Invest Like the Best with Patrick O'Shaughnessy
Cliff Sosin - Investing in Carvana - [Invest Like the Best, EP.421]
Tue, 29 Apr 2025
My guest today is Cliff Sosin. Cliff is the founder of CAS Investment Partners, a fund he started with $5 million in 2012 and has grown to $1.7 billion as of the last reported numbers at the end of 2024. At the time, CAS had only four positions. This conversation is different to our typical episodes. We start by talking about Cliff's investing philosophy but the bulk of this long discussion is a case study into his remarkable investment in Carvana. Cliff is one of the biggest investors in the business, which had a market cap over $60 billion in 2021, then fell 99%, survived, and now has a market cap approaching $50 billion again. While I hosted Carvana's CEO, Ernie Garcia, last year to get the inside perspective on managing through such turbulence, today we hear the investor's side of this extraordinary story. It is a singular episode and there are so many lessons in this rare opportunity to hear a major investor describe his decision-making process at every stage of the journey. Please enjoy my great conversation with Cliff Sosin. For the full show notes, transcript, and links to mentioned content, check out the episode page here. ----- This episode is brought to you by Ramp. Ramp’s mission is to help companies manage their spend in a way that reduces expenses and frees up time for teams to work on more valuable projects. Go to Ramp.com/invest to sign up for free and get a $250 welcome bonus. – This episode is brought to you by Ridgeline. Ridgeline has built a complete, real-time, modern operating system for investment managers. It handles trading, portfolio management, compliance, customer reporting, and much more through an all-in-one real-time cloud platform. Head to ridgelineapps.com to learn more about the platform. – This episode is brought to you by AlphaSense. AlphaSense has completely transformed the research process with cutting-edge AI technology and a vast collection of top-tier, reliable business content. Invest Like the Best listeners can get a free trial now at Alpha-Sense.com/Invest and experience firsthand how AlphaSense and Tegus help you make smarter decisions faster. ----- Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com). Show Notes: (00:00:00) Welcome to Invest Like the Best (00:05:32) Early Career and Discovering Investing (00:06:49) Starting the Firm and Initial Challenges (00:08:41) Investment Philosophy and Market Realities (00:11:07) Building the Firm and Investor Relations (00:12:23) Defining a Good Business (00:17:31) Contained vs. Uncontained Businesses (00:20:30) Mental Models and Market Insights (00:35:13) The Role of ESG in Investing (00:39:26) The Carvana Investment Story (00:46:43) Carvana's Real Estate and Logistics Network (00:49:12) Reconditioning and Selling Cars (00:50:16) Carvana's Financing and Customer Service (00:51:43) Economies of Scale and Trust (00:54:40) Challenges and Management Insights (01:04:07) Operational Issues and Market Challenges (01:23:56) Questioning Carvana's Sales Strategy (01:24:17) The Role of Word of Mouth in Carvana's Growth (01:25:28) Identifying Early Adopters (01:26:00) The Impact of Market Conditions on Carvana (01:27:10) Carvana's Operational Challenges (01:28:10) Cutting Costs and Organizational Efficiency (01:32:19) The Apollo Deal and Debt Restructuring (01:39:21) The Psychological Toll of Investment (01:50:16) Future Investment Strategies and AI (01:54:48)The US Market and Investment Opportunities (01:59:51) The Kindest Thing Anyone Has Ever Done For Cliff
Chapter 1: What is Cliff Sosin's investment philosophy?
Something I speak about frequently on Invest Like the Best is the idea of life's work. A more fun way to think about it is that I'm looking for maniacs on a mission. This is the basis for our investment firm, Positive Sum, and it's the reason why I'm so enthusiastic about our presenting sponsor, Ramp.
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Chapter 2: How did Cliff Sosin start his investment firm?
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Ridgeline has created a comprehensive cloud platform that handles everything in real time, from trading and portfolio management to compliance and client reporting. It's worth reaching out to Ridgeline to see what the experience can be like with a single platform. Visit RidgelineApps.com to schedule a demo. Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best.
This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. If you enjoy these conversations and want to go deeper, check out Colossus Review, our quarterly publication with in-depth profiles of the people shaping business and investing.
You can find Colossus Review along with all of our podcasts at joincolossus.com.
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Chapter 3: What are the key elements of Carvana's business model?
So I launched with $5.2 million. The old-fashioned way. It was $2 million from me because I'd been successful at UBS and they'd paid me. I like to joke it was a lot for post-crisis, not a lot pre-crisis. And I also got $2 million from my mom. She was a sympathetic audience. I had one million from a friend and it was, at the end you always ask people who they're most grateful to.
I had two in mind and he's one of them. I'd known him for years and we talked and he's a very successful person and I had this meeting, it was like my second marketing meeting ever and I sit down and he basically is like, I'm absolutely gonna give you my dollars, no problem. And I was like, wow, this is gonna go great. The next time I saw a check like that, you know, it was years.
