#295 - Jim O'Shaughnessy - Founder of O'Shaughnessy Ventures - Investing into "The Great Reshuffle"

Jim O'Shaughnessy: My grandfather was a fantastic guy who created the world's biggest privately owned oil company. And he then proceeded to be way ahead of the Bill Gates and Warren Buffett of the world, giving away about 95% of his fortune during his lifetime. I'm incredibly proud of him; he was a wonderful guy, and literally, King of the Wildcatters was his title.

But the great irony is the way he made his considerable fortune. He thought he gave the Irish a bad name. And anytime I had the privilege of having dinner with him after my grandmother died. He lived in Saint Paul, Minnesota, where I grew up. And so after my grandmother died, I was like the grandchild there.

And so he would come over for dinner twice a week, and I learned a ton from him. But he hated Joe Kennedy and, by extension, wall street; he said everybody on wall street was a crook.

I was surprised to find out about my future employment. Anyway, all of the oil buddies were speculating during the 1920s, and they were all doing it on a margin of 10 cents on the dollar, and they all got wiped out, and he went and bought all of them out pennies on the dollar because he had cash. 

Chris Powers: Interesting, and you just laid the foundation for where I would start this conversation.

Jim O'Shaughnessy: Cool. 

Chris Powers: So Jim, welcome to the show.

Jim O'Shaughnessy: Thank you for having me, Chris. 

Chris Powers: I have had so much fun getting to know you more the last 24 hours researching you, and there's something that you said that struck me, and you just laid out the foundation for it, so we'll start here. You said you can always understand the son by his father's or father's story.

The father's story is embedded in the son, and you just talked about, I believe, your grandfather or great-grandfather. What do you mean by that? 

Jim O'Shaughnessy: I mean by it that we're not born as blank slates. We come out, and we have these incredible quantum computers up in our noggin, and we are ready to be presented in any environment, right?

That's why we have all these extra brain cells when we're kids when we're babies. And yet we come out pre-programmed, learning how to speak any language. We come out pre-programmed with our genetic inheritance from our ancestors. And so that's the baseline. But then we get in printed very young, right?

Are you going to get a winner script or a loser script? Are you going to get an alpha or a beta script? And that's the part where, The grandfather, the father, the son, the grandson, and let's be very clear, the grandmother, the mother, the daughter it's universal; it's not just men; it's all humans.

And as you mentioned, and as we were chatting, I grew up with an extraordinary grandfather who was one of the world's biggest privately owned oil companies for much of his life. And yet he gave away about 95% of his fortune during his lifetime. And thus, the environment.

I grew up in one where I just constantly saw, give, right? My grandfather stole the line from H, hello Dolly, which was, money's a lot like manure. If you pile it all up in one place, it stinks to high heaven. But if you spread it out, it's the best fertilizer, and I took that to heart. I realized at a very young age that I had been born, not only on third base, but maybe born sliding into home, and so I got lucky; I had nothing to do with picking my parents.

And some religions believe you do, but let's put that aside and say I don't subscribe to those. And I got fortunate, and, I continually repeat to myself, I'm the luckiest guy on the planet. And so that's what I mean by that. The importance of your family, the importance of the people close to you, they shape you far more than you are even consciously aware of.

And I'm a big journal keeper, and I have journals going back to when I was 18 years old and I'm 63 now. I have 40-plus years from 18-year-old Jim up to 63-year-old Jim. And there's a great quote: The faintest ink is better than the best memory. And one of the things that I continually see as I go back through these are these themes, and I didn't understand that when I was younger, and it's I can't remember whose quarter it is, but life can only be understood backward, but it must be lived forwards.

Maybe Wittgenstein. And so that's what I mean, we start with raw clay. We all of us humans have this base programming that allows us to learn the language, allows us to learn how to walk and do all of those things, but then, of course, the genetic inheritance that you receive from your ancestors, but then your father, your mother, your grandfather, your grandmothers on both sides and your siblings.

All start to shape you and affect how you look at the world and act. Are you going to be a high-agency person or not? Are you going to be someone who says, look, I got this great hand; I got to play it? But will you also say that if you get a shitty hand? You got to play them all, would be.

The way I would look at that. 

Chris Powers: Is it fair to say that the most considerable influence on a person's life is their parents or grandparents or lack thereof?

Jim O'Shaughnessy: I think that they, as I refer to it imprinting, the early imprinting is undoubtedly, the parents, grandparents, siblings, but when you get into your teenagers, one of the other things that I have found by doing researching this is that you shift to your peers being much more important to you than your parents.

If we think about it down here, the parents, the siblings, the grandparents, the family. That's the foundational part of you. Then as you get older and you grow and change, your peers become incredibly important to you and shape you. That's one of the reasons why you are the composite of the five people you're with the most.

So definitely, It's a continuum, but a lot of people go through life without questioning any of this. And one of the things I found incredibly effective is always asking, why do I believe this? Do I believe this because my mom told me a story? She always cut the ham's end off before putting it in the oven.

And I said to my mom. Mom, why do you do that? And she laughed. She had a wonderful sense of humor, and mom said I don't know, I always did it, and she said, "Let me call my sister, my aunt Jean, " her older sister. And find out, so my mom gets on the phone, and she asks, and then she starts laughing, and she hangs up the phone and says because my mother's pan wasn't big enough for a whole ham.

So we all do those things on autopilot much, much more than we are aware of. And so unless you constantly question, why do I believe this? Is there anything supporting this opinion of mine? Many people, myself included because we're all running human OS, right? We tend to believe.

Our minds are structured thus that it's I have an opinion about X, and our mind immediately says, this is not an opinion. It is a fact, and we must understand that most beliefs are not facts. And in fact, most of our beliefs are wrong. And when we do a deep dive into them, we discover that.

And then so, it allows us to be agile and continually improve our explanations and beliefs. So, we start Here with some silly beliefs. Naive realism, the world's out there. I'm in here, I am me, and then we start reading, and we start experiencing life, and we're like, doesn't it seem genuine? That is that, and so I always advocate you can get much, you can improve your mental models Continuously, and to do that though.

