Episode 56: Gavin Baker - Managing Partner of Atreides Management

Really excited to be here, Amir, and I have a lot of admiration for the hustle, man.

I grew up in Texas, which I think has shaped a lot of who I am. My parents really encouraged me and indulged me in all of my interests. Some of my earliest memories are loving illustrated books about ancient history — the Phoenicians, the Israelites, the Egyptians, the ancient Greeks, ancient Romans. I've had a lifelong interest in history. My parents were both attorneys, so I had a fortunate upbringing. Some of my fondest memories were going to a bookstore probably three times a month with an unlimited book budget; we might spend hours there. I was probably in my teens the first time I went to a family dinner without bringing a book to read. My parents would say I would ask, 'Is this a one-book dinner or a two-book dinner or three-book dinner?' I guess I wasn't reading very long books. I have a lot of gratitude to my parents. The other part of my childhood was spending most of the summer at my grandparents' house in the Texas Hill Country, which was really amazing. My parents might be there for two to two and a half weeks out of eight, but I was there with all my cousins. We slept on a screened-in porch and were encouraged to do whatever we wanted — hike in the hills, look for arrowheads, go fishing. It was a very free-range childhood. My grandfather also encouraged me to read, though he wasn't as encouraging of my hunting and fishing. He would say, 'Gavin, if you're loving that book, feel free to hang out at the house.' We called my grandmother Nanny. A signature memory: around two or three PM, Nanny would say to my grandfather, called Popo, 'David, I'm ready for my first gin and tonic.' We'd stay up all night with my grandfather trying to catch an armadillo with a high-powered rifle. It was a different childhood. I always loved games of skill and chance: Stratego, chess, later poker in college. I haven't played much poker as an adult. So that's kind of how I grew up. I was not a good student; I was an indifferent student. I found it hard to work hard on things that did not interest me, but I was very engaged in other things. Dungeons and Dragons was a big thing for me before high school. So I had an intellectual, free-range childhood but was a relatively indifferent student.

Sure. So first, Fidelity is an amazing place. If you're looking for a place to learn how to be an investor, I just don't think there is a better place. Because being a successful investor is about finding an investment philosophy and process that fits with your own unique emotional makeup such that you can be rational and wrong. It's different for everyone. Most people come in as value investors, but that's maybe not the right philosophy for a lot of people. At Fidelity you're exposed to every kind of investor imaginable, and you see people succeeding with very different philosophies, processes, approaches. As an analyst you have to learn how each PM thinks because your job is to service all of them. So it's an incredible place to begin your career and I feel so lucky. During college it never occurred to me that I wanted to be an investor. Rock climbing and skiing were the most important things. My plan was to graduate, live out of the back of a pickup truck, climb full-time, try to be a photographer and write the next great American novel, and work in the ski and river industry. My parents only asked two things: don't join a fraternity freshman year, and have one real internship. So I had an internship at DLJ in a retail brokerage. I started reading the research reports and was amazed. I realized investing is a game of skill and chance where the way you win is by intersecting the most thorough understanding of history with the most accurate understanding of the state of the world to form a differential opinion about what will happen next. I read Warren Buffett's letters twice, Market Wizards twice, taught myself accounting. I switched majors from English and history to history and economics. I had another internship in sell-side research covering EDA, Synopsys, Cadence. It was awesome. They initiated coverage on Wind River and I wrote the first draft. The internet was starting up and I was into The Motley Fool. I learned about ROIC. I then interviewed at Goldman Sachs, but they thought I wouldn't like the repetitive nature of investment banking. However, I got an offer to work with a legendary research analyst. Then friends told me about Fidelity and the recruiter Steve Calhoun. The offers from banks were exploding, but Calhoun told me not to worry. So I joined Fidelity. I went to the business bridge program at Tuck and then started covering cement and aggregates. That was incredible education in a commodity industry, understanding supply and demand. After three months, they moved me to semiconductors. In February 2000, I published a note using the supply-demand framework. I analyzed inventories: customer inventories and finished goods at all-time highs, semiconductor inventories at all-time highs, valuations never seen. I wrote that this was not consistent with the demand environment. Rajiv Call, my senior analyst, printed 50 copies and we visited every PM. That was formative. The two stocks I liked were Integrated Circuit Systems (run by Hock Tan) and Nvidia (run by Jensen Huang). Hock was a little intimidating to me, but Jensen was less so. It was obvious to me he was exceptional. Being exposed to him at such a young age really shaped me. Then they gave me large cap pharma. I got the sector call wrong and went from one of the most highly ranked analysts to the bottom. That was super formative. Going through something like that early is advantageous. Public equity is the biggest competitive set on Earth. To succeed you need resilience, tenacity, and you must love the game. I read A Wizard of Earthsea and it became a touchstone about arrogance. I also learned that having a hobby where you can improve a number is psychologically helpful; I lost weight and got into shape. Fidelity hired its first team of quants. I met with them for an hour or two every day for a year and learned quantitative risk management. That was incredibly lucky. Then they gave me tobacco. I had to call three litigation cases correctly or I thought I would be fired. I went to every trial, found clerks to help interpret, read thousands of pages. I got the stocks right. Then they gave me HBC and retail. I traveled to each of the BRICS once a year, which was incredible for learning about globalization. Retail was incredible. I was doing all my shopping at Amazon and asked retailers why they weren't investing in e-commerce. They said they didn't like the margins, but I saw it was the future. I learned from Tim Cohen the importance of deflationary vs inflationary goods and how the working capital cycle gives e-commerce a pricing advantage against retailers like Home Depot where goods don't deflate.

