy contest is like Catholicism without help. You're very active on the Twitter as well. You found your voice? 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 Betts before Wall Street Betts existed. Can you just walk us through your evolution as a public persona? Sure.

I mean, there was this brand new technology that came out called The Internet, and it was really shortly that thereafter, long before Reddit or any of these other things. There were a series of chat boards. There was Yahoo.

There was something called Silicon Investor. A few other ones, and people would congregate in Kevin's. It was done mostly anonymously, and it was an interesting place to exchange ideas. It was really the wild west.

People could pretty much say or do anything, but there was a lot of substance there too. It's not actually that much different than from today. Did you engage at all in any trolling, per se? Well, some people use the term OG.

Sometimes I say I was the OT. New original troll. No, I did. I mean, it was fine. I didn't know I was one day going to run institutional money,

and have a big fund. You know, I was just having fun. And blowing off steam. And yeah, it was fun. I mean, investing is fun.

And particularly on this short side. I mean, there's so much humor in it when you detect these companies, especially in the '90s. I mean, 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 prevail.

“You have one story above others that kind of stands out in that era?”

I mean, there were a bunch. 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 five, six. I don't remember what is that. Some large multiple of book value. And they kind of 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 your evolution as an investor. When you start a third point, I mean, you start with very, very little capital.

Now it's almost 30 billion of AOM.

You're multi-strat. But you learned at Jeffries.

“I think like you learned helping people like David Tepper,”

allocate capitals. Just walk us through how you learned to invest. Well, I started really fascinated by investing and wanting to do it. I remember when I was 10 years old, my dad took me. My dad was 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 and the 11th grade, I got a job at the branch office. I'm a bearer, sorry, of pain, weather, working for a guy named Alan Crown,

who let me post his books and make cold calls. And I think we broke certain securities laws. But I think the Statue of Limitations is passed. I would trade options on oxidant petroleum and teledine. There was a lot of volatility.

And I think I had fluries 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. And then my learning started really formally at Warburg Pankas, where I really learned to value enterprises as my first job.

I kind of across the spectrum of private equity and venture capital. I worked at a risk arm firm, which was really invaluable. And then as skipping forward, I had way too many jobs in my 20s.

But I got really serious at Jeffries at an amazing opportunity to work on the distress debt desk.

And it's just like drinking out of a fire hose.

There was so much activity. The securities were so cheap coming out of distress. And it was, you know, the 10,000 hours, 10,000 reps. We would write up different things every day. There were 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, business 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.

You know, like Dick Eric Mendesch was a boy wonder at Goldman. He was the youngest partner. He was partner at Goldman. Yeah, ran the arbed desk there. And he had this triumvirate or quadrumvirate, whatever.

Four people, I don't want to leave them out, but almost morone, Dinaker, and I can't be honest. Some other guys. Anyway, they were great. And they really kind of brought me into their thought process.

They came out of venture of an investing. And then, you know, I covered some of the smartest people in the business, including David Tapper. 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 third point?”

What was that expression? 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. Take over spin-offs, risk, risk or arbitrage.

Bankruptcies, privatizations, de-mutualizations. 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, I'll just put 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 right along not just the, well, we got to right 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.

And from where that started to what third point is today,

“just describe that and where you want to, what, where do you go from here?”

Yeah, so stylistically that event approach. It's, 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. You could make money before by not being technology savvy in the markets. You could be technologically illiterate or just I don't do it. And you could also be even more or less at, you know, 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, how much more important. Like the tech through line needs to be understood everywhere. But even if you're like blue owl on your trade, I mean, blue owl obviously is very sophisticated and tech now.

But any pool of capital that used to not be correlated is effectively correlated? I mean, yes, 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. I think I never made a past yellow belt.

But we reconnected at our 20 year reunion in, I'm, we're aging both of us.

It was our 20 year reunion. And he was working as a sales rep for wireless RF components. And I said, wow, this got to be great to do channel checks for us. And then I asked him a couple of years later say, you need some smart people. If you ever come across a really savvy engineer, we should invest.

We didn't know what we were doing. We weren't venture capitalist, but we were getting behind. Personally, it was a guy named Dave Fisher started a company called Rated Communications. They made chips. He made chips that were, I still remember ABG compatible for Wi-Fi based stations.

