00:12:59 (someone): That's about the management team. That's about, obviously, Elon Musk and the rest of the folks there, the engineers there, thinking about the world and, as I said, opening that probability tree. When they see it, it's probably to open that probability tree and then narrowing it onto something they want to execute on because they think it's the right thing to do and it's a good business opportunity, but also the right thing for the world, frankly. That's very important. I should tell you, when we think about all this, We think about it with the guiding principle of, is this good for the world? Is it pro-entropic? But under the guideline of, we want to invest in things that make the world better. That is our ethos here. That's who we are. That's who we want to be. So it's got to be pro-entropic, but also when things go bad, something happens in the world, these particular companies are actually making the world better. They're serving people, providing something valuable to the world. That's also important to us. And we think about that all on the front end when we're underwriting an investment.

00:13:43 Patrick O'Shaughnessy: If you drill all the way down to the end source of demand for what a company is providing, is it true that pro-entropic companies tend to serve very constant, basic, unchanging human demand at their base? Is it building on that Bezos concept of betting on things that won't change about humans?

00:05:29 (someone): It's really true of SpaceX. We have a company called GoPuff in our portfolio, which also actually is, I think, heavily pro-entropic. Believe it or not, these guys are disrupting 7-Eleven, so it's really convenient stores. Convenience stores do well in recessions. They do well in pandemics. They deliver convenience store stuff. It does well in almost any environment you can imagine. They did extremely well through COVID. They're still growing very quickly now. We think they'll grow through a recession. I believe that's the case because usually convenience stores do. It's not just the super high-tech stuff. It could also be things like GoPuff, where you're providing a very valuable service to people no matter what and they need it no matter what. That's how we think about it. Then when we find a company that's strategically philanthropic, we think about Are the managers pro-entropic? Are the people running this company, are they really good at understanding chaos in the world? The way we think about this and our differentiating resilience is that a great pro-entropic thinker is someone who is able to keep their probability state, their Bayesian probability state open on options. You're running a company. You always want to have optionality in what's going to happen and how you're going to build the company.

00:32:18 (someone): The company's making the world better. That's how we develop meaning, and we all are getting great information. But the reality is we'd rather pay a higher price, more information, less risk. What we're trying to do is the entire distribution of the portfolio, the mean distribution over the right, and increase the size of the fat tail and reduce the losses. Whether we pay 1x or 2x the price, and it's a year later, two years later, and it's been de-risked substantially, it doesn't really matter. The IRR may be lower, multiple costs might be lower, but the reality is the risk we took was a lot lower. And so the investment itself, the risk-reward dynamic was much better. We're trying to balance a really great asymmetric risk-reward equation.

00:32:51 Patrick O'Shaughnessy: It's a great excuse for the concept of risk to talk probably for a while about one of my favorite things that you and I have talked about, which is the evaluation of people. And this really gets into the world of psychology. You've mentioned your foray into neuroscience a couple of times already, but I think that the ability to understand people, their motivations, the type of person they are, the type of leader they'll be is incredibly important. Certainly in pro-entropic companies, it probably drives the outcomes. I would love you to take us down this road that you've been on for 15 years or so into the world of psychological research, the theories or ideas that you found to actually be helpful in investing and why.

00:13:43 Patrick O'Shaughnessy: If you drill all the way down to the end source of demand for what a company is providing, is it true that pro-entropic companies tend to serve very constant, basic, unchanging human demand at their base? Is it building on that Bezos concept of betting on things that won't change about humans?

00:14:02 (someone): Yeah, I think that's probably true actually, because what we do here, we do disruptive innovation. We're thinking about that a lot. And almost everything you do is disrupting a current existing market that's an existing demand function. We do some, I'll call it brand new stuff, new technology platform, like we're investing in blockchain infrastructure. It's filling a fundamental need for asset tracking. That's how we think about it. That's why we're investing in the infrastructure layer more than we are in our solutions. But yeah, I think that's probably true. We think the demand function is stable. And these businesses are all, if you look at them carefully, disrupting their markets based on both product and cost. So our model for disruption, you have to disrupt on both axes. You actually have to make the product a lot better for consumers and you have to make it cheaper. And cheaper can be measured as, it's not just absolute dollar cheaper, it's just a lot better money for value. So the iPhone wasn't cheaper than the Nokia I had right before my iPhone, but man, it was a lot better. My dollar value trade was way better.

00:17:39 (someone): So if you look at our investment strategy, you will see that our largest checks are on the companies who know them the longest. And we have this underwriting guideline here where we really don't want to invest in a company we haven't known for six months. We want to know someone, we want to see them through enough time that we can see a few bad things happen, understand what they're telling us. We do some things we call short duration. If we know a sector really well, we'll do it quickly. GoPuff is an example of somebody who did it quickly. But many of our best relationships, whether it was investing with Elon early on, or we have a great biotech partner named Jeff Varonin, who's been wonderful for us in biotech. We know these folks over long periods of time. We follow their companies. So we're very happy to pay a higher price when the risk-reward trade has changed because we have more information. And the way we talk about it here internally is, We're trying to generate asymmetric information that generates asymmetric risk. We have an operations team here, as you know. About a third of our people in the growth fund are doing lean operations. This is really working at scale. When we deploy a team to a company in the growth fund, we learn a lot about that company. They learn about us. We're going to know a lot about how those executives think, how they execute. They're going to learn about how valuable we are as partners.

