Gavin Baker – Tech and Consumer Growth Investing

**Patrick O'Shaughnessy** (0:04)
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, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

**SPEAKER_1** (0:24)
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.

**Patrick O'Shaughnessy** (0:47)
My guest this week is Gavin Baker, the founder and manager of Atreides Management. I met Gavin in the same way I meet many of the most interesting people on Twitter.
His focus is on consumer and technology growth investing, which is the topic of our conversation. We discuss many of the largest trends in these sectors, several fascinating investment cases and also explore the video game industry in detail, which I found especially interesting. Please enjoy my conversation with Gavin Baker.
So, Gavin, this is going to be really fun. The way that you invest, I think, is one of the last interesting ways to do public market investing. So, I'd love you to begin by describing what is unique about the way that you view markets, maybe growth, tech and consumers specifically, and why you do it this way.

**Gavin Baker** (1:31)
I'm a student of history and I think we are living through a period of accelerated change.
The only comparable period in history, I think, is the Industrial Revolution. You and I both like Carlotta Perez, and I would argue her work and kind of history suggests that we have another 30 to 40 years of rapid and powerful disruption ahead of us. In some ways, I think of the invention of the microchip in 1959, or the integrated circuit, as being analogous to James Watt's invention of the rotary steam engine in 1761, but I would argue peak economic, political, social change as a result of that invention was 70 to 100 years later during the peak of the Industrial Revolution, 1820 to 1850 I think in some ways, we may be just entering peak disruption, and with that lens, I try to invest at the edge of disruption just before it.
I approach public equity markets. I think a lot of people say this, but like a private equity investor, like a business owner, always looking out five to seven years and trying to own very high ROIC companies with growing competitive advantages, owner-oriented management teams who are on the right side of disruption, and what I try to do, sometimes successfully, sometimes unsuccessfully, is looking out five to seven years by these businesses at what I think is a 20% or 30% free cash flow yield to the EV. It's critical in growth investing to assume multiple compression. It doesn't always happen, but you want to be paid based on business outcomes and assume valuation is not part of the outcome.

**Patrick O'Shaughnessy** (3:09)
That seems like a key part here is that over some long enough time scale, I'm curious why specifically five to seven years, I'm sure there's thought behind that. Over some minimum time scale, the only thing that matters is the business growth, not valuation changes that gets muted as time goes on. I think that's part of the reason, but why specifically five to seven years?

**Gavin Baker** (3:27)
Five to seven years, I think is as far as I can convince myself that I can look out and have a differential view on a future state, something that I can have conviction in.
Yeah, for sure, in the short term, valuation dominates price movement, but the longer you go out, the less important valuation is. I would always modify, it's absolutely true that the price you pay determines the return you get, but I would modify that statement by saying the price you pay determines the return you get for a given business outcome. No matter how cheap it is, if it goes bankrupt, you're at a zero.

**Patrick O'Shaughnessy** (4:00)
We're going to use tons of individual company examples here because I think when you're thinking about that five to seven year period, you've often honed in on it. I'll call it most important question or single variable, which really is going to drive that cash flow growth for an underlying business. Maybe we'll start with one I've seen you talk about publicly, which is more current, which is Apple.
If you're thinking about Apple as a growth investor, what is that distillation and how did you arrive at it?