Cliff Sosin - Investing in Carvana - [Invest Like the Best, EP.421]

Episode Summary

Executive Summary: Patrick O’Shaughnessy interviews Cliff Sosin, founder of CAS Investment Partners, on his long-term, concentrated investing philosophy and the full Carvana saga: why he loved the business, how he understood its moat, what went wrong in 2022, and why he ultimately stayed with it through a 99% drawdown and recovery.

Main Topics: Cliff Sosin’s investing philosophy (Priority: 5/5): He favors concentrated, long-term ownership of businesses he can understand deeply. Contained businesses and mental models (Priority: 5/5): He seeks narrow, invariant advantage structures that can be modeled and tested over time. How he analyzes industries (Priority: 4/5): He uses economics and psychology frameworks like Cournot oligopoly and secondary reinforcers. Why Carvana looked exceptional (Priority: 5/5): He saw scale, scope, trust, and logistics advantages that could create a durable moat. The 2022 Carvana collapse (Priority: 5/5): Operational strain, demand decline, and credit-market distortion nearly broke the thesis. Decision-making under extreme volatility (Priority: 4/5): He describes doubt, stress, and the discipline of not overreacting while evidence evolved. Lessons and future investing changes (Priority: 4/5): He now weighs management and balance-sheet risk more heavily and is less eager on loss-makers.

Key Arguments: Long-term ownership works best when a business is contained and its economics are stable. Investing is about maximizing performance, not marketability; most firms prefer short feedback loops. Cournot-style markets can preserve profits when capacity is constrained, as in cruises and rentals. Brand loyalty can be explained by psychology: fast reward delivery creates strong secondary reinforcers. Carvana’s moat came from combined scale in retail, logistics, underwriting, and trust. The 2022 collapse reflected bad luck, operational immaturity, and a once-in-a-generation used-car shock. He bought more only after doing fresh underwriting and seeing operational green shoots. The business recovered because costs fell, rates normalized, and the platform’s economics proved real.

Data Points: Starting capital: $5.2 million - Cliff launched CAS Investment Partners with this amount in 2012. Firm size: between a billion and a half too - He described current firm assets as roughly this range. Investor count: between one and 200 - He estimated the firm has investors across several vehicles. Carvana market cap peak: over $60 billion - He referenced Carvana’s 2021 valuation peak. Carvana market cap recovery: approaching $50 billion again - He described the stock’s recovery after the crash. Expense review automation: 85% - This appears in the sponsor read for Ramp. Expense review accuracy: 99% - This appears in the sponsor read for Ramp. Company savings claim: 5% - This appears in the sponsor read for Ramp. Fund size after growth: $1.7 billion - The introduction describes CAS Investment Partners as now this size. Average investing turnover: one thing a year - He said he tends to buy/sell about one investment annually. Typical portfolio size: between like four and eight - He said the portfolio usually contains this many names. Carvana cars sold in 2021: 425,000 - He cited Carvana’s 2021 sales volume. Used vehicle market size: about 40 to 42 million cars a year - He discussed the normal annual used-car transaction market. Used vehicle market size in 2021: 39 and change - He said the market shrank versus normal levels. Used vehicle market trough: as low as 34 annualized - He said the market briefly fell to this level. Carvana growth: 45% to 50% year over year - He said recent growth had returned to this range. Average dealership margin: about 4.5 - He compared Carvana’s margins against traditional dealerships. Carvana margin multiple: 2.5 to 3x - He said Carvana’s EBITDA margins are this multiple of competitors. Customer price advantage: $500, $600 cheaper - He said Carvana sells comparable cars for this much less. Carvana review score: five stars - He noted customers give the transaction top ratings. Inspection/reconditioning center capacity: up to 40,000 cars a year - He described IRC throughput. Parking inventory at IRCs: 6,000, 7,000, 8,000 cars - He described the scale of IRC parking lots. Truck transport configuration: nine-car hauler - He repeatedly described the logistics system using these trucks. Average auto loan duration: about two years - He used this to justify two-year Treasury as a benchmark. Transaction scale in Connecticut: three quarters of all the inventory - He gave this as an illustrative example of local inventory concentration. Awareness rate: 80 percent - He said Carvana awareness was about this high in a market example. Referral importance: 70% - Survey respondents said a recommendation was somewhat or very important. Non-recommended buyers: one third - Only this share bought without friend/family recommendation. Poison pill threshold: over 5% - He explained the ownership threshold in Carvana’s defensive measure.

Pivotal Quotes: "One might naively think that the investing business is about maximizing performance. But it's not. It's about maximizing marketability." — Cliff Sosin: He explains why many hedge funds are structurally misaligned with his long-term approach. "I think investing is the emperor of activities in the sense that of intellectual activities." — Cliff Sosin: He argues investing is uniquely accountable and cognitively demanding. "It was the first and only time in my life where I, like, lost control of my inner monologue." — Cliff Sosin: He describes the psychological toll of the Carvana drawdown.

Implications: Cliff’s lesson is to demand wider moats, stronger balance sheets, and more humility about turnaround risk before underwriting future concentrated bets.