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WCM Investment Management | Insight | Beach Reads - 4 - 14 | Welcome to Beach Reads.

Beach Reads

April 14, 2020

Welcome to Beach Reads. After another two weeks at home, the future is finally starting to look a bit brighter! With the recent quarter end and more visibility into business impacts, there was a lot of good content published over the last two weeks - so this edition is a bit long. Feel free to pick and choose your favorite topics among the ones listed below. Enjoy!

  • The first section profiles two tech CEOs and one article about tech's relationship with conspicuous consumption
  • The second section features links about changes in the e-commerce world
  • The third section includes an article about changes in interchange fees
  • The fourth section is all about the investing process - I recommend all three pieces
  • The fifth section looks at government and central bank responses to COVID-19
  • The sixth section provides perspective on business and life pre, during, and post-COVID-19
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 CEO Profiles (and Culture)

Atlassian's tools helped build today's tech. How's it prepping for the future?

Atlassian has been a phenomenal story and it continues to do well despite market volatility as a COVID-19 WFH play. This interview with the company's CEO, Scott Farquhar, highlights what Atlassian brings to the table. Farquahar believes that every company is or will become a technology company, and that Atlassian is a key tool that helps facilitate the digital transformation of businesses. One interesting example of this is how Atlassian solves a difficult problem for companies using multiple pieces of software: "When companies talk about best of breed versus a single suite, I think what we've found is that companies are after effectively a unified backbone or a control plane that runs across all their products. What we do really well is to be that backbone of how work travels around your organization." It might be a stretch, but Atlassian can be thought of as an operating system for a business, with individual software products and employees interacting with that system to be more productive.

Zuckerberg's Jealousy Held Back Instagram and Drove Off Founders

A Bloomberg story on the relationship between Facebook founder Mark Zuckerberg and Instagram founder Kevin Systrom highlights the former's desire for power. Zuckerberg seemed to get jealous of Instagram's success as it grew — despite owning it: "After Instagram reached 1 billion users, Zuckerberg directed Javier Olivan, Facebook's head of growth, to draw up a list of all the ways Instagram was supported by the Facebook app. Then he ordered the supporting tools turned off. Instagram would no longer be promoted in Facebook's news feed." Systrom left the company in 2019.

Signaling as a Service

I enjoyed this article from a blog I had never come across before. In it, the author expands on the notion of conspicuous consumption. Specifically, he examines what role software has in status signalling. His conclusion is that, for the most part, software cannot be a status symbol because it can not be effectively displayed in public. Instead, most software is successful as an amplifier of existing status symbols. Having said this, he believes that Tinder and Fortnite have crossed that chasm, and represent status in a digital world. Importantly, this is how they monetize (and in massive ways): "Fortnite has pulled off what so many other software products have been struggling with – monetizing a purely digital product whose value is not based on utility or entertainment but solely on the one thing we all secretly care so much about: Signaling...The financially most lucrative strategy for software companies is to provide distribution for free and instead monetize users who want to stand out of the crowd with paid signal amplification." Signaling in the Fortnite way - solely through digital media/ products - is an interesting phenomenon that signals elements of the metaverse. I'm curious what other software will be successful in a similar way.

02. E-comm in COVID-19

Will We Forgive Amazon When This Is Over?

I'm sure nearly all of us have ordered something off of Amazon over the last couple of weeks. As many have experienced, the company is prioritizing necessities and the promise of 2-day shipping (let alone receiving a random impulse purchase) is a thing of the past. This article, from the WSJ, considers whether or not Amazon's inability to keep up with demand may lead to fewer prime subscribers, or at least less demand on the platform as consumers realize that they can buy online, elsewhere: "As manufacturers struggle to meet demand, no one retailer is able to monopolize supply of critical items, leaving consumers to scramble to find them wherever they might be. Increasingly, that's not Amazon. The entire point of Amazon's Prime customer loyalty program was to convince Americans to shop at Amazon first, but after this crisis, it's possible Americans' reacquired skill of shopping elsewhere will, like anything repeated often enough, become habit." Another interesting tidbit from the article: US grocery shoppers have moved online in a big way. "A recent poll conducted by RBC Capital Markets found that as of March, 55% of Americans polled had ordered groceries online, compared with 36% two years ago. One-third of respondents said the first time they had ever ordered groceries online was in the past 30 days, and 60% of respondents used Amazon to order groceries." I wonder if this trend will sustain into the post-COVID-19 future.

