The admittedly ambitious title of this issue reflects the focus of Latticework 2017, hosted by MOI Global at the Yale Club of New York City last month. While the enormity of the topic ensured that definitive answers and prescriptions would remain elusive, the participating members and instructors engaged in thought-provoking, valuable dialogue.

Superinvestor Tom Gayner of Markel Corporation surveyed the long history of the firm he has helped build, extracting lessons about the long-term compounding of intrinsic value at any organization. While the world has always been turbulent and technological change has accelerated recently, core aspects of value creation remain constant. Says Tom,

“There was a phrase in the 1995 annual report that speaks to the humanity of Markel, the fun of working on customer problems: ‘We want people who will view their work as something more than a job’—so qualitative factors of what goes on at Markel are critically important. [There was] a lot of talk about ‘relationship’ and that our people are committed to us because we’re committed to them. We can look at a lot of numbers and quantify things, but these are all people businesses, and we operate accordingly.”

In another Latticework session, Josh Tarasoff and Tom Russo explored the durability of global consumer brands. Many brands that had once been considered unassailable have come under attack due to the ease with which new entrants can bring products to market and reach large audiences without reliance on traditional media. States Tom Russo,

“I wrote in an investor letter that in this Amazon-oriented world you have to be careful that assets don’t become liabilities. Gillette had won the razor war at some point. There was absolutely no way anybody could have dislodged Gillette. Wilkinson tried. Schick tried. Unilever tried in partnership with Target; they may have spent $500 million, but none of that could budge the success Gillette enjoyed.

“The trouble was, they fell prey to the standard game on Wall Street, which is driven by short-term results. Gillette asked too much of the brand. They charged too much. The price paid for the razors was so high they had to keep them locked up behind the checkout counter. If you’re trying to sell fast-moving consumer products, the goal isn’t to lock them up. The problem is, they needed to get those prices to sustain reported earnings and have the options used for compensation vest, and to retire rich…

“Along came these kids from a fraternity and created a business called Harry’s, and then another guy came along and did Dollar Shave Club.”

Tom Russo — while pointing out the factors behind the relative downfall of brands like Gillette (Tom is also bearish on Coca-Cola) — expresses confidence in brands that stand for luxury or satisfy long-standing consumer preferences and habits. Tom is a long-term investor in companies such as Nestlé, Swatch, and Richemont.

Latticework instructor David Pakman, a partner in Venrock’s New York office, was an early backer of Dollar Shave Club, putting him in a unique position to observe and influence the disruption in the branded consumer sector. David shared Venrock’s uniquely differentiated investment strategy at the summit, and I am pleased to bring you a glimpse in this issue. Every investor in traditional branded consumer businesses needs to understand what some of the smart people funded by David are doing to erode the competitive position of companies long thought of as wide-moat businesses. I found the following exposé by David fascinating:

“I’ll tell you about a company in New York. Most people don’t know about them, and they don’t have a strong brand. But, this is the ultimate new way to build a consumer products giant. The company is called Mohawk, and they sell consumer products on Amazon only. They scrape the Amazon website, read all the product reviews and ratings, and digest all of the pricing and the rankings. They feed that into an artificial intelligence [system]. The AI says to them, ‘If you make a matte black 1400 W hairdryer with a 1.5 meter cord and price it for $41.87, it will be the number one hair dryer sold on Amazon.’

“Then they have a team in China go to the hair dryer factories and find the two or three factories that make the best hair dryers. They hand them the specs… Then they bring that to market under one of three different brands, which I won’t even bother to tell you because you’ve never heard of them. They launch them on Amazon and — guess what — within three or four days they are the number one product in that category, and they stay there because of the way the Amazon ranking engines work. They immediately displace L’Oreal and all these other companies that have been making hairdryers for a hundred years.

“They have 250 SKUs on Amazon, and they are the top three products in those categories for each of the 250 SKUs. They are absolutely killing it. It is an example of a company that is built for the Amazon era. Their only risk is that Amazon does the same thing to them. Amazon already has the data and can do that. Well, Amazon is doing that. Amazon has thousands of SKUs that are Amazon-branded.”

The other Latticework sessions included in this issue are similarly fascinating. I encourage you to read the transcripts. Whether you are looking to profit from technological change, or simply not get hurt by it, you will likely find the insights of Latticework instructors immensely valuable.

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