Ep. 14 - Dan Rasmussen, Founder at Verdad Capital: Where's the Evidence?

Dan Rasmussen is the founding partner of Verdad Capital, and he's had quite an illustrious career, even though he is pretty young. So Dan got his undergrad at Harvard, and then he actually wrote a book called American Uprising about the largest slave revolution in America afterward he worked for Bain Capital as consultant, where he had an idea that private equity wasn't the best asset class. After that he got his graduate degree at Stanford, and then he opened Verdad Capital, the thesis for Verdad Capital is that private equity, when invested at high valuations isn't a good asset class, but rather, you can replicate that strategy on a micro cap scale with the public markets.Thank you so much for listening, we really appreciate you.You can find more information and content by going to these places:If you have found this valuable, please consider leaving us a review as it will help more people find it! Thanks you're awesome!Website: https://www.investingcity.orgYouTube: Investing CityTwitter: investing_cityInstagram: investing_cityOr feel free to email us at service@investingcity.orgIf you would like $10 off/month on a Dynasty Membership, just email us with the keyword "Podcaster Elastimer" and we'll hook you up! (it had to be a strange yet memorable keyword right?!)Again, we really appreciate that you would take the time to listen. Hope it was valuable. Let us know if you have any questions!Ryan Reeves 0:38On today's episode of the investing city podcast we had the pleasure of talking with Dan Rasmussen. Dan is the founding partner of her dad capital, and he's had quite an illustrious career, even though he is pretty young. So Dan got his undergrad at Harvard, and then he actually wrote a book called American Uprising about the largest slave revolution in America afterward he worked for Bain Capital as consultant, where he had an idea that private equity wasn't the best asset class. After that he got his graduate degree at Stanford, and then he opened Verdad capital, the thesis for Verdad capital is that private equity. When invested at high valuations isn't a good asset class, but rather, you can replicate that strategy on a micro cap scale with the public markets. I was up able to tell in this podcast band is an avid reader and thinker. I won't say too much. So let's just dive in, enjoy this episode with Dan Rasmussen.I wanted to start off with something that is not directly related to investing because just doing a little background research on you. And I find it really interesting that you're actually a New York Times bestselling author on slave revolution so can you just tell us a little bit about that.Dan Rasmussen 2:23I wrote a book it was actually my senior thesis was my junior paper then my senior thesis and then after college when I was working at Bain Capital actually spent nights and weekends, turning my thesis into the into a book called American uprising Untold Story of America's largest slave revolt which you can buy on Amazon and I highly recommend doing so. Get a good plug in for the book.But the story was fascinating. It's the largest slave world American history. They marched towards the city, they were flying flags beating drums, they had uniforms and their goal was to create a Haitian Revolution style event in the United States. They failed. The Revolution was brutally suppressed.And the story was largely written out of history and what I did to uncover it was actually a lot of data and analytical work so actually built a database of every slave that have participated in the result revolt you know where they came from what we knew about them from each individual source, and then I mapped those that database on to old land maps that I found from around that time and then I actually use Google Maps to say okay well if we knew that these five people came from this plantation and this event happened at 11am according to this letter, you know, how you know what time must they have left this plantation, if they were walking along the River Road to get from place to place, or transcripts and property records, a story about a revolt, and then turned it into, you know, a more narrative form. Once I was able to, you know, figure out exactly who and what and where and when everything happened.Ryan ReevesFascinating. So how did you actually come across this story and decide actually make a kind of a huge project out of it.Dan Rasmussen 4:00Yeah, so I guess I'm interested in studying the history of the American South.That was my, my focus in college. You know, Solzhenitsyn said that the line between good and evil goes through every human heart and I think slavery is one of those ways in which the line between good and evil goes through the heart of this country. And I think, studying slavery and the South provides almost a more interesting picture of American history.Then, sometimes some of the more you know, Northern focus narratives which don't grapple in quite the same way with sin and defeat, and these other really powerful emotions and human elements that are defined the history of the south and so that was what I wanted to study and, you know, read a huge amount in college, and it was actually up there, there was a wave still ongoing of sort of Marxist histories of the United States and one of the Marxists this guy at her word app thicker than the 1940s decided that he would try to document every, every slave instruction that are never happened in the United States as sort of an example of Marxist class consciousness among the slaves so you know he actually documented this revolt 1943. And then, you know, basically, nobody really written anything about it because they only records for these sort of, you know, court records and property records and things like that No we could make head or tail of them. And, and it was boring. And so, you know, it was really a great project for me, so it's clearly very significant amount of the largest revolt in American history. But it was not really, there's no book about it. I think the longest article was like 15 pages. So it was really an untapped area of study and really just an