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This is Master's in Business with Barry red Holts on Bloomberg Radio. Strap yourselves in for another good one. This week. I have Ricky Sandler. He is the CEO and CIO of Eminence Capital. They're a hedge fund that's been around for twenty five years, running over seven billion dollars in both a long short format. Not a lot of successful
long short hedge fund managers around. Sandler is one of those rare birds who not only is a bottoms up fundamental stock picker on the long side, but they also have a very specific methodology for hedging the downside by shorting individual names. They have a tremendous track record over the past twenty five years. This is a masterclass in how to think about allocating a capital, managing risk, and
looking at how changing market structure has affected investors. Whereas David Einhorn talked about the passive side changing things, Sandler talks about how the active side has changed and it's very different than what it was like thirty years ago when fundamental investors dominated the active alongside. According to Sandler, that's no longer the case. I found this conversation to be fascinating, and I think you will also with no further ado, my discussion with Eminence Capitals Ricky Sandler.
Thank you Berry. Great to be here.
I've been looking forward to having this conversation. You have such a fascinating background. Let's start with college BBA in Accounting and Finance from University of Wisconsin. What was investing always the plan?
No, investing wasn't always the plan.
Although I have a family background that investing, and I've been around investing my whole life, I kind of thought I was going to go in a different direction. I was applying to law school at the end of college. I thought I would be more as a business operator builder. And then when I graduated, I decided to put these law school applications or these law schoo acceptances on hold
and worked for a few years. I came into the investment business out of college and loved it from the first minute and never looked back.
Well, you probably made the right choice. I enjoyed law school, but three years is way too long. They should really tighten that up to two years and get you out in the real world.
YEP.
So your first gig out of Wisconsin is an analyst at Mark Asset Management. Were you analyzing stocks or running a portfolio? Then?
No analyzing stocks. I was a young young kid, good with math, you know, good with understanding businesses, but really learned the ropes at Mark Asset Management. You know, Morris Mark was a great mentor, and that was an incredible experience to be kind of very close to the portfolio.
It was a small firm, but we had a lot of access and so from a very young age, I was put in front of CEOs and CFOs of some of the most important companies and it was just an incredible platform and incredible experience to learn from.
And then your next stop is you co found and co general partner Fusion Capital Management. Tell us a little bit about that shop.
Yeah.
So when I went to go work for Marris Mark, I took the job of Wayne Cooperman, who was Lee Cooperman's son. He then came back two years after business school, came back to work at Marris Mark's Mark Asset Management. We worked together for a couple of years and then at the young ages of twenty six and twenty nine, we decided to leave and start our own thing together. I think that we were both kind of young, smart analysts, probably a bit naive, and felt like.
We could give it a go.
The HEDGPHNT industry was still a cottage industry back in this was nineteen ninety four. We launched Fusion in nineteen ninety five, and both of us had kind of roots and history. Our fathers had worked together the other at Goldman Sachs. They knew each other, and so we had sort of family backgrounds. I would say we had a good story. We were the sons of two successful money managers. We got on some radar screens and when we did well,
money sort of came to us. And so that was kind of very formative years of managing our own portfolio. And you know, Fusion Capital Management was, you know, in some ways quite similar to what we do in Eminence. On the long side, obviously we've evolved quite a bit over the last thirty years, but we were bottoms up stock pickers looking for what I would call good businesses and stocks that were value and I think, you know, we were I would say shorting as a little bit
of a byproduct of what we did. That was something that changed later in Eminence, but we had a good four year run together and then at the end of nineteen ninety eight we split up and I kind of launched Eminence right out of Fusion.
So what was it like raising money. You're a relatively young person. It's not like you have decades of experience. I recall the nineties as just a wild period. Did you find yourself being challenged raising capital or given the success of Fusion, it wasn't that big a lift.
So I would say to start out, it was the MCI friends and family plan when we launched, but I think because we had the family backgrounds, and as I mentioned, we were on some radar screen. So as we started to do well, as we put up a good first year in a good second year, money was there.
There was. There was a whole industry of people.
Looking to invest in young hedge funds, believing that that when firms were young, they would they did their best.
So a lot of emerging manager merging matter exactly.
Thank you for that.
So we grew from what was twenty six or seven million when we started to about three hundred and fifty million over the four years, and I would say it was for us fortunately, because of our backgrounds and the success we had. It was not particularly challenging, and I was very fortunate.
In that regards.
So raising capital is easy. Let's talk about deploying capital. You know, Greenspan famously gives the rational zuberance speech in ninety six. Markets laughed off and continue to trend higher. We have the ti Bot crisis, the Asian contagion and was at ninety seven, and then long Term Capital Management ninety eight. You launch in ninety nine. What were you
thinking about with regards to that investing environment. You have robust trend but stretched valuations and a lot of companies with wisps of business models and very ephemeral revenue.
Yeah.
So when we launched Fusion at ninety five and went through those periods, in the end of ninety eight, I launched Eminence, and you're right, this was right on the back of the long Term Capital Management kind of crisis. I think that the experience over those four years, and particularly the ninety eight crisis, convinced me that I needed
to develop a real expertise in shorting. That going through a market like nineteen ninety eight with I would call it light hedges and shorting the more expensive bigger cousin to your small company was not effective hedging and strategy. And one of the things that I felt in ninety eight was the inability to lean into a dislocated market
because we weren't protecting capital well enough. And this led to a lot of what has been the hallmarks of eminence, which is single stock shorting has been critical pillar of what we've done for the last twenty five years, and for both the skepticism that it brings to the longside of investing and for the ability to protect capital, or do a reasonable job protecting capital in dislocations, which allows
you to be offensive. One of the things I've seen throughout my entire career is that being offensive when there's dislocation, you are planting the greatest seeds possible.
At that time.
Everybody else is kind of emotional throwing things out looking short term, and you get a lot of great opportunities.
But you can only do that if you.
Have a portfolio that has protected some capital that you can kind of lean into. So I'm going through those early crises were kind of formative in our ability and my both abiliting desire to build a true long short hedge fund. That that single stock shorting was was kind of at the core of what we do.
