Mimetic Theory And The Future Of E-commerce (#25)

Mimetic Theory And The Future Of E-commerce, w/ Julian LEHR

Your host, Ben Robinson, is virtually sitting down with Julian Lehr, an ex-Googler, startup founder, and current startup partnerships lead at Stripe. Julian and Ben get into all sorts of interesting behavioral psychology related to buying and how digital companies can use physical elements to take advantage of signaling. You will also learn Julian’s tactics for staying productive, why advertising budgets are shifting from celebrities to micro-influencers, why the Berlin startup scene hasn’t quite lived up to the hype — and much more!

Podcast also available on:

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Julian recommends:

  1. One book: Finite and Infinite Games by James P. Carse
  2. One influencer: Dan Romero
  3. Best recent article: The Arc of Collaboration, kwokchain.com, August 16th 2019
  4. Favourite brand: Kleid Stationery®
  5. Productivity hack: Treating your email inbox like a to-do list.

Full podcast transcript:

 

How do you stand out of the crowd? How do you make sure that other people see your content? And this is something that the most successful digital products have done as they monetized signal amplification. — Julian Lehr

[00:01:19.06] Ben: Thanks so much for coming on the podcast! I wanted to kick off by talking about Europe and the European startup scene. So, your job at Stripe gives you quite a lot of exposure to up-and-coming European startups, and I just wondered how excited, how bullish you are about the European startup scene?

Julian: I’d say I’m generally an optimist. So, I think things are moving in the right direction. Are we close to Silicon Valley, yet? Probably not. Will we ever be Silicon Valley? It’s like, in Paris or London or Berlin, is there going to be a new or next Silicon Valley? I don’t know. I guess I’m less bullish on that. But, on the other hand, I don’t think there has to be a Silicon Valley in Europe. So, that would be my answer, I guess.

I’d say Berlin, in general, has been a bit of a disappointment, in the sense that, I think 10 years ago, we looked at Berlin like, “This is going to be the next startup ecosystem. It’s very cheap, there’s a lot of talent, there’s a lot of international talent, and there’s a lot of crazy people. ” And we haven’t really been seeing that, at all. — Julian Lehr

[00:02:04.17] Ben: And what about Berlin — the city in which you live? What’s the startup scene like, there?

Julian: I shouldn’t be saying this, probably, being part of that ecosystem. But I’d say Berlin, in general, has been a bit of a disappointment, in the sense that, I think 10 years ago, we looked at Berlin like, “This is going to be the next startup ecosystem. It’s very cheap, there’s a lot of talent, there’s a lot of international talent, and there’s a lot of crazy people. And crazy people will work on crazy ideas, and the next big thing will look like a toy first, and we’ll see a lot of very interesting innovation from Berlin.” And we haven’t really been seeing that, at all. Like, in the sense that the most successful companies in Berlin have been sort of like rocket internet type copycats, which is interesting. So, this is a famous Peter Thiel quote: “We were promised flying cars and all we got was 140 characters.” And, in Berlin, it’s sort of like we were promised flying cars and all we got was the guy trying to copy 140 characters. So, I wonder, where’s that crazy innovation that we were promised? I don’t know if it ever will come. I think there’s a couple of reasons why we haven’t seen what we expected but I thought that was interesting.

[00:03:22.24] Ben: What are those reasons then? Because it sounds like you’ve got all the ingredients, right? You’ve got weirdos, you’ve got talent, is cheap enough for people to live inexpensively. So, it sounds like it should all be coming together.

Julian: Well, I wonder — and this is sort of my pet theory — I wonder if the low cost of living is actually more of a barrier. And if the high cost of living in San Francisco is more of a feature than a bug, and it’s like, a) there’s the high cost of living, so you have to be serious about the work that you do. And then, on the other hand, there is very little to do in San Francisco. The quality of life is pretty bad: there’s not much of a nightlife, there’s not great parks you would spend a lot of time in. So, in a lot of cases, the best place to be is literally your office, whereas, in Berlin, there are all these distractions: there’s great nightlife, there’s great bars, there’s great parks — there’s a lot of other things you can do. And so, you don’t need to work hard to enjoy all of the benefits because it’s so cheap.

I’ve seen a lot of people who have moved to Berlin with the intention to start a company, and then they get just sucked into the nightlife and they do some other job because life is pretty great. — Julian Lehr

[00:04:22.24] Ben: And, I guess what you’re saying is if it’s very cheap to live, that gives you a long runway and kind of takes away that pressure to getting things done every day.

Julian: Yeah, exactly. Exactly. You don’t need to raise venture capital from day one. You can just see what happens. I’ve seen a lot of people who have moved here with the intention to start a company, and then they get just sucked into the nightlife and they do some other job because life is pretty great. I think there’s another Peter Thiel quote: “People move to Berlin in their 20s to retire.” That’s not necessarily a bad thing, right? It’s a good thing for a city to have a great quality of life. It’s just, the side effect of that is we probably won’t see as many companies as in other ecosystems.

There’s a trend in Eastern Europe, where entrepreneurs, because their home market is too small or too insignificant, they start selling to US consumers or businesses from day one. And they actually pretend to be a US entity. — Julian Lehr

[00:05:05.01] Ben: And then, why do you think Europe hasn’t produced more top-of-the-food-chain platform companies?

