Steve Mandel - Investing Behind Change - [Invest Like the Best, EP. 235]

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At a Glance

This episode's guest is Steve Mandel, founder of Lone Pine Capital. He reviews the evolution of the investment industry from the 1980s to the present day. His core argument is: The golden age of generating alpha through short selling is over, and while the long-term efficacy of "investing in change" remains unchanged, the difficulty of execution has increased significantly due to heightened competition and elevated valuations.

Structural Shifts in the Investment World: Information, Competition, and Short Selling

Steve Mandel argues that the rules of the game in the investment industry have fundamentally changed, particularly regarding the speed of information dissemination and the competitive landscape of short selling.

• Democratization of Information and the Disappearance of Edges: Mandel describes an era of extreme information asymmetry, using his experience tracking Walmart in the 1980s as an example. At that time, earnings were released during trading hours. Analysts had to retrieve data via teletype machines, then call the CFO for details, and finally publish reports through the Goldman Sachs system. This information gap constituted a significant competitive advantage. Today, "we have 1.8 billion tracking services that tell you what sales were this morning." The acceleration of information dissemination has greatly compressed the space for short-term arbitrage based on information advantages.
• Structural Deterioration of the Short Selling Market: Mandel clearly states that the status of short selling as a source of alpha is not what it used to be. He recalls that during the internet bubble of the late 1990s, shorting companies like OnSale (whose business model was reselling obsolete computers, burning $20 million per quarter) was painful (the stock rose from $12 to $108 in six weeks), but at least executable. Today, when a similar company appears, "borrow costs immediately spike to absurd levels, and the borrow is very limited." He attributes this to two factors: first, the ultra-low interest rates of the post-financial crisis era changed the P&L dynamics of shorting; second, the rise of multi-strategy platforms like Millennium and Citadel brought "hundreds or thousands of trading units competing every day," making the short selling market extremely crowded and efficient.

Investing in Change: From Retail to the Payments Paradigm

Mandel emphasizes that Lone Pine's core strategy has always been "investing in change," but identifying trends with genuine long-term viability is key.

• The Lifecycle of Change: Mandel points out that not all changes are worth investing in. Some changes have a short lifecycle. For example, the early wireless communications industry, after a period of high growth and M&A consolidation, eventually devolved into a "commodity business." Lone Pine has not invested in it for over 15 years. Other changes have a much longer runway, such as the payments sector, where "the shift from cash and checks to digital payments has been underway for a quarter of a century and still has a long way to go."
• The Essence of Retail and the Power of Culture: Mandel's background in retail has shaped his unique investment perspective, placing extreme importance on corporate culture. He uses Walmart founder Sam Walton as an example, describing his ability to remember the names of roughly 100,000 employees and his leadership in motivating the team through Saturday morning meetings. He believes a good culture "creates a win-win for employees, customers, suppliers, and shareholders," citing Costco as a model. He warns that a bad culture involves "squeezing suppliers, landlords, and customers." While this model can succeed in the short term, it will eventually backfire.
• Getting Under the Hood of a Business: Mandel believes the core skill of a great analyst is "getting under the hood of a business" to find the one or two key levers that drive it. Using UnitedHealthcare as an example, he notes that Wall Street still focuses on the short-term metric of the "medical loss ratio," but the company has long since transformed into a healthcare services and data company, and its core drivers have changed. He encourages analysts to identify and continuously track these truly key variables.

Software and Consumer: Opportunities and Challenges Amid High Valuations

Mandel holds a cautiously optimistic view on current investment opportunities in the software and consumer sectors, identifying valuation as the biggest challenge.

• Software's "Good" and "Expensive" Nature: Mandel acknowledges that software is an excellent business model, characterized by stickiness, pricing power, and the ability to benefit from customer growth. However, he also notes, "This hasn't been lost on investors. So valuation is a problem." He believes the barrier to entry in the software industry is not capital, but intellectual property and user habits. Therefore, investors must have a very high degree of certainty about a company's growth over the next several years to "make the math work."
• Community and Innovation in the Consumer Sector: Mandel observes profound changes in the consumer sector. Beyond the "offline to online" mega-trend, the ability to "build a community around a product" has become crucial. He praises Figs (a medical apparel brand), commending its founders for building a strong community around healthcare professionals through a direct-to-consumer model. He also speaks highly of payment innovations like ShopPay, finding its continuous iteration capabilities impressive.

Position Moves

Position	Guest's Stance	Key Data
Walmart	Positive Example	Founder Sam Walton could remember the names of roughly 100,000 employees; earnings were released via teletype in the 1980s.
Costco	Positive Example	Became a top seller of quality olive oil and nuts in the US by bypassing middlemen (e.g., Planters) and working directly with growers.
OnSale	Risk Warning (Short Example)	Stock rose from $12 to $108 in six weeks, later went bankrupt.
Books A Million	Risk Warning (Short Example)	Stock rose from $5 to $39 on the day it announced building a website.
Amazon	Positive Example	Revenue growth slowed to 9% in the quarter before launching Amazon Prime; Prime was initially priced at $79.95.
Netflix	Positive Example	Underwent two major transformations: from DVD-by-mail to streaming, and then to original content.
Figs	Positive Example	Built a community around healthcare professionals through a direct-to-consumer model.
UnitedHealthcare	Neutral (Analytical Framework)	Has transformed from a health insurance company into a healthcare services and data company, but the market remains overly focused on the "medical loss ratio."
ShopPay	Positive Example	Continuously iterates, providing an excellent user experience.

Judgments Worth Remembering

1. The Era of Alpha from Short Selling is Over (Steve Mandel): Short selling was once a major source of alpha, but due to low interest rates and competition from numerous multi-strategy platforms, it has become extremely difficult and expensive.

2. "Investing in Change" is a Long-Term Strategy, But Requires Distinguishing the Lifecycle of Change (Steve Mandel): Wireless communications was a short-cycle change, while payments is a long-cycle change. The key is to judge the sustainability of a trend and the room for innovation.

3. A Good Corporate Culture "Creates a Win-Win for All Stakeholders" (Steve Mandel): Using Costco as an example, treating employees, customers, and suppliers well ultimately benefits shareholders. A bad culture involves "squeezing everyone."

4. Great Analysts Must Be Able to Handle Probabilistic Questions in "Grey Areas" (Steve Mandel): Extremely intelligent but linear thinkers are not suited to be analysts because the investment world has no standard answers, only probabilities and outcomes.

5. "Getting Under the Hood of a Business" Means Finding the One or Two Key Levers That Drive It (Steve Mandel): Using UnitedHealthcare as an example, the market still focuses on the "medical loss ratio," but the company has transformed, and its core drivers have changed.

6. The Biggest Challenge for the Software Industry is Not Competition, But Valuation (Steve Mandel): Software is an excellent business model, but this is fully recognized by the market. Investors must have a very high degree of certainty about future growth to profit.

7. Amazon and Netflix are Excellent Case Studies for Researching a Company's "Massive Transformation" (Steve Mandel): Both made "bet-the-company" transformations (Amazon Prime, AWS; Netflix streaming, original content) when facing existential threats, ultimately creating enormous value.

8. The Global Poverty Rate Has Fallen to an All-Time Low, a Fundamental Change Driven by Technology (Steve Mandel): Despite negative news, technological development has lifted billions out of poverty over the past 30 years. This is one of the most important macro contexts for understanding the world today.