🎙Drew Cohen of Speedwell Research: Deep Research and Business Counterfactuals
"The most interesting thing is to pull on counterfactuals. You might hear, 'we're successful because of X.' Find another company that has been successful in spite of not doing X."
I always enjoy discovering people who are passionate about their work and are dedicated to a deep understanding of their domain. That’s definitely the case with Drew Cohen who writes Speedwell Research along with the prolific Kevin G (Drew used to work in research at Goldman and Capital Group.)
You can tell Drew is deeply curious about his work from the way he writes and digs into his companies. The business history section alone in his report on Meta is 44 pages long and basically a wildly detailed mini-biography (the entire report is a whopping 166 pages; you can find shorter examples of business history on their website, namely Constellation Software and Floor & Decor).
I was excited to record a conversation with him during which he commented:
I believe it's not worth writing anything that I don't believe is worth reading. The things I think are most interesting to read are the ones where the writer’s really excited about it. I spend the better part of a month on each report and it just would not be a great experience for me if I wasn't enjoying it. I think it would show up in the quality of work. It's very hard to be good at something when you don't enjoy it.
I couldn’t agree more. Drew recently outlined his research and writing philosophy on Speedwell’s substack:
How many sell-side reports that were published just a year ago would you want to read today? Not many, if any. The lack of shelf life is indicative of a lack of signal and insight.
Most companies change far less than you’d think by the publishing cadence of the sell-side. Costco’s value prop is essentially unchanged from several decades ago, the competitive advantage of Moody’s rating agency business still stands, and the virtues of BlackRock’s business model have endured quarter after quarter since their first index fund launched in 1999.
In line with that idea of increasing the resolution of a photo, our first aim is to understand what we are “looking at”. What is their operating model? How did they get here? We put these two questions together because a business’ operating model is typically born from a need, and their history gives us a better understanding of how they’ve iterated on their original value prop over time.
Floor & Decor was started after founder George Vincent West was fed up with the limited selection and prices of local alternatives. Sam Walton wanted to provide better value for money to his customers. Jeff Bezos wanted to create a service that could take advantage of the unlimited “storage” space the internet enabled. Starbucks’s Howard Shultz wanted to create a “3rd space” that wasn’t home or work. The original problems founders tried to solve and the ethos they imbue their companies with are usually still true decades later.
The idea is basically consumers value different things to different degrees. So you want to fill one desire and then a subsequent one, et cetera. So when you're shopping at Costco or you're shopping for flooring, you don't care about the decor of the place necessarily. If you had to drive a little bit further, that's okay with you in this circumstance.
And you're okay with the format being a warehouse because the things you value really are having a lot of selection and the fact that the stock is right in front of you. So that works for flooring. It wouldn't work for any model where someone wouldn't be willing to drive to an area where they couldn't build a big store. IKEA is another example.
What does this mean for building enduring businesses?
Companies that meet more conditions on a Consumer’s Hierarchy of Preferences, beyond the point that the consumer would have already satisfactorily purchased the item are effectively increasing the consumer surplus. Getting more higher-level items filled on The Consumer’s Hierarchy of Preferences is crucial to creating loyal customers with a unique value prop that cannot be easily mimicked by competitors. This is precisely why brands want to become “lifestyle” or “aspirational” brands—it is a more unique node on The Consumer’s Hierarchy of Preferences.
Nike’s competitors sell shoes; Nike sells athleticism and excellence. Dell sells computers; Apple sells perfectly crafted, consumer-friendly technology that “just works”. Just think—can you ever recall a Nike commercial talking about shoes, or an Apple advert talking about their computer specs?
Everything about how you structure your operation is a signal to consumers.
Having a product offering that creates consumer surplus tends to compound over time, as growth in the business allows a company to continue to work to improve their core value prop. In a sense, this consumer surplus is effectively compounded over time, and increases the intrinsic value of a company.
Drew and I talked about Meta, Constellation Software, Floor & Decor, Restoration Hardware, and his research and writing process. I hope you enjoy the conversation. You can also get in touch with Drew and Speedwell on Twitter.
I will share a few excerpts from their research reports below as well. Thank you for reading,
DISCLAIMER. Drew writes about stocks and so it’s important to mention: none of this is investment advice! I write and podcast for entertainment purposes only and this conversation reflects just our personal opinions. This content should not be relied on to make investment decisions. Do your own work and seek your own financial, tax, and legal advice before making any investment decisions. Speedwell’s reports were written in the past and their views are subject to change (and of course all of these stocks have since changed in price). Also see their disclaimer.
Business counterfactuals, failed businesses, and excerpts from Speedwell’s reports on Meta, Floor & Decor, and Constellation…
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