Jason Karp – Opportunities in Public and Private Markets - [Invest Like the Best, EP.86]

Episode Summary

Executive Summary: Patrick O'Shaughnessy interviews Jason Karp on how public and private markets have changed, why value investing must adapt, and why health, wellness, and cannabis may be major long-duration opportunities. Karp argues that passive and quant flows have distorted public prices, private capital has surged, and disciplined investors must focus on growth, cash flows, and structural edge.

Main Topics: Public markets and the rise of non-fundamental flows (Priority: 5/5): Passive and quant trading now dominate, creating major gaps between price and business value. Private markets' appeal and risks (Priority: 5/5): Private assets avoid daily marks and panic, but crowded capital has pushed valuations higher. Value investing vs. deep value (Priority: 5/5): Karp argues deep value is largely dead; growing cash flows matter more than cheap multiples. Market evolution and durable edge (Priority: 4/5): Edge has shifted from information to analytics and structure, especially long holding periods. Health, wellness, and Hugh Kitchen/Hugh Products (Priority: 5/5): Karp built Hugh around strict food standards and sees a durable consumer shift toward transparency. Cannabis as an investable growth theme (Priority: 5/5): He views cannabis as safer than alcohol, medically useful, and likely to produce big winners and losers. Hiring and human capital (Priority: 4/5): He emphasizes intelligence, passion, emotional intelligence, and life experience over credentials alone.

Key Arguments: 90%+ of stock volume is now non-fundamental, weakening price discovery. Private markets reduce panic via no daily marks, attracting capital despite higher valuations. Deep value is mostly a trap because cheap stocks usually have something structurally wrong. Growth can offset valuation error because expanding cash flows compound quickly. Long-duration public investing works best when you can hold through 3-5 years of dislocation. Health-conscious consumers now demand transparency, not legacy brand trust. Cannabis is a cash-flowing industry, unlike crypto, and could see major public/private alpha. Structural edge now matters more than informational edge in crowded markets.

Data Points: Public market share of daily trading volume from fundamental discretionary managers: less than 10% - Karp says this is down from 40% to 50% about 10 years ago. Public market share of daily trading volume from fundamental discretionary managers (historical): 40 to 50 percent - He cites this as the level a decade earlier. Time for convergence between business fundamentals and stock price: three to five years - Karp's typical public-market investment horizon for dislocations. Private capital growth phase: last five to 10 years, particularly five years - He says private capital has surged across VC and slow-growth PE. CFA-related public/private market risk example: Uber down 20 to 30 percent - He contrasts public mark-to-market pain with private volatility being less visible. Deep value book references: 8,000 books - He cites a search on Amazon and Google as evidence of crowded value investing. Hedge fund count: over 10,000 - He contrasts this with only a few hundred hedge funds when he started. Number of public stocks: down by more than half - He says the number of listed companies has fallen over 20 years. Sell-side analysts relative to public stocks: at an all-time high as of the end of 17 - He uses this to show more competition and less edge. Hugh Kitchen daily traffic: between 1,000 and 1,500 people a day - Customer volume at the Union Square restaurant. Hugh Products retail footprint: over 1,600 stores today - Distribution footprint for the packaged-products business. Hugh Products expected footprint: about 2,500 by the end of the year - Projected store count expansion. Hugh Products revenue mix: 98% of our revenue is chocolate - Karp describes the current product mix. RX Bar acquisition price: $600 million - He cites Kellogg's purchase as an example of revenue-multiple acquisitions. RX Bar revenue: around $100 million - Industry estimate he says was heard at the time. Cannabis market size: $50 billion industry today - Karp's estimate of the overall cannabis market. Legal cannabis market size: $6 billion to $8 billion - He says only a fraction of the total market is legal. Canada legalization timing: July of 2018 - He notes Canada was set to legalize recreational cannabis nationwide. Type 2 diabetes reversal claim: most type 2 diabetes can actually be easily reversed - He ties this to diet and lifestyle changes. Public market example of earnings growth: at least 20% - He uses Facebook as an example of high earnings growth.

Pivotal Quotes: "I think the public market space, and again, depends on your time horizon, if your time horizon is five years plus, there's a very linear relationship between effort and outcome." — Jason Karp: On why duration matters in public investing. "The problem is with deep value investing today, as a broad category, is that the markets are pretty efficient now." — Jason Karp: On why classic deep value has become harder. "I prefer businesses that have cash flows than businesses where I'm just doing full. I mean, all crypto is greater full theory, just to be clear." — Jason Karp: On why cannabis is preferable to crypto as an investment theme.

Implications: Investors should update their process for a world of crowded public markets, rising private capital, and consumer-driven health shifts, while watching cannabis and wellness for durable long-duration opportunities.