Ensemble Capital’s 2020 Holiday Post
What a year! Looking back decades from now, we’re confident that 2020 will go down as one of the most memorable and important years in market history. With that in mind, we thought we’d close out the year getting some final thoughts from Ensemble Capital’s research team on the year that was, and what impacts it might have in the coming years.
Thank you for reading our articles this year. We hope you enjoy this holiday season!
What company impressed you the most in 2020?
Sean Stannard-Stockton: In our portfolio, it would have to be Ferrari. Remember Italy was the first place outside of Wuhan that was hit hard by the virus back in March. Hospitals were overflowing. People were dying in hospital beds that were stacked end to end in hallways. At the time, we had several Zoom calls with investors and business executives in Italy. Every one of them was horrified! Seeing this peak into the spare bedrooms or home offices of businesspeople living and working in Italy, and seeing the fear that was on their faces and in every word they spoke, drove home the fact that operating a business at that time was a near impossibility.
But Ferrari did the impossible. As described in a Harvard Business School case study of how the company responded to COVID, they recognized immediately that the most important thing was to protect their employees. While the Italian government struggled to care for its citizens, Ferrari rolled out testing and when an employee tested positive, they immediately put them up in an apartment and provided medical care in an environment isolated from the employee’s family and co-workers.
But they did not stop there. A company is not an island, it exists in an interconnected reality of customers, employees, suppliers, etc. As HBS wrote:
“[Ferrari] focused on all stakeholders, not only employees. At a time when businesses are hurting financially, many leaders are focused locally on cost-cutting — including layoffs and furloughs. By contrast, Ferrari has been thinking about its stakeholders more broadly. Ferrari’s suppliers can access the same voluntary coronavirus screening offered to employees and their families. In addition, all the protocols Ferrari is using internally are shared with its suppliers so that they can use the same procedures in their own companies, and it is distributing masks not just to employees but also to suppliers and residents of the three towns—Maranello, Fiorano, and Formigine—where most of the company’s employees live.”
Most people would not look to a luxury car company to be a standard bearer of social responsibility. But we believe that all companies, in every industry, need to understand their relationship with all stakeholders and strive to make each of them a positive sum relationship.
Arif Karim: If I were to pick one company as the poster child, I’d say Moderna impressed me most this year… but really it’s the dawning of the age of genetic medicine that really came to the fore this year.
The combination of technology and our understanding of life sciences came to the fore this year, highlighted by Moderna’s (and BioNtech) development of an RNA based vaccine. After getting its hands on the RNA sequence of the SARS-COV2 virus that comprise its genetic instructions, Moderna was quickly able to design the RNA template for the spike protein powering the vaccine response in just two days. Not only is this a win for humanity against COVID, but it demonstrates the front edge of the wave of gene-based therapies that are in development and will generate huge gains in the treatment of inherited and acquired gene and protein centered diseases over the next few decades. Powering this wave of therapies, Illumina’s sequencing technology has opened up the realm of our personal genomes at an affordable price. This will allow scientists and engineers to access and use population level insights using machine learning across millions, and eventually billions, of genomes from around the world.
Todd Wenning: As Masimo’s CEO Joe Kiani put it, Masimo was built for a COVID-type scenario. And, Masimo delivered. Not only were its existing pulse oximetry products instrumental in treating COVID cases, but the company made some of its newer products, such as hemoglobin monitoring, available to hospitals at no additional charge during the pandemic. Back in March, and within a matter of weeks, Masimo iterated on an existing product to create a way for hospitals to remotely monitor patients’ vital signs using wireless sensors and a smartphone app. When hospitals don’t have enough beds or monitors to treat patients, Masimo SafetyNet can continuously monitor patients at home and alert medical professionals and caregivers if they need to come to the hospital immediately. For eight days of continuous monitoring, the patient pays just $150. Everyone wins in that situation – the patient, the hospital, and the medical system. Post-COVID, we believe there will be a huge market opportunity for this product to be used post hospital discharge on patients with chronic illnesses.
What’s something you changed your mind about in 2020?