Facebook Ad Rates Fall as Coronavirus Undermines Spending

This article, again from the WSJ details changes in ad spending as a result of COVID-19. Across the board, ads have gotten significantly cheaper: "Prices in Facebook's ad auctions nonetheless plunged between February and March, according to executives at several companies that do business on the platform. The cost to put an ad in front of Facebook users 1,000 times in March dropped 15% to 20% from February, according to a recent analysis by one advertising holding company's buying group." With many businesses potentially cutting back on ad spend because of economic uncertainty, Facebook has apparently been courting sports TV advertisers: "in March, Facebook proposed to ad buyers that its video ad offerings could be a suitable landing spot for ad dollars being reallocated from sports sponsorships and media, according to senior ad agency executives and an email reviewed by The Wall Street Journal." With professional sports temporarily up against the ropes, and online advertising now 20% cheaper than just a month or so ago, I wouldn't be surprised to see some sports advertisers move spending to digital platforms. The question is, will is stick?

03. Payments

Another Challenge for Small Businesses: Higher Card Fees Could Be on the Way

This article out of the WSJ highlights a theme that I've written about on Beach Reads before: the card networks' plan to raise interchange on different merchant types. This plan looks like it will likely be delayed in light of COVID-19. From the author: "Some large merchants, including Inc., Costco Wholesale Corp. and Walmart Inc., in recent years have negotiated their interchange fees down in part by leveraging their market reach, according to people familiar with the matter. Small merchants have less power to negotiate." With small merchants struggling to stay in business (and with volumes through the floor if they've managed to survive), I'm curious how card networks will make up for this loss of expected revenue. Increase interchange on larger merchants? Squeeze the small ones? Change interchange based on purchase type (e.g. discretionary vs. non-discretionary)?

04. Investing Philosophy


Howard Marks has been prolific as of late. His pontifications on recent market volatility have appeared to turn a long-term bear into a bull: "In that vein, I now feel the odds are more in investors' favor or, at a minimum, somewhat less against them. Portfolios should be calibrated accordingly." Besides Howard's notable change in sentiment, I found his framing of offense and defense to be interesting. In January, Howard wrote about successful investors betting when the odds are in their favor - in this letter, Howard makes a similar point between balancing offense and defense: "One way to think about the balance between offense and defense is to consider the 'twin risks' investors face every day: the risk of losing money and the risk of missing opportunity. At least in theory, you can eliminate either one but not both. Moreover, eliminating one exposes you entirely to the other. Thus we tend to compromise or balance the two risks, and every individual investor or institution should develop a view as to what their normal balance between the two should be." It sounds like Oaktree is now firmly in the risk on category today.

Fundsmith Annual Shareheolders' Meeting 25th February 2020

This is a YouTube video of the Fundsmith annual shareholders' meeting, held in early 2020. I enjoyed listening to Terry Smith and Julian Robins talk about their holdings - I love how much detail these two went into when discussing their portfolios. A couple of highlights: around the 20-minute mark, Terry talks about valuation and how bad people are at valuing companies, especially over the long-run. Just before the 52-minute mark, Terry and Julian explain why they've avoided investing in Apple. Just before the hour and 20-minute mark, Julian talks about Phillip Morris and ESG. These are just a couple of highlights - anyone interested in quality growth investing should give this a listen.

Investor Field Guide: Gavin Baker

This is Patrick O'Shaughnessy's second interview with Gavin Baker, from the podcast "Invest Like the Best." In it, the two discuss a number of interesting topics. Some highlights: around the 14-minute mark, Gavin gives his thoughts on where we are in the draw down and what names are likely positioned well to perform over the coming years. At the 21-minute mark, Gavin talks about software companies and then goes on to describe how software providers might be hit as a result of the downturn. Specifically, businesses are refusing to pay for software, or at least asking for term extensions or price reductions. Gavin then goes on to discuss how small differences in UI and UX can mean huge differences in adoption - he gives the example of Zoom. Finally, just before 40-min mark, he talks about a favorite topic of mine: the metaverse.

05. Fiscal and Monetary Responses

Bail-outs are inevitable—and toxic

In the wake of COVID-19, governments have stepped in to stem the tide of otherwise inevitable corporate pain and likely mass bankruptcies. These fiscal policies are designed to help the economy limp along on the path to getting healthy again, instead of falling into complete chaos. Such Keynesian intervention has become somewhat commonplace, but should be managed very carefully. With competing interests from the government, taxpayers, equity holders, credit holders, etc., managing bailouts is tricky business. This article from The Economist highlights some potentially desirable bailout clauses, but ones we should ultimately avoid: "governments should not interfere in other ways. There will be populist calls to force airlines to give more legroom, car firms to build electric charging-points and manufacturers to build factories in rustbelts. But bail-outs of individual firms are a bad mechanism for dealing with these issues. The one rule that governments should impose is to ban firms getting bespoke deals from paying cash to shareholders through dividends and buy-backs until state loans are repaid." Serving as a lender of last resort, I think this point makes a lot of sense - governments, when intervening to save industries, should get paid back over the long run. The author goes on to address one of my biggest fears regarding bailouts: "Broad rescue schemes could also leave a legacy of indebted, ossified firms that impede the eventual recovery. Speed is essential, but governments also need a clearer framework to organise the jumble of schemes, protect taxpayers and preserve the economy's dynamism." The big getting bigger, the ossification of a system - these are real fears I have, and ones that have real negative economic consequences. But how do we avoid them when the big need to be saved?

Investors should ask who will buy all of this new US government debt

This article, from the FT, highlights issues with US government debt levels and questions who will be the incremental buyer of new issuances. As a caveat: I'm not an expert in debt investing. Regardless, while US government debt levels have ebbed and flowed through time, we are reaching a new peak: "This week, for example, Goldman Sachs warned clients that America's debt to gross domestic product would hit 99 per cent this year and 108 per cent in 2023, up from 79 per cent last year. If so, this would beat the previous record seen in the second world war — which, not uncoincidentally, was the last time the US sold war bonds to a patriotic public." A frightening part of potentially issuing "war bonds" is that they have historically been a negative return investment: "Investors should urgently reread Prof Reinhart's research because it shows that financial repression delivers negative returns for bondholders. Those widely purchased war bonds, in other words, were essentially a tax on savers which the public accepted in the patriotic cause."

06. COVID-19 Perspectives: Business, Personal, Recovered

JPM CEO Letter to Shareholders

This annual letter from JP Morgan's Jamie Dimon was a thoughtful piece that put the challenges and role of the bank during COVID-19 in context, while also serving as a call to arms of sort. Two excerpts stood out to me. First, I appreciated Jamie's focus on the importance of organizations knowing who they are: "Entering into a crisis is not the time to figure out what you want to be. You must already be a well-functioning organization prepared to rapidly mobilize your resources, take your losses and survive another day for the good of all your stakeholders." Corporate culture plays a critical role in challenging times, and Jamie is right to focus on well-defined cultures adding to resiliency and benefiting all stakeholders. Importantly, stakeholders are not just shareholders - they include all individuals that interact with a company. Second, Jamie has a "fervent hope" for America that is worth sharing: "I...hope we can avoid people using times of crisis to argue for what they already believe. We need to demand more of ourselves and our leaders if we want to prevent or mitigate these disasters. This can be a moment when we all come together and recognize our shared responsibility, acting in a way that reflects the best of all of us. As President Kennedy historically said, 'Ask not what your country can do for you – ask what you can do for your country.' My fervent hope is that America rolls up its sleeves and starts to attack these problems."

Home Alone Together, in LA

I enjoyed this piece from The New Yorker. While the news around COVID-19 tends to revolve around numbers: case counts, GDP, unemployment, etc., this essay is more personal and reflects upon the way the world has changed, what it might mean to be sick, and how uncertain we all feel. Early in the essay, the author points out an amusing (and in some ways, sad) reality: over the past couple of years, even when in public, people have been "socially distancing" through phone use. Now, phones allow us to peer back out into the world. From the article: "The required form of isolated solidarity is, weirdly, both in synch and at odds with what, for the past decade or so, has seemed an increasingly solipsistic withdrawal, whereby, even as people appear physically to be on the streets, they're psychically disappearing into their phones. Now we're on our phones at home as a way of being on the street, kicking ourselves for all those hours wasted outside, looking at screens when we could have been looking at one another." The author includes many more personal anecdotes in this piece, but I latched onto this quote because it stuck a chord with me. While my phone is keeping me connected now more than ever before, I can't wait to leave it home and get back to life as normal - hopefully someday in the not-so-distant future.

'You Could Lick the Benches': Life for the First Wave of U.S. Survivors

A life exists beyond COVID-19. This article, from the NYT, points to what it looks like - that is, what normalcy is. From the article: "the first large wave of Covid-19 survivors, likely to be endowed with a power known to infectious disease specialists as adaptive immunity, is emerging. They linger in grocery store aisles and touch doorknobs without flinching. They undertake not entirely essential travel. They have friends over. They hug." The article provides glimpses into a number of peoples' lives who have gotten over coronavirus - each with unique advantages and often confusion. While it is unclear what exactly immunity to COVID-19 looks like, it is clear that humans, sooner or later, will go back to being human. I'm looking forward to it.


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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