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WCM Investment Management | Insight | Beach Reads 8 - 18 | Welcome to Beach Reads. Some familiar topics appear in this edition, especially in the Technology section.

Beach Reads

August 18, 2020

Welcome to Beach Reads. Some familiar topics appear in this edition, especially in the Technology section. "TikTok and the Sorting Hat" puts a fascinating spin on the success of the app in the United States, while there are some great pieces in the Investment Philosophy section (have you heard of Nicholas Sleep?). The Retail category includes an inside look at Puma, and the Reflections section includes a collection of thought pieces with a focus on journalism. I haven't covered all the news in this edition, so to fill you in here's a good take on the Epic/ Apple news and an overview of recent USPS issues can be found here. The themes covered in this edition are:

  • TikTok tackles cultural barriers, regulating technology companies, and Nintendo's opportunity
  • Nicholas Sleep on Costco, Nicholas Train on COVID-19 demand pull-forward, and a review of Morgan Housel's new book
  • Puma's e-commerce strategy and an update on consumer loyalty
  • Reflections: Bill Gates on COVID and how to save journalism

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Conor Deveney



ABOUT Beach Reads

Welcome to Beach Reads, a collection of interesting links that we at WCM have come across and want to share. The goal of this publication is to engage with a broader audience in order to better ourselves and others. Feel free to email us at with any thoughts or feedback, and click here to subscribe!

01. Technology

TikTok and the Sorting Hat

This insightful analysis of the rise of TikTok by Eugene Wei decodes how an algorithm worked around significant cultural relevance barriers. In contrast to traditional social media growth and relevance, which are determined by social graphs and the actual (often physical) connections people have, TikTok de-emphasizes relationships to focus on shared interests elucidated by the algorithm. This transcends differences between eastern and western cultures. From Wei: "The rise of TikTok updated my thinking. It turns out that in some categories, a machine learning algorithm significantly responsive and accurate can pierce the veil of cultural ignorance. Today, sometimes culture can be abstracted." Wei marvels at the ByteDance/ TikTok algorithm's powerful ability to connect the right content to the right consumer: "It is a rapid, hyper-efficient matchmaker. Merely by watching some videos, and without having to follow or friend anyone, you can quickly train TikTok on what you like. In the two-sided entertainment network that is TikTok, the algorithm acts as a rapid, efficient market maker, connecting videos with the audiences they're destined to delight. The algorithm allows this to happen without an explicit follower graph." Past Beach Reads have talked about the value of demand versus supply aggregation, what it means to run a marketplace or platform, and how customer focus is an important growth driver. According to Wei, TikTok does a lot of each of these right. "In a two-sided entertainment marketplace, they provide creators on one side with unmatched video creation tools coupled with potential super-scaled distribution, and viewers on the other side with an endless stream of entertainment that gets more personalized with time. In doing so, TikTok, with a product team and infrastructure mostly located in China, came out of left field and became a player in the attention marketplace on the same playing fields around the world as giants like Facebook, Instagram, Snapchat, YouTube, and Netflix." With a rumored acquisition price around $30B, Wei thinks TikTok is a bargain and that more US tech companies should be bidding for what he sees as an incredibly high-quality asset.

Regulating Technology

In this post, Benedict Evans offers a two-prong argument for thinking about potential consequences when it comes to regulating tech megacaps. First, Evans advocates for a judicious, rather than reactive approach. "The move towards regulation has sometimes been accompanied by a moral panic, and a rush for easy answers. That's a lot of the appeal of a phrase like 'break them up!' - it has a comforting simplicity, but doesn't really give us a route to solutions. Indeed, 'break them up' reminds me a lot of 'Brexit' - it sounds simple until you ask questions. Break them up into what, and what problems would that solve?" Second, Evans points out that the global nature of technology companies creates previously unseen problems: "This really just scratches the surface of the complexity we might see, as companies used to thinking in terms of inherently borderless platforms collide with five or ten or fifty different regulators and governments around the world." And it only gets more complicated when you consider that traditional anti-trust measures may not apply, because technology has created new industries and new scale that never existed before (see the work of Tim Wu for more on this). Therefore, developing a proper framework for regulation should supersede some of the other issues associated with reactivity and multinationalism – and might even help ease those concerns.

