Dan Loeb: The Lost Art of Short Selling, and Why Stock Picking is Back
In a Nutshell
Dan Loeb argues that short selling and disciplined stock picking have returned as essential skills in a market dominated by bond and credit selection. Third Point has evolved from pure event-driven trades toward evaluating durable moats, adaptable management, and tech-driven disruption while running a multistrat platform that spans long/short equity, structured credit, private lending, and insurance. Loeb highlights outsized opportunities on the short side—especially structurally flawed sectors like homebuilding—and stresses that human judgment, pattern recognition, and selective activism remain irreplaceable even as AI grows.
These notes were generated by AI and may contain inaccuracies.
Dan Loeb states that the lost art of short selling has come back and is absolutely critical. He emphasizes that you have to be really selective regardless of what you do. He notes that people talk about a stock pickers market but clarifies this is a bond and credit pickers market.
Loeb mentions that when Third Point was small, their main tool was shame and humor. He references turning up the heat on Nestle. The shift has really been more towards a dare to be great message. He states that activism without proxy contest is like Catholicism without hell.
Loeb discusses his evolution as a public persona before Twitter. He was active in very different places, including Wall Street Bets before Wall Street Bets existed. He explains that there was a brand new technology called the internet, and shortly thereafter, long before Reddit or any of these other things, there were a series of chat boards including Yahoo and Silicon Investor. People would congregate and kibbitz, mostly anonymously. It was an interesting place to exchange ideas and was really the wild west where people could pretty much say or do anything, though there was a lot of substance there too.
When asked if he engaged in any trolling per se, Loeb confirms he did. He states that some people use the term OG and sometimes he says he was the OT, meaning the original troll. He explains it was fun and he did not know he was one day going to run institutional money and have a big fund. He was just having fun and blowing off steam. Investing is fun and particularly on the short side there is so much humor in it when you detect these companies, especially in the 90s. It was really unsupervised and there were some incredibly fraudulent companies out there. It was just fun to uncover them and kind of taunt the management teams and ultimately prevail.
Loeb shares one story that stands out from that era. There was a company called Act Trade run by a guy who was a repeat fraudster. They uncovered it and really got under this person's skin. Ultimately it was really just a factoring company trading at five or six times book value. They had created a new technology called TADS. He does not remember what TAD stood for, but they were basically repackaging factory securities and saying that they had some special technology. They were financing refrigerators and things like that.
Loeb started Third Point with very little capital and it has grown to almost 30 billion of AUM. He is a multistrat now. He learned at Jeffries helping people like David Tepper allocate capital.
Loeb started really fascinated by investing. When he was 10 years old, his dad took him to meet a broker. His dad was a notoriously bad investor himself and a great lawyer but not a great investor. In high school in the 11th grade, he got a job at the branch office of Paine Webber working for a guy named Allan Crown who let him post his books and make cold calls. He thinks they broke certain securities laws but the statute of limitations has passed. He would trade options on Occidental Petroleum and Teladine. There was a lot of volatility and he had flurries of making money and lost all of it a couple of different times, but it was a good lesson.
He continued doing it in college and his learning started really formally at Warburg Pincus where he really learned to value enterprises. His first job was private across the spectrum of private equity and venture capital. He worked at a risk arb firm which was really invaluable. He had way too many jobs in his 20s but got really serious at Jeffries. He had an amazing opportunity to work on the distress debt desk there. He started out as a research analyst and was drinking out of a fire hose. There was so much activity and the securities were so cheap coming out of distressed. It was the 10,000 hours and 10,000 reps. They would write up different things every day as there were big blocks of debt to move. That was his real learning point.
Loeb stresses that everyone sees mentorship as this sort of hierarchical thing where you learn from some wise older person, but he learned a ton from his colleagues, from his own cohort, and from his customers. Eric Mindich was a boy wonder at Goldman and was the youngest partner. He ran the ARB desk there and had a triumvirate or quadrumbate of people including Amos Dicker and some other guys. They were great and really brought him into their thought process thinking about event-driven investing. He covered some of the smartest people in the business including David Tepper. He got to watch their thought process and was like a Chinese corporation copying and reverse engineering and taking everything in and creating his database of knowledge and his own operating system, kind of taking the best out of what all these different people did.
When Loeb first started Third Point, the style was event-driven investing. It was really less focused on the quality of business and more focused on very complex transactions including takeovers, spin-offs, risk arbitrage, bankruptcies, privatizations, and demutualizations. These transactions created unbelievable opportunities for alpha because of the confluence of dislocation, opacity, time, but also nothing changes. He always quotes the Jesse Livermore line that there is nothing new under the sun. There was a real focus on management incentives.
In all these different kinds of transactions, management was incentivized to sandbag their numbers during a time when there was an excess supply of securities where their options were being set. Third Point as co-investors got to come in with these depressed projections and ride along not just the greater transparency and understanding of the business coverage, but companies that delivered a topline and margins and ROE and everything else better than expectations. It was really a golden era for that type of investment.