So a risk managed hedge when things are pricing and things seem to be dislocated from reality to give you some downside protection. But the flip side of that is opportunistic aggressiveness when everybody hates the market and things are selling off.
Is that is that a good I think? I think that's good. And then and then even when things are going well, if you can do a good job with long short spread, you know that that shorting isn't going to hurt you nearly as much. It allows you to be levered to your lungs. So we've always run with a portfolio where our long side is typically over one
hundred percent gross long. We bring that down with the short side, so you get extra leverage too long, and you could still outperform the market over the long term even while only having let's say forty percent net exposure to the market, because you can generate long short spread and you can be levered too long. So a combination of a model that allows you to do solidly when markets were good and outperform them over time, maybe not
in the very very short run. If markets are going to be up twenty percent in a given year, but if the market's going to be up ten over the long term, we could outrun that but also be able to protect capital, So you can be offensive, and that was part of the way you can outperform ULL.
We'll talk a little later about the specific strategies, but the three main ones are long only, long short, and then one fifty by fifty alpha extension. So it sounds like long only is obvious, Long short seems like you're somewhat hedged, but one fifty by fifty that that seems like that's on steroids. That's the most aggressive portfolio.
Yes, so I think I think that will be our highest absolute return portfolio over time. You know, the roots of us are the long short hedge fund. I would call that healthy gross moderate net exposure type portfolio. Call it one thirty x eighty five kind of forty five net two hundred and twenty five two hundred and twenty gross. Use stock picking to generate good absolute returns but reduce systematic risk through shorting, and that has variable net too.
So there have been times where we've been ten or twenty percent net, and there have been times like post COVID where we went to one hundred percent net. Long, so we have flexibility, and then most of the time we tend to run it pretty much in the middle of the fairway. With those exposures, one fifty x fifty is more of a long replacement. It is for the investor who's already chosen to be along. The market is always one hundred percent net long and fifty right right.
But now we have two opportunities to generate alpha for investors. There's the alpha on our lungs what we would do if we had one hundred percent long portfolio, and then you add a fifty by fifty almost neutral sleeve on top of that.
So we can generate.
Value from our long short spread because we have an extra fifty points on either side.
And that's a product.
As allocators have increasingly bifurcated their portfolios, they want full risk on one side and they want uncorrelated on the other. They don't want this thing as much in the middle that long short equity had been. We launched a long fun twelve years ago, alpha extension a little over a year ago, realizing that as a business, we need to give allocators a product that fits what they need. We can pick stocks and our long short hedgephone has done great over twenty five years, but it's framework.
Its fees structure is something.
That that allocators have increasingly said, I want something different, and so one fifty fifty it's always one hundred percent that long, and we have a fee structure where you only pay for alpha.
So the fea structure.
There is to define that because some people have called those pivot fees or non beta fees. So you're charging a fee over and above whatever the S and P five hundred generates. Is that the thought process, that's.
The thought process.
So we picked the MSCI world, which is half of it's the S and P five hundred anyway, because we do global but we charge a fifty basis point fixed fee and then thirty percent of the alpha. So if we don't beat the market, you pay us a pretty low fee fifty basis points. If we crush the market, you pay us what we're worth. It's a fair sharing of fees and a good alignment. And so there's a huge pool of capital that already wants to be long
the market. Right This seventy to thirty model like a lot of full risk, and so people in that full risk want passive index they want lung only, they want private equity, they want venture. So we're playing into that world. But we can generate very significant alpha both through the long stock picking and our long short spread.
So I love the business idea of that. Hey, if I don't generate anything over my benchmark, you're paying me what's essentially a mid price mutual fund fee. But we have the potential, as you've demonstrated over the years, to hit the ball out of the park, and when that happens, you're going to pay up. I'm surprised more funds don't play in that space from a business perspective. Why do you think there's so reluctance to adopt I mean, obviously you are eating your own cooking. You're like, hey, we
do well when you do well. Why have it more funds embraced what sounds like something that's fair for both for both the allocator and the fund manager.
It's a great question. You know, I think we have been you know, the world and markets have evolved over my thirty years in the business, and we've had to evolve in two ways. We've had to evolve the business. So to this point, I think as as allocators have changed we've said, hey, we're going to disrupt ourselves. Yeah, one and a half and twenty. Our fees are one and a quarter and twenty, but one and a half
and twenty absolute fees. That's great, it's really lucrative. But if you can't get it or Allocatus wants something, you know, we could either be a smaller version of ourselves when a lot of the peers that I started in the business with are no longer managing money. I feel like
I love this business. I want to do the right thing for my employees, for my investors, and keeping a strong and stable business is important, even if it's you know, less lucrative, and so were a bit disrupting ourselves, but you're moving to where the market is and keeping a business strong. So I think some of my peers maybe have felt like, I don't want to give investors something else that is lower fees than this lucrative business I have.
And I think also in order to really do one fifty to fifty well, you need to have a scale shorting infrastructure.
Shorting is hard.
This is something we have stayed committed to in the decade after the GFC as we went into this ZERP environment shorting got hard stocks kept going straight up. Valuations expanded, valuations stopped mattering when rates were really low. Then we go into the memestock craze in twenty twenty one. You're telling me, not only does valuation not matter, but fundamentals don't matter either. In order to do this well, you need to believe that shorting adds value and you need to be committed to it.
You're addressing exactly where I was going to go next, which was the general consensus about why short sellers have become an endangered species. Has not been the business model it's been. Hey, shorting has become too There's just too much capital, especially when you have zero interest rate and QE. You know, there was no alternative to equity. Fixed income was not desirable. Wait, I got nothing but downside and no yield. Of course I'm going to roll into equities.
I'm going to assume that the pandemic and the shift from a monetary regime in the twenty tens to a fiscal regime in the twenty twenties change that. Are we possibly seeing a resurgence of short selling.
I believe the opportunity set is great. I'm not sure that everybody's gotten back into the single name shorten, the memestock craze, the retail led rallies, the shortcovering rallies. The new market structure still makes it not easy. You need a really thoughtful portfolio construction, really thoughtful portfolio execution. It's not just about the ideas. Volatility works against the short side,
it helps the alongside. If a stock goes down and you're long it, you have a small position and more upside.