Nintendo, Disney, and Cultural Determinism

A previous edition of Beach Reads included a thesis on Nintendo. This deep dive into the company by Matthew Ball largely (implicitly) agrees with the thesis while also casting doubt on Nintendo's ability to seize growth opportunities (a recent podcast with Matthew Ball can be found here). A core issue for Ball is the cadence of IP releases from the company: "Nintendo only makes games and sequels when they believe there is a sufficiently new and ambitious idea. This is why most AAA releases are tied to consoles — new hardware that unlocks new functionality — and why franchises like Super Mario will go from water-based play on GameCube to space-based play on Wii to hat-based play on the Switch. Lessons are only applied via remix." Releasing new IP alongside new hardware is only the tip of the spear in terms of the issues that Ball sees. In a world where content drops, micro transactions, and cross-platform play are critical, Nintendo has taken a different approach, which Ball sees as troublesome: "There is still a demand for high quality, packaged games like The Legend of Zelda, of course. But the biggest titles are built on creation and simulation, supported by marketplaces, mods and live services. There is nothing structurally preventing Nintendo from thriving here — again, millions would love to live in the worlds of Hyrule or Mushroom Kingdom — but the difficulty of transitioning to this new world can't be downplayed." Ideological and cultural hurdles thus far have prevented Nintendo from taking full advantage of its phenomenal IP - Ball suggests that M&A may help the company bolt-on expertise it is missing in critical areas (e.g. marketplaces). However, I'm curious if this is what makes Nintendo IP work: the company is perfectionist, perhaps to the chagrin of shareholders. But if it wasn't, would Nintendo be as popular and have the longevity it has now? I'm not sure.

02. Investment Philosophy

Another lesson from cult fundie Nicholas Sleep

Among those "in the know," the letters and writings of former Marathon Asset Management's former fund manager Nicholas Sleep are worth their weight in gold. Imagine them as a less discovered "Margin of Safety." Sleep's musings, from as long as 16 years ago, are back in the spotlight, in no small part because his work has proven to be so prescient. This Financial Times (another here) article highlights some of his thinking and features a link to a thesis he wrote on Costco in 2004. The FT puts this spin on the piece: "Sleep's pitch was just as much about the fact the market hadn't priced in Costco's 'perpetual growth' as much as it was about its customer-orientated business mode." Customer-orientated business strategies are fascinating and Sleep's focus on customer centricity reminds me of Benchmark General Partner Sarah Tavel's idea that customer happiness can be a moat source. Tools such as the Net Promoter Score can be helpful to a certain extent in gauging a company's customer focus (or at least perception), but I'm curious if anyone has any frameworks they use to better understand how well a company serves its customers. It tends to be a tough question to answer.

Lindsell Train - Fund manager interview with Nick Train

Lindsell Train's occasional thought pieces are insightful (recent example here) and I recently stumbled upon this video conference interview with the cofounder of the London-based asset manager, Nicholas Train, on long-term investing. Train believes that COVID has accelerated trends that were previously under way: "It's evident we're having this, to me rather extraordinary filmed discussion over this device right now. Probably inconceivable five years ago, this extraordinary acceleration in the adoption of digital products and services, that definitely is a result of the virus." The pull-forward of digital adoption, broadly speaking, is an investment theme that a number of managers have addressed, but does the trend continue when we eventually return to normal? How many of these new digital habits will stay? Train also has a suggestion for investors: do yoga. "That's become an increasingly valuable part of my life over the last 10 or 15 years," he says. "Yoga practice makes you a better person at virtually every level. I would say I'm definitely a better investor because of the yoga practice."

Do You Know the Difference Between Being Rich and Being Wealthy?

Morgan Housel, a recurring author featured on Beach Reads, wrote a book to be published next month called "The Psychology of Money." This WSJ review by famed financial author Jason Zweig praises Housel's writing, and this point resonated with me. "How, asks Mr. Housel, did a janitor 'with no college degree, no training, no background, no formal experience and no connections massively outperform' many professional investors? Investing isn't an IQ test; it's a test of character... Mr. Read [the janitor] could defer gratification and had no need to spend big so other people wouldn't think he was small. From such old-fashioned virtues great fortunes can be built." The anecdote illustrates perhaps the key takeaway of the book: "Many rich people aren't wealthy, Mr. Housel argues, because they feel the need to spend a lot of money to show others how rich they are. He defines the optimal savings level as 'the gap between your ego and your income.' Wealth consists in caring less about what others think about you and more about using your money to control how you spend your time."

03. Retail

Puma's Secret Sauce: Growth, Efficiency, and Adaptation

This podcast is a good look under the hood at athletic-equipment maker Puma. In the interview, the company's head of global e-commerce technology Dylan Valade describes how cultural and organizational evolution was necessary to more broadly embrace e-commerce. "If you're the change agent, you're traveling from the future and you need to come back in time and help everyone else realize that that something important is [sic]. And then based on that, you've got to be persuasive enough to say within the timeframe you've got to make a change or else." Under Valade's leadership, the "70-year-old wholesale distributor model" has evolved to meet the needs of today's increasingly digital customers. In terms of looking for companies that are or will undergo similar successful transformations, Valade suggests keeping an eye out for "the brands that have people in charge of their digital experience who also really have a strong foundation [in] databases, networking systems. [I'm] thinking they're going to be the ones that just outperform. So then regardless of what the disruption is, they'll be able to adopt it or assess that it's valuable or not. And that's a big part of what I'm asked to do at Puma is, is this a good idea?" Do you know of any brands that are transforming how they use data and customer engagement to improve their businesses?