Stylistically, the event-driven approach is still something they think about and it is in their framework. What happened really when technology became a bigger force is a greater focus on business quality, innovation, and disruption. It became more thematic on the one hand with understanding of consumer trends, what is going on in financial services, and what the economic macro backdrop is supporting all this. AI is sort of the culmination of that, along with all these major technological innovations that have really happened since.
You could make money before by not being technology savvy in the markets. You could be technologically illiterate or just say I do not do it. Up until the GFC, you could be more or less economically illiterate and make a lot of money. Now you would not want to be either one of those things given how much more important the tech through line needs to be understood everywhere. Even if you are like Blue Owl and you are trading, any pool of capital that used to not be correlated is effectively correlated.
Loeb gives a snapshot of what they do today. Rob Schwarz is his partner and they took Kempo Karate together when they were 10 years old. It was a purple belt. They reconnected at their 20-year reunion in 1999. Rob was working as a sales rep for wireless RF components. Loeb said this guy would be great to do channel checks for them. A couple years later, he asked Rob if he ever came across a really savvy engineer, they should invest. They did not know what they were doing and were not venture capitalists, but they were getting behind the person.
There was a guy named Dave Fischer who started a company called Radio Communications. They made chips that were ABG compatible for Wi-Fi base stations. Ultimately the company was sold to Texas Instruments. They started to do venture business within the fund and have done a couple of dedicated funds.
All these things are interconnected and come together under the platform they have today. They have the main hedge fund which does credit equity long short. Credit is both structured credit and high yield. They have a CLO business that they acquired. They started a private credit business that does traditional private credit, direct sponsor financing, direct lending, and workouts which is very important. Credit solutions as they call it has a lot to do there. They started an insurance company a few years ago. It is not the first insurance company they did as they did a P&C company, but this one was wholly owned and now they own half of it.
The insurance company captures basically the investment grade part of what they do. So private credit through structured vehicles, structured credit, whole loans, investment grade both private and public, but they also can use their surplus capital in very interesting ways.
Loeb's time is spent primarily on managing the hedge fund which for now is the biggest capital pool and most important business they are in. Regarding the human element, he thinks this is true for everyone. The element of the social component, the human network of knowing people, being able to capture opportunities, work with people, and interact is never going away. You are never going to have agents that will sit at Andreessen Horowitz or whoever else your funds are. The human will always have to be there because people like to know who is making or losing the money.
There is a thing that agents or AI will never really be able to do which is look in your eye and assess all the things that people can assess.
Loeb has expanded his philosophy of investing in companies from cheap securities with catalysts to being very concerned about moats, defensibility, and the quality or the brittleness of the revenue. Chanos talks about the time bounded value of companies and that is essential. What are the companies that are going to be around seven to 10 to 20 years? What are the real moats that exist out there? It is harder now.
Loeb does not think they can really go out 10 or 20 years. He thinks they deluded themselves earlier because if you ask people about the moat around IBM or AOL or Yahoo, it was not forever. They are investing outside of tech into companies that have some great attributes. It also comes back to the management because they cannot really just look at a product or a technology and say this is going to be it forever. They really look for a management team that they think will be adaptable. They do not want to be on boards of companies. Finding management teams that you really believe in that have a proven ability to stay ahead is a huge part of it.
Assessing the management team is still very subjective and qualitative. After 30 years there is pattern recognition.
Loeb has said publicly that there are a lot of opportunities on the short side in the market right now for the first time in a long time. There is no one approach to it. One thing they have avoided is a solely valuation-based approach. He has seen too many people get run over by shorts that have dumb valuations but they get captured on Reddit or one of these other things. Some of these space companies right now have no rhyme or reason.
They had a really strong view on homebuilders from last year. There were two things going on. It was not just rates and mortgage spreads that were depressing housing prices. The home building industry was first structurally impaired because of the way that they were all pretending to be NVR, saying they were asset light but they had massive commitments to these land pools which they said were options but they were really very committed in the capital and that value was going on.
The home building industry was really the last industry that had this post-COVID hangover of inventory disruptions and pricing that really made no sense. All those prices went up to unsustainable levels but building costs went up and buyers are no longer able to pay those prices in the current financing environment. They have also gotten squeezed by inflation and costs. They have been short on things related to that.
Sax discusses distribution of public securities and the quote let your winners ride. As a private market investor, navigating distributing equities and sharpening judgment about which ones have brittle or more robust revenue is one of the most vexing questions.
They were private investors in Palantir and sold all their stock in the 20s, which was a huge mistake as they missed a 10x after going public. They were private and led the B round in Upstart. That was one where they learned not to go on boards anymore because it restricts your ability to be liquid. They were also early investors in Enphase and sold some stock on the IPO and then took a tax hit and sold it under a dollar. The stock, had they stayed on, would have made 4 billion dollars.
Sax states he is not claiming to have any great expertise in knowing how to best distribute stock. Markets are brutal and it is so hard. It is case by case. There are some companies where being on a board means you cannot sell and you end up regretting that. There are others where the best thing to do is just hold on to that stock forever.
