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WCM Investment Management | Insight | Beach Reads - 3-16 | Welcome to this week's edition of Beach Reads - I hope everyone is safe and healthy out there.
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Beach Reads

March 16, 2020

Welcome to this week's edition of Beach Reads - I hope everyone is safe and healthy out there. While it is nearly impossible to avoid coronavirus headlines, only one section in today's collection is focused on COVID-19, while the rest feature links about other topics. I particularly enjoyed the content in the "Investment Philosophy and Themes" and "Startups" sections, as well as the "zero trust information" link. I hope that these articles help get everyone through the new, unfamiliar work from home life. Enjoy!

  • The first section details the changing startup landscape, especially as it relates to DTC companies
  • The second section is about the recent problems at Boeing (which seem to be worsening)
  • The third section includes links to articles on the coronavirus 
  • The fourth section includes two good podcast links
  • The fifth section is composed of two links - one from Howard Marks, one from Matthew Ball - that cover investing ideas
  • The sixth section "Reflections," which features a link on leadership
Conor Deveney

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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. DTC Startups: Struggling

How Outdoor Voices, a Startup Darling, Imploded

This NYT expose shines a light on the dramatic changes that have occurred within Outdoor Voices over the past couple of months. Specifically, it details how the ex-CEO and founder, Tyler Haney, became frustrated with how outsiders that were brought in to help the company negatively impacted the ethos of the brand (specifically Mickey Drexler, former chairman of the company). From the article: "The shake-up has highlighted the generational friction that can arise between idealistic start-up founders, the employees they hire and the seasoned executives their companies often need for success. And it has added to questions about the viability of money-losing e-commerce start-ups, which have amassed piles of venture capital in recent years as they try to disrupt the markets for everything from toothbrushes to watches. In recent months, as investors have become more skeptical, the valuations of a number of these cash-burning 'direct to consumer' businesses, like the online mattress company Casper Sleep, have plummeted." While it sounds like Outdoor Voices experienced a bit of a perfect storm situation, many DTC companies are struggling today. Read below for more examples.

Why All the Warby Parker Clones Are Now Imploding

This article, from Medium, is a good overview of the current DTC landscape. In what has become an ever-clearer theme, the halcyon days of DTC startups are over. This article references the trials and tribulations of a number of once high-flying startups, beginning with Outdoor Voices. From the author: "Even before the Outdoor Voices revelation, the past few months have exposed major cracks in the DTC business model, as several high-profile, venture-backed DTC startups have struggled and others have completely closed their doors. The investors bankrolling these companies are discovering one thing in common — that most of their money is going to expensive and ever-rising customer acquisition costs (CAC) via Google, Facebook, and Instagram." One of the cofounders of Warby Parker shared their perspective on why this is: "It's never been easier or less expensive to start a business, but it's also never been harder to scale one." The strategy of spending money to acquire users and then turn a profit later down the road has fallen apart as many more mature startups have failed to become profitable. This may have been exacerbated by ample VC funding: "Perhaps the original mistake of the DTCs wasn't in their vision, but in their decision to take the venture capital in the first place. Now under pressure to grow even faster and at greater scale than they otherwise would have had to naturally, they are being confronted with what happens when growth slows down, the cash starts running out, and investors are expecting their returns." Tough times in DTC land.

Rockstar Energy Drink Founder Cashing Out For Nearly $4 Billion, Says The American Dream Is 'Alive And Well'

While not necessarily DTC related, this article from Forbes that details the sale of Rockstar Energy to Pepsi illustrates the success that some consumer brands can still achieve. The nearly $4B sale positions Weiner, CEO, well - but also positions Rockstar well: "Rockstar, which has had a distribution agreement with PepsiCo in North America since 2009, is currently sold in 30 countries around the world. Weiner says the deal with PepsiCo will help make the brand a 'global powerhouse." Curious to see what Pepsi can do with this business going forward.