Julian: I don’t know if this is a question about platform companies. It’s more about larger companies, in general. And maybe the lack of funding might be one reason. There are other things, like, the average European might be more risk-averse than the average American. But I think the larger problem is that it’s just a very fragmented market. So, if you’re a German entrepreneur, you’ll probably start a product that works for the average German consumer. And that is a big market. It’s a big enough market to raise venture capital, but it’s not the same as the US. And it’s not just language barriers, but there’s different user behavior — like in-payments for example. This is really interesting and this is something we see at Stripe, of course. The average German uses very different payment methods than a person in France or in the Netherlands, for example. And there’s a lot of these tiny differences. So I think there’s an interesting trend in Eastern Europe, actually, where these entrepreneurs there, because their home market is too small or too insignificant, they start selling to US consumers or businesses from day one. And they actually pretend to be a US entity. So, they have US headquarters, which is one guy in San Francisco or New York, but then the entire team is somewhere in Romania or Belarus — cheap engineering talent that they just sell to the US market from day one.

[00:06:43.18] Ben: How confident are you that we can overcome that fragmentation? So, I’ve been noticing that over the last few weeks has been a number of initiatives coming out of the European Union to try to overcome these obstacles that startups face when they do business across borders. Do you think this is something that we can fix, we can make it a more homogeneous market?

Julian: Well, I think you can fix parts of it. And I do think that, on average, people’s English skills probably improved. And so, you can just release an English product that’s going to work for most markets. I think those things will get better over time, but I think it just takes time. I am optimistic in the long term. Probably not so much in the short term.

the idea is more to connect with businesses that you’ve purchased from before to increase lifetime value, which is one way to work against high user-acquisition costs from aggregators in the channel, which are Instagram, Pinterest, etc. — Julian Lehr

[00:07:28.21] Ben: Okay. So, your last two blogs, which I really enjoyed, both have been about Shopify or at least eCommerce. When you’ve analyzed Shopify, you sort of correctly identified that it’s a platform, it’s not an aggregator. But, in a way, you suggest that that might leave it open to an aggregator, to somebody who might sit on top of it, and kind of suck away its margins or gradually kind of move downstream and gobble up some of its market share. And then, you’ve also talked about ‘Shop’, the app it just launched. So, how do you see Shop? Do you see Shop as an attempt by Shopify to try to aggregate demand and therefore protect its business — so, go upstream to protect its business and its margins?

Julian: Yeah, Shop is interesting. So, I think people have misinterpreted what Shop is. So, Shop has been interpreted as sort of like a demand aggregation play, sort of like a discovery platform and you log in and you see different products, recommendations across different Shopify stores. I don’t think it is. So, the way I see it is, you can only really discover shops that you’ve bought from, previously. So it seems to me that the idea is more to connect with businesses that you’ve purchased from before to increase lifetime value, which is one way to work against high user-acquisition costs from aggregators in the channel, which are Instagram, Pinterest, etc. So this is how I see Shop. That being said, over time, I could see it becoming more of a discovery platform, perhaps. I think that is interesting. It’s definitely something that I would assume Shopify is interested in experimenting with. The question is, how successful will that be? Ben Thompson had a few good articles on this. He was like, they should focus on the supply side. There’s very few cases where the supply side aggregator has then successively become a demand-side aggregator — it’s just not what they’re good at. It’s more of a distraction. I don’t know. I don’t disagree with him, but I think it will be interesting to see Shopify trying things in that space because I do think that there’s room for innovation in the product discovery space.

I don’t think you have to become a demand aggregator to be successful as a platform that aggregates supply. — Julian Lehr

[00:09:50.24] Ben: I suppose the argument is, if they just remain a platform, then they can build massive economies of scale, right? But, as you know, in your article, those that aggregate demand always have a stronger position than those that aggregate supply. And I suppose the argument is, if you’re a platform, you kind of don’t exist to the end consumer. Nobody should theoretically know whose Shopify is. But, nonetheless, if its job is to serve those businesses as best as possible, then that might mean, over time, that they have to become a demand aggregator, otherwise, there’s no way out of paying the aggregator tax to acquire new customers?

Julian: Well, it depends. So, I don’t think you have to become a demand aggregator to be successful as a platform that aggregates supply. If you’re able to diversify the demand side, so if the demand was spread across hundreds or thousands of different channels, then it doesn’t matter. Yes, there will always be a tax that people have to pay, but that’s just normal. I don’t think there’s a way around that. There’s always going to be some user acquisition cost. You have to pay your distributors, in a sense. It becomes dangerous when there’s one or two very powerful aggregators — like Instagram — and they capture all of the value, I think that is a potential risk, not so much for Shopify itself, but for its individual shops and suppliers.

we look at someone that we admire, and we look at what are the things that they have or the things that they want, and then those are the things that we want, as well. — Julian Lehr

[00:11:28.08] Ben: It was a two-part blog, and the first-part blog was really talking about these dynamics, of how does Shopify coexists with Facebook, with Instagram. And then, in the second part, you were talking about Shopify in the context of Mimetic Theory. What is Mimetic Theory and how does that play out with influencers and helping curate better recommendations for us, as consumers?