interesting, interesting niche within American history to explore.Ryan ReevesAnd did you find that some of those same research, processes and findings that really kind of translated into your investment process?Dan Rasmussen 6:12You know, in some ways, perhaps they must have, but hopefully there aren't too many, you know, intersections between studying plantation slavery and small cap equities.I think there's there, a world apart but i think i think that investing is a game of meta analysis, right, you have to know what matters is and how you know your understanding of a company, but how your understanding compares to the markets understanding, and I think history trains you really well to be a meta analyst because you have to say not okay here's, you know, what happened but, you know, why does this matter and try to find the events that maybe haven't been written about or where the people that have written about it I've gotten rough gotten it wrong. And I think that, in that sense, I think this sort of detective work of a story in, and the storytelling work and the ability to sort of say, here are the gaps in our knowledge or here the gaps and other people's understanding of an issue that is really at the heart of what makes I think good investing right you, you have to find a different story or story that's misunderstood and a place where you know you can really contribute and be an expert, and you have to sort of in that have emigrate and sort of acknowledge that, you know, it would be really hard as a 22 year old to write a good history of the Civil War because there have been so many histories of the Civil War, but a slave revolt and 1811 and New Orleans, you know, no one else was written about that it was uncovered. So, you know, gee, you know maybe that's a good place to cut your teeth, and I think investing somewhere and I think in small and micro cap stocks, you know it's sort of like that you know hey, how many people cover Microsoft, you know, there's some story the other day like Microsoft's stealth rises, it was like since that stealthy it's like the third largest stock in the market, you know, I don't know how you get, you know, an edge on Microsoft stock, although I do use Excel a lot so maybe I have an edge but.But I think in a smaller micro cap stock that isn't covered where most of the big players don't play, you know there's much more opportunity to come to a unique perspective. And I think generate alpha.Ryan ReevesThat's fascinating. So I want to touch on something you said about digging into history and maybe cross referencing something to figure out. Somebody had the wrong view of history. So I think there could be some parallels to investing. So I'm just interested if you have an example where you're looking through, maybe a bunch of documents and somebody had something wrong in history, maybe as a historian just had it slightly off.Dan Rasmussen 9:10People see the world through a specific lens right they have an ideology, they might not know what their ideology is or where it came from, but it defines the way they see the world. And so if you look at for example the history of slavery.You had multiple sort of waves right during the time of slavery. People were only interested in the slave writing about the slaves you either had the slaves themselves rather illiterate if they were literate, you know that they weren't getting their stuff published unless they were able to escape the North. So, you know, by and large, you don't have we don't have many records of what the slaves themselves thought or did what you have is the planters records right and they exclusively think write about their slaves as though they're, you know, cows or something right here's how they're healthier sick or they cause trouble they don't right and then you have on the other hand the northern abolitionists who are writing about slaves with a very specific agenda right which is to overcome slavery and show evil it is. And then you have sort of after the Civil War, you have to schools and historiography right you have this sort of Northern week school which is continually basically relying exclusively on the abolitionists documents, and then you have another school which is essentially the southern.The southern historian, Oregon Phillips, and others who are saying, you know, the South was this beautiful lost cause it was a wonderful plantation community the slaves are part of the family. And, and they were blatantly white supremacist in their in their viewpoints. And then in the 40s you had Marxism in the 30s and 40s you have Marxism horizon us and so you had a bunch of people trained in Russia or, you know, funded by the Communist Party international or, etc. You know who are writing very explicitly communist oriented accounts of slavery in which the slaves had no more agency than they had in the previous accounts but in this case we're cast is, you know, Marxist class revolutionaries. And I think all of those histories were wrong in their own ways. And I think the better way to write history is just to write about, not about slaves but about individual people happen to be enslaved and Gee, what were their lives like what do they think, what do we know about them. And my view is that that's a better approach but just like an investing, you know, every wave of historians as their own biases they have a thesis they're trying to prove. And that's why they're telling you a given story to prove out there their thesis or illustrated with facts. That's true and investing as in history.Ryan ReevesIt’s that confirmation bias. People kind of have an idea or thesis and then they gather all these facts to kind of support that. Before getting into debt capital and your investment process. I want to talk a little bit about kind of what you're up to. Before that, after writing the book so tell us about your experience at Bain Capital and how that provided a foundation for what you're doing now.Dan Rasmussen 11:50Yeah, I think, you know, it's a great segue you know I think the people I worked with the thing capital, many of my very close friends with today and have, you know, huge respect for, are some of the smartest people that I