Speaker unverified: belief

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…ings 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. I mean, I think it's like a human tendency, like, “Oh, this is a new company. I love investing. Let's learn about this new company.” And this sounds super exciting, but at the end of the day, there's only so many amazing companies and trying to sell them and move into something else is almost always a bad decision. That's the nice thing about the private markets is that once you invest, you can't sell. And usually for the best companies, that's a huge benefit ultimately. Yeah. I just want to go back to the starting D1 for a second. So the lore is that prior to D1, you were at a firm called Viking. Is that right? Yep. And the lore is that almost all of Viking returns increasingly came from Dan Sundheim offhandedly making a comment to someone at the water cooler that, “Oh, that could be a good stock” or “Definitely don't invest in that,” and people would be taking those trades as their own for the most part. Those are your words, not mine. That's the lore. I never said that. I guess my question is, when someone comes up to you—an analyst on your team today—and says, “Hey, what do you think of X, Y, Z?” And you do that sort of Dan Sundheim, 30-second, 10-second take, what is going through your head exactly that gives you just this binary sense of “Looks good, not good”? Well, look, I mean every situation's different. I think the biggest risk is sometimes people will come to me with an idea and they pitch it for a little bit and I think about it and I give them an answer. And I don't have enough information to give them a really solid answer. But whatever I say they think is like, “Okay, well if he said that's not good, then I'm just going to forget about it.” And actually that's not constructive. I am wrong all the time, even when I've done a ton of work. And if it's just a 30-second pitch to the water cooler, I can say, “That sounds interesting.” Or I could say, “That doesn't sound interesting,” but I'd say my hit rate there is dramatically lower than once we've done all the work. And there is a risk that analysts are like, they try to take my temperature if it’s going to be something that interests me, and if it's not interesting to me, don't waste time on it. That's actually not great. But I think what Daniel is getting at is, it seems you have an intuitive sense for companies in this underwriting. It's not just all about, “Does the model spit out a 19% or a 21% IRR?” And what is that that the Spidey sense is picking up on? I think it's like anything else in life. It's like it's pattern recognition, right? Part of it is just understanding business models, understanding what kind of valuations companies should be trading at. Part of it is just having invested in this capacity for 20-something years. You get a sense, if somebody comes to you and pitches an idea to allocate a ton of R&D resources to some engineering project, you probably have a pretty good sense upfront whether or not they should go write a big memo proposing that or not. and pitches an idea to allocate a ton of R&D resources to some engineering project, you probably have a pretty good sense upfront whether or not they should go write a big memo proposing that or not. When you interview young, younger— It’s an art, not a science. Right. So when you interview younger, say, portfolio managers or when you meet—do you have a sense fairly quickly if they have whatever this is? Do you think this is a thing just people have or they don't? I think the answer is yes. So a couple things. One, we don't hire portfolio managers. I pretty much only hire people who've never done public equity before, which has pros and cons. So what have they done before? We typically hire from private equity because then they have the analytical skills, they understand accounting, they understand financial modeling, and then we can teach them the stock picking. And if I hire somebody laterally who's a portfolio manager of another fund, that's rarely been successful, almost never. Because some negative transfer, they have expectations that are— Every firm has a different approach to investing and getting people to change their habits to align more with how we invest is incredibly difficult. Now, if I hire somebody from private equity, it takes about three years for them to really be contributing to D1. So obviously it would be much faster for me to just hire an external and there's funds— What is that? So they come in, you say it's three years, what's happening? Say they're three months in and they're trying to speak up in a meeting. And you must be thinking to yourself, this isn't really the D1 way. What is that, exactly, that changes in them over the course of the three years? Yeah. Look, I would tell you that I wish that… It is incredibly difficult to figure out who is going to be great. And even after three years, I'd say our hit rate still is not as high as you would expect. I imagine, if you hire an engineer… After three years, you probably have a pretty good sense of if that guy's a good engineer. Or that girl's a good engineer. I think that I have a pretty good sense but it takes even five years to really get a sense because some people start out where they're analytically really solid and they work incredibly hard, but the actual intuition of stock picking hasn't come to them yet. Is it because you're saying the job is so pattern recognition-oriented that you just need some time to build up the pattern recognition and is that what they're learning? king hasn't come to them yet. Is it because you're saying the job is so pattern recognition-oriented that you just need some time to build up the pattern recognition and is that what they're learning? Once in a while, people come in and right out of the gate you're like, “Wow, this person sees it.” They see the ball really clearly. But that is a very small fraction of the time. Most people get great over time and they have to learn an industry. So when they come in, we will say, “You're going to cover fintech.” And it just takes them a year just to understand fintech. Then they have to see, well, why is XYZ stock trading at this multiple? Why is this stock trading at this multiple? What's the market saying? And I think it's like the market is constantly giving you data points. Some of them are false signals and some of them are good signals. And over the long term, they're all good signals. And the people who do great at this job, you have to have some commercial sense which I think is probably just—you're either born with it or not. Charlie Munger’s moneymaking gene. Yeah, I wish I could test for that. It's impossible. But you also have to love the job. You have to wake up in the morning—in the shower, be thinking about your stocks. This isn't the kind of job where you close your laptop, you go home, and you forget about it. You have to always be on and there's people who love it. And if you love it and you have that commercial instinct. And you have to be analytically sharp. Do you have a leaderboard of individual people's portfolios and how they're doing compared to each other? Yes. Everyone has what we call a mock portfolio. So every week they have to take the positions they cover and they have to say, “If I was managing capital, here's how I would allocate capital.” And then what happens at the end of the year is that sometimes it's like “I own these five stocks, my mock portfolio was up.” And we take it very seriously. The mock portfolios actually goes into people's comp. Sometimes, it's like that person did phenomenally well in their ideas and I didn't monetize them. And then sometimes, it's the opposite. But it takes care of a lot of the typical hedge fund thing of at the end of the year, like, oh, everyone remembers the things that they want to do that worked out and forgets what, so— People have to pre-register what they're going to come to you at the end of the year and say, “See, I was right.” Yeah, exactly. So I know— Do you ever have a situation with the mock portfolio where someone goes short something you're long or vice versa? That hasn't happened yet? No, that hasn't happened yet but there are big discrepancies. Sometimes analysts will be like, “I think this is a 5% position.” And I'll be like, “I think you're crazy. I think this should be double that.” Do you have a mock portfolio yourself, or is D1 your mock portfolio? That wouldn't be very useful yet. D1 is my mock portfolio.…

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