You've got to be willing to say You know what? That was wrong; I was wrong. So let me learn from that. Most learning comes from being wrong, and we concurrently have this fear of being wrong, of looking bad, of, that's socialization again, right? And so if you're not afraid about being wrong, wow, you can learn a tremendous amount.

Chris Powers: Do you think that in today's world, I love that framework where. With social media and the internet, we're confronted with the opportunities to either confirm our biases or what we believe are facts or opinions almost by the second. You can get on Twitter and go down the list, and your brain is working at a rate where, you know, maybe before the internet, there were four or five things a day that confronted you where you had a, an opportunity to either Believe that opinion or believe it's a fact.

And now, as humans, we're met with that opportunity sometimes thousands of times a day. I'm figuring out the question, but is that changing how we believe and perceive things? Because we're forced with this ability to decide so many times a day what we believe or don't believe.

Jim O'Shaughnessy: Yeah, there is a thing called cultural, cumulative cultural evolution. And try explaining one of these to somebody from 1970. The closest they'll get because Star Trek was on back then is they're going to say, Oh, that's a communicator, but it's been proven.

There's a great book called the weirdest people in the world. And weird is an acronym for wealthy Western. I don't know the rest of it, educated. And they definitively proved this by looking at MRIs of people's brains, and one of the things they did started with this. It shocks you the awareness that there are our brains; the brain of an illiterate person is structurally different from that of a highly literate person.

What? How the heck did that happen? We evolved, and we came up with writing, and that was. Again, remember how we come out, and we can all talk no matter where we're dropped. If you're dropped in China, you're speaking Mandarin. If you dropped in Paris, you're speaking French. If you dropped in New York, you're speaking New York English but reading different things.

Learning to read takes kids a long time because it's a recent event in our evolutionary path. So what happened was that the external world books changed our physiology, and the brain colonized the part of the brain that had been used for facial recognition.

Now, why would it do that? It did that because our visual acuity was necessary when we were hunter-gatherers. When Grog came through the trees, we had to instantly know if Grog was a friend or foe, right? So we had this incredible facial recognition that we didn't need as we evolved into farming, cities, and all of that. 

The brain colonized it for literacy. Is the external world affecting us humans? Yes, it is. Social media is one of the things that is also really fascinating; there's a guy who died recently. His name was Professor Flynn, and he has an effect named after him called the Flynn effect.

He studied IQ or General intelligence and looked at the earliest of those tests, which were done circa 1900, and then looked at them whenever he was doing it. I am still determining the date, 2000 or 2005 thereabouts. And he found that we have become more intelligent as a species. And he's trying to figure out why that is.

And what he concluded was we moved from a very concrete type of thinking. We thought in terms of things. So that's a cow; that's a bear. One of the examples he gives is that these farmers in Germany in 1900 would be told at the North Pole that there are polar bears, and they're white.

And if you were surrounded by snow and a bear started coming at you, what would you expect him to be? And everybody answered brown because all they'd ever seen with their own eyes was a brown bear, right? What happened as quantum physics came online, all of these things came online, and we moved our ability to abstract thought far more to that ability from this concrete, this is this, that is that, and we moved it to our ability to abstract broadly.

And that gave us tremendous leverage over much of the modern world; it created much of the modern world. Back to social media, look, it depends. Are you aware that we feel great dissonance when seeing something opposite to our beliefs? All of us do, again, a human OS, me, you, anyone.

And so what we do is seek out opinions that agree with what we already believe. And that's called confirmation bias; the behavioral finance guys always discuss it. If you strike through that mental model and understand I'm probably doing what I'm programmed to do, find evidence and stuff that I agree with and say but the facts, and so what happens is we create these bubbles. We follow people who are just like us, think like us, and have the same particular set of beliefs as us.

And that, my friend, Tim Urban, has a great book about it, and he does, it's, I can't remember how he refers to it, but the Tree of Knowledge or something, that's down here at the monkey level, right? If we can understand that, we need to correct many things.

We should be open to other points of view, and it doesn't mean we have to adopt them. It means that we should continually challenge our point of view. That's healthy, and in social media, tribalism. I joke on Twitter that political Twitter is verboten for me because all it is ideas, ideologues shouting at each other.

And what makes me incredibly sad is that most people are cannon fodder. They're foot soldiers. There's a great book by a guy who was a longshoreman and became an incredible philosopher; Eric Hoffer called the true believer. And he talks about this quite a bit, and overcoming our evolutionary DNA is hard.

And so we do seek out seeks, right? And in many instances, that was a highly profitable genetic inheritance because we had the tribe that protected us, right? The problem is that if you're in a tribe, what are the first two things you must do? The first thing you got to do is get along.

Because if you are back in the hunter-gatherer days and tribe, you're not getting along, they banish you, and you die. So our first programmed response is to fit in. But then, we fit in the minute and are confident in our idea. Then what do we do? We stand out. That's why we have these hierarchies and various signaling mechanisms.

And so it's a difficulty. You got to fit in, but then you want to stand out. And social media, does it change our brain? It does. Does it shorten our attention span? If you use it the wrong way? It does. If, on the other hand, you are very aggressive in the way you curate all forms of social media, right?

Not just Twitter, but all forms of social media, then, despite all of the incredible missteps that Mr. Musk has made, At Twitter and the missteps that Jack made before him, I still believe it's very Lindy; it's very anti-fragile like this thing won't die. And that's the network effect, right?

Because there are so many people on that particular network, killing it will be hard. So it's very anti-fragile. The point I was going to make is I still believe there will emerge; I always said it was Twitter; it might not be Twitter, but a global intelligence network will emerge, and we're building it.

It's the human Colossus, and it's getting built, and we now live in an age where it used to be. You grew up in Fort Worth, right? If I weren't in Fort Worth, you and I would never know each other. We wouldn't have a chance, or you were here in New York. Our opportunities to get to know and talk to one another are limited.

Now the world is your oyster. I have friends worldwide, and that is because of this human Colossus we're building. And, again, it can be used for really great things. It could also be used for terrible things. It's in all the debates about AI right now; for example, is it good? Is it evil? It's neither.

It's a tool. Can it be used for good? The use cases are enormous. Can it be used for evil? Unfortunately, the use cases over there are also numerous. Rather than try to imbue a technology, platform, lever, or anything like that with some essence of good or bad, we need to understand that they don't possess any of those.