What COVID-19 did to customer loyalty

COVID has driven significant changes in consumer spending habits. Not only has the medium changed (more e-commerce), but apparently loyalty is on the decline as well. According to this Retail Dive article, "more than 75% of consumers have tried new brands, places to shop or methods of shopping so far during the pandemic." This may be a bit unfair: the number one reason for trying new brands was because of an out-of-stock problem at the preferred retailer. What is more interesting is whether or not these were one-time purchases, or if the new retailer will earn preferred status. To this point, one contributor to the article offers a potential key to loyalty: "The emotional connection that drives not just repeat business, but loyal repeat business, is more important than ever." Therefore, retailer shifts could be longer-lasting if the new seller has strong content and fosters a relationship with the consumer.

04. Reflections

Bill Gates on Covid: Most US Tests are 'Completely Garbage'

Given the expertise and capital at the direction of Bill Gates, his interview on COVID with Wired Magazine is well worth a read. While he isn't happy with how things have gone thus far, especially in the US, he remains optimistic: "There's been trillions of dollars of economic damage done and a lot of debts, but the innovation pipeline on scaling up diagnostics, on new therapeutics, on vaccines is actually quite impressive. And that makes me feel like, for the rich world, we should largely be able to end this thing by the end of 2021, and for the world at large by the end of 2022. That is only because of the scale of the innovation that's taking place." While those dates still sound like the distant future, having some sort of timeline is soothing, as is the fact that treatments are improving. "We've had about a factor-of-two improvement in hospital outcomes already, and that's with just remdesivir and dexamethasone," Gates says. "These other things will be additive to that." We're far from through with COVID, but some green shoots appear to be emerging.

The Truth Is Paywalled But The Lies Are Free

Whether for good or ill, the internet gives power to individual voices so that people and groups that previously had no way to have their message heard can build audiences and share information for practically zero cost (more here). However, according to this article, much of the free information online is misinformation or at least influenced by the interests of private groups: "It's concerning that the Hoover Institute will freely give you Richard Epstein's infamous article downplaying the threat of coronavirus, but Isaac Chotiner's interview demolishing Epstein requires a monthly subscription, meaning that the lie is more accessible than its refutation." This poses real problems that can have ugly real world consequences. The author poses a number of solutions for "free" information, but ultimately this is a tricky issue (I don't agree with all of the author's suggestions). What I think is most important here is that in many cases, information creation (e.g. work published in academic journals) is largely funded by the public, but then sold back to the public. The author provides the following quote from a University of Johannesburg professor that explains this issue: "The costs of the research production are borne by the universities, and as a result, by public monies, in most cases. Then, private companies publish the research, and charge the universities and public institutions for the very research outputs that they paid for. This is effectively the subsidy of the private sector by public money. There is a myth that this is an example of entrepreneurialism. In my view, all it does is facilitate enrichment at public cost with huge consequences for those most disadvantaged." Fixing arbitrage opportunities such as the one outlined here is a good first step in making quality information more widely available. PS: Is anyone bothered by the fact that some articles featured in Beach Reads are paywalled? I don't have a great solution to this issue but I'm open to suggestions.

Can Killing Cookies Save Journalism?

Moving on from issues with free versus paywalled journalism, this piece from Wired Magazine examines the impact that using cookies - or not - may have on advertising revenue. The result is far from expected. When Dutch public broadcaster NPO - the "BBC of the Netherlands" - abandoned using cookies to track users on its website in January, ad revenue increased. "In January and February this year, NPO says, its digital ad revenue was up 62 percent and 79 percent, respectively, compared to last year." This is borderline unbelievable - the ad tech industry is massive (and horribly complex) and can consume 30% of advertising economics, according to this article. The author posits that one benefit of more profitable advertising may be more comprehensive journalism, in part by reducing the need to place content behind paywalls: "The future of digital publishing could be one in which a lot of money shifts back to the organizations producing the articles people want to read and the videos they want to watch. If advertisers start paying to appear in a certain context rather than to target a certain user, it will advantage publishers whose content is actually good—and put out of business the long tail of low-quality or outright fraudulent sites that currently soak up much of the money spent on automated programmatic advertising."


Disclaimer: To the extent that Beach Reads discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. The companies and or securities referenced and discussed do not constitute an offer nor recommendation to buy, sell or hold such security, and the information may not be current. The companies identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the companies identified was or will be profitable. Beach Reads does not constitute a recommendation or a statement of opinion, or a report of either of those things and does not, and is not intended, to take into account the particular investment objectives, financial conditions, or needs of individual clients.

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