00:00:00 Patrick O'Shaughnessy: This episode of Invest Like the Best is sponsored by Catalyst. Catalyst is the leading destination for public company data and analysis. Founded by a former buy-side analyst who encountered friction sourcing, building, and updating models, Catalyst is now used by over 400 institutions, including the largest money managers globally, and by a number of guests on the show. With detailed company-specific models and data on virtually every public company, Catalyst clients are able to ramp up faster, update models instantly, and incorporate the highest quality fundamental data into any workflow. If you're a professional equity investor and haven't talked to Catalyst recently, you should give them a shout. Learn more and try Catalyst for yourself at catalyst.com slash Patrick. That's C-A-N-A-L-Y-S-T.com slash Patrick. This episode is brought to you by Lemon.io. The team at Lemon.io has built a network of Eastern European developers ready to pair with fast growing startups. We have faced challenges hiring engineering talent for various projects and Lemon.io offered developers for one-off projects, developers for full start to finish product development, or developers that could be add-ons to an existing team. Check out Lemon.io slash Patrick to learn more. Hello and welcome everyone.

00:06:20 (someone): You're running a company. You always want to have optionality in what's going to happen and how you're going to build the company. They're able to keep that probability state open to the appropriate moment and then close it for execution because great managers, great CEOs, great executives are great at strategy and they're great at keeping options sets open. But then when you watch what happens, the moment's like, nope, we're going to close the probability set and we're going to do that thing. We're choosing one of those paths or maybe two of those paths. We can't have 20 of them all the time. If you assume it's always open state, they don't get anything done. You've probably seen that too. We have too many ideas and we don't go anywhere. executives that are really good at doing both of those things, opening the probability tree and then knowing when to close it and execute really hard and then reopen it. We define that as pro-entropic thinkers. They rarely get knocked out of homeostasis. They're resilient too. They're usually really good at recovering, but they get knocked out of, I'd say, their regular homeostasis by events less than someone who's resilient because they're already predicting it. They've got a probability tree they're running already about what the world's going to look like and their inference is running against what the world's going to look like. They're making decisions about that and they're deciding when to toggle down and close off and when to reopen.

00:23:10 (someone): So I went to go talk to the chemist and ask him the question, what's going on? And he's describing Faraday's law. If you have an aqueous solution and you put a current through it, Basically, the current dissipates in the center. So if you make the bath longer, you've got to slow the whole thing down to get the right amount of plating on the part. And we went, let's take out three nickel baths. Well, it takes one extra chemist. It's going to cost pretty much nothing. Okay, let's do that. That's an example. It's a closed system. And in a closed system like this, the thing that limits its speed is the slowest element. That was really how I started thinking about closed versus open systems theory. And first, I started thinking about entropy. which is, when you're thinking about entropy, it's actually an open system. The world tends towards more entropy. It's because the system is open. When you have these very closed systems, like a manufacturing facility, you don't have as much entropy inside. What you have is this idea of constraint-based thinking. In this case, it was driven by Faraday's law, but it happens in pretty much any business I've seen, like our business here, or in the asset management investment business. We think about it this way.

00:01:04 Patrick O'Shaughnessy: Check out Lemon.io slash Patrick to learn more. Hello and welcome everyone. I'm Patrick O'Shaughnessy, and this is Invest Like The Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest Like The Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at joincolossus.com.

00:01:36 (someone): Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

00:02:02 Patrick O'Shaughnessy: Today's guest is Antonio Gracias, founder, CIO and CEO of Valor Equity Partners. Antonio is perhaps best known for his role at Tesla as the earliest institutional investor and director from 2007 to 2021. But he has a deep operating and investing experience, having first acquired and managed a number of manufacturing and technology companies during his 20s. It was during these formative years that Antonio and his team developed the skills that led to Valor, which provides operational expertise to high-growth private companies they invest in.

00:04:28 (someone): Demographics are changing the world. So much is changing all at once. And if you think about the second law of thermodynamics, it tells us that everything tends toward entry anyway. and entropy being chaos, it felt to us that the world was getting more chaotic and we wanted to find things that were good that got better when chaos went up. One of the reasons we invested in a company like SpaceX is because whatever we could imagine was happening to the world, this company just got better and it was actually good for it. I think how we really think through it is think about all the probabilistic outcomes of the world. We're Bayesian thinkers here. We think a lot about Bayesian probability trees and Bayesian updating. As you think about all the probability sets that might occur to a company, pandemic, wars, recession, whatever might happen, how will that company respond if nothing changes? It's strategy itself. That's how we differentiate if we're resilient. Some things are resilient. Resilience is great too. We invest in resilient companies as well. But every once in a while, we'll find something that we think is really pro-entropic. And that for us is the Holy Grail of investing. A company that gets better no matter what, just by virtue of what it's actually doing. It's really true of SpaceX. We have a company called GoPuff in our portfolio, which also actually is, I think, heavily pro-entropic.