Sean: Despite Ensemble Capital embracing remote work years ago, I was initially very skeptical of the idea that there would be a big shift towards remote work. The fact is that most jobs in America can’t be done remotely. As professional investors, it is easy to look around and see your peers seamlessly working remotely (and enjoying it!) and think everyone feels the same. Yet studies show that single men and women, as well as married women with children, report far lower levels of satisfaction with remote work then married men. Yet much of the capital invested in the stock market is managed by married men. So, I had originally thought that the majority of investors were expecting too much of a permanent shift to remote work.
Then as Europe and China seemed to get the virus relatively under control over the summer and people there quickly began returning to the office, and to in-person life more generally, I thought my viewpoint valid. However, as Americans have sheltered-in-place for nine months, I’ve come to recognize that this long duration is, in fact, creating new habits and new norms. Our own company has onboarded new clients and even new employees in a fully remote environment and the entire country has gotten a crash course in using Zoom.
Habits are hard for people to change. They are a big part of the reason most big calls that “this changes everything!” are wrong. But as shelter-in-place drags on, I’ve started to feel that the “habit to break” is not in-person work, but the nearly yearlong “habit” of remote work.
Arif: COVID has certainly led many of us to rethink how we live our lives and spend our time, both physically with stay-at-home orders and philosophically in the way the explicit examination of one’s mortal risk leads us to reexamine what we do with our limited time in the way we lead our lives. In the US, we are very much focused as a society on staying busy, being productive, and indulging in conveniences. Stay-at-home orders, and having our families spend time together at home, has led me to appreciate the value of time spent together NOT being busy… just spending time together doing everyday things such as cooking meals together or going out for a walk together. Busyness is the antithesis of having time and savoring it, and in my life at least, that has meant time passes by very quickly. I’ve found the slowing of time and spending “idle time” together has increased depth in my family relationships and our enjoyment of each other’s company, which ultimately is the point of having and being a part of a family that we all nominally profess to being the most important thing in our lives. It’s been a nice lesson learned!
Todd: I have been skeptical about electric vehicles and their appeal outside of major metropolitan areas, but my opinion changed this year. As sticker prices fall on EVs, the total cost of ownership increasingly favors EVs over internal combustion engine vehicles. The major auto producers have seen Tesla’s success and want in on the EV action, so we will see more variety in terms of choice and price points. There remains several obstacles for EVs in terms of charging (we’re used to filling up our cars with gas in a few minutes) and infrastructure, but they are far easier to own and maintain than ICE cars. Forgoing oil changes might be reason enough for me to get an EV.
What behaviors from the COVID era do you think will persist after a vaccine is widely distributed?
Sean: Back in March, I never would have guessed that the number of homes sold this year would exceed the level of transactions in 2019. But here we are. And as we near the end of 2020, both new and existing home sales are much higher than this time one year ago and has remained so since July.
Housing activity, the number of homes bought and sold, has been depressed ever since the housing crisis a decade ago. Transactions have been constrained by low levels of homes being listed for sale and very low levels of new homes being built. Real estate is unique because other than first time buyers, every buyer is also a seller. You cannot buy what’s not for sale and you don’t want to list your home for sale if you are uncertain about finding something to buy.
But COVID has lowered interest rates, increased home values (and home owner equity has increased by $1 trillion this year), and caused many people to reconsider their housing needs. Therefore, I think the high level of home sales, home improvements, and all of the other economic categories that relate to home transaction activity, has finally had its growth “flywheel” kickstarted. And, while home prices may not continue to climb higher, home sales activity is likely to grow strongly for many years after COVID fades into history.
Arif: Certainly work-from-home has led to benefits for some parts of society, namely reducing time wasted commuting, while enabling people to work productively at over disperse locations. This has already been something we had observed at Ensemble Capital since as we had a remote work policy for a couple of years prior to COVID’s onset. However, with more workers and companies also seeing the benefits with lower than anticipated costs, it probably will mean there is a significant segment of the population which will see this as a benefit they require from their employers, especially in the case of harder to find talent.