The users of those tools are the ones you want to look at. 

Chris Powers: I want to talk in detail about what you're doing today at OSV, and you just touched on it, but I think before we talk about that, it would be essential to set the stage at the earlier part of your career, which was in quant investing. And you just mentioned things like having an open point of view and being able to challenge the status quo.

And I am a real estate person. I am not a quant. But when I think of an open point of view, if you're quant investing, you have an algorithm, which is what the algorithm says, and that's the point of view. So let's start again, going back to how you were raised, and you said your grandfather didn't like wall street, but you made a career on it.

How did you get into quant investing, and what Is quant investing? You create an algorithm and then put it out into the world. And then it just trades stocks all day. And you sit back and watch, like, how does it work? Because this will set the tone for what you're doing today, which is also fascinating.

Jim O'Shaughnessy: Thanks, Chris. So take a step back; how, why did I get interested in this? It was the most exciting puzzle that I had seen at an early age. I mentioned that my grandfather gave the majority of his money away during his lifetime, but there was some left, and that went into a foundation, so every quarter, all my aunts and uncles showed up; I always wanted to be at the adult table, and when I finally earned that privilege, I was seated next to my favorite uncle, Uncle John. He and my father were having this very heated discussion over IBM, and I was listening, and basically, they were going back and forth, and it was all about the CEO or the products that IBM had, and I just interjected.

We didn't look at how much money they make and how much you have to pay for that, and basically, they said shut up, but that ignited my curiosity. They got it all wrong; what you want to do is you want to look at the underlying characteristics.

If you're going to a doctor, do you want him to look at you and say, yeah, you look healthy; go ahead? No, you want him to take your blood work. You want him to take an x-ray. You want them to be able to have data that says, Ooh, you're very healthy, or you need some help. It would help if you looked Underneath.

And so that gives birth to what defines the stock, right? What defines the stock are the factors that the stock possesses. So some stocks have super high valuations. It means investors are big believers in the future of that stock and are willing to pay through the nose for it. Other stocks are super low, meaning investors have meager expectations.

Generally, what happens is super high expectations get dashed. Nothing grows to perfection. And super low expectations, pretty easy to beat. If you have zero expectations for a stock, it won't earn any money for the next four years. And then it comes in and earns a dime.

Everyone reevaluates, and they're like, Ooh, we got that one wrong. And you build out these series of factors. And you use them to short-circuit human OS. I always joke that the four horsemen of the investment apocalypse are fear, greed, hope, and ignorance, and only ignorance is not an emotion; more portfolio value in public and private markets has been wiped out by fear, greed, and hope than any bear market.

And what do I get people to understand when discussing why you would be a quant? Essentially, you are arbitraging human nature. We talked earlier about People sometimes have their beliefs about things wrong. One of the things that we have a wrong belief about is our abilities.

All of us men are the worst here, by the way. If you give a man a quiz and say, Okay, so there's, we'll chunk things in 10% buckets. So the top bucket is you're in the upper 10% of this particular skill; down to number 10, you're in the bottom 10%. And then you ask men in a survey, where are you in your athletic ability?

Guess where men put themselves in the top two buckets, and then the stragglers, a little bit more modest, put themselves in the third bucket. It cannot be statistically accurate. Same with thriving, same with insight, same with intuition. We all believe that we are much better than we are.

And by the way, that is good for survival. That is good for all those things. It could be better for making investment choices. And so what happened to me was I built out all of these facts, but, and this is the dark ages when I was writing about it, the first book I wrote was called invest like the Best that showed you how you could clone your favorite portfolio manager, the book I'm best known for what works on Wall Street was essentially, hey, how do all these particular factors perform over massive periods? Because the other thing, we have all of these kinks in our human OS. And one of them is we are hyperbolic discounters.

What does that mean? It means that anything beyond five years doesn't matter. Like that is infinite, that's infinity. We don't think about that at all. And so what we need to understand is if we hyperbolically discount, what do we do? Our emotions get aligned with what's happening right now. Why do you see the majority of sales at bear market bottoms?

Why do you see the majority of buys or a bubble at the top of that bubble? Because we just cannot. The siren song is so strong that our human OS drives us to do it. I'm guilty of it; I wrote a piece in 1999 April 1999 called The Internet Contrarian, in which I said, This is the biggest bubble anyone alive today has seen.

It's more significant than the 29 bubbles in this particular sector. 85% of these companies are going to be carried out feet first. Even the companies that survive, and I mentioned Amazon, will be 95% lower in price than they are today. That's analytical, Jim. That's quant Jim over here because that's what the numbers were telling me human os Jim, what did he do?

He founded an internet company.

So Seeing this at work in your own life freaks you out. And so the ability to have a set of algorithms Buy and sell for you. It is perfect, especially if you're a longer-term investor like we were with O'Shaughnessy asset management. Does that mean that we set it and forget it?

No, not at all; we had a considerable research team that continually researches. Are we missing factors? Is there information that we need to be made aware of? One of the reasons why I became so interested in machine learning and artificial intelligence is that I viewed that as the next frontier of quantitative analysis.

And so the models directionally remain the same. Buying cheap stocks on the mend is one of the best strategies in the world. What does that mean? It means their valuations are super low; their price has turned a corner, right? And that's momentum and cheap stocks on the man. That's a powerful strategy.

How many people are going to use it? Virtually none because it's a very volatile strategy. So again, hyperbolic discounting that O'Shaughnessy, oh God, he's a genius. No, he's a blithering idiot. And it's all based on what happened over the last three months or years; that differential is enormous.

And it allows you if you can do it, to arbitrage it. So that's what Quant is trying to do. It's trying to improve the security selection models continuously. But the reason it works over long periods is it immunizes you. From the emotional decision-making that makes all those sellers sell at the bottom of the market, all those buyers buy at the top by immunizing your emotional reactions.

You get a sustainable edge. Now, does that happen all the time? No, there are strategies. We have some value strategies that underperformed for years. And again, what happens? People are people. Jim, I believe all of your data. It looks perfect, but now you need clarification. And I'm pissed at you because you convinced me that you had this grand strategy, and now I'm losing money, and they get fired.

