Kelly Granat - Investing At Lone Pine

Patrick O'Shaughnessy hosts Kelly Granik, Co-Chief Investment Officer at Lone Pine Capital, to discuss the evolution of investing and maintaining a competitive edge through deep research and collaboration. Granik emphasizes the importance of leadership and transformative change in businesses, highlighting how market dynamics and investment strategies have shifted over the years. She reflects on the challenges and lessons learned during periods of market volatility, particularly the impact of short-term market reactions driven by pod shops. Granik also shares insights into Lone Pine’s investment philosophy, focusing on long-term growth, innovation, and the importance of strong leadership in navigating complex markets.

• The investing landscape has dramatically evolved since the early 2000s, with a shift from fundamentally oriented, long-term investors to more dynamic, data-driven approaches.
• The market was previously dominated by firms like Fidelity and Capital, with a focus on deep research and longer time horizons.
• The rise of passive investing and levered pods has significantly altered how stocks are traded, with more focus on short-term dynamics.

"The marginal dollar being dictated by fundamental decisions that are long term oriented...is just less meaningful on how stocks actually trade."

• This quote highlights the shift from long-term fundamental investing to more short-term, event-driven strategies.

• Organizational structures within investment firms have shifted from siloed sector-based models to more collaborative approaches, allowing for broader insights across different sectors.

• The tools available to investors have evolved, with new data sources like credit card data and expert networks becoming integral to research processes.

"The org structure was...pretty siloed...The level of conversation amongst peers was just not as informed."

• This quote underscores the previous limitations of sector-focused research and the benefits of a more collaborative approach.

• The current market structure emphasizes the importance of short-term events and data dissemination, affecting trading dynamics and investment strategies.
• Investment firms now have access to advanced tools for portfolio construction and risk management, allowing for more strategic positioning.
• The focus on short-term events creates opportunities for investors with a long-term perspective to capitalize on non-fundamental dislocations.

"We want to be positioned in a way to capitalize on non-fundamental dislocations and lean into duration."

• This quote illustrates the strategic advantage of maintaining a long-term perspective in a market dominated by short-term dynamics.

• Investment firms are running lower gross exposures to allow flexibility in responding to market changes and to capitalize on opportunities.

"We've been consistently...running more kind of 150 by 180 gross to give ourselves that room to breathe."

• This quote highlights the strategic adjustment in exposure levels to better navigate the current market environment.

• The investment community is excited about the transformative potential of new technologies, such as AI, and their impact on markets and society.
• The current technological wave is seen as a significant opportunity for learning and growth, with investment firms actively engaging in research and experimentation.
• The focus is on understanding where value will be created and how to position portfolios to benefit from these changes.

"It's makes us kind of giddy...the opportunity to do that at scale on a topic that is...transformational...is just intoxicating."

• This quote captures the excitement and potential seen in the current technological transformation.

• There is an awareness of the potential for bubbles and a focus on identifying sustainable profit pools and real opportunities.

"There's the appropriate amount of skepticism around where will the profit pools evolve...where is their fake AI and where is their real AI."

• This quote reflects the cautious approach to navigating new technological trends and identifying genuine investment opportunities.

• Lone Pine Capital operates with a collaborative research team, valuing diverse insights and maintaining a concentrated portfolio of best ideas.
• New analysts are integrated into the firm through an apprenticeship model, allowing them to learn the firm's processes and gradually take on more responsibility.
• The firm leverages a combination of fundamental research and data analysis to inform investment decisions, with a focus on collaboration and continuous learning.

"We want everyone to sit around a table to have a conversation at our research meetings and be a part of the conversation."

• This quote emphasizes the importance of collaboration and open dialogue within the research team.

• The firm maintains a balance between fundamental research and data-driven insights, utilizing a dedicated data team to enhance research capabilities.

"We have a three person data team...They are our interface with third party vendors on the outside and internally with our research team."

• This quote highlights the integration of data analysis into the firm's research processes, enhancing decision-making and strategy development.

• The organization employs a structured approach to market research, utilizing data resources to aid analysts in problem-solving.
• Analysts meet twice weekly to discuss new ideas, portfolio updates, and market performances.
• Monday meetings focus on new ideas and portfolio updates, while Thursday meetings involve brainstorming and evaluating significant market movements or potential transactions.

"They are another tool in the kit in terms of how to approach market research."

• Data resources supplement fundamental research, providing additional insights for market analysis.

"We as an organization meet two days a week, Mondays and Thursdays."

• Regular meetings are essential for discussing new ideas and portfolio updates.

• Portfolio management involves collaboration with a trading desk and consideration of factors like max position size and liquidity.
• A dedicated risk function analyzes past performance to identify patterns of success and failure.
• Continuous evaluation of portfolio composition is crucial to maintain balance and maximize returns.