Todd: Video games were normalized during COVID – as a form of family entertainment, socializing, and education. That was inevitable, but COVID “stay-at-home” efforts pulled it forward a few years. In the 1980s and 1990s, parents viewed video games as rotting their kids’ brains, but the kids of that generation are now becoming parents themselves and have a different opinion. As the chart below indicates, parents were already beginning to regularly play video games with their kids a few years before COVID.
What “stay-at-home” did was accelerate other media and social events into the video game environment. Fortnite is a perfect example. Fortnite became a gathering place for friends to stay in touch and have fun together, and also hosted virtual concerts. Rapper Travis Scott’s Fortnite concert reportedly generated over 10 times more in sales as a successful in-person concert would have yielded. With economics like that, Travis Scott’s virtual concert will not be the last. Nintendo’s Animal Crossing also served as a sort of Zen garden for players to maintain, relax, and connect with friends during stressful times in the physical world.
What was your favorite piece of writing, research, or podcast from 2020?
Sean: This is a tough question! Our full-time job is to hunt down and consume excellent and insightful writing, research, and podcasts, so I have so many examples to choose from.
COVID tested everyone in the world. When people are pushed to their limits, their true colors are revealed. You get to see how people behave when the chips are down and the future of a company, or a life, is on the line.
On March 20th, just days into the shelter-in-place order, when absolutely no one knew what was going to happen with COVID, the CEO of Marriott, Arne Sorenson, recorded a video message to his global team. To me, this six-minute video embodies everything I admire about someone who is tasked with leading others and knows that true leaders see themselves as acting in service of the people they lead.
It is not just that Sorenson is authentic and empathetic, not just that he is so clearly speaking from his heart, it is that he is honest as well. He refuses to offer any false hope, refuses to pretend everything is going to be OK, but he tells his staff that he will do everything he can to lead them to the other side of this crisis.
I have rarely, if ever, been so emotionally moved by a business leader, but then I have rarely, if ever, seen a business leader step up so confidently in a moment of true crisis and display the attributes that I wish all of our leaders would display more regularly.
Todd: I have really enjoyed a relatively new podcast called The Rest is History with historians Tom Holland and Dominic Sandbrook. As you might expect from the title, they talk about historical events, but they also dive into broader topics like the purpose of history itself, why historical lessons can be misleading, and comparing historical events with current phenomena (e.g., how the printing press had similarities to social media).
Any book recommendations?
Sean: The Deficit Myth by Stephanie Kelton. The Deficit Myth is an incredibly readable book explaining Modern Monetary Theory (MMT). As we described in our blog post about The Overton Window, we ourselves do not believe that MMT is correct (it might be, we just don’t know). But we do know that the neoclassical explanation of the relationship between inflation, the money supply, and fiscal deficits is wrong. Anyone paying attention should be able to see that the economics field does not currently have a robust understanding of the dynamics that impact these critical inputs to the economy. Indeed, the Federal Reserve’s updated policy framework (also discussed in the Overton Window blog post) is a recognition of this current lack of understanding.
So, while we do not embrace MMT as “correct,” we think The Deficit Myth does an amazing job explaining a complex subject in an easy to understand format. The book is a New York Times best seller, which is not typical for an economics book! We think that no matter what view investors hold on MMT or neoclassical explanations of these topics, as the US government runs shockingly high deficits which will likely continue for some time, it would be foolish to not build a solid understanding of an alternative explanation of how the economy actually works.
Arif: I found Alchemy by Rory Sutherland to be a fascinating and entertaining read (and even better listening to Rory narrate his book) in the realm of human behavior and economic decision making constructs, and how the emotional brain that controls our subconscious can be revealed via marketing experiments. This is well captured in the quote he shares from David Ogilvy: “People don’t think what they feel, don’t say what they think and don’t do what they say.” It’s a nice complement to one of my all-time favorite books, Sapien by Yuval Harari.
Todd: Morgan Housel’s The Psychology of Money will undoubtedly be part of the core curriculum for anyone interested in investing and personal finance. If you haven’t already grabbed a copy, I highly recommend it.
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