I loved this piece from Matthew Ball for a number of reasons. First, it talks about video games, which I have an interesting past with as both an investor and player. Second, I immediately latched onto the idea of the "metaverse" and believe that it will be influential in the not-too-distant future. In short, the metaverse is a more dynamic and immersive version of “Ready Player One” or “The Matrix.” Ball contests that the metaverse will be a massive technological and economic change, although it won't happen all of a sudden. In fact, we see pieces of a metaverse today: look no further than Fortnite and some of the live experiences the "platform" hosts. Here is the author's description of the metaverse: "Even if the Metaverse falls short of the fantastical visions captured by science fiction authors, it is likely to produce trillions in value as a new computing platform or content medium. But in its full vision, the Metaverse becomes the gateway to most digital experiences, a key component of all physical ones, and the next great labor platform." Ball highlights large companies such as MSFT, FB, AMZN, and AAPL as potentially having a large impact on the metaverse, but also smaller companies like Epic (Unreal engine) and SNAP (cameras and glasses).
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01. The Metaverse, Video Games, and Hardware
More on the meta. This article, from a blog that I am unfamiliar with, gives more color on the history of Epic, Fortnite, and the coming metaverse. In short, the author argues that Epic's success in part stems from an early move into game engines (Unreal) and the live services aspect of the game. Game may actually be a misnomer; from the author: "Fortnite is on the cusp of turning its game into a platform — not to mention kickstarting a competitive ecosystem — a feat that will surely leave 99% of other publishers in the dust, unsure of how to even compete. Of course, it’s a massive industry that can support multiple winners — Fortnite at its peak 'only' represented ~2% of total game industry sales — but these moves ensure Epic Game’s ceiling is a lot higher than other companies." Epic as a platform (including the Epic Games store) is a compelling company - I wonder who else will rise to challenge Epic.
Don't forget that software runs on hardware! I thought this article, from EETimes, was an interesting overview of the 7nm node and what different systems players and foundries are doing with it. The article is a bit technical, but it sounds like there are (at least) two versions of 7nm, and which version is deployed determines how easy it will be to transition to 6nm and ultimately 5nm. This has implications for ASML, among others. From the article: "It is worth mentioning that the N7+ EUV lithography layer is 4 layers. According to news reports last year, TSMC has further introduced N6 (6nm) process nodes and will use more EUV layers (at least 5 layers). N6, however, is not a long-term node. N6 is compatible with N7 in terms of design guidelines and IP... N6 and N7+ seem to be two different paths, because N7+ is incompatible with N6 — and N+ actually has a slight advantage in density." It sounds like semi customers are carefully planning out their node shrinks and technology needs in order to best situate themselves for further shrinks given existing demands. I had never previously thought about how nuanced some of these decisions are.
02. Disruption in Payments and CROs
This article, from the FT, is a short but interesting overview of Visa's acquisition of Plaid. As background: Visa bought Plaid for $5.3B last week. This is the second large FinTech acquisition in the last couple of months - PayPal's Honey acquisition was another notable private company purchase. From the article: "Plaid’s data will give Visa insights into most of the major financial technology companies. That could direct the company’s future acquisitions and product sales. Visa has just bought a key piece of the infrastructure required for a digitised financial system." I almost see Plaid as the connective tissue within the body of the financial world. So seeing as Plaid connects different pieces of digital financial infrastructure, the purchase make strategic sense in further expanding Visa as an important middle-man that helps enable financial transactions. I'm curious to see what exactly the company ends up doing with Plaid, especially when considering the "frenemy" situation it creates with banks.
This bit of news, from Bloomberg, has interesting implications for a number of players in the CRO/drug discovery/pharma supply chain. The article details how 23andMe licensed an antibody it developed to Almirall. 23andMe, best known for ancestry-type consumer DNA tests, has been building a vast database of genetic data that will be increasingly used for patient population targeting and drug discovery. From the article: "Leveraging its genetic data to develop drugs has become an increasingly important part of 23andMe’s business. More than 10 million customers have taken its DNA tests, and that trove of data can help illuminate new drug targets to treat disease." For now, CROs and others in the drug supply chain don't seem too worried.
03. Internet Culture
This was a fascinating read from the NYT magazine. In it, the author describes her interaction with her own daughter (a teenager) as well as an arms-length view of online teen culture (for lack of a better term). The point she makes is that all humans, but especially teenagers, juggle a number of identities. It appears that the internet has provided a route by which individuals can express multiple different personalities, even through the same "character." The result is a fast moving, chaotic presentation of one's self, generally via vlog, that jumps between emotions, characters, looks, etc. The author puts it much better than I can: "This chaos — this cubism, this unleashing of our multiple selves — is a feature, not a bug, of the online world. It’s arguably its defining characteristic for those who grew up there. You could attribute all the jump cuts, all the endlessly iterating memes, to a destroyed attention span. But it’s also evidence of something deeper, a mind-set people are just trying to name." I thought this was particularly interesting considering Ball's discussion of the Metaverse above.
I was recently in LA for a college alumni event. One of the topics that came up during the Q&A session with the president of the college was about college students' mental health. Given the article above, I thought this piece from Nichola Carr was worth including as it builds on the idea of chaotic identities of teens by suggesting an always-on, always-open mentality. This, in my opinion, may be linked to increase levels of stress, etc. This article focuses on TikTok’s role in this phenomenon: "To manufacture the unlimited supply of content that an app like TikTok needs, the total productive capacity of the masses needs to be mobilized. That requires not just the ready availability of media-production tools (the smartphone’s camera and microphone and its editing software) and the existence of a universal broadcast network (the internet), but also a culture that encourages and celebrates self-exposure and self-promotion. Vanity must go unchecked by modesty. The showoff, once a risible figure, must become an aspirational one." Always-on vanity seems exhausting.