"To your resources question and the questions there are what is max position, size, liquidity?"

• Thorough analysis of position size and liquidity is integral before making transactions.

"We have a risk function now that we didn't have going back, you know, five or seven years ago."

• The introduction of a risk function enhances the understanding of investment patterns and performance.

• The investment philosophy is flexible, adapting to changing market conditions and emerging technologies like AI.
• The team considers exposure to different themes and industries, balancing risk and opportunity.
• Macro trends are considered as non-prescriptive tools in investment decisions.

"I don't think we have a guiding principle around it. I would say the way that we discuss it internally is how much exposure do we want to this theme."

• Investment exposure is carefully evaluated, especially in rapidly evolving sectors like AI.

"If I were to wind the clock to 10 or 15 years ago, sitting in our research room and around, around internal meetings, we didn't talk about macro at all."

• The role of macroeconomic factors has evolved, now playing a significant part in investment strategies.

• The team actively monitors significant market events, such as tariff announcements, to assess potential impacts.
• Decisions are made collaboratively, often resulting in strategic non-action based on thorough analysis.
• Constant communication and evaluation are key to navigating volatile market conditions.

"We all see the news starting to come out towards the end of last week and over the weekend."

• The team remains vigilant in tracking market news and its implications.

"The net of that is a lot of conversation and decision to do nothing."

• Strategic non-action can be a calculated response to uncertain market conditions.

• Investment decisions heavily emphasize the leadership and culture of companies.
• Changes in company leadership can significantly impact investment opportunities.
• A focus on innovative companies and their ability to adapt and grow is crucial.

"It's the people who are running the businesses. And I think that companies are in some ways like families."

• Understanding company culture and leadership is vital for assessing investment potential.

"One of our favorite sort of themes in investing, which is not a sectoral theme, but sort of a change theme, is around new people, right?"

• Leadership changes can transform companies, presenting new investment opportunities.

• The firm emphasizes succession planning, ensuring continuity and long-term success.
• A culture of mentorship and leadership development is ingrained across all departments.
• Recent transitions to new leadership roles reflect a commitment to evolving the firm's structure and strategy.

"It starts with Steve, our founder, and how he set the firm up when he started it, you know, 27 years ago, which was with an orientation to succession."

• Succession planning has been a foundational element of the firm's strategy from its inception.

"And that's been, if I'm being honest, a heavy lift."

• Transitioning to new leadership roles presents challenges but is essential for the firm's evolution.

• The company has transitioned from a long-only business model, adapting to technological advancements and modernizing processes.
• Emphasis on collaboration and communication has increased, requiring a different skill set for new hires.
• The focus is on developing the next generation of leaders and exposing them to broader aspects of the business.
• The company is adapting to changes in the market and redefining its identity to align with current industry standards.

"We built all our systems homegrown because when we launched in 1997, a lot of this stuff didn't exist."

• The company initially developed its own systems due to the lack of available technology, highlighting a need for modernization.

"We've evolved over time. The types of people we hire, we've learned from who's really succeeded inside of our culture."

• The company has adapted its hiring practices based on past successes and failures, focusing on collaboration and communication.

• Personal competitive instincts can be traced back to childhood experiences, such as early tennis competitions.
• The transition from individual sports to team-oriented environments can reshape personal experiences and motivations.
• Burnout in competitive sports can lead to reevaluation and rediscovery of motivations and goals.

"I was probably 6 years old... my heart rate just started, like, escalating... that moment of, like, winning and internalizing that I now had access for myself."

• Early competitive experiences instilled a sense of excitement and achievement, fueling a desire to replicate success.

"I burnt out in junior tennis... I was done with the sport... but it really became about the team."

• Burnout led to a shift in focus from individual achievement to team camaraderie and enjoyment.

• Initial years in the investing field involve learning and building confidence through successes and challenges.
• Working in a culture of excellence and research can significantly influence career development.
• Critical moments, such as successfully challenging a respected figure, can boost confidence and career trajectory.

"When I got to Lone Pine, I was super excited about being in a culture of excellence and a culture of research."

• Joining a firm with a strong research culture was pivotal for personal and professional growth.

"I kind of made a career of disagreeing with Steve, right. And like look where I'm sitting now."

• Challenging established norms and respected figures can lead to personal growth and career advancement.

• Leadership plays a crucial role in the success of a business, with strong leaders driving strategic decisions and resilience.
• The current investing climate emphasizes execution and strategic decision-making due to increased cost of capital.
• The industry is characterized by collaboration and mutual respect among firms rather than cutthroat competition.

"It's having knowing when to be bold and when to be humble. Attracting, challenging, you know, motivating a really talented organization."

• Effective leadership involves strategic boldness, humility, and the ability to motivate and challenge a talented team.

