Speaker unverified: evaluation

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…h. I mean, people have trading authority but most of the trades, I put in myself. So memos come up to you and then you ultimately size them and decide whether to do them or not or something like that? Yeah, I mean, the process starts way before the memo. I'm in dialogue with the team about the idea, why they like it. We're having conversations way before it gets to the memo stage, and then it gets to the memo stage and usually we start buying it before, because in the public markets, if you have a good idea, you could take a month and a half to write a memo but by that time, the price may have moved. So usually we start buying it before the memo's done, and then the memo is the final compilation of the due diligence. And that's when the best thing that could happen is we're buying it and then the stock keeps going down. So by the time you have the memo and have even the most conviction, you can buy more. A lot of times it's going the wrong way. But a fraction of the time, do you finish writing the memo and you're like, “Oh no, this is a terrible company, this is not good.” Yeah, yeah. No, that doesn't happen because usually they'll start writing the memo and then they'll come to me and be like, “I think I made a mistake” and we'll sell it. I don't think I've ever owned a position because we had discussed it, then read the memo and been like, “Oh my God, what are we doing here?” Yes. That'd be a bad sign for the analysts. We jumped right off the deep end. Describe what D1 does—AUM, strategy—for the uninitiated. Yeah, so we invest in public and private companies. We do fundamental analysis, and so deep research, trying to understand business models, trying to understand company prospects, choosing the right management team. And whether it's public or private, we're investing with a horizon of three to five years. And we apply the same due diligence process to both public and private. Obviously, private is a one-way door and public is a two-way door, so that's different. Is private actually a one-way door, even as just the private markets have matured and there's so much more secondary activity and things like that? Do you still have to treat it as a one-way door? Definitely. I mean, you can sell—the best companies, you can sell easily, but those aren't the companies you want to sell. So we rarely transact in the secondary market because we don't want to sell the best companies. And it's hard. People think you can just transact in the secondary market, but if you want to sell $50 million, a hundred million dollars, people have to get information rights from the company. And then it's like— And it's viewed as a signal if you're large— Exactly. They go to the management team and say, “I want to sell,” and the person doesn't follow through. It's not great. So the AUM is about $25 billion—about two-thirds private, $10 billion public. Public is long, short, all bottom up, no quant. Really kind of the same thing people were doing in terms of stock picking 30 years ago. about $25 billion—about two-thirds private, $10 billion public. Public is long, short, all bottom up, no quant. Really kind of the same thing people were doing in terms of stock picking 30 years ago. And when you say no quant, that is, you're contrasting to some of the more short-term technical firms that are just trading based on what will happen the next day, the next week, the next month? Exactly. And we're not using any computer programs to guide our trading. We are not trading based on quarters. You could be doing my job the same way 20 years ago. You wouldn't have exactly the same tools but it's just— Do you think of any of those signals that people talk about when you think of one to enter or exit a trade? Like the stock would be oversold or overbought? No. Okay. What I find interesting about you guys is you're long-term, in that you're not like some of the quant guys who are just trying to predict what the next buyer is doing, or the high frequency guys, or something like that. You're instead just thinking, is this company selling a good product? Will their sales exceed what people expect and will that add up to a good business? And so the work is evaluating future earnings of the company, but there are some people who are really buy and hold. Like Costco seems to attract a lot of shareholders who think there is no price that is too expensive for Costco, and there's a huge loyalty there. Whereas you can have a price on both ends where, ”At this price, I am an enthusiastic buyer” and “At this price, God bless them, I'm selling the entire position.” And you kind of have that price boundary at both ends. Yeah. I mean, so practically we may say we think that in three years this company is going to be worth double, right? So roughly 20-something % IRR. But if we're right about the company, usually it doesn't go 24%, 24%, 24%. People will pull forward the IRR, the stock may go up 50% in the first year. If things go well, then the forward IRR all of a sudden looks a lot worse and you're moving capital to the next opportunity. I think the biggest mistakes, if we look back, I mean it's easy to think about the mistakes where you lost money and you think about those a lot. But the biggest mistakes are selling the Costcos too early because the IRR is totally dependent upon what you assume the exit multiple is, and that is difficult to be precise about, what the right exit multiple is for a business. So let's talk about painful mistakes. Can we talk about Netflix or something like that? Yeah. So Netflix—when we started the firm, almost every LP I met with, they always wanted to hear a stock pitch. So I pitched them Netflix. And actually, when we were interviewing candidates, what we did was we gave every single interviewee the same case study. We said— this is in 2018. So we said, “Look at Netflix, look at Spotify. If you had to buy one of these businesses and hold them for five years, which one would it be and why?” It was like Netflix all the time because I was talking about Netflix with LPs, I was talking about it with interview candidates, and ultimately the thesis was correct and I didn't hold it long enough. It was like Netflix all the time because I was talking about Netflix with LPs, I was talking about it with interview candidates, and ultimately the thesis was correct and I didn't hold it long enough. And so in 2018, the reason Netflix was contrarian was—it was obviously a great product that people loved—but they were burning a lot of money. And so it was just not clear: was this a classic tech company? Would they ever make money? That's why it might've been contrarian without peace. Yeah. I think the issue is there's very few tech companies that are massively capital intensive. Almost every tech company loses money for a period of time but the typical software company you're looking at, there's operating losses, you leverage it, and then people are very used to that business model. Up until the LLMs are very few tech companies where it's a huge fixed investment, and then the incremental margins on the sales are extremely high. And so what that meant was that Netflix was investing heavily in content, which is a fixed cost. And then they were selling that to consumers. The next year they were investing more in content and selling it to more consumers. But you're constantly investing more and more in content. The skeptics thought this would have to keep going up forever and they'd never make money. Yeah, because cashflow just looks worse and worse every year because you're investing more and more. But ultimately, that created a moat that was, I think, the defining aspect of the business model that made Netflix what it is today. Meaning that it's like a flywheel— you invest a ton before anyone else. Actually, what happened here is the media companies enabled Netflix by selling them content. And then Netflix invested a ton, sold to people globally, took that money, invested more in content, actually borrowed in the high-yield market, invested more in content, sold it to more people. And then the flywheel, then within five years, they're investing way more in content than anyone else. They're selling it to way more consumers. The incremental cost of selling that content is very, very low. And so you have this fixed asset that you've built up that— And what ultimately caused you to sell it? We had transitions on our team. And look, we cover every sector. We're covering, at any given time, 300 stocks. And we had transitions on our team and our media analyst left, and I was focused on other things. It was not excusable because if I look back, we get plenty of things wrong, but Netflix— Yeah. How do you think about… there's a sense of do you ever have this issue where people want to pitch in new things because they're new and exciting? And I guess the good old Occam's razor idea is just hold what you have. Do you ever have to push back against that? Yeah, I probably should push back more. Yeah.…

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