It's easy to and the opportunity to buy in at a lower price.
And if the stock goes up, you have less upside and a bigger position. It's easy to sell. The opposite happens on the short side, and so things get bigger automatically when they go against you, and risk constraints come in. So you're going to be really thoughtful about portfolio construction. So it's not easy. We have one hundred and ten short positions. You need a scaled infrastructure to have one
hundred and ten alpha generating short positions. That's hard for people to do, so I think that's one of the reasons that we haven't seen quite the resurgence. But to your point, higher interest rates help in a lot of ways on the short side. So first of all, we are now discounting the future at some rate. So no longer can you tell me this company is going to do fifty billion and ten years and you could discount
that at zero as if fifty billions coming tomorrow. Secondly, the higher cost of capital for businesses to actually operate make industries more rational, So no longer do we see profitless companies just destroying businesses. So it adds more rationality to the economic factors that affect busines. So that's good for fundamental investors. So now we have valuation is going to matter and fundamentals will start to come into play. And then lastly, we're now also getting short credit rebate.
You know, we're getting five percent on our shorts, so you're getting paid to wait. So I think higher regist rates are good for shorting on several levels. It's not clear to me that people have come back to it with the same vigor. We still feel like a number of peers and others short indices, baskets and single name shorting scaled infrastructure. It's hard business.
So let's talk a little bit about eminence. You've been around for twenty five years you've been doing bottom up stock picking, both on the longside and the short side. Tell us a little bit about your process. What is your bottom up research like?
You know, I would say over the twenty five years we've been in business, we have had to you know, markets, the world business has changed a lot. I talked a little bit about how we've pivoted our business to what allocated have wanted, but we've also had to adapt our process and our approach as markets have changed over the last twenty five years. In general, we are still doing exactly the same thing we did, which is trying to
buy good businesses and stocks that are cheap. And those two concepts are very important because I think we get the opportunity to make money in two ways.
When we do this.
We get the opportunity for the business to compound in value at above average rates, so time is our friend. And then we have some undervaluation, some discounts, something that's misperceived about it, and we get an opportunity for rerating.
And over our history, our success has been typically owning things for two to three years, where we get a couple of years of value creation growth a rerating we make fifty or one hundred percent and then we turn our capital to what I call the next mispriced durable business.
And I think that repeatable process is something we've always done now that has adapted and evolved as markets have changed, and we can get into the market structure changes to which I think are the most consequential theme I could talk about is how different markets are today. The price setters in markets vastly, vastly different than they've ever been and very important for fundamental investors down.
So let's go there. I had David Einhorn on a couple of months ago, and he famously said markets are broken. He blamed indexers like black Rock and Vanguard for saying people aren't exercising any intelligence. They're just blindly buying indexes and putting them away for decades, and that made value investing more challenging and it deeply affected the measure of equities, although arguably you could say would not create more dislocations and more opportunities. But where do you see the change
in markets? And is broken a bridge too far? Or are markets broken?
Yeah?
I don't think they're broken. I think they're quite different, and I think in the mid to long term they still work. I love David, he's brilliant, he's friend and a great investor. But you know, our view is that markets are very different and the people setting prices over the short run are very different than they were. You know, fifteen years ago, the marginal price setter was a bottoms
up investor. So markets fifteen years ago were twenty five percent passive and seventy five percent active, and most active investors did bottoms up research. Fast forward today, that twenty five percent index is now sixty. So David's right about how big indexes have come. They are accepting prices. But the bigger change is also that the forty now relative to the seventy five is not bottoms up stock pickers.
It's quantum investors. It's podshops that are trying to make money in every one, two, three week or two month period of time. It's thematic investors, it's systematic investors, it's retail investors. And so the makeup of the active investor community is significantly different. And so on most days the price action you see in a stock is being driven by somebody who is not doing bottoms up research. I'm not saying that they're throwing darts at the board. But
they're doing something because it fits in a camp. This is a small cap cyclical, and now because the FED wants to cut rates, I want to buy small cap cyclicals. Or this is a large cap defensive, and I want to buy large cap defensive because the economy is slowing and they're doing things in big swaths. I don't want to own unprofitable growth, and so I'm selling all unprofitable growth.
And it doesn't matter whether it's a flying taxi that's never going to make money or an eighty percent gross margin software company that is technically unprofitable because it's reinvesting efficiently in its business. We see all this investing done in kind of I call it blunt instrument investing, and people talk about like the theme da joure, we want to buy AI, the GLP one losers, the GLP one winners, Like how about a business? How about an individual company?
So what I would say to you is that this creates more just location. As you said, it's different trading patterns. So it's not easy because you have to retrain your mind and your process to say what I see in the screen today doesn't matter, It doesn't mean anything. It's not a signal, it's only opportunity. The market is creating greater opportunities. But it requires investors to number one, change the mindset and recognize that the priceetters are doing things
for reasons that have nothing to do. They're selling your stock because it's technically unprofitable growth, Okay, doesn't matter that the fundamentals are getting better. Doesn't matter that in eighteen months it won't be unprofitable. It only matters that it fits in.
A bucket today.
And you need to say you're providing no signal to me, and so I as an investment were going to take advantage of that. And so it requires mindset adjustment, It requires some portfolio construction adjustments. We have to be a little more diversified because the volatility of individual stocks is quite high, and if you run uber concentrated, you run the risk of kind of having such bad performance over short periods of time that you're.
You could scare your investors.
And I think it also requires higher turnover to take advantage of this market vowel or what I would call high volve that has little to do with the bottoms up fundamentals in that company. And we see it in both directions.
So you're raising two really fascinating through lines that I that I want to address. So, where Einhorn was saying the passive investing side of the market has changed the structure, what you're specifically saying is don't ignore the active side. The way the active behaves has completely changed. Also, they're not fundamental bottoms up stock picker. They're this, that and the other, and it doesn't matter what it is. It's just different than what came before. Is is that a fair access?
I think that's a very fair ascessment.
And then the second point you bring up is kind of really intriguing. All the various new types of active you're describing, they all seem to be intensely narrative driven. It's a storyline. Whether it's AI or ozembic and alternatives or quant or you know, very short term trading, there's a story there, and if the story works out, they make money, and if the story turns out to BBS, they're out.
