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

Key Takeaway

True mentorship isn't hierarchical—it's omnidirectional. Dan Loeb learned as much from his customers and colleagues as from senior mentors at Jefferies. He reverse-engineered the investment strategies of clients like David Tepper and Eric Mindich, building his own 'operating system' by absorbing the best practices from every direction. The lesson: treat every interaction as a learning opportunity, regardless of hierarchy.

Episode Overview

Legendary activist investor Dan Loeb discusses his evolution from early internet troll and short-seller to running Third Point's $30 billion multi-strategy fund. He shares insights on event-driven investing, the changing nature of competitive moats in the AI era, and his passionate work on criminal justice reform, including his role in securing Ross Ulbricht's presidential pardon.

Full Transcript

Transcript of Dan Loeb: The Lost Art of Short Selling, and Why Stock Picking is Back from All-In Podcast. Auto-generated from episode audio; may contain minor errors.

Legendary activist investor Dan Loeb He of course is 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 and credit pickers market. When we were small, our main tool was 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 without proxy contest is like Catholicism without hell.

You're very active on the Twitter as well. Oh, well. Oh, well. Oh, well. You found your voice. A lot a lot of emotion brewing there. Can we actually start with that? Before Twitter Twitter 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? public persona? 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 Investor Investor um the a few other ones and people would congregate and kibitz. 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 substance there, too. It's not actually that much different than from today. Did 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 Um Um The original troll. Yeah, no, I did. I mean, it was 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 uh and blowing off steam and and 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 you you detect these companies especially in the 90s.

I mean that it was really unsupervised. There were some incredibly fraudulent companies out there and it was just fun to uncover them and them and them and kind of taunt the management teams and ultimately ultimately ultimately prevail. prevail. 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 uh uh Wow. Um Wow. Um Wow. Um there was a company called Actrade that I remember run by a guy who was like a repeat uh fraudster and we un- uncovered it and and um and um 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 at at five, six, I don't remember what it was at.

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 repackaging repackaging factory securities and saying that they had some special technology. They were financing refrigerators and things like that. that. that. Tell us Tell us Tell us um um 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. You're multi-strat but you learned at Jefferies, I think like you learned helping people like David Tepper allocate capital.

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 years old years old my dad took me and 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 Stearns sorry of Paine Webber 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 statute of limitations is 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 good lesson. I continued doing it in college and then um my my my learning started really formally at Warburg Pincus where I really learned to value enterprises. It was my first job in private kind of a process spectrum of private equity and venture capital.

I worked at a risk arb firm which was really invaluable. really invaluable. really invaluable. Uh and then I s- skipping forward, I had a I had way too many jobs in my 20s. Uh but I got really serious at Jefferies. I had a amazing opportunity to work on the distressed debt desk there. I started out as a a research analyst. It was just like drinking out of a fire hose. There was so much activity. activity. activity. Uh the securities were so cheap coming out of distressed.

And um And um 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 kind of sees mentorship as a sort of hierarchical thing where you you know, learn from some wise older person, but it's I it's I 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 did Eric Mindich was a um boy wonder at at Goldman. He was the youngest partner youngest partner youngest partner Youngest partner at Goldman. Yeah, ran the arb desk there, and he had this triumvirate or quadrumvirate, whatever the four four people. Uh I don't want to leave them out, but almost Marrone, uh Dinakar, and um can't think of 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 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. people did. people did. And what was that style when you first started Third 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 really really less [snorts] focused on the quality of business, more focused on very complex transactions, takeovers, spin-offs, risk risk or arbitrage, bankruptcies, privatizations, demutualizations.

And these transactions created unbelievable opportunities for alpha because of the confluence of confluence of confluence of dislocation, dislocation, dislocation, opacity, opacity, opacity, kind of time, but also this goes and nothing changes. You know, 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 Well, we got to ride along a few different things that would happen.

Greater transparency and understanding of the business, coverage, coverage, coverage, companies that companies that companies that 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. From where that started to what Third Point is today, just describe that and where you want to like where do you go from here? from here? from here? Yeah, so stylistically that event approach, it's it's it's still something we think about. It's in our um um um it's in our framework, but I think what happened really when technology became a bigger bigger bigger uh force, but really everything changed is a greater focus on business quality and and and um 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 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. could be technologically illiterate or just say I don't do it. And you could also be even more or less ac- You know, up until the GFC, I think you could be more or less economically illiterate and make a lot of money. And now? And now?

