Collaborative Fund partner Morgan Housel has a knack for elucidating important truisms through stories. This time around, the former Wall Street Journal columnist uses evolution to highlight the need for continuous change in business and investing. "Startups have their obvious challenges," he writes. "They're trying to find their niche. But once that niche is found and perfected, old companies discover a whole new minefield. They get complacent, bureaucratic, cocky, and unwilling to discard what once worked so well. There is never a point where a company can indefinitely coast along, cashing the chips of past success. Everyone has to keep running." Though exhausting, continuously running is how businesses best serve customers and remain relevant. As a counterexample, consider the April 14th edition of Beach Reads, which examined the risks associated with bailouts for industries (think airlines) that are poor at evolving (specifically, the ossification and entrenchment of such companies is a net-negative to society). So, like Housel, I hope companies keep running. I also hope that we, as investors, continue to evolve to stay current in a changing world.

The headwinds experienced by value investors over the last 13 years or so are often chalked up to strength in another investment style: growth. However, often underlying growth is the all-important "quality" factor. This piece from investment firm Lindsell Train examines what quality is and how it relates to its own portfolios. Importantly, author James Bullock highlights how improving quality is an important element of returns. Bullock writes that a number of holdings were "not obviously textbook quality companies when we first bought them. The business vitals were ok with mid-single digit returns and margins, but certainly nothing that would jump out at you from a screen. All, though, have improved dramatically in the eight or nine years that we've held them...and missing out on any would have made a noticeable difference to our performance." This is where factors or screens may fall short: the human eye and analyst mind seem better positioned to predict changes - improvements - in businesses, and the market rewards improving returns.

I owe a personal debt of gratitude to Aswath Damodaran, professor of Finance at NYU Stern, whose free online resources were a critical part of my early investing education. His blog, Musings on Markets, is great. He was recently interviewed by Barron's and I wanted to highlight a couple of fantastic quotes. First, I loved his take on continuous learning. "Improvise is the key word," he says. "It's how I've finagled my way to where I am today, by improvising. Because every time I run into something I've never seen before, I go back to basics, and amazingly there's so much give in the basics that I can stretch them to meet just about any requirement that I need, any conditions I face. But to me, every crisis is a crucible. It tests my faith. It checks my philosophy. And it teaches me new things." He suggests that others adopt this improvisation strategy, too, when cautioning against relying on old methods or assumptions when valuing companies. "My overriding message—get away from static to dynamic, from backward-looking to forward-looking. And that scares people." There is a delicate balance between extrapolating from historical facts while avoiding hindsight bias as we try to assess possible future outcomes. This may be where frameworks and pattern recognition are most important. And here is another snippet of wisdom that we should all live by: "You've got to be willing to change how you do things when you're wrong. There is this deeply held view that there is smart money on Wall Street. I'm looking for humble money."

A green shoot emerges among fallen direct to consumer (DTC) stars. As highlighted in past Beach Reads, Outdoor Voices (OV) is an athleisure brand with a turbulent past (see here). According to this Vogue article, though, ousted CEO and founder Tyler Haney is active with the OV board again and is looking to set the company on the right path. "Details of the structural rehaul of Outdoor Voices are still slim, but the idea, according to Haney, is to focus the company around mission and longer term company sustainability and hire leadership that is aligned with these things...Indeed, from the outside Haney has always seemed to put female empowerment and dedication to diversity, equity, and inclusion at the forefront of her brand." Now past the churn-and-burn phase of startup life, I'm curious to see what success OV may have as it deepens the brand and focuses on a long term, sustainable vision for the future. If successful, OV could write the playbook for other troubled DTC companies to get back on their feet.

Previous Beach Reads generally refer to video games and eSports in the context of the metaverse. A recent Economist article suggests an alternative use for video games as Olympic events. There is a serious case to be made here. Consider the following: "Electronic sports such as 'Fortnite'...are vastly more popular than Olympic oddities such as dressage or curling. In fact, they are more popular than most mainstream sports. Only 28% of British boys aged 16-19 watch any traditional live sports; 57% play video games." Compared with many traditional sports, video games are cheap, accessible, and provide an important social outlet. I can see a day in the near future when eSports are in the Olympics, although figuring out which game to feature is difficult. Whichever title ends up being picked would significantly increase its longevity, providing a massive boon to the publisher, which would undoubtedly upset rival game producers. So perhaps an equitable solution would be to rotate games or publishers - a task that I'm sure has plenty of conflicts, too.

NZS Capital took a multimedia approach comprising a written essay and a podcast to illustrate its thinking on the semiconductor sector and to highlight how critical chips are to everyday life. Importantly, the content illustrates how a combination of consolidation and ever-increasing complexity and cost in leading-edge chip making have left just a handful of companies with the capability to advance semiconductor technology. NZS believes that these businesses have wide moats and should continue to grow for years thanks to the still nascent digital transformation of the global economy. Additionally, the authors examine why China's attempt to catch up by building its own semiconductor industry may be futile. "As a nation China remains several years behind its American and European counterparts, a gap that would likely be decades without access to western tools. Moreover, China has little to no hope of closing the gap, since it's impossible to reverse engineer the complex processes, making traditional industrial espionage techniques pointless."