Modest Proposal – Better, Cheaper, Faster: Why Companies that Reduce Friction Win

**Patrick O'Shaughnessy** (0:00)
This episode of Invest Like the Best is sponsored by Canalyst. Canalyst is the leading destination for public company data and analysis. I'd heard of Canalyst over the past few years and became more interested after meeting the founder and CEO last year to pick his brain about SaaS businesses. Founded by a former buy side analyst who encountered friction in sourcing, building and updating models, Canalyst is now used by over 300 institutions, including the largest money managers in North America and by a number of the guests on this show. With detailed company specific models on virtually every investable public equity, Canalyst clients are able to react more quickly. If you've been scrambling to keep up with the deluge of IPOs these days, Canalyst has models on Snowflake, Unity, GoodRx and everything in between. Their pre-IPO models are built as soon as the S1 hits and include all segments, KPIs and non-GAAP figures.
If you're a professional equity investor and haven't talked to Canalyst recently, you should give them a shout. Learn more and try Canalyst for yourself at canalist.com forward slash Patrick. That's canalyst.com/patrick.
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** (1:27)
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 Oshanose Asset Management may maintain positions in the securities discussed in this podcast.

**Patrick O'Shaughnessy** (1:53)
Before getting to this week's guest and announcement, starting Thursday we will be introducing a new series of interviews. Be sure to check out this same podcast feed in two days to learn more. My guest this week goes by the pseudonym Modest Proposal. He's both a close friend and one of the most respected thinkers on financial Twitter. I field more inbound questions about him than just about anyone and you'll see why in this episode. We discussed many of the biggest themes in today's stock market, from consumer to technology to marketplace and local home services businesses. As always, Modest brings specific insight and general frameworks to the discussion.
I talk to him as often as I can because I learn something new each and every time and this discussion was no exception. Please enjoy my conversation with Modest Proposal.
So you sent me a message not long ago saying that you'd been thinking about something for 18 months, which is this idea of investing being about underwriting the past versus the future. And I want to set that as the frame for this conversation. Can you open by explaining the big concept here so that we can dive into all aspects of it?

**SPEAKER_3** (2:55)
Sure. I think the stereotype of the classic value investor is very quantitatively focused, very focused on the past, trying to find a margin of safety based on what a company has done and not trying to be too smart and figure out what they're going to do. Obviously having a view to the future, but being far less important.
Or even in the case of classic nets, price to book, that kind of thing, that is almost necessarily a rear view mirror approach. And that is what worked for a long, long time. There were folks throughout 100 years of investing, you go all the way back to Phil Fisher, he was always talking about look to the future and look at the qualitative aspects of business. And there's a Buffett quote from a long, long time ago, that biggest outcomes in his life have come from qualitative insights, even though the vast majority of his capital and time at that point was spent on the quantitative. And as we talked about last time, the value sort of quantitative rear view methods have certainly struggled through 2018 And today, they've done far worse in the interviewing period.
I think everybody has come to the realization that underwriting the future now has been what's successful and is probably a skill set that you really need to have.
But that comes with an entirely different set of tools and way of looking at the world. And so I just think it's a shift that even if you are a quote unquote value investor, bucketed into that, we're not going to go buy Snowflake, but we might look at banks and all the stuff that is bracketed in their wheelhouse. You still need to be able to separate those that have an interesting qualitative future from those that don't. Because one thing that we've seen over the last couple years is even within sectors, the best companies have wildly outperformed and have gotten far better valuations than sort of the middling companies. So even if you're looking at a quote unquote value sector, the qualitative insights have separated wildly the best and the median and certainly the worst. So I think it's forced investors to develop new muscles, left some behind for sure whose skill set was right for a different era. And as I always caveat, you never want to say it's totally different and that may never come back. There may be periods where that works again. But I certainly think if you believe like I do that the market is on a relentless march towards increasing efficiency, that some of that rear view underwriting and simply quantitative methodology is becoming less and less valuable and computed away.