Julian: So, Mimetic Theory is this theory from this French philosopher called René Girard. A few people might be familiar with him — he has gained quite a following in tech in recent years because he’s one of Peter Thiel’s mentors. And, basically, the theory is that what sets us humans apart from other species is that we observe others and we learn by observing and copying other people or people around us. And according to Girard, that also includes copying what other people desire, what they want. So, basically, what we do is we look at someone that we admire, and we look at what are the things that they have or the things that they want, and then those are the things that we want, as well. Which is not something that we are aware of. We think there’s a direct relationship between myself and an object that I want to have. So, what he argues is that it’s not a direct relationship, but it’s more a triangular relationship. So, there’s a so-called mediator that I look up to, and then I look at, “What does this person have? I want the same thing.” Because, in the end, I sort of want to become that person. So, the object that I buy is more of a means to an end. I’m just buying that thing to eventually become that person. If you take that theory, and you look at the way that eCommerce works, it’s not really set up that way, in the sense that if I look for a product on Amazon, I just get a list of products. I can rank them by relevance, I can rank them by price, I can’t really rank them by what I apparently am interested in, which is, who of my mediators is using which products?

[00:13:36.25] Ben: But that’s true on any platform, isn’t it? I mean, it’s particularly acute on Amazon, because you have to start with an idea that, you know, I want to buy a blender, for example, right? Whereas, it’s easier on Google or other platforms to search for a variety of things: what’s the best blender? And what you’re saying is there’s actually a third way, right? So, rather than just kind of know what I want and seek the cheapest option on Amazon or have an idea of what I want and seek recommendations from others via Google, you’re saying there’s the third way, which is “I want to see what blender Kanye West uses.”

Julian: Right! Or any other influencer, for that matter.

Ben: Yeah. Beyonce or whatever. I think you used Kanye West in your article, that’s why I mentioned Kanye West.

Julian: Right! So, yeah. A mediator could be a celebrity, it could also be a friend or someone else you look up to. But, if you think about Girard’s theory, basically perfectly describes what influencers are. The name is perfect, if you think about it. So, basically, the way I see it, a lot of shopping or eCommerce decisions are made by browsing an Instagram feed — I’m going through a feed of mediators and look at what they are interested in, and that’s what I want to buy as well — which is exactly why Instagram works so well as a user acquisition channel for Shopify products, especially because the products that are typically sold on Shopify are things that are visually appealing, they’re products that you didn’t necessarily know you wanted in the first place. So, I think that’s why it works really, really well. I think there’s a bunch of other products that aren’t necessarily discovered on Instagram, but they’re discovered on Twitter, for example, blogs, newsletters, podcasts, etc., that you would then go to Amazon trying to find it later, but I still feel that there’s potentially room for an aggregator that specifically just does product recommendations based on people that you follow.

[00:15:53.07] Ben: Yeah. And they would have lists of the products they’re using and all the products they recommend?

Julian: Yeah, exactly. So, I think if Shop app eventually does become a product recommendation engine, I think that’s what they should try to build — sort of like collections or lists of things that I might be interested in, based on people I follow on various social networks.

[00:16:19.04] Ben: Because, again, not only differentiates them from Amazon on the one hand — which is really about the cheapest and knowing ex-ante what you want — and Instagram — which is, you know, I don’t want to say cluttered, but it has many, many people sharing many things on it — with something which is dedicated to a curated list of recommendations from influencers?

Julian: Exactly! And I think there’s a few products that have tried to build something similar. None of them have really been successful. So, maybe there isn’t room for a product like that. Maybe that’s not something that people want to use, but I do wonder if there is room for a product in that space.

a lot of advertising budgets have shifted from very big influencers or celebrities, almost, to more of like micro or nano influencers that only have a couple thousand or a couple of hundred followers because that is perceived as being more authentic. — Julian Lehr

[00:17:00.24] Ben: And how do you square that with authenticity, because the big buzzword is authenticity, which is, people are becoming skeptical when they think that an influencer is paid to promote a product. So, how would this sit? You know, if I was an influencer, and I had a list of products I’d recommend, how would you, as the consumer be able to infer whether or not they were genuine recommendations or paid-for recommendations?

Julian: I think that explains some of the trends that we see in online advertising, where a lot of advertising budgets have shifted from very big influencers or celebrities, almost, to more of like micro or nano influencers that only have a couple thousand or a couple of hundred followers because that is perceived as being more authentic. But that could also work in a product recommendation engine. It doesn’t have to necessarily be someone like Kanye West that I follow. It could be, literally, the guy next door that I think is interesting.

[00:18:03.14] Ben: What about voice? So, you also wrote a blog about emerging platform opportunities. Why do you think we haven’t seen more breakout applications with voice?

Julian: I think the mistake that we have made is we’ve looked at voice as a new kind of interface that replaces a normal screen or other types of interface. And I just don’t think that that makes a lot of sense, in the sense that talking to an assistant just takes a lot more time and it’s less convenient than doing things on a screen. There’s no room for discovery. I have no idea which voice commands I could use. We might get there at some point if these voices systems get better, with time. I’m a bit bearish about voice as a primary interface.

