Jacob Rubin, Philosophy Capital Management – I’ve Learned In This Business, You Want To Be Successful And Justify Charging A Fee, You Swing The Bat | #295

Episode Summary

Executive Summary: Jacob Rubin, founder of Philosophy Capital Management, discusses his journey from a conventional path to value and distressed credit investing, emphasizing contrarian thinking, pattern recognition, and finding market inefficiencies. He shares case studies like Loral and Danaos, explains his short-selling approach, and highlights the importance of hidden assets and free options. The conversation covers his investment philosophy, portfolio construction, and the current value vs. growth debate.

Main Topics: Investment Philosophy and Background (Priority: 5/5): Jacob Rubin's transition from a traditional finance career to value investing, influenced by mentors like Jerome Simon at Lone Star Capital. He emphasizes contrarian thinking, pattern recognition, and focusing on market inefficiencies. Case Studies: Loral and Danaos (Priority: 5/5): Detailed analysis of Loral (a holdco with hidden spectrum assets) and Danaos (a Greek shipper with high free cash flow yield). These examples illustrate the 'free option' pattern where hidden assets provide asymmetric upside. Short Selling Strategy (Priority: 4/5): Rubin's approach to shorting, focusing on structural themes, avoiding frauds, and using stop-losses. He discusses the challenges of shorting, including management manipulation and squeezes. Portfolio Construction and Risk Management (Priority: 4/5): The fund holds about 35 longs and 35 shorts, with position sizing limits (max 10% long, 2.5% short). Rubin emphasizes dynamic adjustment, stop-losses, and avoiding ego-driven decisions. Value vs. Growth and Macro Outlook (Priority: 3/5): Discussion on the potential regime shift from growth to value, driven by inflation risks and reopening. Rubin notes the historical underperformance of value and the possibility of a sustained reversal. Lessons from Mistakes (Priority: 3/5): Rubin shares a painful short on Atlas Air, highlighting the importance of understanding contractual business and management trust. He emphasizes learning from failures and avoiding stubbornness.

Key Arguments: Value investing requires finding market inefficiencies in areas like technical mandates, emotional avoidance, or complexity. Pattern recognition and a network are crucial for uncovering hidden assets and free options. Short selling is fundamentally different from long investing, requiring smaller positions and strict risk management. The current macro environment (inflation, money printing) favors value over growth, with potential for a sustained regime shift. Investors should focus on asymmetric upside (multi-baggers) rather than concentration for outperformance.

Data Points: Fund inception: April 1, 2020 - Philosophy Capital Management launched on April Fools' Day, reflecting Rubin's contrarian nature. Portfolio size: 35 longs and 35 shorts - Rubin manages a concentrated portfolio with many related positions. Position size limits: Max 10% long at cost, 2.5% short - Rubin uses strict position sizing to manage risk, with automatic trimming at 15%. Loral price target: $141 - Rubin's probability-weighted NPV target for Loral, based on spectrum and LEO opportunities. Value underperformance: -50% trailing - As of mid-2020, small-cap value had underperformed large-cap growth by 50%, a historical extreme. Danaos free cash flow yield: 100%+ - When Rubin found Danaos, it was trading at less than 1x PE with massive free cash flow yield.

Pivotal Quotes: "If you can recognize the patterns, but you're not wired to get into the burning building, and most people aren't, then the pattern won't help." — Jacob Rubin: Rubin explains the combination of pattern recognition and contrarian courage needed for successful value investing. "Our way of outperforming is our things are so mispricing. If it's not 100% upside, we don't look at it." — Jacob Rubin: Rubin emphasizes the need for asymmetric upside in his investments, targeting multi-baggers rather than small gains. "Ego gets tied up and all the work you did. You have a sunk cost in the work, advocacy bias and wanting to think you're right. Get rid of all of it, cover, move on. Your job's to make money." — Jacob Rubin: Rubin shares a lesson from Jerome Simon on the importance of emotional detachment in short selling.

Implications: For investors, the podcast underscores the value of contrarian thinking, deep due diligence, and focusing on market inefficiencies. The potential regime shift from growth to value suggests rebalancing portfolios toward free cash flow and hidden assets. Rubin's approach highlights the importance of risk management and learning from mistakes.