A Signpost for Quality, Facebook Standing Up for Itself, Scuttlebutt Done Well, and Links
A Signpost for Quality- Management Is Intrinsically Motivated by the Quality of the Product/Service
One of the hardest parts of being a quality-oriented investor is defining quality. When I first gravitated toward this style, it was mostly financial/qualitative. I looked for companies with high ROIC/ROIIC and strong FCF generation. I noticed this “screening” type of approach missed a lot of companies that were in a period of heavy investment, and so I shifted more toward qualitative assessments of management, competitive positions, etc.
In evaluating management teams going forward, I want to make it a point to look for leaders that are obsessed with what they are doing and really just want to be the best at whatever that may be. In investment management, for example, this might mean putting asset gathering aside in favor of focusing on maximizing returns. The sense of pride comes not from the business that was built, but more from the track record generated. Managers should approach their businesses how athletes and musicians approach their craft.
Although this is an easy game to talk, there are few managers that put it into practice. I’m working on becoming better at being able to feel out the passion in someone’s speech and language vs someone who is just talking the talk. Here are a few examples of a constant improvement mindset that have stood out to me:
Spotify
Daniel Ek
Over the last 2 years, we have tripled the number of experiments from a few hundred to thousands of A/B tests. Some of these experiments yield nothing more than a few key learnings, while others have shown great promise. In one of our recent podcast experiments, we increased listening among the test group by 33%. And that's just one example of many. And when we see results like this, you should expect us to invest even more. And we know that no one experiment is going to materially impact us even in the next year. It's the thousands of little things that we're doing which will gradually add up over time.
Stitch Fix
Heath Patrick Terry, Goldman Sachs Group Inc., Research Division - MD [15]
Great. Really appreciate some of the details that you're sharing. I'm wondering if you could give us a little bit of a sense of sort of what your expectations are as you move more into some of these customers that hadn't shopped with you in the past? Or as you're seeing customers that are experimenting with some of the other ways that they can buy with you, how are your expectations for returns, and where it's appropriate, keep rates are evolving? And then with customers that are on automated Fixes and have been on automated Fixes through this period where their lifestyles are obviously changing pretty dramatically, I'm curious what kind of change you've been seeing in keep rates?
Katrina M. Lake, Stitch Fix, Inc. - Founder, CEO & Director [16]
Sure. Well, I think I can answer most of these and a little bit that Mike may weigh in. On the first is just how -- what are expectations around returns and keep rate and what's evolving. Our North Star is really around how do we help clients find things that they love. And so that kind of naturally always is driving us towards features and functions and ways to be able to deliver more value to our clients and really drive up keep rates. We've been just -- we've been very amazed, I think, at the very low return rates that we have even in our direct-buy experience, which I think is a little bit more like "normal e-commerce", but I think it's a real testament to the -- our ability to be able to get size right, to get style right in that channel. And on the keep rate side as well, I think this is a place where Elizabeth mentioned some of the testing that we've been doing with stylists. And those tests have actually had pretty high keep rates attached to them. And so I think those are -- I think those are some examples of things that we're doing to ultimately drive these metrics. I think these metrics of people keeping things that they love is ultimately like the true North Star of our business. And that's really where we're orienting a lot of our efforts against.
Netflix
Kannan Venkateshwar, Barclays Bank PLC, Research Division - Director & Senior Research Analyst [46]
That's great. And then I guess when you think about the product itself, one of the big discussion points has been content discovery because there's an enormous amount of content and there are an enormous number of streaming services now. And so we've got to sort through all of that in order to figure out what to watch. So when you think about content discovery, I mean, Greg, I know you run a lot of A/B tests all through the year, you run hundreds of them. So what are the kind of things you're thinking about in terms of improving the experience? You have the top 10 list. How has that done? If you could just give us some sense of how you're sort of looking at that issue.
Gregory K. Peters, Netflix, Inc. - COO & Chief Product Officer [47]
…But I think it's indicative of the kind of work that we need to go do, right? And I think that we have created literally the most incredible collection of entertainment options that has ever existed available to a consumer at a click of a button. And Ted's team is off producing more and more fantastic content at an accelerating rate. And that is, for our members, simply wonderful. It creates both challenges and opportunities for us as a product team to think about the experiences that we evolve to make the process of choosing and finding a great story in that as delightful and as easy as we possibly can.