Julian: What I do think is interesting is voice as a secondary interface. So, one of the most interesting applications that I’ve seen in the device space was at a Hackathon, where a team built a voice interface for Starcraft. So, the idea is that you’re so busy with your hands on your keyboard and your mouse, that you would use an additional interface to command your troops with a couple of voice commands. And I wonder if there’s room to replicate that for other applications. What if I could edit my Word document, as I’m writing it with voice commands? I think there could be something interesting in that space. So I think voice is interesting — just not as a primary interface.

[00:19:46.26] Ben: When you look at finance, where do you see the big platform opportunities there? Do you think, ultimately, finance is something that just gets embedded in other products and services? You know, i.e. do you think that we will always have an interface directly into finance? Or do you think that, for an SME, it’s easier to take a loan out through their accounting system or, if I wanted to pay you, it’s easier for me to do it through WhatsApp? Do you think, ultimately, finance becomes just a layer in the internet infrastructure, which is what a lot of people are predicting?

Julian: I think there’s a few interesting apps that do have a social component. Like, if you think about Venmo or PayPal, to a certain degree, they’re basically messaging, but based on money, to a certain degree. There are a few interesting investment apps in the US that have a social component to it. So, you have a feed and you see what your friends have invested in. So, I think there’s a few interesting ideas in this space. I think the question remains, is that a mainstream application or not? I don’t know.

At some point, your inbox will become crowded with too many newsletters and then content providers will look for the next best thing — Julian Lehr

[00:21:00.07] Ben: I want to talk to you about content, now. So, you also wrote an essay talking about the proliferation of newsletters and podcasts. It’s quite difficult to get access to the end consumer when you go via an intermediary like Facebook because it’s so crowded. And then, ultimately, an idea that I guess was a bit more popular last year, which is, we’re all retreating a bit from some of these mainstream platforms because there’s so much noise and trolling, etc. So, why do you think we have seen such a proliferation? Do you just think it’s a functional all-of-the-above or do you have a different theory?

Julian: Well, I think those are two different things, sort of like dark forest theory of people moving into private chat groups. There’s a different problem there than people wanting to reach an audience and not being able to because the platform is so crowded. So, I think those are two different things. The main trend that I see is people looking for a new platform because they want to reach their audience, which is difficult if you’re new to a platform. It’s very similar to that Shopify — Instagram problem that we discussed earlier, if you think about it. If you rely too much on one demand channel, then that can become difficult. And so, I think newsletters aren’t necessarily better than blogs. It’s just that they have distribution built-in and as long as people don’t have too many newsletter subscriptions, then that’s great for content producers. At some point, your inbox will become crowded with too many newsletters and then content providers will look for the next best thing, which might be Telegram, it might be some other platform we aren’t even aware of. It might be audio. But I think that’s just sort of like an ongoing thing where people just constantly look for an additional trade route, so to speak.

[00:23:00.23] Ben: Do you think, in this case, actually, because people will pay for newsletters, they kind of have more sustainability this time? Because I guess, what happened in the past was people weren’t prepared to pay for content, so it was really difficult for people to stick at these things for a long time. But I’m just wondering, since there is more willingness to pay for content, maybe this theory of the long tail could actually happen after all?

Julian: Yeah. I think there’s room for that. There’s 7 billion people on this planet, so even if you have a super tiny niche, you can probably make a living. But I do think that we will see bumbles over time in the newsletter space or content space, in general, because there are some power laws and there can only be so many Ben Thompson’s who actually made a decent living off of newsletters. I think that still remains to be seen how many people will actually be able to make enough money to make that a sustainable source of income.

[00:24:15.04] Ben: And if we, again, compare it with this Amazon versus Shopify kind of analogy, if Substack is Shopify, the Facebook of newsletters — is that Facebook itself? Or do you think there’s a gap?

Julian: That’s a good question! I guess, maybe, your inbox will be that. If you receive 100 newsletters, will there be a dedicated newsletter inbox in your Gmail account? And we’ll just rank those newsletters by date? Will those be ranked by relevance? Or will there be ads so that your newsletter shows up on top? And so, it’s like a separate newsletter. I wonder if Google is working on a product in that space. That’ll be interesting. And then, yeah, I guess the question is where do you discover newsletters in the first place? There’s a product called ‘Stump’, I believe. It’s trying to build a demand-side aggregator for newsletters. I’m pretty sure we’ll see someone trying to build that discovery engine. Maybe that will be Substack itself, trying to build that.

[00:25:29.05] Ben: You’ve written a lot about email. I suppose we think email is being a tool that’s kind of old-fashioned, right? Because it was the first use-case for the web in many ways, right? And everybody has email. And, in some ways, we’re dissatisfied with email, right? Because you have this constant struggle to keep up with emails. But you seem to think that emails could almost be like this meta-tool that sits above all these other productivity tools, which, in the work that we do, is a problem, right? Because, as you said, we’re using Trello, we’re using Slack, we’re using all these different tools — Teams, Zoom. How do you keep track of everything? And one of your ideas is that we don’t have to reinvent a new tool. In fact, email might very well be the right tool to do that, to perform that metafunction of aggregating all the tasks and information and conversations from all these other different applications. So how would that play out in your mind?

Julian: So, I think of email, and calendar, and To Do’s as sort of the same thing. Sort of like different sides of the same three-dimensional coin. And people have built great to-do apps, they’ve built great calendar apps, they’ve built great email apps, but nobody has really integrated them. I think Superhuman are in an interesting spot where they could build that product. So, basically, what they’ve done for those who are not familiar with Superhuman, is they have a command-line interface. So, instead of having 100 different buttons in the interface, you can basically trigger a command-line interface, and then just write whatever action you want to do, with a bunch of really clever keyboard shortcuts that just makes you very, very effective. And so, I wonder if we’ll move to a world where we can trigger certain actions directly from your inbox. So, something that we’ve seen in the last couple of years is we can now snooze emails, and they come back and so, the emails become to do’s. But if we want to interact with their actual content, we still have to switch to whatever application we’ve received the initial email notification from. I think what we’ll see next is, when you receive a GitHub notification, you can basically close an issue directly from your email. Or you could, maybe if you receive an invoice, you can trigger a payment action that pastes that invoice instantly, without you having to switch back to your bank account. I think there’s a lot of interesting room for innovation in that space.

I think email is, for me, at least, it’s sort of like an underrated tool. If designed right, I think it can be super powerful! — Julian Lehr

[00:28:17.24] Ben: All conversations just get aggregated up to email, and you just control everything from there?

Julian: It could be email, it could be something else. People thought that Slack might become that place, sort of that meta layer that sits across different apps. It hasn’t really. And Slack, to me, is mostly a distraction. Email is better. I’m in control to whom I answer, when. So, I think email is, for me, at least, it’s sort of like an underrated tool. If designed right, I think it can be super powerful!

[00:28:51.16] Ben: In a way, this problem of fragmented productivity applications is getting bigger, right? Because, as we try to coordinate the activities of workforces that are increasingly distributed and not in the office, then it becomes harder and harder to do this, and are more urgent, at the same time?

Julian: Yeah, 100%. This is what I think: Microsoft — and I get Spark there as well — given that they do have their own email client, and they have all these different productivity apps, they have started to build some of these things that I’m describing. But I do hope that there will be something like Superhuman that combines different products that aren’t necessarily from the same company.

[00:29:38.09] Ben: I’m amazed at how well Microsoft’s done. I suppose I’m not surprised they’ve done well, but I’m still surprised they’ve done as well as they have. And for me, Microsoft is like the case study for bundling, right?

Julian: 100%. Yeah.

[00:29:55.12] Ben: Because, I mean, none of those applications work very well in themselves. And I suppose, where I’m slightly surprised, is that we’re moving to this world where, since everything’s easier to integrate now, we’ve increased the mix of buying the best of everything, but still, the power of bundling should still never be underestimated, right?

Julian: Yeah! I guess the problem is that it’s risky for any business to open up their product to other apps. It’s very easy to become commoditized and then there’s like that one tool that just makes you redundant, but you’re still an input of that demand aggregator that captures all the value. So, as a startup, I’m just probably reluctant to open up my platform to others, and just trying to build it myself. And so, you end up with all these different walled gardens that don’t really interact with each other, which is a pity.

[00:30:52.17] Ben: And just while we’re still on the topic of productivity, you seem to be somebody that, based on reading everything that you’ve written, somebody who is extremely focused on productivity, and making sure that you waste as little time as possible and automating things. What kind of productivity tips do you have? And what would have been your major discoveries in the last few months?

Julian: So, I’ve been looking for a to-do app that works for me, for basically the last 10 years, and I’ve never found one that really works for me, that I found useful. And so, I’ve actually made my email inbox my to-do list. So for a to-do list, I just send an email to myself, and then I snooze it for the day that I think I want to get that task done. And that works pretty well for me. I mean, I already spend quite a lot of time in my email inbox, so that’s just a good place for me to keep my to-do’s as well. And then, I do work a lot in Google Calendar, as well. So, yes, I have my meetings in Google Calendar, but then I would also add specific to-dos to my calendar. So, at the beginning of each week, I would go through my to-do’s and my email inbox and then block out time in my calendar so that basically the whole day is blocked with different events so I know exactly when I need to get what tasks done.

[00:32:17.06] Ben: Do you have notifications set up to come into your email?

Julian: I don’t. I’ve turned almost all notifications off. So, Slack Direct Messages is turned on, but I would then sometimes just close Slack for an hour or two when I want to get deep work done. The other thing that works really well for me, it’s just using an actual pen and paper for my writing, for example. I do it on actual physical paper, with just no distractions.

[00:32:44.28] Ben: So you write in pen and paper and then copy it?

Julian: Yeah, mostly. Otherwise, it’s me writing two sentences and then it’s like, “Let’s see what’s on Twitter!” And then I waste 30 minutes on Twitter.

[00:32:57.08] Ben: Yeah. Okay. Because there’s this constant challenge of synchronous and asynchronous, right? And the problem with email is, is synchronous. So, basically, what you’re saying is you don’t just switch off all the apps because you don’t trust yourself. You actually take a pen and paper, write what you’re going to write — the blog, the essay — and then you type it up afterwards?

Julian: Yeah. It just makes me a lot more productive.

[00:33:18.15] Ben: Okay. And then music, again, is something that is conducive to productivity, right?