know.But Bain Capital like any other investment firm has a philosophy. It has a view of what of what you know what is adding, adding you make a good investment you know what's a good investment and I think, you know, for being capital, you know, they would, they're looking for high quality businesses where, you know, if you look at LBO model the math works so some combination of the growth, being enough to justify the purchase price and being able to bear dead, combined with a sense of a business quality, and then I think, you know, they would layer on a sense of, you know, could we improve it operationally right and that's sort of their template for what they look for and I don't think they would necessarily say, define it necessarily so simply but that would be my observation about Ben and I think that that's broadly help. I think there are a lot of investors who are more quality and growth oriented that right they said I want to buy good companies that have good industries with good you know gaining market share, where you know all the boxes are checked and i think that that is you know philosophy that then you go and Marshall evidence for right how do you how do you know if a company is a good company you know what is a good company well you know let's find what's Marshall evidence that this is a good company many customers love it but it's got really high market share.You know, maybe it just works better than other products, etc. And that was sort of intellectual project and then I'm going I think again that's a very widespread philosophy, I don't think that's necessarily unique to them. And, you know, and I think, you know, during my time at then I came to question that ideology.You know I came to have a different view. Maybe mine is right maybe there's is right but my view is that investments. Read Khaneman and Tversky and Tetlock, and I came to the view that investments read based on based rates, they should be based on evidence, and that your investment philosophy should be like an actuary and insurance company right like you should sit there and think okay if I want to forecast this man's life expectancy I asked How old is he does he smoke, you know, how often does he drive a car you know is employed as he married, and then I look at those numbers and match it to an actuarial tables okay my life expectancy is 75, rather than saying, you know, I'm going to assess how healthy is by employing, you know, seven McKinsey analysts for a million bucks for six months and doing like a deep dive and interviewing everybody knows, and coming up with a 40 slide PowerPoint deck to understand him really well. I think that my view is that actuarial based forecasts, investing is ultimately about making forecast podcast about price prices, you know is the price of this asset going to go up or go down, and that those forecasts are better done directorial to them through idiosyncratic analysis of situations, no matter how brilliant people that are analyzing those individual situations are. And I think once I started to do that. I think that way. I started to say, Okay, well, what are what are the sort of actuarial table type factors are predictors of equity returns, and I discovered this magnificent literature, you know, at the farm and French school you know West Gray's work or shyness is work you know all these great minds that you know who, who had documented empirically what worked and didn't work. And then I started to think, Okay, what about this ideology ideological that I see a band about good companies and growth and industry growth and, and I started to study that to you know, where did that come from a you know what, where, why do people, where do people come up with the idea of why most or that market share matters or, you know, why do people think that growth rates are forecasts are important. And I spent a lot of time, you know delving into the history of these ideas, and trying to understand the ideologies that motivated them, and then to compare test those empirically say okay do good companies have higher returns do high growth companies to higher returns. Do companies with great CEOs and better returns and trying to not just understand these ideologies and their histories, but also test and validate or falsify them as it were.Ryan ReevesSo I think it'd be really interesting if you can talk a little bit more about these histories and maybe through the lens of I particular paper that you wrote on Michael Porter and how his competitive strategy might not be the great holy grail that everyone thinks it is. So, can you just talk about those histories and overlay it with that paper.Dan RasmussenYeah, so, you know, Harvard Business School has wrestled with intellectual legitimacy since it was founded, you know, Harvard is a snobby place and I think a lot of the people in the other departments of, you know, how are you going to teach business you know like, I think there's some old joke about like are you going to have butchers and cobblers and like shopkeepers and grocers and you know this isn't that when it was founded. Right. And there was sort of a snide you know how can you teach those things why do they need a school. And so, and I think, you know, to some extent, okay well what is Harvard Business School going to teach and, and when it came to sort of business analysis or strategy, which is probably sort of the most area date or intellectual of things one could possibly study about business in the 70s, you know, in 60s, they were literally teaching SWOT analysis strengths, weaknesses, opportunities threats need to create a two by two and the new right the strengths and one thing weaknesses, right and i think you know Michael Porter came along in the early 80s and sort of took a look at this and said, You know, this is ridiculous right like you know like literally This is like Harvard and we're putting a SWOT analysis or I'm in. And this is like so on rigorous and, you know, silly in some ways, and Porter had had studied under this it done his dissertation, studying a school structure conduct performance theory and structure kind of performance theory so that industry structure of determines firm conduct and