And now? Uh Uh Uh 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. understood everywhere. understood everywhere. Yeah. Yeah. Yeah. But even if you're like Blue Owl on your trade 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, I mean, 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 Schwartz is my partner, and we took Kempo Karate together when we were 10 years old. He 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 age I'm aging both of us. Sorry to give up your secret, Rob. Uh in 1999. It was our 20-year reunion, and he was working working 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 um um a couple years later, "Say, you you meet 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 capitalists, but we're getting behind person. There was a guy named Dave Fisher. Started a company called Radiocommunications. Radiocommunications. Radiocommunications. 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 what you get to is that all these things are interconnected and come together under the platform that we have today cuz 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 It does 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 P&C company, but this one is was wholly owned. Now we own half of it. And the insurance company insurance company insurance company captures basically the investment grade part of what we do. So, private credit through structured vehicles, structured credit, whole loans.

Um Um Um investment grade, both private 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 Loeb in running Third Point 10 years from now? Like Like Like 10 years before Dan Loeb was 100% of Third Point. Third Point. Third Point. Uh-huh. Uh-huh. Uh-huh. 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?

managing risk? managing risk? I 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 most important business that we're in. Yeah. Yeah. Yeah. The human element, I think this is true for everyone you have here. Like the element of the social component that 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 Andreessen Horowitz and whoever else your funds.

But I think the human will always have to be there because people like to They want to know who's making or losing the money. the money. the money. Yeah, there's a there is a thing that I think that it the the agents that they have will never really be able to look in your eye and assess all the things that that that You've expanded your philosophy of investing in companies from cheap cattle cheap securities with catalysts is I think how you described it on a podcast recently.

Um 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 can 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. durability. durability. Yeah, obviously that's everything right now. Chamath 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 around around 7 to 10 to 20 like what what what what are the real moats that exist out there? And it's it's it it it is harder now. I don't think we can I don't know that we can really go out, you know, 10 or 20 years ago. By the way, I think we diluted ourselves earlier because I think if you ask people about the moat around, you know, IBM or, you know, some of the other companies in AOL AOL AOL AOL, Yahoo, you know, you say the same thing.

I mean, look, we're we're we're we're investing we're investing we're investing outside of tech into uh companies that have uh uh uh you know, some great Well, first of all, it also comes back to the management because we can't really just really just 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 a very much a subjective Yeah. Yeah. Yeah. Sorry, is [clears throat] what? Is it quantifiable assessing the management team? Have you built a rubric for doing that? No, it's still very subjective, qualitative. subjective, qualitative. 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 Is that a top down or is it an opportunistic like 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 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 evaluation a solely evaluation-based approach. There's a lot I've just seen I've seen too many people get run over by shorts that have have 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 uh that uh 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 the home building industry was first structurally first structurally first structurally um um um impaired because of the way that they were all pretending to be NVR, which is they're 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 um the home building industry was really the last industry that had this post-COVID hangover of inventory disruptions and and pricing um pricing that really made no sense. You know, you had 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 uh uh in the current financing environment, but that the but they've also gotten squeezed by squeezed by squeezed by by inflation and costs.

So, that's been, you know, something so we've been shorting things related to that. Let me bring Sachs into the discussion here. Sachs, 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 um 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. questions. questions. We were We were We were um um um we were private investors in Palantir, and I think we sold all our stock in the 20s. Huge mistake. Gosh. So, you missed a 10x after going public. public. public. Yeah. Yeah. Yeah. Or 8x or something. We were um um private. We led the B round in round in round in in uh 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 were also early investors in in Enphase. 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. So I am not claiming to have any great expertise in knowing how to best distribute our distribute our distribute our Dude, markets are brutal. It's so hard. I mean, you're is why I bring it up. We've all struggled with this. Sachs, where did Where have you wound up?