So it's not just quants; it's all asset managers, right? It's a sine wave. You go from hero, goat, hero goat. And that's because your time frame and horizon are wrong.

Chris Powers: And probably because you can, at any second in the stock market, you can choose a result where in private markets, you don't fully know. 

Was there a time, like when you were young, that you're like, I'm going to do Quant, and then I'm just going to, I'm trying to simplify the question as much as I can when you built the first model. How did you know it was okay? The model's good to go. It is the algorithm we're going with. What was the green light that you got? Was that a bunch of researchers came together, met in a room, and said, this is as good as we can do.

How does a quant investor know they got their algorithm right, at least for that day?

Jim O'Shaughnessy: First off, it's not just for that day. 

Chris Powers: Yeah. Or that strategy.

Jim O'Shaughnessy: That our stuff is long-term oriented as opposed to short. They're very different. So one is the algorithmic super-fast trader, making decisions second by second, suitable?

And they have to have their computers located close to the stock exchange because they're looking for a very different edge than a quant like me, who's looking for an edge. That is more sustainable. How do you do it? You let yourself be an empiricist. You look at the data. People used to say, Oh my God, I wrote another piece in 2009 of March called a generational buying opportunity.

And as everybody said, in hindsight, you are such a genius. No, I'm not, I was looking at the numbers, and you let the empirical data inform you. So how do you make up your mind? First, you must review as many market cycles as possible because some things have been popular for five years.

And if you're looking at five years, you'll make many mistakes. Because value investing became very popular right after the crash of the dot com, but then everyone was like, Oh, this works fabulously well. It does over long periods, but it worked exceptionally well over that short period back in the 60s and the dot com; the stocks with the highest valuations did the best for a persistent amount of time that changed many minds, right? So you got to see as much data as possible over as many market cycles as possible. Remember, as long as human beings are pricing securities, the underlying names will differ. But what they love or hate will not be all that different, right?

So get as much data as possible and stress test it as much as possible. What is the worst-case scenario? Most people need to learn about what worst-case scenarios are. We had a strategy at my first firm, O'Shaughnessy Capital. We still have the strategy. We renamed it O'Shaughnessy Capital. It was called Cornerstone Growth.

Essentially that cheap stock on the men strategy that I mentioned earlier and in the first version of my book proved to be the best-performing strategy, so when clients come in, what strategy would they want that one? And so 1 of the things that I would do is say okay.

Let me do this, though, and then I would put the ten worst drawdowns that strategy had gone back to the 1950s on the screen. They were huge. And you instantly knew whether the client would be the right for that particular strategy by their reaction. Like the ones who looked at it, their eyes got super wide, and, Oh, there's no way I could handle that.

We have a much more conservative one. What does that mean? We're giving people information. We're giving them evidence again, back to doctors. Are you going to go to the doctor? Who's going to say? Hey, Chris, this guy, this pharmaceutical rep, just dropped these little yellow pills off, and I like that guy, so I'm going to give them to you and see if they work for you.

You're going to run as far and as fast as you can away from that doctor. If, on the other hand, You go to a doctor, he gives you the complete workup, and he comes back to you, and he says, Chris, generally, you're in really great health. You do have this problem. I'm going to prescribe this medication. And I'm prescribing that you will want evidence because of these double-blind tests over various types of patients.

And so that's what clots want. We want evidence. We understand that We're probably going to be wrong much more. We understand that our emotions are going to get involved. It's like you're in real estate. Real estate is the king of, Ooh, I, that's my house, where my office will be because it's so cool.

And it's such a great location and all that. It's all our emotional side. And it's present everywhere, right? Like, why does advertising work? It works because it appeals not to our analytical mind. It appeals to our emotions, right? We want to fit in back to our evolution, but then we want to stand out.

That's a short version of why quantitative can be very effective. A final thoughts on it, though. What is only suitable for some? I always say to people, That for the vast majority of investors, honestly, who are not interested, who don't mark passionately curious about it, who don't understand what the underlying evidence suggests, suitable?

For those people, index your portfolio. Pick a world ETF that has the lowest management cost. You can get them for ten basis points. And then just dollar cost into your 401k or your Ira. You know what? You're done. You're done. You don't have to be on FinTwit. You don't have to watch CNBC, read the Wall Street Journal daily, or read all the analyst reports.

And you're going to be much happier. You'll probably do better than 90% because, again, persistent investment over time. But other investors do love all that stuff. And they think. Yeah, not quant. Like, I have this unique insight, and you know what some people do; it's just hard identifying them ahead of time.

And so you, what I always counsel people is find what's right for you, find what's suitable for Chris. You will have a completely different outlook on your objectives, goals, and everything you might want than I do. And so when you can find something that resonates with you, that's something you'll be able to stick with.

And that's the secret. The secret is a persistent investment over time. Very hard to do. It just sounds so simple. Everyone's, of course, if you've got a dog, right? And you just were at the store, and you saw that, Oh, his favorite dog food is right there.

And so you bought a dozen cans, right? And then you're in that same store the next day. And you see the same dog food half off in real life in the real world. You stock up. It is awesome. My Fido loves this. And I can buy much more at a 50% lower price in the stock market.

What do you do? You rush home, take the 12 you bought at the higher price, bring them back to the store, and say, I want a refund.

Chris Powers: Oh, that's so true. Why do we do that? Is that because, and you wrote this quote, 45% of our investment choices in life are the genetics in which we're born? Is it something to do with how we're predisposed that we would? The case you made for dog food is so obvious. Why in the stock market do we treat it differently?

Is it because we think about money differently, or is there some other emotion that's elicited that makes us do that? 

Jim O'Shaughnessy: We think about dog food differently. So, that's something we do know. We know what our favorite pet is and their favorite food, right? So it's simple; it is not a multifactor decision-making process.

It's my pet's favorite dog food. It just went half off, easy; I'm going to buy a lot of it because it's going to stay, it's scanned, and blah, blah. In the market, oh, very different. Multifaceted, multi opinions, multi people saying, pounding the table, like this stock will do great. And then there are the other guys, gals, saying this is a disaster.

It's going to go way, way down. And as we're being bombarded. With all of these various opinions and the market collapsing, what's our basic instinct of all humans, not just humans? All animals fight or flee, and so flea is what operates at market bottoms. I'm going to flee; I am in danger, right?

