Sunday Finds + 3 Thoughts From Last Week
Farfetch + Xponential Fitness
Welcome to Chit Chat Money’s Sunday Finds + 3 Thoughts From Last Week. In this newsletter you will find three topics I thought about last week, links to shows we’ve recently released, and links to some interesting articles, podcasts, and tweets. Check out the archive here.
1. In bear markets, is it better to focus on simplicity?
We are definitely in a bear market, whether you care about technical definitions or not. You can just feel it in your bones. Bear markets, from what I’ve read and the short experience I have, are quite chaotic. This chaos can make you feel stressed out and emotional, potentially causing you to make poor portfolio decisions.
Knowing this, I think it is smart to keep things simple when volatility rears its head. For me, that means focusing on businesses I can easily understand with simple investing theses that generate positive cash flow. Inverting means avoiding short-term bets, complicated business models, and turnaround stories. I don’t want to make a bet on the comeback of athletic shoes among Chinese millennials in early 2023, I want a simple secular growth story with easily identifiable unit economics trading at a reasonable valuation. Is this different than how I invest normally? Probably not…but it is extra-important to focus on during market downturns.
In a bear market, if your portfolio is struggling, your instinct will be to press the situation and try to win your losses back as quickly as possible. Understanding this bias, I try and explicitly push myself towards the long-term and continually focus on what makes sense on a three to five-year time horizon, even if my brain is trying to panic and formulate a plan to win back any losses by the end of year.
2. Apparel/fashion is a difficult business. So why even focus on the sector?
A few days ago we recorded a show on Lululemon (will be out this week). The company has an impressive growth record and created tons of shareholder value over the past decade. In preparation for the interview, I was listening to the company’s Investor Day in April, and I noticed how much work management has put in to get Lululemon in the position it is today, and how much more work they plan to do in the future to grow.
You can’t help but come away impressed by how well the team has executed in elevating the brand above all of the other middling DTC companies in the athleisure/apparel space. But to be honest, from a potential investor’s perspective, all this hard work and execution is actually concerning. Why? Because it indicates to me that perfect execution will be required for strong shareholder returns to continue into the future.
This may sound nitpicky, but after covering a wide range of apparel/brand-related businesses (Farfetch, Callaway, Skechers, Allbirds, Peloton, ThredUp, Poshmark, Revolve Group, American Eagle, Stitch Fix, and more), it is clear these industries are difficult to thrive in. Few companies have sustained success in apparel — Nike is the easiest example — because consumer habits frequently change and brands go out of style as people age. Can Lululemon be one of the few apparel brands with multiple decades of prominence? It is definitely in a prime position. But it will require tons of work from all its employees and strong execution year after year. It also may require multiple strategy pivots.
I’m searching for businesses that don’t have to work hard and where success seems to come naturally to them. Speaking of which…
3. Some positive anecdotal evidence on Airbnb.
Last weekend, I went to California to see my brother graduate college. At these events, you meet tons of different students and their families. From hearing about post-graduation trips people were planning to where they were staying in town for the weekend, Airbnb kept coming up again and again. I know, this isn’t an abnormal thing to hear, but the platform seems to be the preferred travel choice for more and more people as we come out of the pandemic. It’s staggering how much of a lead the platform has in the minds of people, specifically wealthier cohorts under 40.
Headed to Europe? Book an Airbnb in each of the different cities you are staying in. Taking a month to work remotely in the sun? Stay at a long-term Airbnb. Visiting relatives and need extra space because you have kids? More and more people are choosing Airbnb to fulfill this need. I know the company is still controversial and many people believe it has a negative effect on communities, but on a net basis, I think it has delivered a win-win-win situation for users, hosts, and investors. This is a recipe that should create sustainable shareholder value.
I know you can’t invest in something solely because of anecdotal evidence, but it is pretty clear to me that Airbnb’s business is going to be just fine moving forward. At a $63 billion market cap and $8.25 billion in estimated 2022 revenue, I don’t know what forward returns will be for shareholders (the price you pay matters!), but I’m confident in saying this will be a dominant platform for many years to come.
See you next week,
Brett
***Our fund, Arch Capital, may own securities discussed in this newsletter. Check our holdings page and read our full disclosure to learn more.***
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Catch up on Our Shows From Last Week
3 Good Reads
In the Inland Empire region of California, for example, Amazon may cycle through every worker who’d be interested in applying for a warehouse job by the end of 2022, the internal report warned. One of the reasons is that Amazon is increasingly finding itself in a bidding war for workers with rivals in the area, which is a key logistics region because it is within a two-hour drive of 20 million potential customers and two of the largest container ports in the US.
Why Stock Market Short-Termism Is Not the Problem - Man Institute
So, let me tell you a little bit more about what I mean. The mechanism that's leading to corporate contribution to less sustainable results, and more risk of climate catastrophe isn't that they're too short term. It's more a matter of corporate selfishness, in the economics vocabulary it's the corporation's capacity to push the costs of pollution and climate change outside the corporation. To externalize the costs, while keeping the profits for themselves and for their shareholders. It's not really a time horizon problem, it's an externalization problem. And the two problems call forth different measures to remedy them, but in the resulting confusion and conflation of the two, they don't call forth different solutions. Because we think if we can just make the corporation think more long term, we're going to get better results on climate change and corporate sustainability than we would otherwise.
Credit Unions and Banking Groups Warn of “Devastating Consequences” of a U.S Central Bank Digital Currency - Wall Street on Parade
Credit union and banking trade groups have released a joint letter to the chair and ranking member of the House Financial Services Committee, warning of “devastating consequences” if the Federal Reserve moves forward with a Central Bank Digital Currency (CBDC). The letter was sent on May 25, one day before the Committee convened a hearing on “Digital Assets and the Future of Finance: Examining the Benefits and Risks of a U.S. Central Bank Digital Currency.” That hearing took testimony from only one witness, Lael Brainard, the Vice Chair of the Federal Reserve.
1 Good Listen
The Bill Simmons Podcast is, by its own description, "the most downloaded sports podcast of all time." This week, it hits its 1,000th episode.
Bill Simmons began his career as a Boston sportswriter and went on to found ESPN's sports and pop culture blog Grantland. After ESPN shut down the site, Simmons started the Ringer — which he sold to Spotify in 2020.
In this wide-ranging conversation, Recode’s Peter Kafka talks to Simmons about how he became a podcasting pioneer, and when he realized nerditry about the NBA and Game of Thrones could both live under the same roof. Simmons also reflects on what he learned from his time as an employee of The Walt Disney Corporation and how things are different at Spotify. Plus, he reveals the number one dream guest he’d love to have on his show.
Smart and Funny Tweets:
