(0:00) Dan Loeb joins the Besties! (0:34) Investor journey: From message boards to a multibillion dollar hedge fund (3:15) Third Point's early days: mentors and market turmoil (8:47) Strategy shift: Event-driven to quality and AI (16:01) The art of short selling and a homebuilder trade (22:15) Criminal justice reform and the Ross Ulbricht pardon Thanks to our partners for making this possible! EY - Agentic AI is introducing a new investment discipline. As AI shifts to consumption-b ✦ AI generated
Dan Loeb argues that short selling, which he calls a lost art, has returned as an essential investment strategy in the current market environment.
Dan Loeb: The 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.
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Loeb describes his early days on pre-Reddit chat boards, calling them the Wild West where substantive investing ideas mixed with anything-goes trolling, and notes the continuity with today's online investing culture.
Dan Loeb: I was the original troll. Yeah, no, I did. I mean, it was fun. You know, 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 blowing off steam. And 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 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.
Loeb explains that Third Point's original event-driven strategy exploited complex transactions like spin-offs and bankruptcies, where management was incentivized to sandbag projections and informed investors could ride the subsequent re-rating.
Dan Loeb: 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 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. And 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... 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 investing.
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Loeb argues that the investing landscape has fundamentally changed: pre-GFC you could succeed without understanding technology or economics, but now every capital pool is correlated and understanding the tech through-line is mandatory.
Dan Loeb: 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... 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... Like the tech through line needs to be understood everywhere. But 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.
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Loeb asserts that despite the rise of AI and agents, the human network and trust-based relationships in investing are permanent, as counterparties will always want to look someone in the eye and assess who is managing their capital.
Dan Loeb: The human element, and I think this is true for everyone you have here, 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. 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 want to know who's making or losing the money. Yeah, and there's a thing that I think that the agents that they have will never really be able to look in your eye and assess.
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Loeb explains his framework for criminal justice reform philanthropy, distinguishing between truly dangerous people who should remain incarcerated and three categories of people who deserve a second look — the falsely convicted, the rehabilitated, and the disproportionately sentenced.
Dan Loeb: 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 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 contrition and rehabilitation. And there are those who just had a really disproportionate sentence relative to what they did.