Because that gets back to the whole money angle; listen, what is money? Money is an information technology. That's what it is, and people have such screwed-up ideas about money, and because they tie it to themselves, they tie it to their self-worth. They tie it to, can I feed my family? And those are the, mainly, can I feed my family? That's a significant thing to think about. But if you're familiar with the mass love hierarchy of needs, right? As you get love, you get basic food and shelter, right? That's the bottom of the pyramid. And yet we carry our emotions to the top of the pyramid.

And most of us, at least in this country, thank God. And globally, the progress that's been made fighting things like hunger, dysentery, and people not having access to clean water. Over the last 20 years, the improvements have been extraordinary. And yet, we're always looking for novel dangers, right?

That is part of our human programming. And so that gets bundled up in. We have this incorrect attitude about money, about what that means, and all of that. And then you have a short-term thing happening. The doll went down 950 points today. Is it going to stop details at 11? We like to do it again, back to human programming.

We are programmed to seek out novel dangers. That's good programming. If we see a novel danger over there, we're going to do; we're going to fight or flee. So the problem is that switch is never turned off. And so we see things that are not novel dangers like a bear market, and we see them are nervous system in our brain sees them as a novel danger.

Like them, whenever you hear always or never, you're always in dangerous territory. And never, if you can ban those from your thought process, you'll be so much better off because Ben Stein, the guy in Ferris Bueller, his dad was a renowned economist. And he said unsustainable trends tend not to sustain themselves.

Always like, this stock is going to go up. No, it's not right. This stock is never going to recover true. In some cases, companies go bankrupt. But when, and here's another problem, right? That happens at the individual stock level. Many companies go bankrupt and will never recover an extensive portfolio of stocks. That makes that a de minimis occurrence because you've got diversity there.

Chris Powers: This leads into, and we're about to get into OSV, but you said there's a vast difference between probabilities and possibilities.

It's a perfect time to layer this question in. What do you mean by that? After discussing everything, I decided it was the perfect time to introduce this concept.

Jim O'Shaughnessy: I always say that we are deterministic thinkers living in a probabilistic world, and hilarity or tragedy often ensues.

A deterministic thinker has yes, no, 0, 100 Aristotelian logic. It's either this or that. Those are the only two choices; that's not how the world works. If you know anything about physics, you know that most things may not be yes or no. There are maybe and quantum indeterminacy.

And that happens at the societal level too. So what do I mean by that? Probabilities are easy to create. Look at what is the base rate. What's the batting average? How often did, how often does the home run king strike out? Most people intuitively don't understand that they strike out a lot.

But their overall base rate, the probability of the slugger getting the home run much higher than the duffer who's got a base rate of striking out 95% of the time and maybe getting a single or a double 5% of the time. So we confuse the science of probabilistic thinking with possibilities if I was going to think in possibilities.

We probably wouldn't be on this podcast because I would be terrified that a plane might land and kill me today or the sun could explode. It's possible. Is it probable? People confuse possible with probable, creating all sorts of wrong thinking. Is it possible that the United States could have a revolution and turn into a totalitarian dictatorship?

Sure, it's possible; is it probable? No. Not probable at all; when we think in terms of the possible, we let a lot of that stuff freak us out because, like, It's possible, even though it's like this small, that the sun could go supernova tomorrow and then we're all gone, and it doesn't matter, right?

And so imagine thinking that was probable. What would you do if you thought about the probability of the sun going supernova tomorrow or 90%? You're probably going to do a lot of reckless, crazy things. I know I would, right? It's our last day on Earth. Let's party like it's 1999.

And so that is the problem that people face. They mistake and insert possible occurrences, which are usually rare and have a very low probability of occurring, and conflate them with probabilities. And then they get, this is going to happen, and generally speaking, it leads to either tragedy or hilarity because you get many people doing pretty stupid things.

Chris Powers: And the world has changed a bit on that. In a podcast you were on a couple of years ago, you said something similar to when you first started watching the news. It was 30 minutes of neutral. Here are the facts, the Yankees won the world series. There was a storm in California, and blah, blah, blah.

And then you're on, and now we live in a 24×7, 365 across a thousand mediums where we speak. And pretty much this is going to happen. The world is ending. We are going to war, blah, blah, blah. But it seems to have at least made maybe probably more folks live in what you would call the very much yes or no world. It is happening, or no, it's not. I don't know if that's a question, but it's an observation of why maybe more people think that way.

Jim O'Shaughnessy: It's a good observation, and there isn't much news for 24×7. That's relevant. Claude Shannon's information theory posits that information is novel.

So it's something new, and it draws our attention. And the fact is that the news isn't novel at all; it is essentially various reality tunnels or belief systems that reinforce and confirm whatever you happen to be. So it's tribalism. It's devolved back into tribalism because the internet took away all that sweet advertising revenue, and they got to come up with other things.

You've got to find an audience, right? You've got to be a more narrowcast than broadcast. And so what do you do? You look at this particular tribe. What do they believe? What don't they believe? And you program according to it. So I don't care if you're on team red or blue; they use the same operating system.

So we're going to have team red over here, shouting about this and that, and we're going to have team blue over here, shouting about this and that. And the fact is you're being conditioned, right? And the soul of propaganda is to sow fear, uncertainty, and doubt. And I stopped watching the news, TV news in particular.

And there's a reason why it's different than reading the news or something on Twitter. I'll get to that in a minute. But I stopped watching TV news about 12, even more years ago because I just became convinced that it was devolving very rapidly and badly into these fake trumped-up Arguments that are just there to serve the tribe, right?

And, like when I occasionally glance at it, I don't care what network we're talking about here. Let's be very clear about this, and I joke that, boy, I can't even imagine George Orwell, who wrote 1984, in the book. He had the two-minute hate. And the two-minute hate was you got all the believers to hate on whatever you would try to be opposed to.

Now we have 24-hour hate, and unfortunately, back to human OS, right? The dark side is more appealing to many because they fear it, right? And so they're drawn to it, right? Like train wrecks, I can't look away. And so it's our underlying programming that makes that easy to sow fear, uncertainty, and doubt and keep people seeking the safety of their particular tribe. 