then that translates to for performance. That was a big school of thought amongst or industrial organization analysts and the seven days, they broadly thought you know if you if you take a lots of complicated theories but, and it's hard it was a theory about power and industry so they said within an industry the most powerful firm has these advantages right it has barriers to entry it can put pressure on its suppliers that can bully out its competitors. So what you really want to know about a company is you know what's its market share within its industry right and this relates a lot to antitrust thinking and monopolies right so you know if you think well, if a company is a total monopoly they should be able to charge whatever they want and that's dominated industry and they should earn very high returns, and therefore, you know if that's the ideal of a business you know the closer you get to a monopoly, the more powerful you should be, and therefore the goal of strategy rather than the silly SWOT analysis should be to understand industry structure, since industry structure is going to determine from conduct and firm performance right if you're a low market share player you compete differently than if you're the incumbent with a lot of power, maybe there's an irony the fact that Harvard so thoroughly embraced the idea of an advantage, established company dominating everything ruling the world power in order to understand companies, you know, and so you know Porter lead this revolution second printing strategy this way through the lens a structure kind of performance theory key made that industry have a simple template, you know the five forces and but at the heart of the five forces is power, right what company is the highest market share and this has the most, you know, the most force in the five forces, as it were. And, you know, it's a really compelling theory it makes a lot of sense right amount of monopolies should earn higher returns they should have higher margins, you know, the more market share you have, the better you should be industry should, you know, if you understand an industry should understand how a company behaves. And so you know understand industry structure to learn companies, all that sounds really good. Sounds really intellectual The only problem with it is that it's wrong. There's just no evidence for it. It's interesting that over the past 2030 years you know, even in the field of industrial organization, they've completely thrown out structure kind of performance, they've completely thrown out this idea that market shares any relationship to margins, and that margins have any relationship with stock prices, and basically all of those theories have been thrown into the rubbish, because they're all empirically wrong. In fact, even the very idea that industries matters and thrown into the rubbish bin, you know, nobody in industrial industries matter anymore because there's no predictive power to industries, it's just as sort of an interesting variable, but it has no statistical significance so so industry structures definitional a just empirically it just doesn't matter is there's no evidence for it. And this was actually the point made by a lot of the Chicago School theorists in the 70s, who also wanted to the legal court, the Supreme Court looked at this and they said you know what all this stuff is rubbish, you know, it market share doesn't matter all that matters is consumer harm and a different and I trusted the ology but invalidated everything Of course I forces built on, and yet despite, you know, sort of the complete abandonment of structure chronic performance theory is earliest at is by the Supreme Court by economists in the 70s the Chicago School just blowing this idea up, and then industrial organization theorists and the 80s and 90s, you know, saying, Okay, this is rubbish and doesn't validate this became this Uber theory among value investors right Warren Buffett helped popularize this this wide moat idea it was all the people that have gone h vs, which is by the way like all the private equity guys who had gone to HTTPS, and then they've got to business school, they got into their private equity job and said hey let's use five forces analysis or some bastardized version or just look at market share, determine which companies are good companies to buy and hold versus, you know which ones we shouldn't. And so you had this dramatic rise and it's very popular theory, without any empirical Foundation, and in fact without most of the investing practitioners, realizing that they were applying a theory that was wildly controversial. If not, you know, the controversy have been settled and favorite being rubbish, you know, 20 or 30 years earlier, in every field within the academic rigor and that was I think the heart of my piece about Porter and competitive strategy.Ryan ReevesYeah, really fascinating history. And so I think that's a good segue into what you're doing with her dad capital right now. So can you just talk a little bit about your investment process.Dan RasmussenYeah, so factor investors and evidence based investors broadly, like the sort of Earth text of all this is mama French's work on the three factor model which basically said small value is great. Okay, right like says take out all the academic garbage they're like pie small companies that are trading at low multiple so that was the essence of it. Okay. And that is like the foundation of factor investing and everything since has been there improvement upon that we're all standing on the shoulders of giants but broadly within that school right. What I do is a sub segment of small value. And I argue that private equity is a sub segment was a circuit was a sub segment of small value. So, if you look prior to 2006, and I don't get to why 2006 is so important, but prior to 2006, the average private equity deal was 200 million a market cap 65% net that to enterprise value and seven times EBITDA. Now, if you think about how that compares to the broader public markets right 200 million is a micro cap. So, so, you know, think of the size factor right and think of like the first Desiree public equity markets like we're