Julian: Yes. I haven’t actively looked for music that makes me more productive. It’s more that I noticed when I looked at music data — I log everything I listen to with Last FM — I saw this trend that there are certain genres of music that have just increased over the years, like classical music, ambient music. And so, it seems like that’s a good proxy for my productivity. I can look at which weeks or months I spent most of my time listening to music and then compare that with my notes of how productive did I feel on a given day — and, yearly, that correlates pretty well, which is interesting.

I have about 50 to 60 things that I track on a daily basis, things like mental well-being, physical well-being, media consumption, how fit I am — all sorts of things I’m just interested in. And people assume that that’s a lot of work. It actually isn’t.— Julian Lehr

[00:34:07.28] Ben: So, every month, you share data on what you’ve been reading, what you’ve been listening to. But you also sometimes go further, right? I can’t remember what you called it, but during the quarantine, you released data on all sorts of different things: your sleeping patterns, your commuting, what you’ve been eating. And I suppose one question is, how do you even track that data? And then, the second question is, why is it you choose to be just so open about sharing all this information? It’s almost like a mini Truman Show, where you just sort of lay yourself open for public consumption. So, how do you do it and why do you do it?

Julian: I use a pretty big air-table spreadsheet for most of the things that I track. So, I have about 50 to 60 things that I track on a daily basis, things like mental well-being, physical well-being, media consumption, how fit I am — all sorts of things I’m just interested in. And people assume that that’s a lot of work. It actually isn’t. So, when I started with this, initially, more than seven or eight years ago, I carried around a physical notebook with me and I would just take notes as things happened. And then, at some point, you just get into the habit of being more present and realizing what you do. So, at the end of the day, I know exactly how many cups of coffee I drank, or how many beers I had on an evening, just because I subconsciously counted those, and then, each morning, the first thing I do is just open the spreadsheet, put in all the data from the previous day, which takes me three to five minutes, tops. That’s it. And, yeah, I’ve decided to share some of the data. I found that people find that type of data interesting. There’s only certain things that I’ve shared publicly. There’s a lot of things that I track — personal data that I wouldn’t share publicly on the internet. How many books I’ve read or how many podcasts I’ve listened to, I’m very much willing to share that with other people and it doesn’t seem like giving up on a lot of privacy.

[00:36:18.29] Ben: Why do you track all that stuff, yourself? Is it, again, in pursuit of productivity and well-being?

Julian: No, not really. So, it started as more of an experiment to just find out how much you do in a year. So, when I started with this, I was just curious how many cups of coffee do you drink in a year? How many people do you talk to? How many buildings do you enter? How much time you spend in the shower, etc. So, I had this pretty big project, where I tried to quantify pretty much every single aspect of my life — and I did that for an entire year. And then, as I was doing it, I sort of figured out that the data is interesting — there’s all these interesting patterns that you can see — and it’s almost like keeping a diary, I would say. It just makes you a lot more present. So, off the last seven years since I’ve been doing this, it feels like I remember more day-to-day activities than I did previously.

[00:37:16.02] Ben: And you don’t feel like the act of recording it changes your patterns in themselves? A bit like there’s a lot of evidence that this happens in economics, right? The minute you start to record something, then people’s behavior changes, right? A bit like, if I were to record how many beers I drink, I might naturally reduce consumption, right?

Julian: 100%. So, initially, when I started with this project, the idea was for the data not to influence my behavior, but then, it definitely does, like, you realize that “Oh, actually, I do drink a lot of alcohol. I should probably reduce my alcohol intake”, etc. So over time, I’ve started to introduce yearly goals where, at the beginning of the year is like, “This is how much I want to swim this year. This is the maximum amount of alcohol that I want to drink, etc. And then, the data just becomes a good way to see if I actually achieved all of those different goals.

[00:38:11.28] Ben: So, this might seem like a random shift of gears, but since we have been in quarantine, I can’t remember what the exact figure was, but I think Zoom went from 10 million daily users to 300 million daily users or whatever, and probably, as we come out of quarantine — some places already have — likely we’ll see a reduction in the number of daily users. But it feels like we’ve accelerated that trend towards remote work. We’ve accelerated people’s comfort levels with video conferencing. I’m just wondering, do you think Zoom is a big platform opportunity? Do you think we’ll get all those yoga teachers that started doing yoga classes online and suddenly realize that they, thanks to the internet, could reach a much larger customer base or consumer base? And I suppose there are hundreds of hundreds of other professions that have realized that they can reach a bigger audience. So, do you think there’s a platform opportunity in Zoom, that maybe people have underappreciated?

Julian: I think there’s definitely a platform opportunity. I do wonder if Zoom will be the one who’s actually building that platform. I’m a little skeptical. They don’t strike me as a company who’s been thinking about that. I think they’re busy working on everything. But I do agree that there’s definitely a platform where you probably should have different interfaces for different use cases. You know, it’s not just meetings, but as you say, it could be yoga instructors, or whatever it is that would need a platform. And there’s all these things that you can build on top of Zoom. I think there’s a payment opportunity, sort of like in-app purchases for Zoom calls where you can upgrade to premium content or different things as you are on the call. I think that’s an opportunity. I haven’t actually seen anyone building something in that space, but I think there’s definitely an opportunity there.

[00:40:22.16] Ben: And what about audio in general? You said that you listened to the podcast with Brett Bivens, and one of the things that he talks about is that he thinks the ear is under-monetized versus the eye. Do you agree that there’s a lot of untapped opportunities in audio? Just because we can do it alongside, it’s kind of less all-consuming and therefore, we can do it alongside other activities that we do.