And ultimately, the company was sold to Texas Instruments. And, you know, we've, I won't go deep into 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, why don't you get to it?”

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.

It does traditional private credit, direct sponsor financing, direct lending, and workouts, which is very important. So credit solutions, as they call it, 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 is was fully owned, now we own half of it. And insurance company captures basically the investment grade part of what we do. So private credit through structured vehicles, structured credit, hold loans, investment grade both private and public.

But we also can use our surplus capital in very interesting ways. So what's the role of the human?

“What's the role of Dan Loeb in running third point?”

Ten years from now? Like ten years before Dan Loeb was 100% of third point. And then there's now there's agents. There's AI. There's all this learning.

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, so first of all, investing now. 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.

Yeah. The human element, I think this is true for everyone you have here, like the element of the social component, the human network of knowing people, being able to capture opportunities,

work with people, interact. That's never going away. Like you never have. Maybe you can theorize that there will be agents that will sit in and Jason Horowitz and whoever else, your funds.

“But I think the human will always have to be there because people like to.”

You know, I want to know who's making or losing the money.

Yeah, there's a thing that I think the agents they have will never really be able to.

Looking your eye and assess all the things that you've expanded. Your philosophy of investing in companies from cheap capital, cheap securities with catalysts. I think how you described it on a podcast recently. And now you're very concerned about votes,

defensibility, and just the quality or the brittleness, as Jamoth 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 vote, you feel they have durability.

Yeah, obviously that's everything right now. Jamoth talks about the time-bounded value of companies.

And I think that's essential.

What are the companies that are going to be around seven to ten to twenty? What are the real votes that exist out there? And it is harder now. I don't know that we can really go out, you know, ten or twenty years ago. By the way, I think we diluted ourselves earlier, because I think if you ask people about the

mode around IBM or, you know, some of the other companies. Yeah, well, yeah, who, yeah, you'd say the same thing. I mean, look, we're investing outside of tech into companies that have, you know,

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.

“I think finding management teams that you really believe in that have,”

should have a proven ability to stay ahead of. Is that quantifiable or is it still very much as subjective? Sorry, is what? Is it quantifiable assessing the management team? No.

We built a rubric for doing that. No, it's still very subjective qualitative. I think it's one of those things after 30 years. There's like a pattern recognition in you. Yeah.

Let me ask a question 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 it a top down or is it an opportunistic, 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 of a systematic top down as a 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 valuation based 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, write it 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 home builders from last year that there were two things going on. It wasn't just rates, mortgage spreads that were depressing housing prices.

The home prices, the home building industry was first structurally impaired

because of the way that they were all pretending to be NVR, which 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, but that the, the home building industry was really the last industry that had this post-COVID hangover of inventory disruptions and pricing, pricing that really made no sense. You know, it 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, current, the current financing environment, but they're also gotten squeezed by inflation and costs. So, that's been, you know, something so we've been short,

things related to that. Let me bring Saxon to the discussion here, Sax. We've learned a little bit about distribution of public security, is your famous NZ 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, how to navigate distributing equities, and how you've sharpened your blade about, which ones have brittle or more robust revenue?

I mean, that's, I'm sure you guys share this. It's one of the most vexing questions. We were, we were private investors in Palantir, and I think we sold all our stock in the '20s, huge mistake. Gosh.

I've just to kind of acts after going public. Yeah. Or we ate acts or something. We 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 end phase, and we sold some stock on the IPO,

and then took a tax hit, and then I think sold it under $1 in the stock.

I think had we stayed on, would've made $4 billion.

So I'm not claiming to have any great expertise in knowing how to best distribute our-- Dude, markets aren't brutal. It's so hard. I mean, you're--

Dude, this is, I'm bringing it up. We've all struggled with this. We're, wherever you wound up. I think it's case by case. I mean, there's some companies where I like how 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. Example. In your portfolio, we made great decisions. I'm not going to talk about the ones that didn't do so well, but, no, I mean, look, I've owned Meta and Palantir

as an angel investor. And you sell it.

“And the question, well, I sold some and held onto some.”