talking extremes of small size. Now, second value like seven times even Doug, and it's probably in the cheapest decile or two deaths aisles of the public equity markets so we're talking about like extreme value right and then third, private equity firms are using debt to finance the purchases right so they're levering up those really small really cheap companies and they were putting you know, two thirds of the purchase price to find step right and then, you know, should that have worked. Well, according to family and friends right small value is great. Well if you'll ever small value up, you know, two thirds, you know debt to enterprise value cheap, you know you should get the small value premium on steroids as rubbish and he says, small value on steroids and that was true right from 1982, and six, a private equity is earning these crazy returns crazy I think over 80% of private equity funds raised prior to six beat the public equity market and it's very logical that they should have because what they were doing is completely in line with what the academic say works right they're buying small cheap companies and they were using debt to juice the returns, and it worked and it worked fantastically it was perhaps the best idea in investing in the last 30 years right what's happened since oh six now, with the farmer French research also tells you is the worst performing asset classes small growth so if you pay a very high price for a small company, you're likely to do disappointed, because the growth rates are going to disappoint you, that are not going to live up to those expectations and small companies are more fragile and big companies they go bankrupt at higher rates, they run into problems at higher rates, they tend to be less diversify geographically by customers that are more fragile in every way. And so if you pay a big price for the small companies, you know it doesn't end well you know you get burned and that's been a very consistent finding in the academic research that. By the way, why venture capitals the worst asset class you know it's just a total disaster for investors and has been for three decades. And that's because venture capital is small growth, a, you know, an extreme of small growth.But what's happened with private equity is that pre-’06 they were buying small value stocks with leverage and then starting really no six it became info for institutional investors to allocate to private equity so project was an alternative. It was something that was unusual for large investors to do pre oh six and then starting really no say oh five or six private equity becomes something that everybody has to do it becomes an asset class that you as an institutional allocate or have to own you fast forward to 2018 2019 right not only they have to do it, but they believe it is the cynic one on it is what defines an institution and institutional investor is an investor that invests in private equity private equity is the key core engine of the endowment model. And as that transition occurred money dumped into private equity. The money fundraising with 100 billion a year 300 billion a year roughly.When purchase prices went from seven times on average, up to where they are today which is over 11 times. So private equity went from leveraged small value to leverage small growth, and we know small growth is bad. Well, gee, because these small companies are fragile and growth disappoints will cheat you put leverage on them. And now you've got a set of really fragile companies become even more fragile by virtue of having six or seven times net debt to eat it up of debt on them which is way more than any company, we're not any company, way more than most companies can handle, especially if they're running the sort of any sort of turbulence and so my view is that as an investor, you know, probably the seminal issue of our time right is the impending looming disaster when these institutions, realize that they've deployed hundreds of billions of dollars into levered small cap growth.You know, 11 times even six times net debt to even transactions at the peak of the cycle knocked up their capital for 10 years, and Holy smokes they're paying two and 24 it. And when they discover how disappointing that seemingly brilliant in vogue idea.But what we do is we just say well gee, if find things that less than seven times even with greater than 50% leverage in the small cap world was a good idea, and 82% of funds that ever have done it in the private equity world you know beat the market you know why don't we just copy what's worked right like, let's just copy it let's just do exactly what they did, let's just go by small cap companies that are leveraged 50 or 60% that trade at less than seven times they would that are free cash flow to the 20 is basically a small value on steroids and all the empirical work that we've done suggests that the grocery turns of doing that, look pretty similar to that restaurant turns private equity over the 1986 period, which is logical it's backers, and, and, and there's a lot of complexity to how we do that and, and how to optimize the returns in the universe and the pros and cons of it but at its heart with what I believe it's really simple which is that private equity today is a huge problem. It's really dangerous people don't understand the risk. Everybody believes that they're pouring money into it and it's going to end in tears. And, you know, people should be doing better things their money and you know what we do again is a very miniscule little gnat on the world of asset management, but, but, but, you know, broadly within the realm of the right answer is the small value world, you know, which is where we think you know the best returns on lie and public markets.Ryan ReevesSo I'm curious is. Was there an event in 2006 that really led to all this money, starting to pour into private equity?Dan Rasmussen 30:13So, well, I think it's a few things so the returns have been really good. So from 1982 2006 private equity beats and public equity market by 6% per year now to see it so everybody was looking at that data, and they were saying, “Holy smokes!” Okay, so, so they had a few other really good