I I think it's case by case. I mean, there's some companies where uh 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. forever. forever. Examples in your portfolio we made great decisions decisions 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 Palantir 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. IPOed at a $50 billion market Yeah. Yeah. Yeah. 50 billion, now it's went down to 18, now it's Yeah. Yeah. Yeah. Can you imagine how the alternate universe 400, right? 400, right? 400, right? Chamath never sold his Facebook, how insufferable he'd be? Or Or Or if if if I would I would I would Reid Hoffman never sold his Google, Reid Hoffman would be worth 10 billion.

No, I I wouldn't be nearly as good. What's that? What's that? What's that? I wouldn't be nearly as good. Like a I'm like an analyst. Because he created tension created tension tension tension Not real, it's not it's not earned. So back in those days, 10 years ago, we thought a $100 billion market cap company was pretty much as big as anything could get. Yeah. Yeah. 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. that's a rub against Nvidia, which is a $5 company and people feel like it's sort of a ceiling on it. I think we'll look back look back look back at some point in time and say that was a foolish foolish foolish way to think about Nvidia given its dominant position and its valuation relative to everything else. else. else. right now? right now? 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 stuff that's stuff that's growing faster and going up more. People are it's are it's are it's 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 short. Um short.

Um Amazon was a safe short. So, I mean, this just happens and sometimes the language should have a valuation and they they break out. I think that'll eventually happen with Nvidia. But there's probably some boundary condition discount to that, right? Like we've never seen a valuation like this. You can't You can't 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. with you. 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 Ulbricht. Tell us your views on criminal justice, why it hit such a nerve, and then why Ross Ulbricht. 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 Gerstner 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 deeply about deeply about making sure that as many people have opportunities to do the incredible things that we've all had here. So my interest in criminal justice reform really started earlier with an interest in education. in education. 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 Academy which is a charter school network in New York and I do think nobody talks about it but it the thing that's hiding out in plain sight for everybody is that the problems with income inequality isn't that you know Jeff Jeff Jeff Bezos is going to be a a trillionaire or all these other people are gaining wealth is 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. 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. hearing, yeah. hearing, yeah. So spend a lot of time on that just leave it at that. Um I I then became aware and it was interesting that I was looking for issues that conservatives, you know, it's great to see Fetterman 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 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 cuz I think this administration has done an 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 in the current 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 they they uh uh 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 the way around. and a customer. Right. And they are capturing part of that that that value as a customer for the American people, which they I think everybody deserves. 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 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. are rehabilitated. are rehabilitated. Uh Uh Uh well, there's really three different categories. There's people who are falsely uh falsely uh falsely uh convicted. There are people who have shown shown 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 Jonathan Grobman who was a dealt in grey market diapers and formula. He got an 18-year sentence for dealing these goods.

In the case of Ross Ulbricht, I was approached by someone and this just seemed seemed seemed Ross's people may know probably this room knows he was sort of a a 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 shouldn't have done. He regretted it regrets it. Drugs were were dealt on the exchange. Um Um Um Uh Uh Uh but but but that that's that's what he was accused of.

The government later said that there were murder for for hire incidents. That was never that wasn't in the 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. lifetimes. lifetimes. And um And um And um There There There there's a there's a there's a a woman I met through Intel named Rivas who alerted me to this.

She's friends with Olaf Carlson Wee and 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. presidential pardon. 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 falsely 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. I just found out a couple days ago cuz 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 would It takes a village, but David had been working on it and on the last day of Trump's Trump's Trump's 45th term 45th term 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 you you if if you commute his if if you commute his sentence, we're going to go after you." To to the president.

So, he uh as I understand um he uh withdrew the withdrew the withdrew the commutation. So, 4 years went by and um really Charlie took the lead on this. This was his only ask of the president and the president had a uh to libertarians and to the crypto community promised to uh deal with this and not only was his sentence commuted, but he was pardoned and today Charlie is married Oh, not Charlie, sorry. Um Ross is married, is having a child, and uh uh 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 one-off or a I I continue to work on cases. There's an organization called Aleph uh and we work you know, constantly on different people and uh I think it's you know, look there'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 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 amazing amazing amazing All right, let's give it up for Dan. Dan Lowen. Lowen. Lowen.