And then it was a couple hundred thousand from some other people that I knew. Started with that. And, you know, over the years was sort of able to kind of steadily bring in a little bit of money here and there and compound and was fortunate. You know, I've had up years, I'd have down years. If you changed the order of the years, get to the same place.
But I definitely wouldn't have raised any money. So there's also a meaningful component of luck.
And where does that bring us today? So how many investors do you have? What's kind of the capital base? Like, how do you think about the firm today?
So I don't remember exactly how many investors we have. It's sort of between one and 200 across a few different vehicles. And the firm moves around every day, but sort of between a billion and a half, too.
What is your view of investing in markets? Like, describe how you think it is supposed to be done in some detail.
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Chapter 4: What challenges did Carvana face and how did they overcome them?
The premise was always... You know, let's find a handful of businesses that are publicly traded where I can buy a piece of that business in the markets and own it with a premise of owning it forever. And then own it until basically I find something that I can upgrade that I think is even better. Or I discover that I've misunderstood the business in the first place.
And so there's two ways out of the portfolio. One is that the gap between what I think – I find something better so I can upgrade. Or the other one is that I have some view as to what makes a business successful. You can think about like a mental model of kind of how the business is competing and winning in the ecosystem. And that makes predictions about the world.
And then you get real-world data and you can compare the real-world data to – to what your predictions of your mental models are. And if you discover that your predictions aren't lining up, then you need to update your role to model. And it might be that you need to throw it out. And at some point you sort of realize you don't know which way is up anymore.
And then that would be an investment that you would jettison because you just no longer know. Over time, We've sort of had kind of between like, we'll call it four and eight. It might have been as many as 10 at one point, but that's kind of the number of investments. We tend to, over the course of time I've been investing, I think on average, I've sort of bought and or sold one thing a year.
It's a pretty sort of lethargic pace of turnover. It's this idea that like businesses compete and win in certain ways. There's sort of a minority of investors. businesses that, you know, once you sort of figure them out, like you can just tell, like they're going to be very successful relative to other similarly priced businesses.
And so, and we can talk, there's a lot of like mental models and stuff, like ways that I think businesses can be sort of a taxonomy of businesses that I've sort of think about. But those are just, you know, my ways of understanding a really complicated world and sort of trying to find a few things that work.
Yeah. So I guess like the obvious and very simple, but very big question is like, what is a good business? Like what is that taxonomy? Maybe this is the time to talk about one of my favorite ideas of yours that you like businesses you described as contained. I've always liked that description when we've talked about companies. Yeah, give us your kind of view on what makes a good business.
If you think about it, in most markets, you shouldn't have a lot of profits, right? Like profits are kind of a fluke of some sort of something about the setup that makes it so that some reason why competitive forces can't drive economic profits to zero. And those reasons, I mean, there's sort of a lot of them.
And in terms of how to think about them, I gather different examples from sort of microeconomics, from psychology, from business history, to try to understand different ways that companies have carved out a piece of the world where they are advantaged. And then they can, you know, you can think about a company's profitability over time as kind of its market opportunity times its advantage.
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Chapter 5: What is the significance of trust in Carvana's customer experience?
What makes that interesting is that it turns out that the strength of these secondary reinforcers is proportionate to the power of the stimulus, as well as it's proportionate to the... inversely proportionate to the time lag between when the stimulus comes and when the pleasure sensors get stimulated.
So if something makes you feel good three hours after you got it, your brain kind of doesn't know where it came from. If something makes you feel good within a moment of when you got it, then your brain knows exactly. And what's interesting about that is this is called secondary reinforcers because you create these associations
between the stimulus and other things that are in the context that it was received. So you can make rats prefer cocaine that's given to them with a certain color light. They'll continue to seek out that light even when you deprive them of the cocaine. Okay, cool. That's a neat thing to know about the human brain. Where do I see that applied? Well, if I were to rank
by margins, the consumer packaged goods industries, I think the ranking might look something like this. You'd have the nicotine cigarettes at the top, and then you'd have like dip, and then you'd probably have Coca-Cola, and then you'd probably have coffee, and then you'd probably somewhere have like
candy and then you'd have like sugary sweets like um uh you know cookies and stuff like that and then you'd have like tomato sauce and bread and then you'd have i don't know water right something like that it's probably a rough like ranking well it turns out that if you go down that same list and you ask, what is stimulating people's pleasure systems?
Well, in the case of nicotine inhaled through a cigarette or a vaping product, nicotine is incredibly powerful. And the respiratory system is a very fast delivery mechanism. So you get this very rapid stimulation of people's pleasure sensors. And lo and behold, it creates these very strong secondary reinforcers, which make people very brand low.
If you ever watch smokers, they're not only smoking the same brand, they're smoking at the same time in the same place every day. It also helps that nicotine is addictive, which creates a trigger for a habit, which is a whole other brain function piece where you're kind of making and following habits.