Julian: Yeah, I think there’s definitely an opportunity there. Like, all that time we spend not in front of a screen, we usually have Airpods or some other headphones plugged in. So, there’s definitely opportunity to just consume content, and then, also to monetize that content. I’d say audio is overall probably under-monetized. There’s probably room for more. I think Spotify is in an interesting position there, where it seems like they’re trying to become the Netflix of podcasts. I think there’s room for an AdSense-type ad network for audio ads. That isn’t really something you could build with podcasts being very decentralized. But, if you have one aggregator dominating the space, I think there’s some interesting monetization opportunities there for sure.

[00:41:45.18] Ben: Are you bullish on Spotify? Because Brett is super bullish on Spotify!

Julian: Definitely in the non-music space. For music, they’ve been in a tough spot, given that there’s only so many suppliers, and they basically control what you can do and what you can monetize. But everything that’s not music, I think there’s huge opportunity to monetize. And it’s not just podcasts, right? It could be meditation apps, some other things that we aren’t even thinking about. Maybe there’s room for stuff like audio-based social networks. There’s a few popping up these days. I think there’s still a lot of interesting ideas that haven’t been explored yet.

[00:42:34.05] Ben: Yeah, I mean, that’s one of the things that I most like about your monthly update of what you’ve been listening to because Spotify it’s getting better, but that kind of stuff is not very salient on Spotify. It’s not easy to see what other people are listening to. But I suspect, as you said, there was almost this disincentive to get people to spend too much time on Spotify, because the more time they spend on Spotify, the more they have to pay the record labels. But when they have a more Netflix catalog of content that they own outright, then yeah, you basically want to drive people to the site and have them spend as long in there as possible because once it moves out of just listening to music they don’t own, then they can take up gross margins quite a bit, right?

Julian: Exactly! Yeah.

[00:43:17.14] Ben: When do you listen to podcasts? Because I noticed that during quarantine, thanks to all the data you shared, you hadn’t been listening to as many podcasts as you normally would. Is that because you weren’t commuting?

Julian: Yeah, exactly! So I usually listen to podcasts while I’m commuting — so, before and after work. I’ve now started to basically go for a walk before and after work to simulate a commute. And so, my podcast consumption has gone up, again, as well. So, it seems like we’re almost at pre-quarantine levels, at this point.

Everything that we do is sort of a signaling aspect. We’re just trying to let people know that it’s a hidden message in what we do, and that that’s why we actually do these things. — Julian Lehr

[00:43:50.08] Ben: I want to talk to you next about signaling as a service. You wrote another great essay talking about signaling and how signaling is mostly associated with physical products, and you were talking about how we can translate that into the online world, right?

Julian: I read a super interesting book called, “The Elephant In The Brain”, which talks about signaling and basically makes two arguments: everything that we do is sort of a signaling aspect. We’re just trying to let people know that it’s a hidden message in what we do and that that’s why we actually do these things. And then, the other argument is that we’re not actually aware of doing that. So, a classic example of this was conspicuous consumption, where you buy a Rolex watch, not because it’s a great watch, but because you want to signal something about your social status and your place in society. And what they claim is that is not just luxury goods, but pretty much everything that you do has a signaling component — whether it’s green products that you buy, whether you’re giving to charity — basically everything that you do, you just do it for the sake of signaling something about yourself.

Julian: And so, I wondered if that also applies to digital products, and if so, if that explains why digital products tend not to monetize it, as well as their physical counterparts. And the way I look at signaling is there’s basically three components to it. So, the first thing is what I call ‘a signal message’ — that’s whatever you want to convey by using or buying a product. So, if you think about a pair of sneakers, the signaling message is something along the lines of, “I live a healthy and active lifestyle.” Now, as a next step, you need some form of ‘signal distribution’ so that other people know about that message you’re trying to send. So again, with the turf sneakers, you just wear them in public where other people can see them. Great! It works pretty well. This is why people are willing to spend a lot of money on sneakers, but not on socks — nobody can see your socks so you’re not incentivized to spend a lot of money on them. And then, the third thing is, if everyone is wearing cool sneakers, how do you make sure that your sneakers stand out? So you need some sort of amplification to make sure that you stand out of the crowd. In the example of the sneakers, it might be a very unique design, it might be flashy colors, whatever.

Julian: So, physical products do really well having a signal message because they’re tangible, they’re physical, they just represent something. There’s certain limits to your signal distribution, in the sense that there’s only so many people who can see you wearing a pair of sneakers, for example. Just because it’s physical, there’s a certain limit to that. And then, signal amplification is also something that seems difficult in a physical world. For digital products, it’s sort of the other way around, where, because they’re intangible, you don’t really have a signal message, or at least it’s difficult to distribute that message to other people. So, if you think about a fitness app, which is also about living a healthy and active lifestyle, it just lives on your phone. Nobody can see the apps on your home screen. So, therefore, the willingness to pay is just a lot lower. You wouldn’t spend $150 on a fitness app, probably.