02. Boeing's Woes

'It's More Than I Imagined': Boeing's New C.E.O. Confronts Its Challenges

It was interesting to read this article, from the NYT, that features the challenges Boeing is going through and what new leadership thinks of the situation. In short, the new CEO, Mr. Calhoun, said that issues at Boeing "speak to the weaknesses of our leadership." The Boeing story doesn't appear terribly unique - while there are a lot of company-specific issues, a common threat among Boeing and other companies that have going through serious problems (e.g. Wells Fargo) is pressure put on employees to hit specific quotas or timelines. Mr. Calhoun appears to be taking the right steps to correct this: "Pulling Boeing out of the hole it has dug will take years, Mr. Calhoun said. He said that he would focus on insulating engineers from business pressures and that he wasn't done shaking up the company's leadership. At a meeting with his senior leadership team on Tuesday, Mr. Calhoun introduced a new set of values intended to guide the company, which he hopes will inspire employees still working on getting the 737 Max back in service." I think this story, and others, highlights that corporate culture, incentives, and governance are key for long term success. This article is also timely because the difficulties Boeing is currently going through (COVID-19 related) will test the culture and strategy of the company over the coming years.

03. Coronavirus: COVID-19

Zero Trust Information

This is a great article from Stratechery. In it, the author traces the evolution of the internet and secure networking in order to, in part, highlight the immense communicative power the internet yields. The author then goes on to describe the important role the internet played in allowing researchers to broadcast information about the coronavirus on Twitter, leading to precautions being taken by businesses, governments, and individuals. Importantly, these were done absent any centralized decision making: "You can draw a direct line from this tweet thread to widespread social distancing, particularly on the West Coast: many companies are working from home, traveling has plummeted, conferences are being canceled. Yes, there should absolutely be more, but every little bit helps; information that came not from authority figures or gatekeepers but rather Twitter is absolutely going to save lives." This example of Twitter being used as a tool to advance understanding of a public health concern is, for the author, evidence of the power of distributed information sharing, rather than information being shared solely through the traditional gatekeepers: "There is, though, reason for optimism, and a belief that things will get better, the more quickly we embrace the idea that fewer gatekeepers and more information means innovation and good ideas in proportion to the flood of misinformation which people who grew up with the Internet are already learning to ignore."

What Coronavirus Could Mean for the Global Economy

While this HBR article is a bit dated (from early March), it is a good overview of how COVID-19 may impact global economies. While there are a number of potential recessionary scenarios, V-shaped, U-shaped, and L-shaped, what I find more interesting is how the virus and its ST economic impact change the economy over the LT. I found these two ways of framing LT changes interesting: "Microeconomic legacy: Crises, including epidemics, can spur the adoption of new technologies and business models. The SARS outbreak of 2003 is often credited with the adoption of online shopping among Chinese consumers, accelerating Alibaba's rise. As schools have closed in Japan and could plausibly close in the U.S. and other markets, could e-learning and e-delivery of education see a breakthrough? Further, have digital efforts in Wuhan to contain the crisis via smart-phone trackers effectively demonstrated a powerful new public health tool? Macroeconomic legacy: Already it looks like the virus will hasten the progress to more decentralized global value chains — essentially the virus adds a biological dimension to the political and institutional forces that have pushed the pre-2016 value chain model into a more fragmented direction."

Airlines beating hotels at cleanliness message

Given the economic implications of COVID-19 outlined above, I was checking some travel websites (Skift and Hotel News Now) to see how these industries are managing. Obviously, headlines suggest that there will be some short-term pain. This article is a short piece from Hotel News Now that highlights the good job the airline industry has done communicating with customers, whereas the hotel industry has been relatively silent. From the article: "In the past two weeks, when tensions moved officially into the danger zone here in the U.S., I started getting emails from every major airline I belong to, outlining clearly that company's policies about how they're cleaning, what they're cleaning and about the air quality on planes... But in that same time period, I've seen only THREE messages about cleanliness protocols at hotels." I'm curious what explains the difference between these two industries' communications.