ideas there other really good ideas were emerging market stocks and commodities. Okay so, and now and you can think of Harvard and Yale sort of the two. The two models for this so in 2006 Yale's going like 30-40% of their portfolio in private equity, and in 2006.Harvard is going like 20 30% of their portfolio into commodities and emerging market stocks right so they're both placing their bets on the invoke ideas, 2006, you fast forward a decade. And what happened is that emerging markets, which had some of the same characteristics of the private equity there were an info gas or class My name is pouring in. Money poured out and it didn't come back in and emerging market stocks did horribly for the next decade and commodities which weren't even worse idea. You weren't even getting an equity risk premium right you're just buying assets, right, those were real disaster we're talking like 70 80% declines and value. Post- ’06 as this commodity supercycle ended. And so Harvard's and download, you know, huge disaster, you know, used to be on par with Yale in terms of prestige now nobody says the Harvard model right and that's been an unmitigated disaster for over a decade. And everybody talks about the model which is the worked out in the bed that worked out you know why did private equity work out well private equity worked out because, in a way, when the public markets went down 50% Peak to trough private equity so our portfolios didn't go down 50% the only down 30%. And you and I right so what you do on levered micro caps, you know how to leverage and micro caps go down unless the s&p 500. And the answer is, well, that's what our accounts Sunday. Did you know their private. And so, you had, you know, post post, you know post the financial crisis, every institution was being pitched private equity and the private equity guys would say look, you know we have better returns. And when the financial crisis hit you know we had drawdowns or half of the public markets were down right so G, you wouldn't you like to avoid the type of volatility you're saying and public markets, these, you know, crazy you know 50% drawdowns and 20, you know, 20% up a quarter 5% down what you know, why don't you just, you know, put it in private equity it's going to be smoother it's going to be a lot calmer and, you know, best of all it's going to beat the market right, there's no nothing with more evidence that beats the market than private equity, you'll look at the data, you know, very compelling. And, and, and so you know that it was really that dynamic which was, you know, this massive boom and private equity fundraising post at the financial crisis so it started in those six, it was the Vogue asset class then, as we're emerging markets and commodities, you know, practically is the winner, and private equity has remained the sort of invoke asset class now in terms of returns in private equity only 40% of private equity funds raised and then so six a beat in the public markets so it's not like a returns perspective it's been lights out great. It's been mediocre, But nobody's really noticed that nobody's really talking about that with a few exceptions, a few a few a few people like Oregon's public employee retirement fund which is being one of the top thinkers in the space you know that are on it. There are other people that are on it, but for the most part people are sort of blind downshift and returns, and they're not thinking about it and, and in fact, people are doubling tripling their private equity allocations, you know calipers came out and says, you know the answer to our pension fund problems that we want when, when we want private equity we want it now I mean, I'm in this type of lunacy absolute lunacy, which is so characteristic of bubbles.Ryan ReevesI'm really interested to hear if you've had, people or institutions reach out to you and say, kind of navigate the ship in a different direction or do you get a ton of backlash?Dan Rasmussen 34:32So it’s a mix. I mean, I think it's a mix, you know, on the one hand, we've had people that have have have, you know, that have sold their entire private equity books to secondary funds.And she I recommend that if you have a lot of private equity stakes you can get a great price for them in the secondary market. You can get close to that if not have a nap on your private equity plucky just sell it just get out. Take your, take your toys and go home. You know, the, the private equity, you know, it's the invoke asset class just sell. And so, you know, we're blessed, we're feel very fortunate that we've you know we've been able to turn some people away from sell their portfolios to secondary firm. We encourage more people to do that, I would think that's probably the best answer.And then I'd say on the other end of the spectrum, you have, you know, a huge amount of people that are pushing private equity and I'd say, you know, on one extreme to the consultants so the consultants, you know, in their bag of tricks right that hedge funds well you know really tough to pitch institutions on hedge funds right because institution so you know didn't Warren Buffett when that bat and haven't had funds return something like treasuries so over the past decade, you know, why would I want to hedge funds and, you know, so the consultants are like okay we agree with you know set hedge funds aside, you know, maybe a little 5% allocation but set those aside, and then you know your public long only and then they'll say, well, there's all this research the passive is better than active in public equities, you know, do you have anything and approves it's not as well you know the intellectual cases and that good you know maybe it's just take your beta, beta, you know, put it in Vanguard, you know, start can choose mutual funds and not wait right there but you know nobody can argue that that template, and then they say, private equity private equity right here is the holy grail right. Not only is a great asset class. Not only is it difficult to access but there's really high dispersion. So the top quartile private equity guys do really well. Mortality really badly and we the consultants can help you choose the top four