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WCM Investment Management | Insight | Beach Reads - 1-06 | This week's installment is the first of 2020 - welcome to the new year! Today, we've compiled a group of articles heavy on the future of retail and on different investment approaches.
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Beach Reads

January 6, 2020

This week's installment is the first of 2020 - welcome to the new year! Today, we've compiled a group of articles heavy on the future of retail and on different investment approaches. Enjoy!

  • The first section highlights changes in the retail landscape that impact digital brands, brick and mortar retailers, and startups.
  • The second section features a podcast with the CEO of Amphenol
  • The third section has a number of fascinating articles on different approaches to investing, including thoughts on thesis creep, sales discipline, and diversity
  • The fourth section includes an article that examines the positives associated with bundling
  • The fifth section is composed of links about the human brain and human nature
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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 insights@wcminvest.com with any thoughts or feedback, and click here to subscribe!

01. How to Sell: Retail, e-commerce, and Startups

What Is the Future of Ecommerce? 10 Insights on the Evolution of an Industry

This blog post, from Shopify, highlights 10 trends that the author believes will define ecommerce in the coming years. I think his points on social, mobile, and content are particularly poignant. Specifically, the author's idea on how to use social to win customers is interesting: "Acquiring new customers is most effective through low-cost engagement campaigns that lead with (1) entertainment or emotion, (2) user-generated content, or (3) influencers and micro-influencers. Front load paid social with content meant to be consumed on social or 'branded' content that tells a story. Not only does it cost less to build an audience like this, but it’s also the reason people go on social in the first place." I think we should use a framework similar to this when analyzing retailers. Companies like LULU certainly seem to be getting a lot of this right.

How Instagram Changed the Way We Shop

Bloomberg had an article out last week that looked at Instagram's impact on consumerism and society. In hindsight, the last 10 years have proved the incredible influence Instagram has come to garner over many peoples' lives. This influence is at least in part economic: besides now being able to buy items directly off Instagram, the platform is responsible for many visual trends and the associated purchases (e.g. maternity photo shoots). From the article: "What Instagram did is change consumer culture. It turned shoppers into a performative swarm of shutterbugs presenting Clarendon-filtered (or maybe Juno-filtered?) versions of themselves and their surroundings to their followers. It changed not only how things are bought and sold, but why. When period-piece movies are someday made about the 2010s, the aesthetics used to evoke this decade — all-white kitchens, neon-colored foods, major sleeves — will be the ones that sparkled in Instagram’s onscreen world. Real life never looked quite so glossy." Do others think that Instagram will be nearly as relevant over the next 10 years? Why/why not?

In 2020, DTC brands will hit a revenue wall

This article from Modern Retail echoes some of the insights from the Shopify article above. In it, the author focuses on the increased cost of customer acquisition for DTC brands as platforms like Google and FB realize the pricing power they have on ads. From the article: "now that customer acquisition costs are going up, companies that relied solely on a few channels are beginning to see budgets dry up... What happens next isn’t quite clear. Companies that don’t have a solid value proposition and relied solely on quick and dirty digital marketing will likely hit some snags. Similarly, new CPG brands with a few solid products and raised a Series A or beyond will certainly feel VC pressure to grow. At the same time, other smaller brands that raised only a seed round will likely feel content staying right below the wall while figuring out other retail channels to stay sustainable." Does this mean that it is a good time to invest in the FMCG/CPG companies that have struggled thanks to startups?

Tech Startups Face New Investor Mandate: Profits Over Discounts

This article, from the WSJ, highlights investor concern over unprofitable startups. A number of recent IPOs point to business models that may not be sustainable without subsidies: see Uber. From the article: "Following a year of dismal performances from companies that were heavily subsidized by venture capital, investors and board members are pressuring companies to figure out a more profitable business model, tech deal makers and startup founders say. Investors want startups to become less dependent on raised capital to cover the cost of customer discounts." Despite this, I highly doubt that the "buy market share at a loss, hope for scale profitability" goes completely out of style.

02. Electronic Connectors: an Interview with Adam Norwitt, Amphenol CEO

The Interface: Adam Norwitt (CEO APH) Podcast

This is a solid podcast from The Interface that features Adam Norwitt, CEO of Amphenol. In the podcast, he covers his background, what Amphenol does, and highlights some interesting cultural nuggets. If you have some time and want to learn more about the company, give it a listen.

03. Investment Philosophy and Approach

The Wandering TRIP

I thought this was a solid thought piece from GreenWood Investors, a group I am unfamiliar with. In it, the author discusses thesis creep and what this really means for those of us that actively manage money. He makes a point that I tend to agree with: effectively, theses necessarily drift and this drift, or unpredicted events, often led to significant value creation or destruction. Therefore, the author is suggesting that thesis creep is not always a negative thing and that the concept seems a bit flawed. In his words: "If we’re going to hold a stock for multiple years, it’s hard to own something where the opportunities aren’t dynamically changing. But furthermore, we’ve witnessed over a shorter time horizon of just a year or two, it’s actually the developments which the market was least expecting that drive the stock returns. 'Of course,' this is true, we would say. Yet, we must also be humble enough to admit, we’re probably not going to be able to legally know that development before everyone else. That means by definition your returns are going to be driven by unexpected events and a changing thesis." What do others think of thesis creep?