Sax has owned Meta and Palantir as a private venture investor and as an angel investor. He sold some and held on to some. In hindsight, taking Meta as an example, Facebook IPO'd at 50 billion, went down to 18 billion, and now it is 400 billion. Ten years ago, they thought a hundred billion dollar market cap company was pretty much as big as anything could get. Facebook at 50 billion, the upside was to 100 billion. Things are totally different now. They have multi-trillion dollar companies. The market is so much bigger.
That changes the thinking around Nvidia, which is a 3 trillion dollar company, and people feel like it is sort of a ceiling on it. Sax thinks they will look back at some point in time and say that was a foolish way to think about Nvidia given its dominant position and its valuation relative to that position. He thinks Nvidia is undervalued right now on earnings over the next two or three years.
It is because people are having a hard time processing the largest entity that has ever existed in human history. Technically there is all this other stuff that is growing faster and going up more. People are short and the long short pods are structured such that they have to be short something. Nvidia feels like a safe short. Google was a safe short, Amazon was a safe short. This just happens and sometimes they will languish at a valuation then they break out. That will eventually happen with Nvidia.
Loeb is very passionate about criminal justice reform and was a key person to get the pardon of Ross Ulbricht. He discusses his framework for philanthropy. He cares deeply about income inequality and making sure that as many people have opportunities to the incredible things that they have all had. His interest in criminal justice reform really started earlier with an interest in education and education reform. He was very lucky to get on the board and ultimately be chairman of Success Academy, which is a charter school network in New York.
The thing that is hiding out in plain sight is that the problem with income inequality is not that Jeff Bezos is going to be a trillionaire or all these other people are gaining wealth. It is that they are not equipping children and particularly the most vulnerable children with the intellectual tools that they need to succeed and compete. It is not because poverty is this intractable thing that cannot be overcome. They have proven that it can be. The problem is that the unions and the basic principles that they all use in business, which is accountability and merit and cultivating talent, is set aside for the benefit of adults who are part of these unions. It is a systemic thing. It is not a lack of money. It is really a lack of a broken structure. Accountability is what he is hearing.
He spent a lot of time on that. He then became aware and was looking for issues that conservatives and liberals and progressives can agree on. Hopefully they can agree that they want young people to be better educated. They can also agree that whenever you put the government in charge of something, they will mess it up one way or another.
He gives a shout out for noting this private public partnership with the investments in the private sector because this administration has done an enormously good job at backing companies. They have a company in their portfolio called Atom Computing that with many other quantum companies has gotten money from the government. They were super impressed at how they contracted with them to engage in cryptography and to meet the government's needs but also in the financial component. They drove a really tough bargain. The government and the taxpayers are going to make a ton of money on this and their involvement also will contribute meaningfully to the value of this business. It is just a win all. They are an investor and a customer and they are capturing part of that value as a customer for the American people which everybody deserves.
Regarding criminal justice reform, first of all there are a lot of bad people in jail. The criminal justice movement has been undermined by folks who see it as an opportunity to not prosecute and not deal with bad people that are out there. But there are also a lot of people that are rehabilitated.
There are really three different categories. There are people who are falsely convicted. There are people who have shown contrition and rehabilitation. And there are those who just had a really disproportionate sentence relative to what they did. There is a case right now of a guy named John Grubman who
There is a case right now of a guy named John Grubman who was dealt in gray market diapers and formula. He got an 18-year sentence for dealing these goods.
In the case of Ross Ulbricht, the speaker was approached by someone. Ross was sort of a folk hero because he had this sort of cat-and-mouse game with the government. He ran Silk Road. Silk Road was one of the first crypto-based exchanges. He acknowledges that he did things that were illegal that he should not have done. He regrets it. Drugs were dealt on the exchange, but that's what he was accused of. The government later said that there were murder-for-hire incidents. He was never prosecuted for that and he denies that ever happened. He was sentenced to a double life plus 40 years.
There's a woman the speaker met through Intel named Rivetz who alerted him to this. She is friends with Olaf Carlson-Wee and sort of the crypto insiders. The speaker thought about this and realized this guy's got no way out. There's no recourse through the system to get someone with a life sentence out of jail. This will only work with a presidential pardon. They worked on it and had some familiarity with the pardon process. Then the speaker approached Charlie Kirk about this. Charlie really embraced this and embraced this individual as someone who had been unfairly sentenced. He took it to the president. Charlie also had an attorney named David Warrington who's currently the White House counsel. The speaker found out a couple days ago because he was talking to him that he was his lawyer for a decade. On the last day of Trump's 45th term, they were certain that he was going to get out. The Justice Department, for whatever reason, said, "If you commute his sentence, we're going to go after you to the president." So he withdrew the commutation.
Four years went by and really Charlie took the lead on this. This was his only ask of the president and the president at a event to libertarians and to the crypto community promised to deal with this. Not only was the sentence commuted but he is pardoned. Today Ross is married, is having a child, and living a free life after spending a decade, which is probably argue whether that was the right amount or not.
The speaker continues to work on cases. There's an organization called Olive and they work constantly on different people. As philanthropists it's great to work with organizations and there's a lot of great organizations the speaker works with. The speaker does a lot fighting anti-semitism and supporting Jewish identity also but also thinks that we can help people one at a time. It just really nurtures the soul and it's a good thing to do.
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