Jason Karp – Opportunities in Public and Private Markets

**Patrick O'Shaughnessy** (0:00)
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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_2** (0:59)
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.
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**Patrick O'Shaughnessy** (1:24)
I believe that any investment strategy that will deliver strong returns in the future must evolve. The strategy itself should rest on rock solid fundamental principles, which change rarely, if ever, things like price discipline or business growth. But the features of the strategy must keep getting better because the marketplace is incredibly competitive.
That evolution is the topic of today's conversation with Jason Karp. Jason is the founder and CIO of Tourbillon Capital Partners, a multi-billion dollar asset manager based in New York City. We cover a ton of interesting ground. We start with what has happened in public and private markets, discussing the role of quants, passive indexes, and value versus deep value investing. We compare the relative merits of investing in private equities and where and how opportunities arise. We then focus in on two interesting private investing trends, the health and wellness sector and the cannabis industry. First, we discuss Hu Kitchen and Hu Products, the food business that Jason started with his family several years ago in response to personal health challenges. Second, we discuss his evolved views on cannabis as an investment space and why it may also represent a massive growth opportunity.
You all know that I value transparency, so it's important to note that since I recorded the conversation, my family became an investor in Hu Products. It's been a fascinating means to learn about the food, health, and wellness industry which has grown so rapidly in recent years. We were customers of Hu in New York City long before I even knew Jason, which made that part of the conversation especially interesting for me. This episode reinforced my belief in pushing one's investment strategy to adapt to changing market conditions and competitive pressures. If we have any hope of beating Vanguard, we can't ever rest on our laurels. This was an especially eclectic and fun conversation. I hope you enjoy my chat with Jason Karp.
I'd love to talk about your view on private markets versus public markets, generally speaking. We'll go into a number of different examples, but that dichotomy I know is something you and I have talked quite a bit about. I'd love to get your take on kind of how the difference has evolved.

**Jason Karp** (3:18)
Yeah, so I think there's obviously similarities between publics and privates, and the most glaring similarity is that they're both companies that hopefully have economics and good margins and generate cash flows and ultimately should be valued by the discounted cash flows that that business will produce. I think the rise of quantitative investors and the rise of passive investors, which tend to be, in the case of quants, they tend to be very short-term and they focus more on what actually makes stock prices move in the short-term, as opposed to what are these businesses worth. And in the case of passive, they tend to be indiscriminate allocations towards themes and sectors and factors and markets where you're buying everything within the S&P or you're buying everything within the triple Qs.
And that has created over the last five years, I've been in the public markets for almost 21 years now, and that has, I'd say the last five years have become pronounced in terms of the dislocations between fundamental values of companies and their prices. And the reason is because if you look at 10 or so years ago, and there's statistics on this that we've been able to capture from prime brokers and investment banks, between 40% and 50% of the daily trading volume of stocks used to come from what they'll call fundamental discretionary managers, people who actually have opinions about companies, people who have opinions about what things are worth, and they're making decisions every day and buying stocks based on what they think these companies are worth or not worth. Today that number is less than 10%, which has been well documented by several banks. So 90-plus percent of all trading activity is coming from non-fundamental sources. It's coming from passive, it's coming from quant, it's coming from CTAs, it's coming from people who are trying to capture risk premia. And knowing that means that stocks aren't trading, the marginal setter of price is not someone who's actually thinking about what does this company do, or what is this worth, or what is it not worth.