"I root for a lot of my friends... I don't have a zero sum game attitude towards our industry."

• The industry values collaboration and mutual success over competition, fostering a supportive environment.

• Winning companies have a clear strategy, accountability, and a strong focus on consumer relationships.
• Leadership and execution are key differentiators in a competitive market with real cost of capital.
• Successful companies are adaptable, focused, and maintain a culture of accountability and measurement.

"There's really clear strategy in terms of what are we focused on... a culture of accountability and measurement."

• Winning companies are distinguished by their clear strategic focus and strong accountability measures.

• Enterprise customers receive personalized service, with dedicated support and a focus on meeting their needs without aggressive pricing tactics.
• The importance of accountability and maintaining high operational standards in enterprise dealings.
• Long-term orientation and strategic thinking are crucial for companies to avoid short-term pressures and maintain cultural integrity.

"Enterprise is when you talk to customers and we do this all the time as part of our research, you hear how they are treated and it is different. They are, there's someone for them to pick up the phone and call. Their needs are being met."

• Enterprise customers receive a different level of service, with dedicated support and focus on their needs.

"There's again back to accountability and sort of a level of operating standard that is the expectation of how things are done."

• Maintaining accountability and high operational standards is essential in enterprise dealings.

• In the past, zero interest rates led to undisciplined growth strategies in companies.
• Currently, there is a renewed focus on cost management, requiring companies to make strategic budget trade-offs.
• The cultural shift towards understanding the costs associated with resources is essential for driving down the cost of capital.

"In the era of zero interest rates and the market, the public markets for years rewarding growth at any cost, I think the disciplines inside of a lot of companies really went away."

• Zero interest rates led to undisciplined growth, with companies focusing on expansion regardless of cost.

"There is just a new religion around cost where when you sit in a budget meeting or even an engineering meeting and you are putting forth two or three initiatives that you want to get funded, you are being asked how to fund them from your budget."

• A cultural shift towards cost management and budget discipline is essential for reducing the cost of capital.

• The end of 2021 and early 2022 marked a challenging period for Lone Pine due to market changes and high growth exposure.
• A lack of accountability around valuation and failure to pivot quickly enough led to significant lessons learned.
• The importance of maintaining balance in a portfolio and adapting to market changes was emphasized.

"It was the end of 21 and the first few months of 22 and we learned a lot."

• This period was challenging due to market changes and high growth exposure.

"We didn't act quickly enough and respond quickly enough to a conversation we were having as well as the market was having at the same time around sort of a different regime from a macro perspective, an interest rate perspective."

• Failure to pivot quickly enough led to significant lessons learned.

• The ideal business has strong leadership, unit economics, a competitive moat, and organic growth potential.
• Investment opportunities often arise from changes in leadership, new products, or leveraging core IP in new ways.
• The importance of distribution and scale in enhancing a business's value proposition is highlighted.

"We want incredible leadership, really strong unit economics, a really good moat around a business in terms of something that is different."

• The ideal business has strong leadership, unit economics, and a competitive moat.

"It's change in leadership. It's a new product that the market doesn't appreciate fully in terms of its capability."

• Investment opportunities often arise from changes in leadership or new products.

• Active management is undervalued compared to passive strategies, despite the value of fundamental analysis.
• Short-term market orientation conflicts with the long-term compounding focus of active managers.
• The market's focus on short-term results creates opportunities for long-term investors.

"Active management is undervalued relative to our, our understanding and execution of that value."

• Active management is undervalued compared to passive strategies.

"We're increasingly in a market that is evaluated by, forget quarters, weeks and months per the pods conversation earlier."

• Short-term market orientation conflicts with long-term compounding focus.

• Pods consist of multiple desks covering sectors, often leading to similar data analysis and trading strategies.
• Market reactions are influenced by pod structures and short-term incentives.
• Understanding pod dynamics can help long-term investors position themselves strategically.

"You have inside of these shops, 20, 30, 40 desks, or pads as they call them, covering a sector."

• Pods consist of multiple desks covering sectors, leading to similar data analysis.

"You tell me, what's the whisper number? What are the, how are the pods lined up? Are they longest? Are they shorted? Because that's going to dictate the trading action the day of."

• Market reactions are influenced by pod structures and short-term incentives.

• The importance of building and maintaining meaningful relationships is emphasized.
• Relationships should be mutual, with a focus on those that are most meaningful and rewarding.
• Leaving room for new relationships is important for personal growth.

"Figure out who in your life matters to you, figure out what matters to them, and then show up for them in all the ways that matter to them."

• Building meaningful relationships is important for a rewarding life.

"The concentration theory of both investing in your highest and best ideas, and the concentration theory of just the people who are incredibly meaningful to you."

• Focus on meaningful relationships and leaving room for new ones is important for personal growth.