I know many older people who like their lives miserable because they watch TV news all day. And the people I care about, I'll come in, shut it off, and say, let's listen to music instead, that is, they're programming you.

You don't want to be programmed now. Why is TV the best hypnotic medium that you could ever stumble upon? Our brains have a tough time distinguishing real from not real. So many people don't believe this, and all I would tell you is go to a horror movie, and do you jump? Do you start to sweat?

Does your heartbeat increase? Or, more in a naughty fashion, have you ever watched a triple X-rated movie? Your brain thinks that's real, just like the horror movie where you're jumping and terrified. Do you have actual physical responses in your body to these things that are not real, right?

And on a much less controversial nature, that's what the news is; it's a one-way medium. It's not a two-way, and it puts you in, put your brainwave patterns into almost a hypnotic trance. And that's why you've got to go back to curation again, right? You've got to curate aggressively in this new world.

And if you want the highest return on investment, if that's why you're tuning in to listen to me, stop watching the TV news. About two weeks later, your brain fog is going to lift. You're going to feel so much better. And you're going to be like, what the hell? Why was I so angry? When you travel around our country, America, like your average American, is a good person for the most part, and what do we focus on? We focus on divisiveness, the anger, the hatred. Please spend some time with your average American; they're reasonable. Go along with whatever you want to do that's helpful for all of these things, and so we have this mask that gets put over us.

That prevents us from seeing that go to take a road trip and watch what happens when you break down.

Chris Powers: I have this American flag in here as a constant reminder of how lucky I am to be in this country and how great of a country it is. Like all things in life, we have our challenges, and we make mistakes here and there.

But just like you said, if you go get out in the world, there are some incredible people here. And the majority of people want to live a good life and do good things. 

Jim O'Shaughnessy: Absolutely. And by the way, it's more than just in America, where most people want. 

Chris Powers: Yes, all over the world. 

Jim O'Shaughnessy: But the beauty of America is we were founded during a very unusual time in the zeitgeist of the moment.

We were founded during the Age of Reason and the Enlightenment. That's why we've got a constitution. That's why this is a constitutional republic. And most importantly, that's why we have a Bill of Rights. And that does distinguish America from other countries. For most of human history, the Sun King ran everything.

And the Sun King was the Sun King because God appointed him to be the king of that, and that was that. And if you didn't go along with that, you were burned at stake, guillotined, or whatever. And so we had this brief shining moment where all of the thought of that particular period in the late 18th century in 1776 was the enlightenment of the rights of human beings, of all of those kinds of things.

Now, did we get it right all the way? Of course not! We still allowed slavery. And got corrected, and did that mean that it was not horrible? It wasn't enjoyable. The fact that we allowed that, the fact that the world allowed that, was a horrible thing. But we evolved, right? And we fixed it.

And if you have a system that guarantees basic things, right? You have the right to say what you want, even if I disagree, right? Voltaire is famous for being attributed to saying he probably didn't say it. I may disagree with what you say, but I will defend your right to say it, right?

And that is the core of the first amendment. And then we also have due process, which builds a trust-based society that all these fear, uncertainty, and doubt folks are trying to disrupt. Because what do they want? They want you to trust them. I will keep you safe, you've got to give up much of your freedom, but I will keep you safe, right?

The classic demagogue, and one of the other things given all of the problems that we face, and we face a lot of problems, and I'm not trying to diminish that in any way. But since I was born in 1960, more progress has been made in this country than in virtually any other one. In 1971, if you were a woman, you couldn't get a credit card without your husband's permission.

How wild is that? You couldn't; if you wanted to keep your maiden name like my sister did when she got married right around that time, you had to go to court. You had to go to court and say why you wanted to keep your maiden name. So most people need to understand how much progress we've made in this country.

And then there's the other thing. Please don't listen to what people say; watch what they do. What would happen if the United States said, Hey, guess what? You can come to live and work here. For the most part, all the most intelligent people would come here again with empirical evidence, right?

So we're fortunate in this country because we have due process, the right to free speech, et cetera. But those are fragile things, and, it's like, it doesn't make you a right winger or a left winger to believe in those basic principles used to be. That's what United most of this country, right?

And yeah, we are uniquely blessed in this country for various reasons; in addition to the constitution and the rule of law, we are devilishly hard for other countries to attack. Imagine if Canada, rather than being the lovely people they are, were aggressive.

And they had some North Korean-type dictator at the top. That would be a whole different situation. And we'd be constantly on edge, and they're going to invade us. And so we have this unique geography that people don't overthink about. And then transportation, our river systems, as if you were designing a landmass for success.

It'd look a lot like the United States. 

Chris Powers: I've never heard someone say the river systems. That's interesting. Okay, you have taken the next part of your career, and you've, and in the last few minutes, you've talked about moments, you talked about when America was created, you've talked about these times, and you have a Theory that's called the significant reshuffle.

We're living through another moment in time. You have bet the next part of your career on a hopeful nature of abundance and what's now possible. But what is the excellent reshuffle? What are we going through from your perspective? And why have you chosen to build your career on a theory of the significant reshuffle?

Jim O'Shaughnessy: The great reshuffle results from all our old models and playbooks collapsing. Why are they collapsing? Because we have created innovations and technologies that allow us to do things that never before in human history could be done. I mentioned earlier that I would only be in 1950 if I happened to go to the same college as you. 

Or if I had a business that brought me to Fort Worth, you and I would never meet. Now we have a significant reshuffle starting with, and we have global connectivity. I can find people in any part of the world who don't stop thinking about how unusual that is. So one of the parts of my thesis here, Is that because we have global connectivity, you and I can have this chat via an innovation that allows us to do it in real time and record it and send it out into the ether, all of these tools are making the old school way of doing things very out, their sell-by date has been reached.

And used to be, for example, as part of what we do at Pushanasi Ventures, we have these fellowships, right? And that was to test the thesis that used to be in the pre-global interconnected world; a genius was born, lived, and died, and nobody knew they were a genius. They didn't probably even know it.