And how -- the way we think about it is actually that we have to make almost every aspect of that experience better. And it's not going to be one thing that's going to be sort of like suddenly make a perfect choosing experience. So we have teams that think about exactly how do we pick what titles are perfect for each member, how do we pick those recommendations to make those better every single day, how do we present those titles in a more compelling way, a way that's specific to what we think the member's interest is. We're thinking about how our user experiences work and the features that are included in there. And we want those to adapt and evolve so that they can be responsive to the specific needs of a growing number of members around the world that have growing and diverse needs from our experiences.
So the perhaps sort of unhelpful answer is there's going to be like literally hundreds of things that are going to have to change, but when you aggregate all those changes, they're transformative. And I would invite you to go back and sort of look at a Netflix experience from 5 years ago compared to today, and it's just stunning how much progress we can make through that process. And we are committed to making even more progress sort of in the next 5 years to come to make that wealth of content a joy for our members around the world.
Carvana
Ernie Garcia III
We are the market leader because from the very beginning, our guiding light has been delivering the best customer experiences available anywhere. To do that, we've recruited the best people to take up our mission alongside us. We built a culture of tireless energy and ambition, and we've invested in technology and infrastructure that are necessary to deliver on the constantly changing preferences and expectations of our customers. And we've done it all with the genuine discipline of a long-term focus… These things are easy to say and hard to do. They are the things that matter in the long run. They are an enduring differentiator and the reason our future was bright before.
…Moving forward, there's a lot to get excited about. As we always have, we're focused on building enduring value. We are positioning ourselves for the shifts we are seeing in customer preferences, investing in our offering of buying cars from our customers, focusing on simplifying the automotive value chain, building out significant capacity in our supply chain, investing in initiatives that make us even more efficient and scalable, and most importantly, continually improving our customer experiences through better technology, infrastructure and process… The customer experiences we deliver on our execution are the forces that matter most over time and they have our complete attention. That focus and our long-term lens are what brought us to this point. They put us on the path to selling 2 million-plus units per year and to becoming the largest and most profitable automotive retailer… They've made us the fastest-growing retailer in the country. They've driven incredible customer experiences over many years. They've generated a constant unwillingness to be satisfied with our own product that has pushed ceaseless improvement, and the accumulation of all that has made us the market leader… We are not content with being a market leader. We're on a mission: To change the way people buy cars. Our ambition and excitement is driven by the opportunity we see in front of us. And today, we are more excited and we are more ambitious than we have ever been before.
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This growth-mindset/focus on constant improvement starts at the top of the organization and flows down. The culture must allow for the constant experimenting and A/B testing that leads to these minor improvements that tend to pile up over time.
Facebook Standing Up For Itself
In recent years, the tone on Facebook’s quarterly call has often come off as apologetic (rightfully so, in some respects). But I am happy to see Zuckerberg beginning to stand up for himself and his company. From the 2Q20 call:
“Since COVID emerged, people have used our services to stay in touch with friends and family who they can't be with in person, and to keep their businesses running online even when physical stores are closed. In many ways, amidst this very difficult period for people around the world, our services are more important now than ever before… It's worth reflecting on this for a moment because there's just a fundamental difference between how the vast majority of people actually experience our services, and the impression you'd get if you just read much of the commentary about Facebook. Imagine going through this pandemic 2 decades ago when the Internet was nascent. Facebook didn't even exist. Sheltering in place is incredibly disruptive now but until recently, it would have meant almost no connection with your friends in the broader economy. Most of the small businesses whose storefronts had to close would have gone under, and there wouldn't have been another infrastructure like the Internet that they can move quickly to in order to stay afloat… People sharing their day-to-day experiences with friends, communicating in groups with people share interests and watching entertaining content, buying and selling things, this is how the vast majority of people use our services. Yet, some seem to wrongly assume that most of the content on our services is about politics, news, misinformation or hate. And let me be clear, it's not. These make up a small part of the content on our services, although they are all things that people generally tell us they'd like to see even less of. We do not profit from misinformation or hate. We do not want this content on our platforms. People come to our services to connect with the people they care about. That's why people are using our services at record levels now, and enabling more of those meaningful social interactions is how we succeed… And we have a plan to further reduce the amount of harmful content. Our AI systems already proactively identify about 90% the hate speech that we removed before anyone even reports it, and no other Internet service does anything remotely as sophisticated as this, and we are committed to continuing to improve. We're having an independent audit done of our community standards enforcement report, which is our transparency report on how effectively we are removing harmful content. We're also opening ourselves up to an audit from the Media Rating Council to look at our content monetization policies and brand safety controls. And we're going to work with the Global Alliance for Responsible Media to provide greater transparency into our measurement of hate speech numbers… Now some also seem to wrongly assume that our business is dependent on a few large advertisers. Now while we value every single one of the businesses that use our platforms, the biggest part of our business is serving small businesses. Our advertising is one of the most effective tools that small businesses have to find customers, to grow their businesses and to create jobs. And that's why I'm often troubled by the calls to go after Internet advertising, especially during a time of such economic turmoil like we face today with COVID. It's true that making it more difficult to target ads would affect the revenue of companies like Facebook, but the much bigger cost of such a move would be to reduce the effectiveness of the ads and opportunities for small businesses to grow. This would reduce opportunities for small businesses so much that it would probably be felt at a macroeconomic level. And is that really what policymakers want in the middle of a pandemic in recession? The right path, I believe, is regulation that keeps people's data safe while allowing the benefits of this kind of personalized and relevant advertising.”