It's add investing like give me, give me a narrative, and I know versus like I'm gonna do the hard work. I'm gonna do three weeks of research. I'm gonna rip through the financials. I'm gonna build a model. I'm gonna go out and talk to the whole ecosystem. I'm gonna find interesting field research contacts. I'm gonna interrogate management. I'm
gonna look at the footnotes, old school stuff. Investors don't do that anymore, and and that creates a great opportunity assuming you've made these adjustments to how the market is.
You know, it's so funny you call it a d D investing. We had that big dislocation in the beginning of August, and I'm home recovering from having some new parts put in, and I'm just flipping around the channels and it's hilarious because, gee, what caused that giant correction. Well, it was the be non fine pay or report. No way, it's the PSALM rule and we're in recession. No way, it's Japan and the end of the character. Oh no, wait, it's the unwines of the Trump trade and we're not
gonna get a fifteen percent corporate discan. No no, it's the vix complacency and it's been too and nobody wants to say, hey, it's kind of random, and there's a lot of moving parts. Oh no, the FED is behind the curve and it's the add investing is exactly what the pundits are talking about.
And to your point, the add investing is also add with my P and L. If I start to lose P and L, I move, So this is not eminence. But other investors have no tolerance for pain. They are
all these risk triggers. So on top of the I'm moving to where the narrative is, I also know that even if that narrative isn't what I believe, if my P and L starts to do something that triggers me to do something I do risk I delever and so you have on top of people investing in ways that are narrative driven, they're also backward looking to their own P and L. So if I have a bad month, that means that I might have to do something differently.
When I'm telling you all the stock prices are moving for non fundamental reasons, we realize we have to absorb volatility, and that is part of the new market structure.
We have to be comfortable if.
They're willing to live with it and then lean into it. We have the advantage of twenty five years of investing, seeing a lot, having built a lot of credibility with investors, so I don't have to make money every month. Maybe a newer manager doesn't. Or if you're at a platform shop, you know, five percent draw down and they cut your capital in half, another five percent draw down, you're out
of a job. So that creates, on top of the narrative behavior that's almost trigger driven and exacerbates this volatility.
That's kind of fascinating. And I can't help but notice you mentioned the twenty five year track record. Your first decade arguably is the lost decade. Markets peaked March two thousand. You guys launch late ninety eight, early ninety nine, The main indices don't get back over that level till what is it thirteen years later, twenty thirteen. So how formative was that first decade? How did it affect how you invested? What were you guys doing during the two thousands.
So the two thousands I would call the golden age of long short This is when the product really showed its metal, because while the indexes didn't do a lot, underneath the surface, there were a bunch of winners and a bunch of losers and what I always say about the short side and alongside is I don't care what happened this year. Twenty percent of the companies really underperformed and twenty percent of the companies outperformed.
Right, it's not so.
Easy to find them, and I'm not making easy. But you can't tell me shorting is hard when I can show you the twenty percent of the companies and underperformed, Okay, you just didn't find them, and that's a separate issue. So I think those were the formative years that showed me that the power of long short, of stockpicking, of finding things that can outperform and underperform, and in many ways bred the opportunity.
To have a real business.
Now to your point, after the lost decade, we go into the opposite environment, the SMP becomes the single best shop ratio possible from twenty twelve to COVID.
Well fourteen percent a year something like that. That's a great decade with Lovall right on top of that. So this is why investors started to move away from long short, because any hedging was not helpful.
It was harder to outperform the market.
I heard it called expensive insurance, and I'm like, is that is that really what it is, because you're kind of missing the points of long short.
I don't want to call it a moment in time because it was long in that, but it was a cycle, it was a period.
And that's what.
We've seen over time is markets go through phases and then everyone says, this is it.
Now you have to just buy indexes.
And so we're this phase right now where everybody's convinced that the SMP or the QQQ, like, just buy that and don't worry about anything. I would tell you that the last ten years, which has been dominated by that, is probably not gonna be the same as the next ten years. So to your point on higher interests in a different world, I think we're gonna go back to
a place where stock picking matters a lot. All this history has shown me is both markets go through cycles, and investors, whether you like it or not, are backward looking, return looking animals.
They rarely look forward.
And so it's like this work for the last three years, just keep doing it even if the world looks different going forward. And so this is human emotion. This is why computers are never going to take over for markets. While we can get the benefit of quantum computers. Human emotion is backward looking, and let's just do more of what worked in the past.
That muscle memory is really tough to break. Let's stay with that idea that your job is to identify the twenty percent of stocks that are going to shoot the lights out and really beat the indices, as well as that bottom twenty percent that's gonna soil the bed and do a terrible job. Is it the same process to identify both groups of stocks or is it a differ instead of research and analysis to pick the winners versus the losers.
It's a different set of research and analysis. There are corollaries, but shortening is not just the inverse of a long Because of the nature of shorting and what you need in the form of catalyst and recognition, it's a little bit harder.
You can be.
Patient on alongside, and so for us alongside I described this durable business or good business and mispriced stock as the repeatable process that we're.
Trying to do.
So our research team of twenty people, we have thirteen sector based analysts and pms that are really know their sectors and tend to look amongst those sectors for businesses that are durable, and then the opportunity to buy them when they think there's a misperception out there. And I think that means that a lot of things we do. We're researching companies and we say, well, it's not the right time. This is a good company, it's a good CEO,
but it's fairly priced. There's nothing wrong with it. So I'm not just looking to buy good companies. I want to make sure that I'm delivering value to my investors in that I'm buying that good company when it's mispriced so I earn outsize returns. So I think our team is doing lots of research across these sectors, identifying the right kinds of businesses, and then through different events that happen, there are things that create miss pricings. Short term company
goes through a disappointment. Everyone gets short term and no one wants to look out twelve or eighteen months. Maybe there is a turnaround story and a business that have been underperforming, Maybe there is a hidden asset that's going to start to show. So things that fundamental investors could could create miss pricings. On top of that, the new market structure that I talked about is creating new sources of miss pricings. So this is everybody's doing one thing.