Now that's not true anymore. Now, because of all of the network effects that the world enjoys right now, it doesn't matter if you're brilliant and you're in Nepal or the dragon kingdom of Bhutan; it doesn't matter. You got a connection to the internet, you can put your brilliance out there, you can do it on Twitter, you can do it on social networks, you can create things, and equally important, you have access to a suite of tools that did Arthur C Clarke say, that a technology that is so advanced is indistinguishable from magic? We're living in an era where our technology is perceived as magical because people in the dragon kingdom of Bhutan can work for O'Shaughnessy Ventures. That would have never happened in the past at all. And so one of the things we do with the fellowships is that we can now find and fund these brilliant thinkers.

And that's what we're trying to do, and we're finding this is the first year of it. So we need to have tangible evidence to point to. Still, the anecdotal things we're learning as we watch these incredible creators, Chris, you should see the applications that we got, like from all around the world, an absolute genius of people is it blows my mind, it's incredible. It was one of the hardest things for our team to narrow it down to just the 12 fellows we have. So as part of that, things like distributed workforces, you see everyone saying, I've got to go back to the office, got to do it this way, no, you don't.

Your preference is to work in an office. We were talking about one of my colleagues, right? He prefers to work in an office-like environment. He doesn't want to work in his apartment because that's how he's built, right? Great. You have a space for him, and he can go there.

My entire Astronomy Adventures team is predicated on this thesis. I have people all over the world; I have people in India, I have people in Singapore, I have people in the UK, I have people everywhere here in the United States. What about, don't you should get together in real life?

Absolutely. We will get together at a minimum annually and for a good chunk of time as part of what we're doing. Those happy things that aren't planned can happen, right? You can vibe with somebody else and, oh, what a great idea. But you can do that here too. So I talk to team members like Daley, and it doesn't matter where they are.

We like what do you think about this? Oh, that's a good idea. Then I'll find out where we can do that. So the other thing is we're moving from a world designed for mass production and consumption to the traditional bell curve. The traditional bell curve is 68% in the middle.

And then you get into the tails, and those people were ignored for the most part by TV, by people making products by everybody because it made sense. What's my market? What's my total addressable market? My total addressable market is 68% in the middle. That's why I love Lucy. The most viewers they ever had was 63 million people watched.

I love Lucy game of Thrones had 18 million. So the idea of mass production and mass consumption is gone. Right now, you can narrowcast, you can narrow down a product, and you're going to find your people interested in that particular thing. People will say, I was talking to somebody yesterday, and he said I need more time to start a podcast.

No, it's early innings, and you'll be able to create. Power laws rule the world, unfortunately, right? The 80, 20 they do. And the fact is, though, when a power law ruled the world, and there was a traditional bell curve, hard to stand out. So what did you do?

You fit in, watched I Love Lucy, got your job, were the man in the gray flannel suit, and went to work for the corporation that dictated it. What you could and couldn't do, right? That's gone, and you can make a hundred million dollars on a good fishing app.

Why? Because many people love to fish, you might have an app that allows you to say, wow, look at this. I not only can brag; I just caught this giant fish. Take a picture of it, put it on your little fishing app with your friends who are also fishermen or fisherwomen, and then you can say, Ooh, what would happen if we added a geotag to that photo so that people could find where you caught that fish?

And suddenly, you get a sticky, Right? Now, is it going to get 68 million users? Of course not, it doesn't matter, and right now, you can create; you can become a king of many smaller hills. That's why we have infinite media; that's why we are building that out. The ability to narrowcast, to be the king of a niche, the king of that particular thing.

There are a ton of niches, and all of that opportunity goes against the old playbook. And does that affect everything? Yeah, right? Corporate speak. People know bullshit, right? It was decided that  Passive voice. It was decided that our view on this, and anyone watching it, is, oh my God, it's like watching a politician of any stripe; they're just bullshitting you continuously.

And that gets back to Claude Shannon's information theory; if you turn it off right now, authenticity is going to be able to be a real asymmetric advantage because one of the things that we are pretty good at is this guy bullshitting me, or do they seem authentic so you're getting a thing like my son Patrick has a fabulously successful podcast empire under the name Colossus. He added David Senra, where he'd got the founder's podcast.

He's killing it; what does David do? He does something that would not have been a conceivable job 15 years ago, he reads biographies of the most significant founders Davîd's interested in, but he reads them all. And then he takes notes and does an hour and a half, a two-hour podcast, where it's just him giving what he learned about that particular founder.

Huge audience, huge potential, colossal everything, impossible 15 years ago, right? Because he would need more reach. So many opportunities are now being presented to people who understand what's happening and reject the old playbooks and the standard operating procedure here.

Now, does it apply to everything? No, there are certain things that you've got to run. According to a standard operating procedure, et cetera. But if you look at our website, @Osv.LLC, you'll see the verticals; they all interconnect if you figure it out like infinite media because there will be massive tons of opportunities for different people to conquer those hills.

We want to be part of that. Infinite films, you don't have to spend a hundred million dollars and get theaters to take a movie anymore, you can spend a lot less, you can give everyone who made that film ownership of the film, and guess what? You'll probably be able to sell it to one of the streamers; worst-case scenario, you put it on YouTube and charge for it, right?

And then what we call infinite adventures. The original term for venture capital was adventure capital, which I love, even the more bracing term they used to call venture capital. They used to call it liberation capital because, in the old days, you worked for a company.

You wouldn't even think about starting your own company. What are you mad about? I'd start my own company; I can't do that. And tell people started to do that with a venture, now. People like JP Morgan combined all the steel companies and created our steel. So a small group of people believe that, but something different from what you saw when ventures start.

And so that's changed too. And because I now have the ability of what I call a loose network, the loose network I have is global. And I can peer into exciting situations in Africa, Botswana, and Bangladesh. In Fort Worth, and that gives me, combined with these people who are now native to these tools, right?

Like, I'm 63, I'm not native to the internet, and now I've tried as much as I can to stay up to speed on it, but the fact is, we now have this group of younger people who are digital natives. And it's incredible what they can do because they know where all the tools are, how they work together, and how to create things with them.

And so we are going into almost the golden era for innovation, new types of companies, new types of doing things. That's what we're trying to pursue at the Shaughnessy venture. 

Chris Powers: I love it. I've got a couple more questions. One, what's interesting is you don't have LPs; this is your money.