I enjoyed Rob Vinall’s commentary in his 1H18 letter: “The standout performer of 2017 was Facebook. It grew its earnings power by – wait for it – 63%. Of course, negative headlines about election interference, privacy violations and fake news dominated the news cycle. Without question, Facebook made mistakes and, rightly, is working on correcting them. However, I found the frequency and intensity of the criticism levelled against it absurd. There are billions of interactions on Facebook every day. Those that go wrong need to be seen in the context of those that go right, for example when families and friends connect, and businesses are matched with customers. Telephones are occasionally used to arrange bank robberies, but Alexander Bell is generally not pilloried as Dagobert Duck made flesh. That newspapers compete with Facebook for advertisers no doubt coloured their reporting of Facebook’s missteps. The theme of unbalanced criticism of companies and the opportunity for outperformance it creates is one I return to later in this letter.”
Scuttlebutt Done Well
I enjoyed reading this interview of Paul Lountzis in which he discusses his scuttlebutt approach to researching companies.
There is one part in particular I have been thinking a lot about: “A lot of people today use expert networks like Gerson Lehrman Group or hire consultants. I never pay people. I paid one legitimate consultant in 25 years. One, and he had a real consulting firm. I don't pay people, not because I'm cheap, but because sometimes it can compromise them.”
Incorporating scuttlebutt into my process has been one of my significant struggles, and trying to do it without expert networks seems even more of a long shot. Nevertheless, what he says is true. Experts sourced from GLG or similar services certainly are compromised in some ways. I think the main way is that they are disincentivized to say “I don’t know”. Too many I don’t know’s, and the expert risks losing that title and not being seen as a good value. This can result in misleading or under-informed statements that can be tough to detect. It’s also tough to incorporate each expert’s biases.
I’m curious if anyone else has any resources or personal thoughts to share on how to get the most out of expert networks, whether you need to take Paul’s approach and just get rid of them, etc.
Links
Here are some interesting things I have recently read/listened to:
Billionaire Ron Perelman has sold off various business stakes, art work, etc. in recent weeks. He sold his 35% SGMS stake, which has sent the stock up over 75%. The purchasing investor group included Caledonia, who has also invested in Flutter, DraftKings, and Aristocrat. The former CEO and CFO of Aristocrat are now Chairman and Vice Chairman of the Board. Between Caledonia and the Aristocrat formers, those seem to be some credible players that one would assume think highly of SGMS’ sports betting and digital assets, which are parts of the business the press release said SGMS would be more focused on going forward. These are higher growth and perhaps more defensible businesses than slot machines, which is currently the largest part of the business. The stock is up over 70% since the sale was announced a few days ago.
Dennis Hong of ShawSpring Partners is interview by ValueDach (here)
Bessemer Venture Partners memos from early investments such as SHOP, PINS, TWLO, WIX, Twitch, YELP, etc. (here)
David Kim of Scuttleblurb did an excellent writeup on CVNA (here)
Mike Novogratz on Tim Ferriss discussing investing, mental health, justice reform, and much more (here)
Tim Ferriss on his healing journey after childhood abuse (here)
#2 ranked UFC heavyweight Francis Ngannou tells his inspiring story on Hotboxin’ with Mike Tyson (here)
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None of this is investment advice and I may hold positions in securities mentioned.