You're in the GLP one loser bucket. And you know what, Goldman Sachs decided that, and Morgan Stanley decided that, and they put you in in this basket of losers. Okay, that is not necessarily the most rigorous process.
It doesn't mean that.
But all explaining GLP one verse is the winners and the losers. Briefly, for people who are are not market junkies.
Yeah, so so GLP one they are the diabetes drugs that are helping people lose weight. This is ozempic, this is manduro go, and will go VI is ozempic just a stronger version.
It is an existing.
Class of drugs applied to a new use and is applied to weight loss. And then there are a lot of downstream effects to weight loss. So a lot of the comorbidities or the co issues we have in the health system come from people who are overweight, so heart disease for an example, or other procedures. If people are healthier or we're gonna have less of these other things. So you could be a GLP one loser because you help patients that have heart disease.
So this can be anything from healthcare to I saw people talk about brands and McDonald's.
So you're eating, so you're you're eating habits or less, you snack less, and so there's the potential that we consume less food.
I think it's.
Moderate but accurate. I mean, today we have relatively small percentage of the population on these things, but people projecting out to when we have ten or twenty percent of the population, and they might eat ten or twenty percent less. So alcohol is another one. There's no craving for alcohol. People who are drinking less. That's a GOLP one loser. And then some of these healthcare things could be GLP
one losers. People throw you in this bucket and then doesn't matter that you have a new product, it doesn't matter that you're gaining market share, it doesn't matter that you're going to grow your earnings at extra y. They're just selling you because you're in this basket that Goldman, Sachs and Morgan Stanley told you about that is creating other sources of mispricing, throwing companies into the unprofitable growth basket.
So back in twenty twenty two, people said you know, you don't want to own unprofitable growth rates were going up, right, they and again they treat everything as one. Uber was a perfect example of a stock that was technically unprofitable, but it was fundamentally profitable at its core, and it was unprofitable because they were growing in uber eats and they were growing in new markets. And what we've seen happen over the last two years is Ubers all of
a sudden become profitable. And point being, they're selling it because I classified it as something but having nothing to do with both the micros of that company or how that classification might change in eighteen months, And so that
creates other sources of mispricing. So, getting back to your question, we are trying to find durable businesses and mispriced stocks, and there are more mispricings coming from investors because it's not just fundamental investors now, it's this new market structure, this thematic type of stuff on the short side you also asked about.
Yeah, that's so I'm fascinated by the short side because you know, short sellers have become an endangered species, and I always thought short sellers kept the market. Honest, we're the first buyers in the crash, and you know, losing shorts is not a good structural thing for the market.
It's not a helpful thing.
And I think we've had a number of kind of media and regulatory pushback on short selling and stuff as if for the evil Empire, because you know, stocks only go up and people on stocks and we're like betting against it.
The truth of the matter is.
Short sells do better research because the risks are skewed the other way. I can only make one hundred percent, I can lose thousands of percent. I better be really good and really accurate, do really good research. I think it's an important part of being a skeptical investor. I think it's an important part of portfolio construction, and I think it's an important source of value add to our investors.
And so for us, we are typically looking for both an overvalued stock and a reason why that overvaluation will correct. So we need to understand what is going to happen so it's fundamentally worthless and something is going to drive that to happen. That could be an earnings miss, that could be a business that's over earning that supply is coming on to it, It could be a company that has a poor accounting or a fraud, it could be
a fad. Lots of different baskets of overvaluation, and then you also need to understand what is going to change that's going to cause investors to value this the right way in a reasonable time. It may not be tomorrow, but it can't be five years because you can lose a lot of money between now and then.
Huh, really interesting stuff. So let's talk a little bit about what's going on in the market today. You said something that I found fascinating. We were talking about shorting earlier. You said, the mother of all short squeezes is no longer valid. Today. Short interest was at one point thirty percent of the float today it's well under ten percent. Explain.
So that was a tweet about Game Stop specifically because we obviously had the original Game Stop episode of twenty twenty one, and then more recently Roaring Kitty had come back and kind of created a new short squeeze in game Stop, and admidst that short squeeze, the company issued three billion dollars of equity, massively increased the float, and a number of short sellers had covered and the thesis behind being long Game Stop for any of these retail investors,
is the market's rigged. The short cells are gonna have to cover, you know, just hold the stock.
If we malls are coming back in a big way.
If we if we corner the market on game Stop shares and nobody and we never sell, then the short cell is are screwed.
And which turned out to be fairly accurate for that one stuff.
For that one s in the original period, right when the short interest was probably eighty or ninety percent. After this more recent episode, I tweeted, I said, I don't know what the thesis is now if the company just massively increased the float, so your short interest is a percenter of the float went down and other short cells covered. So so now your short interest is nine percent. Like that's fairly low as as far as short interests go.
So you don't really have a thesis if your thesis is mother of you know, moass with rocket ships right.
To the moon, to the moon. So to me, the whole original Game Stop thing was so fascinating because I started on a trading day in the nineties and we had the Yahoo message boards. I remember the Iomega fans driving to the factory on a Sunday night and seeing the parking lot full of cars and Wall Street didn't get it. They're running triple shifts and they're going to blow numbers away. This seems like very much a throwback to what took place in the early days of the Internet.
How different was Roaring Kitty and Game Stop with what happened during the dot com boom.
So I think that the fundamental differences are we now have much greater access for retail investors to the market. So we have access on our phones.
We have free trading, Robinhood absolutely Robin Hood swab for free.
So all of a sudden, the ability and access for retail investors to be meaningful players in the market is even bigger than it was back in nineteen ninety nine. And then I would say the other change is that no longer is this just creative research that that some sort of savvy individual did. Let's say, on a stock like Iomega, this is actually bullying. This is coordinated efforts to all come in and try to buy the stock
at the same time. We'll drive it up and then it'll cause short sellers to have to cover and other investors who get triggered by price movements to buy, and so we're going to create the price action that's going to create further price action.
So this isn't even the nineteen nineties dot com. These are the nineteen twenties syndicate buyers. Yes, right, talk about everything old being new again. It's a century ago.
This is the essence of what we're not allowed to do, which is act as a group. But you know, the SEC doesn't do anything about retail investors. If if thirty percent of the company all got together and they were retail investors and they did something that's illegal as per SEC rules, but nobody goes after the retail investor. And that's okay. This is the sandbox we got to play, and I'm not complaining about it. It's a new phenomenon.
It goes back to this new market structure that I talked about, because I mentioned retail investors are a big piece of this new market structure. And one of the things that's happened that people don't appreciate is how significant they are as a player in the market, even in indices.
In the last six.
Months, they have been putting a billion dollars a day into s and P and a.
Day at retail investors.
You want to know why a month ago the market was at a high even though the economy was slowing. It's because the retail investors are just giddy buying the indexes, and until we get a trigger to make stocks go down, other investors aren't selling, and so they are a real factor in the market. We have to both respect them and then ultimately take advantage of them, because I don't
think they're the most sophisticated savvious investors. Some of them may very well be, but as a class, I would say they tend to be following themes and chasing things that are going up, rather than doing what you described in Iomega, which is kind of good bottoms up fundamental research.
Well, obviously, what we saw in the first go round with game Stop was the stock when to the moon and a lot of people bought in very late. It was a ton of money loss by let's call it an unsophisticated retail investors. Let's talk about what took place in twenty twenty four with Gamestock and Roaring Kitty. This time the SEC said, hey, we are investigating because this looks like blatant manipulation. What are your thoughts on that.
I'd love to have some hope and trust that the SEC and the government's gonna get to the right place, but I don't necessarily have that belief. It's nice to see that they looked at some of the actions and suggested, you know, are you misrepresenting, are you committing fraud?
You know?
The size of Roring Kitty's position was about one hundred and fifty million dollars. From what people understood, Roaring Kitty had made thirty million dollars in the first go around in game Stop. People are unsure of where he got one hundred and fifty million dollars to buy more GameStop. He was also buying Chewy. The ultimate beneficiary of Roaring Kitty was games Stop itself. They raised three billion dollars at prices that are well in access to what the
company's worth. They bought themselves a hugely. They could try anything they That company will not run out of money for the longest period of time. It is a money losing bad business that's historically that is going down. But now it's like a spack with a couple of billion dollars and a fame CEO named Ryan Cohen, who you know, people want to believe in. And so the company really benefited from what Rooring Kitty did here, which is get retail to come back in and try to buy the stock.
Get professional investors who had PTSD who are like, oh my god, here it happens again. I better get out of the way. Last time it hurt me. And so that created a situation where a stock went from like eighteen to like fifteen in a couple of days. The company raised a bunch of money. The stock is back to twenty again. So they don't affect the long term of it, but but they create a lot of and l pain, a lot of emotion, and in this case allowed the company to raise three billion dollars.
So let's talk a little bit about Chewy and Ryan Cohen. Full disclosure, I occasionally order from Chewy for treats and stuff for our dogs. Mostly Amazon, but very often. Chewy is very competitive price wise and tends to have stuff in stock which Amazon doesn't always. You and I both have mixed it up with Ryan Cohen on Twitter. You know, again to be even handed, Ryan, if you want to come on Master's in Business and talk about Chewy and
talk about game Stop. I'd love to have you. But he blamed naked short sellers for trashing game Stop and all the garbage we heard about the decade before with overstock and other companies that turned out to be frauds. Blaming naked shorts tends to be a red flag that something on told is going on. That said, Chewy is a real company. It's the second incarnation of pets dot Com, only timed right, funded right, and executed right. Why does Ryan Cohen care about game Stop? It seems so bizarre.
It is a little bizarre.
I've asked myself if this is this decade's version of Eddie Lampert, who made it a wonderful trade buying Sears when it was on the verge of bankruptcy, putting it together with Kmart, and like you know, in the short run, saving that company.
I was told he's a real estate genius. Does that turn out not to be true.
I won't appine on that, but I will say he's not a chief merchant of seers and Kmart. So he ultimately put an enormous amount of his fund into this. He ultimately went and ran the company and tried to turn around or make a failing business successful. This goes back to the Warren Buffett quote, you know, you show me a good executive and a bad business, and I think that the reputation of the business is gonna win out.
I think Ryan Cohen putting himself in a CEO of game Stop, I think he's going to ruin whatever reputation he has as a businessman, because this is a business that is going to be really hard to turn around. That's my opinion. Maybe he's going to develop something. I'm going to be surprised, But when I look at where the world is going GameStop as a physical retailer selling computer equipment that you can buy online games that actually will have no physical component you can download them, it
strikes me that this is a dead end. And to the credit of Roaring Kitty, he now is cash and he's gonna have to go try to reinvent the company. But ultimately I think that's going to be a failed attempt and he's going to ruin what reputation he got through through Chewy.
So can GameStop pull what Netflix did? I mean, DVDs through the mail was not the most compelling business model, but online streaming. They became a dominant, giant, wildly successful company. Is that the future of game Stop following the Netflix model?
So I think that Netflix in certain ways got lucky early on and capitalize that. When I say lucky, the movie studios gave Netflix certain rights to online streaming that they didn't think we're all that valuable. They had a Disney contract that allowed them to offer this product. The gaming companies are never going to allow this to happen. So I don't think it's possible for game Stop to
do what Netflix did. They tried NFTs for a while, They've tried kind of collectibles and a few different things, and you know, at the end of the day, it's a physical retailer with leases in malls that are dying. But he's got three billion dollars in cash now, So we'll have to watch.
You'll see what happens. And for purposes of full disclosure, how did you guys trade around games now?
We lost only a little bit of money the first time around in twenty twenty one. We have been short game Stop for most of the post twenty post meme stock craze period of time.
So that has to be a giant winner.
It has been a good winner.
Twenty twenty one, we made back more than for losses that we lost in January twenty twenty one. Having said that, it hurt us in the second quarter and we lost about about one percentage point shorting game Stop we're still short of today. It's come back down, and the portfolio construction changes that we've made post the memestock craze and how we ran out of the portfolio allow us to ride through things like this. This is one sort of position. It hurt us in one period of time, but ultimately
I still think that game stopers are short here. But it will not go broke. It will not go as far down as I ultimately originally thought out. Blockbuster well, oh they are Blockbuster, but they've three billion dollars in cash.
Now.
