Dan Sundheim - The Art of Public and Private Market Investing - [Invest Like the Best, EP.460]

Investor Dan Sundheim views LLMs as a hybrid business model. They resemble Netflix by spending heavily upfront on a fixed asset (the model) to be sold at high margins. They are like Spotify because their defensibility comes from personalizing a commoditized product, creating a sticky user experience that commands pricing power.

Dan Sundheim identifies a potential conflict with China over Taiwan's semiconductor dominance as the single biggest tail risk to the global economy. Since Taiwan produces over 90% of advanced chips, a disruption to this fragile supply chain would be catastrophic, potentially triggering an economic crisis on the scale of the Great Depression.

Dan Sundheim argues that the biggest threat to LLMs is not their addressable market, which is nearly infinite, but the temptation to pursue too many verticals at once. Spreading a fixed-cost asset (the model) is economically rational, but history shows that companies rarely succeed when they simultaneously attack consumer, enterprise, and science without a focused A-team.

While public markets have more participants, Dan Sundheim finds them less competitive for long-term investors. Many public market players focus on short-term, non-fundamental factors. In private markets, there are fewer investors, but they are all doing the same deep, long-term intrinsic value analysis, making it a different kind of competition.

Early in his career, Dan Sundheim wrote and posted a detailed short thesis on Orthodontic Centers of America to Value Investors Club. The analysis, which uncovered accounting fraud, caused the stock to crater and demonstrated his skill to the hedge fund industry, directly leading to his first major job offer.

Dan Sundheim uses a group chat to constantly share market thoughts with his portfolio founders. This practice fosters a persistent relationship, making founders feel connected even without direct calls. It also builds a valuable peer community for sharing insights and provides a form of 'group therapy' among leaders navigating similar challenges.

Today's markets are less efficient because the dominant players—passive funds, retail traders, and short-term quants—do not invest based on long-term fundamentals. This creates a significant arbitrage opportunity for investors who are willing to focus on a company's intrinsic value over a one- to three-year horizon, a timeframe now largely ignored.

Dan Sundheim defines the best businesses as those that are sustainable low-cost producers. Companies like SpaceX in launch or Costco in retail create a powerful positive feedback loop: lower costs drive more volume, which in turn drives costs even lower. This creates a more substantial and impenetrable moat than a temporary monopoly.

While AI will accelerate hyperscaler growth short-term, Dan Sundheim believes their business models will degrade. Their customer base will concentrate around a few LLMs who, once cash-flow positive, will likely in-source compute. This shift from a fragmented customer base to a concentrated one erodes the hyperscalers' pricing power and long-term defensibility.

During the GameStop crisis, Dan Sundheim's pivotal move was to personally face investors, against his team's advice. He admitted fault and transparently shifted his strategy from high-risk 'fireworks' to a more methodical 'singles and doubles' approach. This act of accountability was crucial for rebuilding trust, even if it meant a slower financial recovery.

When evaluating Anthropic, Dan Sundheim looked past product differentiation and pattern-matched CEO Dario Amodei's essays to Jeff Bezos's 1997 shareholder letter. He believes a founder's clarity of thought in written form is a powerful, often overlooked, signal of visionary leadership and future success, even when financials are unclear.