Tim Conneen taught me that. But you're just always learning these things at Fidelity. Then I covered telecom and those were the early days of smartphones. I was kind of the TMT analyst when the iPhone came out. I covered telecom and media. That was really exciting. And then from 2007 through 2021, I was essentially asked about the bubble in 90% of client meetings. The internet bubble and like Google, Meta, Amazon, and Apple – why would you? They were clearly in a bubble. And from the time I was first asked about a bubble and for the next 15 years, your performance as an allocator or fund manager really came down to whether we overweight or underweight the internet.

Yeah, let's go to AI, man.

So I actually think it's a very good question. There's a great book by Carlota Perez called 'Financial Capital and Technological Revolutions.' The conclusion from that book and the last 300-400 years of history is that anytime you get a truly revolutionary new technology, you always get a bubble. Financial markets get excited and correctly identify it as world-transforming. Then there is a breakdown of diversity of opinion, which fuels a bubble, leading to an overbuild, then a crash. A key distinction is whether that build-out is funded by debt or cash flows – that's critical for AI. We're obviously not in a valuation bubble – tech multiples are at the same level as five or six years ago and are now at a discount to staples. But are we in a capex bubble? The ROI on AI spend so far has been positive; we're in a temporary divot due to Blackwell being used for training. But with agentic AI here, the ROI will be very high. The market is worried about AI putting everyone out of jobs, yet the most AI-exposed mega caps are at attractive valuations. I think a true bubble is unlikely due to the deep scars of the internet bubble and the fundamental shortage of watts and wafers. TSMC is a bottleneck and they won't expand capacity as fast as the world wants. So I'm optimistic that watts, wafers, and the scars of the internet bubble will keep us from a bubble. I'm grateful every day. I'm a student of the science of happiness. I'm grateful to Michael Burry for making a credible bear case. AI, along with the colonization of the solar system, will be the most exciting things in my lifetime. Semiconductors are my first love – as AI eats the world, silicon will eat the world because AI is computationally intensive. Watts and wafers are everything. I remember the Tesla bus tour before lockup. Elon talked about why EVs are superior from first principles: the only car with deflationary core inputs, lower center of gravity, better handling, faster acceleration, safer. The survival rate of Teslas in high-speed collisions is much higher. They are safer, faster, handle better, have more storage, quieter. I've been following Nvidia closely for 25 years and Tesla for 15 years. For me, it's been an incredible pleasure.