04. Podcasts: Open Source and Learnings from "Range"

Benchmark and Investing in Open Source

Having spent some time kicking the tires on a number of tech names, I really enjoyed the expertise shared in this podcast. In it, two GPs from Benchmark share their thoughts on a wide variety of topics, but focus on open source investing. If you are familiar with any open source companies, either public or private, or are just curious about changes occurring in software development, this is definitely worth a listen. There are some interesting thoughts around monetizing open source starting just before the 25 minute mark. Also, the GPs share some interesting thoughts about incentives and sharing equity throughout the podcast, and tie it back to the success of their firm around the 20 minute mark.

David Epstein: How a range of experience leads to better performance in a highly specialized world

I read David Epstein's "Range" a couple of months ago and enjoyed it. This podcast is a very long (I didn't get through all of it) interview with David and delves into a number of topics covered in the book. Some interesting topics include deeper dives into a number of the case studies from the book, a reiteration of the potential fallacy around the 10,000 hour rule, and ideas around how to improve as practitioners of whatever we do. I think "Range" has a number of important implications for investors, especially in light of the kind learning environment vs. wicked learning environment paradigm. If you have some downtime while working from home, give this one a listen and feel free to jump around.

05. Investment Philosophy and Themes

You Bet!

While just a tad dated (it was published this January), this memo from Howard Marks is still worth sharing. In it, Howard examines games and gambling, and compares them to investing. Specifically, Howard believes that like some games (such as poker), investing operates in a realm where the outcome of investing a product of hidden information, luck, and skill. Additionally, he highlights that successful stockpickers need to understand odds: "Success in gambling doesn't go to those who pick winner, but to those with the ability to identify superior propositions. The goal is to find situations where the odds are generous to one side or the other, whether favorite or underdog. In other words, a mispricing. It's exactly the same thing in investing. People often say to me 'XYZ is a great company with a bright future, so I bought the stock.' They're picking a favorite but ignoring the proposition. The former alone isn't enough' they should consider the latter as well." Those well placed to understand the game as well as act when the odds are in their favor are setup to success in gambling as well as investing.

The Most Important Media Businesses of the (Past and) Future

Here is another post from Matthew Ball, whose work I've previously included in Beach Reads. In this post, Matthew examines how media consumption and entertainment have changed through time. Specifically, he begins by looking at the near unassailability of Disney's moat in IP and physical experiences (parks, cruises, etc.). He goes on to describe new entertainment mediums - things like Fortnite - and how they've provided a new, virtual space to experience different worlds. These entertainment forms are different than what Disney does for a number of reasons, but Matthew highlights one key difference: the creative and dynamic aspect of virtual worlds. From the post: "Today, it's possible for the average fan to actually translate their imagination into a real, virtual space and then share it and play in it with their friends and world at large. And not only is it cool to do so, there are many companies designed around facilitating, promoting, and financially rewarding this behavior. This reflects an ongoing generational change in which younger audiences don't just 'consume' content, they 'create' (YouTube, WattPad) and 'remix' it (see TikTok, SoundCloud, Image Macros, etc.). This is particularly viable in gaming given the modular nature of the underlying content — e.g. assets, textures, maps, and so forth, as well as the fact that unlike a vlog or tweet, most gaming content is intended to keep expanding and be updated until it becomes a franchise." The post finishes with Matthew describing ways that traditional media companies can thrive in the emerging metaverse. Very interesting stuff.

06. Reflections

How to Spot an Incompetent Leader

The HBR recently published this essay on leadership. The overarching point is that overconfidence and arrogance are key traits of bad and incompetent leaders. Such leaders can have a massive negative impact on businesses, and therefore should be weeded out. However, these traits are perpetuated for a number of reasons, including self-promotion. From the author: "The problem then, it seems, is not that we lack the means to spot incompetence, but that we more often choose to be seduced by it. This means we have only ourselves to blame for our self-destructive leadership choices. Perhaps it is time to stop paying lip service to humility and integrity, until we practice what we preach and pick leaders on the basis of these traits. Instead of promoting people on the basis of their charisma, overconfidence, and narcissism, we must put in charge people with actual competence, humility, and integrity. The issue is not that these traits are difficult to measure, but that we appear to not want them as much as we say." I believe that winning on the leadership front - at all levels of an organization - is a sustainable competitive advantage.

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