To Ryan Cohen's credit, when this squeeze happened, he came out and sold a bunch of stock for the company.
He's savvy.
If we happened to be in that situation, good for him. He's he's maybe saving the company long term from being bankrupt. That doesn't mean that.
This is a successful business.
There needs to be a pivot. Let's talk about a different type of gaming Eminence took a hefty steak in and tain a UK gambling group. You're re eluctant to that board. Tell us a little bit about n Taine. Is this really a sort of activist play? How does this fit within your overall strategies?
Yeah, in Taine is a global online gaming company. They own brands like Ladbrooks and Coral oh UK. They own half of bet MGM in the US, so that partners with MGM. They have businesses in the UK, Australia, Italy, Brazil.
The industry is growing.
They have been a leader across many markets and it is fundamentally a good growing business. MGM tried to buy the company in late twenty twenty and then DraftKings tried to buy the company in mid twenty twenty one. Over the three subsequent years or two and a half years to that point, in Tane lost its way. It had a terrible CEO, it had a board that was not informed and unable to make the the appropriate changes, and
over three period of time really underperformed. We have followed the company, we've owned it for this period of time in various sizes and recognizing it is both a really good business and a leader, and it had a CEO that was absent Tee completely taking the company down the wrong path and making poor capital location decisions. We decided there needed to be changed there. I would say just taking a step back. In general, activism is not our strategy.
While we get called activist investors in the press, we are not activist investors. We never go into a situation expecting to be activists. What happens from time to time is you go into situation you think management's a B, maybe a B minus, and it turns out you're wrong, there're a D or an F, and your choices sell it, move on, which we often do, or push for change. In this case, because it is such a strong strategic asset, we felt stepping in and trying to make changes was
the right thing. I've been on the board now for seven or eight months. We've made great strides. The interim CEO has done a terrific job. We just named a permanent CEO a couple of weeks ago, Gavin Isaacs, who a lot of US investors know, and I think that the capital allocation decisions have been significantly better. We are in the past to turning around this company. I think
This is a terrific growth business. It's a company that's a leader across many markets, and it's a company with so much opportunity because they had been so poorly executed and managed for three years prior to the last six or eight months. That's the opportunity here. And I'm at this point trying to make a difference on the board, and I think we've been We've been very effective. I've been I've been very pleased and surprised by how receptive it's been for me on the board. This is not
a traditional activist where we're fighting with people. I think they saw the errors of the company's ways and believe that that I and our agenda are breath of fresh air, and so we're making really good progress. You know, time will tell how this works out.
So last question before we get to our favorite questions that we ask all of our guests, a little bit of a curve ball. You serve on the Board of Directors of the University of Wisconsin Foundation. Not only are you a member of the Development Committee, but you're also a member of the investment committee. Tell us a little bit about University of Wisconsin Foundation.
I'm actually only on the Investment Committee today. I used to be on the broader board of University of Wisconsin, Miyama Mada. I do a lot there. I teach a class there, I host interns, I built the whole Badgers and Finance community, and I am on the investment committee. So I commit a lot of my time. It's a passion project. I feel great about helping kids in the
things we do across the university. With respect to the investment committee, you know, this is a traditional foundation runs a bit over three billion dollars allocating capital, and this is an opportunity for me to do two things. One is help this foundation with our perspectives, help evaluate how should we allocate the money, How should think about evaluating this manager, How should we think about evaluating this strategy, How should we be a probably diversified, how should we
be opportunistic in times of dislocation? And secondarily, it's an opportunity for me to see investment committees and foundations from the other side of the table. Obviously, people like the University Wisconsin are significant investors with me. Wisconsin is not an investor or a main fund, but we have similar institutions and so it gives you a perspective for how endowments work, how committees work, and some of the same things that I've said about investors are also true about committees.
Very sophisticated people coming together on committees looking backward looking returns often don't ask the rigorous questions about how did you deliver those returns? Are they repeatable? Was this a cycle?
How much risk did it take in there? And so it's been a really good exercise for me to be able to understand our investors in the investment community around and it's been a great experience on both scorts and helping the school, and they have a wonderful CIO, and I think that we've done a good job of not falling prey to the issues that could happen with a committee managing an investment team. But it's also allowed me to see things from the other side.
And University of Wisconsin always showing up on the lists of top non IVY League schools. That has to be very rewarding for you to do your work with them.
Yeah, humble, hard working Midwestern kids every bit is capable as the kids that go to IVY leagues, but with better attitudes. And I think that there's a lot of this going on in the working world that I think the working world is realizing that I don't just need the kids from the best schools in the country. I need good kids that meet a certain standard of intelligence and capabilities. And then what I really want is the kids with the right attitudes and kids that go to
schools like Wisconsin, Midwest, humble, hungry public school kids. They have a different attitude than maybe kids that might come from some of these Ivy League schools that have an expectation that the path is laid for them and that they just are going to be CEO within the next.
Six fundamental mispricing of an IVY League education. Yeah, absolutely, all right, So let's jump to our favorite questions we ask all our guests, starting with what's been keeping you entertained? What are you watching or listening to these days?
In the podcast land, I tend to listen to a number of what I would describe as business and health and fitness podcasts. So I listened to The Founder's podcast, I love Understanding kind of prior successful people invest like the Best Your podcast. These are kind of interesting market oriented podcasts. I also listen to a lot of health oriented stuff so Peter Atia the Drive Huberman podcast compu Tea is.
The longevity It wrote the book on longevity I live.
Yes, really interesting, tremendous, really thoughtful. There's so much we've learned in the last twenty years about health, longevity, wellness. And he's a big believer in medicine three point zero, which is really us doing things preventatively versus medicine two point zero, which is like, you get sick, your hip hurts, you go for surgery. Well, what do we do to prevent that ahead of time? What do we do to
prevent heart disease ahead of time? What do we do to keep us strong and living greater health span not just lifespan.
I read something this morning. It's so fascinating. Three point zero still comes back to all the things we knew fifty years ago. Don't be overweight, exercise, manage your stress, and be proactive in how you respond to any sort of infirmity or challenge.
Yeah.