The Art of (Not) Selling

Chuck Akre is out with another good thought piece on how to not sell and therefore enjoy the wonders of compounding. For many, this article may be a bit inflammatory. Just look at this quote: "we try to resist the temptation to sell (or trim, even) on the basis of valuation alone. We are unfazed when our businesses are quoted in the market at prices above what we would pay for them. It might be worth reading that last sentence again for emphasis." For someone my age, it is easy to believe this - stocks have effectively only gone one way during my career. However, I'm sure those that have been through rough times would balk at never selling some positions. What do you think? Another point I liked was Akre's focus on actually understanding a business and its advantages rather than the rest of the mumbo-jumbo most analysts concern themselves with: "We endeavor to look past the non-essential details. We want to identify the essence of each business’s competitive advantage. It is a challenging process but the rewards are worthwhile. We can far more easily assess the relevance of new business developments once we are armed with our understanding of what really matters and what does not." Why concern yourself with quarterly earnings if you don't even understand a business in the first place? I think that crafting a thesis around "competitive advantage" likely prevents massive shifts in theses that was described in the article above. But maybe not.

Meet Atlassian founder’s punk-rock portfolio manager

I enjoyed this article from the Financial Review that profiles Armina Rosenberg, manager of the the 6th richest Australian's wealth. This means Armina manages the money of Mike Cannon-Brookes, co-founder of Atlassian, through Grok Ventures. The article focuses on how Armina is an outlier in the financial industry, the challenges associated with this, and how it may improve the investment process. From Rosenberg: “The industry is definitely acknowledging there is a need for diversity of thought and opinion and thus diversity of background. People are now talking about how the more diversely informed you are, the better investor you are.” In addition to the focus on diversity, the article gives some insight into family offices and how the world's wealthiest people want their family offices managed. In this case, Cannon-Brookes' family offices invests in three buckets: 1) VC, 2) global equities, and 3) "stable." It is interesting - a lot of the public equities Grok Ventures holds are SaaS names we well know.

04. Economics and the Impact of Bundling

How bundling benefits sellers and buyers

An interesting and dated (2012) read about the value of bundling. It leans on economic theory around consumer surplus and dead weight losses, and argues that bundling adds value for both sellers and buyers. Here is an example (graphics included in the link) from the article: "By bundling channels, the cable company can charge each customer $11.70 ($13 discounted 10%) for the bundle, yielding combined revenue of $23.40. The consumer surplus would be $2 in the non-bundle and $2.60 in the bundle. Thus both buyers and sellers benefit from bundling." It seems counter intuitive: many of us would rather not have a bunch of the channels we have nor the land line + internet + cable bundles that are forced on us. I include this link because it may have implications on how we think about the "one stop shop" model and perhaps the durability of businesses that employ it.

05. Reflections

The Brain Maps Out Ideas and Memories Like Spaces

I've never sent anything out from Quanta Magazine before (supported by Ren Tech's Jim Simons) but I loved this article about how our brains map space and memory. While the research is still in its early stages, scientists believe that within our hippocampuses, space is encoded in hexagonal patterns that helps us navigate and understand where we are in space. From the article: "In the past few decades, research has shown that for at least two of our faculties, memory and navigation, those metaphors may have a physical basis in the brain. A small seahorse-shaped structure, the hippocampus, is essential to both those functions, and evidence has started to suggest that the same coding scheme — a grid-based form of representation — may underlie them." Beyond this, some researchers contend that this hexagonal mapping function may be how we encode memories, concepts, etc.: "The finding suggested that the brain processes trajectories through physical spaces and conceptual spaces in much the same way. Now, researchers including Behrens, Bellmund and neuroscientist Christian Doeller propose that all knowledge can be plotted this way, in terms of features of interest — that different objects, different experiences and different memories can be organized and traversed with the grid code." An important takeaway from this is that we may be able to improve how we learn, remember, and comprehend everything around us.

What is the function of the various brain waves?

Another link about brains - this one from Scientific American. The article is over 20 years old, but I imagine that little of the content is outdated. In the piece, the author details the four different human brain waves and what activities/states of being they are associated with. Most interesting to me were "theta" waves, where individuals experience creativity and free-flowing thought: "Individuals who do a lot of freeway driving often get good ideas during those periods when they are in theta. Individuals who run outdoors often are in the state of mental relaxation that is slower than alpha and when in theta, they are prone to a flow of ideas. This can also occur in the shower or tub or even while shaving or brushing your hair. It is a state where tasks become so automatic that you can mentally disengage from them. The ideation that can take place during the theta state is often free flow and occurs without censorship or guilt. It is typically a very positive mental state." I'd love to carve out time in my schedule to purposely enter a theta state - besides good ideas, I wouldn't be surprised to learn of other positive side effects.

Even 4-year-olds dislike freeloaders

This is a short article from Yale that summarizes a research paper published in Psychological Science. The takeaway is that humans loathe freeloaders - but with an important caveat: "Children as young as age 4 express dislike of and are willing to punish those who freeload off the work of other group members, a new Yale University study has found. But kids also make a clear distinction between those who freeload intentionally and those who have good reasons why they can’t contribute." An important potential finding here is that a sense of "fairness" may be part of human nature, rather than nurture.

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