04. Asset Management Thought Pieces
This article, from the CFA institute, looks at manager performance based on portfolio "conviction," similar to "active share.” The research conducted by the authors suggests that high conviction portfolios produce significantly higher alpha than neutral or underweight conviction portfolios. From the article: "The High-Conviction Overweights, composed of the managers’ best ideas, is the only category that delivers stock-selection alpha...That High-Conviction Overweights are the sole category through which active managers could add alpha defies the long-held assumption that managers can improve performance throughout the entire stock-selection and portfolio construction process." The first part of this study isn't terribly surprising to me (how could you outperform an index if you are the index?). What is more interesting is that over the course of the analysis, high conviction portfolios performed well in spite of presumably higher volatility and a complete lack of consideration for portfolio construction. While not knowing the exact mechanics of the study is a hurdle, I think these findings are interesting and at least in part explain the demise of many active managers.
Speaking of conviction, I thought this piece from the FT was worth including. In it, the author points out that passive funds now manage more AUM than active funds (as of a couple of months ago). She then goes on to describe how active managers increasingly need to manage for conviction: "it feels like asset management is polarising, separating into areas best characterised as 'high conviction' and 'low conviction.' The latter is the domain of industry giants running trillions of assets. These firms are distribution powerhouses offering a full spectrum of passive and quantitative strategies. Such firms can offset ultra-low fees for managing assets with profitable services, contracting out their experience in risk management and analytics...High-conviction investing, meanwhile, has a goal of beating the market — something that very few investors are able to do on a consistent basis. There is often a bias towards high-quality assets, as those tend to be bets investors feel comfortable about taking, over the long term." The article also suggests that high conviction managers might "diversify" in the sense of moving into multiple asset classes in order to manage for a client’s future. Can an investment firm have both high conviction and a wide variety of offerings across the capital structure/public and private markets?
The most recent letter from OSAM was a nice reflection of what the firm did in 2019 and how they collectively share a continuous learning mindset. The letter includes some interesting financial data, primarily about US growth stocks and potential muted returns going forward. It is worth looking at. On the flip side, Patrick highlights some positives in terms of structural business shifts: "On a more positive note, there is some evidence that the corporate earnings that feed into market valuation measures, ours included, are understated relative to history. If true, this observation would mean that we should expect future returns to be somewhat higher than the returns that markets at similar valuations in the past ended up producing. Why are earnings today understated relative to history? In part because companies today spend less on capital expenditures (a deferred expense that gets smoothed out over a number of years) and more on research and development (a current expense that hits earnings immediately, with no deferral). So, today’s earnings tend to be 'sandbagged' relative to the past." Going forward, a greater portion of the economy and public stocks will be software, as it "eats the world." What are the implications for valuations as this trend continues? Will accounting practices need to change?
05. Leadership, CEOs, and Corporate Culture
Truth be told I didn't listen to the entirety of this 2hr+ podcast. But I liked what I did hear - it is an interview from Farnham Street with Jim Collins. One great section is about leaderships, where Collins describes what Level 5 leaders are all about (starting around 14:10): "The essence of the 5 is an answer to the question, 'What is the truth of your ambition?' Is it really about what you’re trying to get done and contribute and how you want to impact the world, to build something exquisite, or to create a beautiful painting or a marvelous piece of music or whatever the thing is that you’re working on? Or is it in the end really, truly, mostly about you? About what you get, about how you look, about what you garner, about how people think of you? Your ambition is channeled into self. The essence of the 5 is they’re maybe even more ambitious than most people, right? But the ambition is not about them. It’s all channeled outward into the company or into a purpose that’s larger than them." I love this description of Level 5 leadership - the idea that a real leader is building into more than just themselves is likely a long-term sustainable advantage. According to Collins, good leaders find their ambition and "humble [themselves] to that ambition." Fantastic.
The HBR had an interesting piece out recently about companies that tend to produce good CEOs. In it, the author highlights three ways that companies build good leaders: 1) give leaders broad authority, 2) encourage managers to think like CEOs, and 3) challenge strong performers early with big opportunities. From the author: "These three practices for developing strong leaders don’t require huge scale or large training budgets. They require leadership values and corporate structures that allow for real empowerment and risk taking. Above all, they require the leader at the top to be personally invested and genuinely eager to grow other strong decisive leaders rather than obedient corporate foot soldiers." Sounds similar to what Collins was talking about in the previous link. Interestingly, some companies we are familiar with are "stealth CEO" factories: "We estimate there are over a dozen 'stealth CEO factories' across a range of industries and geographies; these include Medtronic, Rohm and Haas, and Danaher Corporation."
Charlie Munger is famous for telling investors to "invert" their views in order to perform company analysis from a variety of perspectives. Peter Kaufman echoes this sentiment when he tells business owners to see relationships (with customers, suppliers, etc.) through the eyes of others. This article, from Ensemble Capital, inverts cultural analysis in a sense. In it, the author makes a simple yet poignant point: cultures are only as good as those they compete against. From the article: "It’s not enough to identify a company with a great corporate culture. For that culture to deliver consistent value, it must be up against competitors with weak cultures or poor stewardship. Knowing how to identify weak competition is critical to understanding the opportunity for strong companies." This makes a lot of sense to me, but likely applies more to industries with no tailwinds rather than those with strong tailwinds.