I mean the truth is you boil down all of this longevity stuff to a few key things. Move, eat less and eat healthy, get sunlight, have meaningful work and meaningful relationships, some strength training Like that's it, you know, you read the blue zones and you look at you know, there's all this data and it's not that complicated, but I think kind of distilling it down, there are things that have really helped me change small things about my life,
my morning routines. Things like that that you know, switching from cardio and getting on a treadmill or a bike to strength training, significant improvement to longevity and the things we need to do, getting out in sunlight, walking, just basic stuff.
Let's talk about your mentors who helped shape your career.
I think there was a handful of people. Most importantly my father, who ran a hedge fund. He was a Goldman Sachs analyst up until the early nineteen eighties and then early hedge fund founder, ran a hedge fund. Always been around markets, and you know, he was a mentor in sort of understanding the power of good businesses and growing.
My first boss, Marris Mark, also another great mentor, a brilliant investor who's still at it today in the age of eighties and going back to longevity, continuing to work in our life is important. A gentleman named David Harrow, who runs the Oakmark International Fund. He was someone I met when I went to school in Wisconsin. He was working at the State of Wisconsin Investment Board, brilliant value investor. He's been a terrific mentor to me on the business side.
And then you know, there is a whole community of peers and people who have done this before I did that. I think I've used little bits and pieces of I'm a big believer that investing's about finding your own compass, but I'm not reinventing a complete wheel. I might take a little bit from Warren Buffett, I might take a little bit from a David Tepper, I might take a little bit from what Julian Robinson did at Tiger or some of the Tiger cubs. And you build what works
for you. And so I think there's been a whole community out there that have been mentors to me, friends and peers and colleagues.
Let's talk about books. What are some of your favorites and what are you reading right now?
I would say, similar to the podcast, my books come into a couple of different flavors. So some of the business books that I'm a big fan of, the Ray Dallio book Principles, I think is terrific that David Rubinstein book on leadership just came out. Lessons of the Titans, another good business book. So handful of business books.
I think. There's longevity and health books. I think Outlive.
We mentioned Peter Atilla Life Force by Tony Robbins, terrific book.
I tend to read.
Some stuff on politics, like Understanding our System so the Politics Industry, a terrific book around the duopoly we've handed to these two political parties and how we change it back. And then some fun books that I tend to like around people, sports characters or other that that I think are great. Open by Andrea Agassi, so good. And a recent book that I read, The Gambler Billy Walters, a terrific book about maybe the most prolific sports gambler of
our time. That's a great listen. I would also say, I talk about reading books, but I listened to them.
Now did you have you watched, listened or read Shoe Dog Phil Night? Really really interesting, the same source one. It's amazing how these incredible companies, all these little places along the way, could have just made one other wrong decision. We never would have heard of them. It's fascinating, all right. Our final two questions, what sort of advice would you give to a recent college grad interested in a career in finance.
A couple of things that would give One is this concept of finding your own investing compass. Don't try to be just like me, or just like Buffet, or just like any one person. The benefit of taking all this information in is to build your own investing compass, because what's really important investing is consistency and confidence. So when things go wrong, you've got to be confident in what
you're doing. We can't chase the latest trends. We can't try to buy the value investor when the market's value investing and the growth investor. Otherwise we're going to be chasing everything. So build your own compass that will build consistency and will build something that you believe in, So that'd be one. I think the other thing that I
would say is manage your rolodex really proactively. At an early age, you start to get access to people who can be really helpful to you, and I think we often get that access and then don't cultivate it and harness it as we move on in life. And I would say, this is a mistake that I made. I had this tremendous access when I worked for Marris Mark. I was twenty four years old meeting with CEOs. I could have done a better job of cultivating these relationships
and using them ultimately over time. I've probably come back to some of them and have used them. But we don't get anywhere in life all by ourselves. We need advice, We need perspective. Somebody that you meet might know a lot about a particular industry and that's not all that relevant today, but in twenty four months when you're doing research on another company, it could be very relevant. Being able to go back to that, I think is really important.
So being proactive about that, sending people a note every now and like, don't just call them when you want something from them. Hey, I read this article and it made me think of you and your company.
And what you're doing.
Just keep in front of them, categorize your rolodex so that you can come back to that over time and use that as a powerful way to get smarter or quicker around a range of things.
Really interesting, and our final question, what do you know about the world of equity investing today? You wish you knew thirty years or so ago? When you were first getting started.
I think the biggest thing that I wish I knew was how individual motivations create decisions by executives and boards that might not be the most beneficial. I think I think when I start in the business, I think I understood human emotion about investing, fear and greed, and how investors behave. But I think I took what executives told me and board members told me at sort of face value,
like this is right, this is what it is. The truth is that they have their own perspective, their own motivations. They might be trying to deceive you. As we moved on in time, we've come to ask different types of questions of executives. I'll do my own research on the business. I'm not going to rely on you to tell me what the company is going to do next year. I want to know how you think. I want to know how you allocate capital.
I want to know what you're going to do.
I want to make sure that you're a person that I can trust to make the right decisions. I'll do my research on the company, and I think I did quite appreciate that executives don't know what's going to happen next year, the world changes, there are things that they can be blind to. They could have their own poor motivations that may be getting the stock up in the
short run, but not good for the business. And I think that that whole area around understanding humans and why they tell you things and being skeptical is probably something I wish I knew thirty years ago.
Really fascinating stuff. Ricky, thank you for being so generous with your time. We have been speaking with Ricky Sandler, CIO and CEO of Eminence Capital. If you enjoy this conversation, well check out any of the previous five hundred or
so we've done over the past ten years. You can find those at iTunes, Spotify, YouTube, wherever you find your favorite podcast, and be sure and check out my new podcast At the Money, short ten minute conversations with experts about information that relates directly to your money, earning it, spending it, and most importantly investing it at the Money, wherever you find your favorite podcasts, or in the Master's
in Business podcast feed. I would be remiss if I did not thank the track team that helps us put these conversations together. John Wasserman is my audio engineer. Attika of Valbron is my project manager. Anna Luke is my producer. Sage Bauman is the head of podcasts at Bloomberg. Shan Russo is my researcher. I'm Barry Rittolts. You've been listening to Masters in Business on Bloomberg Radio.