There is no principal-agent issue. No board of directors needs your permission. And in many of your discussions, you've said, look, I can make decisions that others can't. I was just wondering if you could describe, like, what's something that you've done already at OSV that if you had other LPs, maybe you wouldn't have done, or maybe you wouldn't have been able to do as quickly, and why are people attracted to coming to you because of what your flexibility is.

Jim O'Shaughnessy: Like almost everything, I'm making a movie about an extraordinary man named Dr. David Rooney. 

Chris Powers: I met him at Capital camp. 

Jim O'Shaughnessy: I invested very early in stability AI, a generative AI company that is very speculative. If I'd had LPs, would they have questioned that? Of course, they would! The idea, and by the way, I'm not saying I will be right or wrong.

I could crash and burn on a lot of these things. And that's the other thing, right? It allows me, by not having others, I don't have to be a fiduciary. 

Chris Powers: Why did you do Stability AI? Which is turning out to be super interesting. But, was there early on when you looked at it, what was so crazy about it that most people maybe would have stayed away from, or maybe it just wouldn't have made it through the typical venture investment committee?

Jim O'Shaughnessy: Several things. I have been interested in machine learning and AI for a long time because it's the next frontier for Quant and stability. AI did something quite extraordinary and was the starting gun for all you've seen over the last year of all the developments in AI; they open-sourced a general a stable diffusion model with its weights.

And I don't want to get nerdy here, but for the most part, if you try to use AI, you don't get the weights. Those are the secret sauce. If you open source a model with the weights, every creator in the world can use that model in a different thing to build something new and different. And so what happened afterward, I invested in August of last year, and I knew they would be open-sourcing it. My thesis was this is going to be dropping a boulder in a still pond because my thesis was look, one of the problems people have is that I know what's right. You need to figure out what's right. I'm the one who should control this, not you.

I have a much more generative idea: there are so many talented people out there that I had no idea about right now. I couldn't find them, even with all of the global connectivity. And so my thesis was what's going to happen is a bunch of incredible Use cases are going to be found that nobody had thought of in the past.

That's why I think open source; that's why Linux runs the web as open source. It's open source because of cognitive diversity. I think differently than the fellow over there. What you want is you want as much cognitive diversity because there's a great quote; I am trying to remember who it is. Still, it was like, No matter how intelligent a human being is, no matter how clever, no matter how insightful, you can never ask that human being to make a list of things that would never occur to them, right?

And so they occur to other people. And, when I made that investment, if I'd had LPs And gave him that pitch, they'd be like, can I have my money back, Jim? You're batshit crazy, man. So the more formal way of looking at it is it's the agent's principal problem, right? Most people who work at a venture firm need to invest their capital. They must have a fiduciary mindset; I tried it, but I can't escape mine, proper?

Because I did it for so long, I only have to be a fiduciary. I'm the only one I get to blame, but if I'm thinking about it in terms of Ooh, could a prudent person make this? And there's a thing on Wall Street called the prudent man rule. Now it's been expanded, prudent man rule used to prohibit investing in equities, which was insane, but we learned, right?

And then we expanded it. So the agent-principal problem is, there are so many levels of it because if I'm a young guy or gal at a VC and I got my shot, what do I want to do? I want to impress the senior partners; I want to make a partner; I want to do all those things. So what am I going to do?

I won't take anything that looks or smells risky, crazy, etc. Now, we invest in many not-crazy things, Capital Camp. That's my friend, Brent; we have a significant investment in permanent equity because it makes sense to us, so it's not wild. But we can push further down the curve on the real venture side. That's where all the cool stuff is going to happen anyway. And the more profound the discovery, the more obvious it appears afterward. And so what we have the privilege of being able to do is if we gain a conviction, we pull the trigger. 

Chris Powers: I'll end it on this. If OSV succeeds and we're doing this 30 years from now, looking back.

And you talked at the very beginning; you'll be taking notes in your journal, and themes will have occurred. What will have happened? What does success look like in all this? Because this is the new frontier. There isn't evidence that many of these things will work. You came from a world with a lot of evidence.

The evidence might be that humans are humans, and we can judge based on that. But we're heading into what you called the significant reshuffle. What will success look like 10, 20, 30 years from now? 

Jim O'Shaughnessy: Great question. So everything that OSV has done has been a winning outcome.

In other words, it's not a scarcity world. It's an abundant world where everyone we interact with, fund, employ, or work in touch with. It is better for our interaction than worse off, which can mean many things. We can look at the world of investment. Everyone we fund, succeed or fail, is better because they work with us.

And then they learned so much that they funded another company we invested in together. That grew into the next Apple or the next Nvidia, right? That's unbelievable. That's not going to happen.

Chris Powers: You never know.

Jim O'Shaughnessy: You never know, and then what else will success look like?

All those fellows are going to be recognized. They're going to get jobs that they couldn't have gotten. They're going to get found companies that they couldn't have found it. And we're trying to push the world and humanity forward. That sounds very romantic, but we're trying to do it very pragmatically.

Films hopefully, you'll see a bunch of movies that the big movie companies would never make. So, you're a fan of Rudy. 

Chris Powers: Oh, love Rudy. 

Jim O'Shaughnessy: Okay, so do I, and how come we're not making Rudy's anymore? How come we're not making movies that inspire? The movie about David, Dr. David Rooney will inspire many people because he's inspirational. And we can do it because we have a different underlying formula for making that movie. What else can happen out of that? Some graduates from NYU film school 24 might get to film a movie. Do you know how rare that is?

It rarely happens. So if we get overly focused on Jim, what if the movie doesn't make any money? Okay. A movie doesn't make any money. That director might have just gotten the opportunity of a lifetime and put their career in hyperdrive. They usually would only get a chance to direct a movie once they paid their dues and joined the director's guild; all of those things we can negate.

And we can do that in our investments; we can do that in the movies we make, the podcast, the YouTubes, and the sub stacks we fund and partner with. And it's just exhilarating, so that's what success looks like. 

Chris Powers: Jim, this has been one of my most fun conversations. And, like I said at the beginning, getting to research and learn more about you was a real treat.

I appreciate you doing today's episode with me. 

Jim O'Shaughnessy: Chris, thank you for having me on; I also enjoyed the conversation. It's a win-win.