Obviously, in hindsight, you take Meta, I think Meta, IPOs, Facebook back then. I think-- That's $50 billion, right? Yeah.

Yeah, $50 billion now. It went down to $18. Yeah. Can you imagine how alternate universe is-- $100, right?

Shemoth never sold his face.

Look how in suffer'll be he'd be. Or if I would re-berge never sold his Google. I would be worth $10 billion. I wouldn't be nearly as good. I wouldn't be nearly as good.

What's that? I wouldn't be nearly as good. It's like a-- I wouldn't be an analyst. Because you created tension.

I mean, right, it's not real. It's not-- it's not earned. So back in those days, 10 years ago, we thought $100 billion market cap company was pretty much as big as anything to 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-trollied dollar companies.

The market's so much bigger. Yeah. That changed-- I mean, that's a rub against Nvidia, which is a $5 billion company.

People feel like it's sort of a ceiling on it. I think we'll look back. At some point in time and see that was a foolish way to think about Nvidia given its dominant position. And its valuation relative to that.

Is it on your value right now? Yeah. It's the 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 think that. And the narrative that-- 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. I mean, it's just happens.

And sometimes the language of a valuation and they break out. I think that'll eventually happen within video. Well, 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. I want to shift topics for a second. I just want to talk to society in 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 your very passionate about criminal justice reform. And specifically, you're a key person to get the pardon of Ross Albert. Tell us your views on criminal justice.

Why it hits 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 Gersner”

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 think 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, to 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 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. The systemic thing, we're not a lack of money,

it's really a lack of, it's just a broken structure. >> I don't know. >> I don't know. I think what I'm hearing, yeah. >> So I spent a lot of time on that, just leave it that. I then became aware, and it was interesting.

I was looking for issues that conservatives, you know, it was great to see federal men and McCormick 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 f**k it up when we're another.

I want to give you guys a shout out, though, for not f**k up this private public partnership with the investments in the private sector. Because I think this administration is that enormously good job at backing companies,

but put that aside. It's one of the rare instances where I've seen that.

>> We have a company in our portfolio called Adam.

“I'm 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. Is this like a win all the way around? >> So they're 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. >> Okay, so back to the criminal justice reform.

First of all, there's a lot of bad people in jail.

I'm not going to, 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.

There are people who have shown a 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 Agreman who's a Dalton Grain Market, diapers and formula.

You got an 18 year sentence for dealing these goods. In the case of Ross Ulberg, I was approached by someone. And this just seemed Ross's 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, he ran silk road.

“Silk road was one of the first like crypto-based exchanges.”

He acknowledges that he did things that were illegal that he should have done. He regretted it, regrets it. Drugs were dealt on the exchange. But that's what he was accused of. The government later said that there were murder for higher incidence.

That was never, 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 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 there's a woman I met through in Telnam, Revitas who alerted me to this. Friends with Olaf Carlson, we and sort of the crypto insiders. And I thought, I was 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, this will only work with a presidential pardon. And we worked on it. We had something familiar with the pardon process. We're done 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 sensed. They took it to the president. Charlie had also had an attorney named David Warrington who is currently the White House Council. White House Council.

I just found out a couple days ago because I saw a note that he was his lawyer for a decade. So I'm not taking credit for this. So I'm not saying Charlie does. It takes a village, but David had been working on it. And on the last day of Trump's 45th term, we were certain that he was going to get out.

And the Justice Department, for whatever reason, said if you, if you commute his sentence, we're going to go after you to the president. So he, as I understand, he, with through the commutation. So four years went by and really Charlie took the lead on this. This was his only ask of the president.

And the president at a, to libertarians and to the crypto community promised to deal with this. And not only was it since commuted, but he's pardoned in today. Charlie is married, not Charlie. Sorry, Ross is married as having a child and living a free life after spending a decade. Which is probably, are you whether that was the right amount or not?

Was this a one-hour?

Yeah, I continue to work on cases.

There's an organization called Olive.

And we work, you know, constantly on different people.

“And I think it's, you know, look, it's, I feel like as flapped through piss.”

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 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's just, it's a good thing to do. All right, let's give it up for Dan. Dan Logan. [Applause]