top managers I mean it's just a layup sales pitch, so that the consultants are the ones that are the most opposed to this message because they have the most right and the private equity that they are the biggest promoters of this, because it perfectly aligns their institutional incentives and, and you see you know some consultants putting out things changed and 40% of your portfolio and private equity right and to which I'm saying right like if you went to someone said 40%, forget that it's called private equity and say, you know, 40% of your portfolio should be in laboratory micro caps that where you're locked up for a decade, right like what person in their right mind would recommend that to somebody I mean, it's just so crazy, but because it's called private equity private equity great returns for ‘06, you know, it's the in-vogue thing the market unsuspecting pension funds. Here I said on the next to your people that really don't like these ideas are people that are, you know, starting their careers named Alan foundation well, trying to build private equity portfolios right that they've, you know, building out a private equity portfolio is a really important resume item. Because private equity is the definitive asset class the institutions, so a lot of people that are trying to rise through the ranks of the balance and foundations, they want to have constructed a court for private equity portfolio. Put that on their resume, and they really hate these ideas, right.For obvious. Career reasons, and then I think there's probably a set of people in the middle that say hi, you know, maybe, maybe there's some truth to it but we can't market time. And so even if valuations are high valuations are high in public markets. So, you know, you know, we want to be diversified want some private equity exposure, some public equity exposure you know we're not gonna do anything extreme. And that's probably the middle ground and that's probably, you know, a fair number of people. and then I think there are sort of the few people on the other extreme who again are sort of saying well gee, you know, maybe we should stay out of private equity, you know let's sit this one out.Ryan ReevesGotcha. So, I want to talk a little bit about the verdad capital investment process. So, when you're at Bain and you're talking about the five forces, and a lot of more qualitative aspects of analyzing a business, but now it's her dad, it seems like you guys are very quantitative focus so can you tell us a little bit about how you think about the kind of push pull between quantitative and qualitative research.Dan RasmussenSure. So I think setting aside qualitative or quantitative I believe in evidence. So I think investment strategy should be built on evidence. So Ryan if you came to me and said well I think that tech companies are great and tech companies that have recurring revenues are really particularly great. I would say, okay, Ryan like, why don't we do a back test and let's categorize let's look at every tech company let's look at all of them on a recurring revenue and see if those things actually predicted returns, let's understand the dispersion right let's figure out if that's a good idea or bad idea. And there's that there's a qualitative thing in that right tack whether saying tech company or not as qualitative some extent, whether it is recurring revenue is qualitative judgment. But you can test that empirically right. And I think it's the testing it's the full suffocation that I think I really care about. And I think that broadly there are some things that we know about investing the quantitative evidence has revealed, you know, one of those examples that small stock small value stocks attend out before. It's not necessarily because they're small, you know, and I'll concede that I agree with that. Um, it's just because there are many more cheap small companies than there are cheap large companies and so, you know, you need the size it's an important descriptor what works.And, you know, broadly, some measure of financial quality so you don't want to buy things are going to bankrupt right and you don't want to buy things that tremendously negative sort of technicals like hugely negative momentum massively high short interest right you want to avoid those things right these are things that are just empirically true right. You don't need to believe me. You can test it yourself and you'll discover these things you can go on SSRI and you can find these things like they're very widely known, easy to find easy to prove.You know, by great companies do deep diligence, you know, look for growth, find great products and great CEOs and the problem with all that stuff is it's non-falsifiable, and when it has been falsified it's, it's been proven false, you know, there's just no, not a lot of evidence behind those pretty stories. If there were evidence. I would, I would, I might invest in that way, you know, I might I might look for great companies run by great CEOs and great growing industries, but I think the sort of definitive finding of the quants, and I like the quantitative investment philosophy again because they're evidence based and I'm a historian I like studying history to see what lessons we can learn. And, you know, I think the big lesson we learn is that those sort of qualitative descriptors tend to be applied to whatever invoke. So when people say a great company I mean a company that's been doing really well recently or great CEO to CEO it's been doing really well recently. We're a great industry is an industry it's been doing really well. And those things tend to be overpriced, they tend to be in River. And so all of those more qualitative things tend to be code words or justifications for buying glamour stocks, they're just fancy words for glamour fancy words for paying high prices. And that's all they are, they're just justifications, and those justifications lead to bad investment outcomes. And I think that's been a theme of a lot of my recent writing about Porter about CEOs about growth rates. Right. Buying companies are very things are afraid run by great people, great growth rates as a way to lose money. It's a silly idea, the