You know, if you go down the list, caffeine is a good stimulator, but, you know, it's not as potent necessarily as nicotine. More importantly, you're taking it through your stomach. And by the way, dip goes through your lips. So it's pretty fast, but not as fast as cigarettes. Caffeine soda has sugar and caffeine.
It goes through your stomach, so it's slower, but it still creates a fair bit of, the association isn't that far apart. Then you get to things like cookies. The cookies mix with fat and stuff, so it slows it down. The sugar's mixed with fat and stuff, so it slows it down even more, but it's still pretty potent. It's obviously a sweet.
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Chapter 6: How do economies of scale and scope apply to Carvana?
And I'm going to own a lot of this, provided everything they just said is true. But obviously, that's not how reality works in the sense that the reason why I felt like that was years and years and years of context. And so to go further back, over the prior years for, you know, like when you're in my business, you're waiting for your stocks to go up.
In the meantime, you're sort of looking at other things. And so I had spent time studying CarMax and I had spent time studying car dealerships. So I was sort of reasonably fluent in kind of how the auto retailing business works. I'd also been involved in the auto lending business. I'd been involved in credit acceptance, which is a one on auto lender.
I'd also, you know, looked obviously who hasn't like studied Amazon and like read the everything store. I'd also studied logistics companies. And I'd also looked at, you know, manufacturing companies and all the rest and software companies. And so it turns out that Carvana is like all of these things. As they were explaining the business, it was clear to me that the
The economic advantages that allow someone to build a successful distribution company or a successful retailer or a successful lender, all of them have economies of scale, skill, and trust. And what Carvana was building was going to involve all of the advantages from all of these different businesses that they're effectively in at the same time. And this is called economies of scope.
And by being great at all of these things, it was going to produce this very – it could produce this very big moat. What I didn't believe necessarily until I saw that video was that anyone would buy a car on the internet because that was just common wisdom. And at the time, this is a while ago. This is before it was obvious. But they just had some cohort curves. And I was like, well –
People clearly love this. And so at that point, it was kind of like love at first sight. Maybe to sort of explain a bit about the business and why I think it's so... The things I identified turned into the tremendous advantages it has today. and are kind of the moat. So let me just spend a few minutes. So at the core, the way the Carvana system works, it will follow a car.
Carvana buy cars mostly from the public. You take a picture of your license plate and you enter a few things and it's like four questions and they'll give you a price. You can exercise it or not, you have seven days. Once you do that, you can arrange for someone to pick up the car for a small fee, or you can drop it off at one of their hubs and get your money. And the transaction takes no time.
Everyone gives them five stars. Doing that's hard.
What I just said, it sounds so simple, but actually being able to take a license plate, to map it to a VIN, to map all the features of the car's VIN, to then be able to figure out what you think you're going to be able to sell that car for, how much it's going to cost to ship it, how much it's going to cost to recondition it, and be able to work out from all that, therefore, what you think you're going to be able to make on the car, and then to figure out what you want to offer in order to maximize the profits from this lead.
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Chapter 7: How does management influence investment decisions?
And like, you know, there's sort of an interesting point, which is like if you'd asked me why I owned so much Carvana back when it traded for like 300 back in 2021, I would have said this is an incredibly stout business. People do not appreciate how stout this business is. And in retrospect, I was right.
The world threw three once-in-a-generation curveballs at these guys at the same time while they were having all kinds of internal problems that don't happen that often. And they added debt and whatever at the same time. And they did it. They got through it. So it turns out it really was that stout. But had it not been that stout, had these sort of advantages been –
If this business all grown up and super great was a 5% margin business and not like a 13 or 14% margin business, I'm not sure they'd have had the wherewithal to make it. So I have a greater, like my sort of just my reaction to companies where, yeah, like it works, but there's just consumer surplus isn't that much and the advantage isn't that big, but like pencils, it's just kind of like move on.
Has it made you think any differently about your appetite for concentration. Just like I think of that old quote, like the only rational deployment of our ignorance is diversification.
Yeah.
And that like, it's not ignorance so much. It's just like the Navy Federal Credit Union factor. Like that stuff happens in the world and a simple way to protect against that, you know, the idiosyncratic math of like, whatever, at 15 positions, the risks all gone. And like, why not have 15 positions instead of five? Like, has it made you re-question That stuff?
Obviously, your portfolio is the answer to this question. So maybe the answer is no. But curious what you think.
It's made me re-question that. Well, I think on the one hand, you know, one of the things that I have said to people who've asked me about this is sort of like the lessons from this period are... important, but it's a teaspoon of medicine, not the whole bottle. So on the margin, I'm less interested in loss-making companies, but I'm not excluding them.
On the margin, I think there's probably room to be a little more diversified. But, you know, like we've had a lot of success over the whole history of the fund up to through and including, you know, this period, that success was because of how we did things. And if I were to
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