bad strategy. And I think that, In contrast, you know, building your investment philosophy on the rock of solid empirical evidence is the way forward. And it's the right answer because, you know, if you go out and market yourself and say, you know, I'm a genius and I understand industries and I know which companies are great and which companies are bad, and then you and then you know, the market is up five and you're down 10, you know, what do you tell your investors, like I wasn't a genius this year you know my ability, my visionary prophetic ability to understand industries and business models fail, you know, you do do sign up like Beto O'Rourke and go, you know, driving through the hinterlands to find yourself, versus, you know the quants you know like look at Wes Gray’s work on how long certain factors strategies can underperform but they've, they're still good strategies right you can sort of understand. Oh, gee, this won't work 100% of the time because it's a 6040 bet, and 64 days is because you can get markets, and I think the quants, I think of a much better, much better way of explaining things to clients a much better way of investing. And I think it's much better for everybody to go in with realistic expectations, rather than the sort of unrealistic expectations so thinking to opt to be set by the more qualitative or fundamental active investors.Ryan ReevesYeah, really interesting. So, three episodes ago we had Jim O'Shaughnessy on, and he was talking about quantum investing and I asked him, What are the downsides of quantum investing and he basically said that the downsides is maybe it's not as interesting at cocktail parties, so I'd be interested that your kind of your thoughts on maybe a possible downside because what you're talking about evidence based investing, it doesn't really seem like there is much of a downside because it's very logical, but I just be interested to hear maybe this the flip side,Dan Rasmussenyeah well Jim's us with hero of mine I'm a huge admirer of him and his writing and research and OSAM and they're wonderful and. And I think, for the record that the gym is pretty interesting. A conversationalist so you know he reads very widely. Very, very funny. And, and so maybe he's a quantum Esther and it's date, time, but I think maybe having interests outside of work makes one a more interesting person then going to cocktail parties and talking about your greatest private equity deal ever which is, you know, I think in my mind the mark of a bore the downsides of quantum vesting. There are a few i think that i think the first downside of quantitative investing.Most good quantitative strategies are a capacity constraint, almost by, this is sort of what more iron the rule of markets quantitative investors need a large sample of stocks to select from and spread returns cross those stocks are small, and so most of the stocks that are scoring well in fact your models are small, usually very small. And so if you want to construct really high octane factor portfolios. You know, you're going to want to construct something that is really loaded on the factors which means something and then 50 or 100 names not 1500 names, and those 50 are going to be concentrated in the small micro cap universe and so you do the math on volumes and capacity and all of a sudden you end up figuring out that most of the true alpha one strategy is is you know a few hundred million in America, you know few hundred million capacity for a strategy.And so you find a lot of the quants water it down you know they start sewing gym, they start selling the ninth and 10th so value and then they say oh no, we're just going to tilt towards the ninth or 10th So, because otherwise we couldn't manage so much money. And so I think if there's a downside to quite messy and look this is Brian downside to non investing is that good ideas. Too good ways to run money or not scalable, they just aren't. And so I think being honest and good quantitative investor means also accepting a level of humility that you're probably, you know, not going to be running 100 billion dollars. And if you are you know you're, you're basically just because I index or you're not really generating my childhood but if you want to be a quantitative investor that produces alpha, you know, you're going to have to be pretty humble about your inability to scale.Ryan ReevesWe don't want to take up too much your time, so we'll ask one last question, and we've been asking this question to most people as of late, but are there any personal habits that you do on a day to day basis that you think has attributed to your success,Dan RasmussenWhether anyone should be learning from my success or failure i don't i don't know that 30 great lessons although I'm flattered that you think so, but I'd say, you know if there's one thing that I think matters a lot to me it's reading. And I think I spend a lot of time reading. I read widely I read fiction and nonfiction I read science writing every academic finance writing. And I think there's so much to learn out there on almost any topic conceivable people that have still their entire lifetimes or careers and two books. And so, you know, I'd say if there's one thing that that I think it's benefited me here today as an investor is simply that I'd often read things that other people hadn't read that happened to be really, really, really important, whether that's you know go read, Jim O'Shaughnessy is what works on Wall Street and then the next time you have a conversation with someone when they say well I really like my high margin companies say well you know in chapter 11 of Jim's book he finds that high margins are not predictive equity returns so you know did you read a different book or, you know, are you just saying that you know, and I think there's, there's just so much to be learned from reading, and I would, I would highly recommend it although maybe podcasts are just as good right plug for podcast.Ryan ReevesSo, really appreciate your time then learned a lot, so just thanks so much for being on. Yeah, my pleasure. Thanks for having me. And thanks again for listening. 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