Julian: What digital products have done, though, is what you just mentioned: basically signal distribution at scale. So, what Instagram, and Facebook, and Twitter do is basically they allow you to share things about yourself. You can just take a picture of your sneakers, and now, a million people could potentially see that you own these sneakers. So, that works really well. The problem is, they can’t really monetize that signal distribution. The more people you reach, the more powerful the signal gets. So, if you were to monetize that signal distribution, then you wouldn’t reach as many people because you’re only willing to spend that much money on it.

Julian: Now, there’s a third thing, which is signal amplification, which means that what they monetize is standing out of the crowd, which just goes back to the discussion we had earlier around, if you have so many content producers, how do you stand out of the crowd? How do you make sure that other people see your content? And this is something that the most successful digital products have done: they monetized signal amplification. So, it’s a network that’s free to use, but if you want to make sure that you stand out, that’s when you have to pay. So, for example, Tinder is generally free to use, anyone can join. If you want to stand out with super likes and other in-app purchases, that’s when you have to pay — and that works really, really well for them. I would also argue that Fortnite is a similar example. So, again, it’s not really a game, it’s more of a social network. It’s free to use, it’s free to play. It’s not something that’s common in gaming, typically; it’s free to win — that’s also not common. The only thing that you have to pay for is signal amplification. So, if you want to have special skins that stand out or have these emote dancers that make your character special, that’s what you have to pay for.

what’s interesting is combining a digital product with a physical product. So, I think that’s something that Neo Banks such as N26, or Revolut have done really, really well, where, if you subscribe to a premium plan, you get a really nice-looking metal card. And that’s what people pay for.- Julian Lehr

[00:49:28.13] Ben: Did you ever read the article that was called, ‘Shared Value Transactions’?

Julian: I have not.

[00:49:34.29] Ben: It’s funny because this is what I thought when I read your article, which is like, it looked at this from a different vantage point, which is, actually, the Free to Play, and then when you charge, for add-ons is all about maximizing the number of users because you have network effects, and so on. And then, getting basically your most active users to subsidize the platform for everybody else — and you didn’t need that many active users. But actually, I think your take is more interesting. It’s almost one that I suspect a lot of people overlook when designing applications, which is, it’s almost like, if you had a whole bunch of things that you thought of when you were strategizing, the signaling effect of your product and the importance of that in its marketing and distribution is critical. And that’s one of those I was so fascinated by the essay because I suspect that this is something that most people under-appreciate.

Julian: Yeah, I agree. And it’s not a difficult problem to solve. I think what’s interesting is combining a digital product with a physical product. So, I think that’s something that Neo Banks such as N26, or Revolut have done really, really well, where, if you subscribe to a premium plan, you get a really nice-looking metal card. And that’s what people pay for. The premium benefits aren’t that great — you get a few more free ATM withdrawals, but they don’t really justify the 15–17 euro a month price hack. What people pay for is to be seen with a nice card. And so, I wonder if there’s room for other products to introduce an additional physical element to their digital subscription. If it’s a fitness app, maybe that’s t-shirts or some other fitness gear that they sell together with a subscription. I think there should be more experimentation in that space.

I think there’s going to be an interesting trend where you modularize eCommerce, where you don’t buy from a specific shop, but you buy directly from an influencer. — Julian Lehr

[00:51:32.01] Ben: Well, one of the podcasts we most recently recorded was on the whole craft movement, which is a really big thing — this whole move. We had a couple of companies on: one that does craft beer. And, we talked about this movement as being a function of growing affluence of the internet giving more information, and therefore, enabling people to make better choices, desire to have more sustainable products, and so on. But I suppose there’s a different take, which is craft is just really about signaling. It’s about signaling that I can afford better maybe, or I’m more worried about the provenance of what I eat and drink and where.

Julian: I think that’s part of it. And then, this is something I’ve been thinking about a lot: how do you marry the signaling theory with mimetic theory? Because they also seem to be sort of the same thing, like, you use mimetic theory to learn what you can signal later, and becoming a mediator that other people follow is sort of a signaling play. I think that’s super interesting! I wonder if you look at other people coming up with their own brand for whatever it is, and so, I want to use it as well, sort of like a network effect, the mimetic network effect where, because my friend has started a craft beer brand, I want to have my own brand, perhaps. And this explains why we’ve seen all of these microbrands in general, not just for craft beer, but all sorts of things.

[00:53:19.27] Ben: And I’m convinced that that’s how you scale these craft products, right? Which is the end of the mass consumer, right? So, we don’t sort of mass produce, mass advertise, and mass sell relatively standardized goods. Instead, we sort of cater increasingly to smaller demographics, and so on. But actually, those demographics can be quite similar across many different locations. And, how do you reach those demographics at scale without paying a lot of money to Facebook and Google? And I think it comes back to your same point, which is, you find the influencers. So I really do agree that the signaling and mimetic theory, they could coalesce.

Julian: Yeah. I actually think that the products, in a lot of cases, remain the same. They just have a different packaging and a different brand. So, it’s the same product, but you buy it for a different reason because everyone is a little different. And so, you see a lot of these influencers becoming brands. And so, I think there’s going to be an interesting trend where you modularize eCommerce, where you don’t buy from a specific shop, but you buy directly from an influencer. And it’s the same product that you would buy from another influencer, but it’s branded in a slightly different way. So, we buy the same things, but we buy them for different reasons. It looks slightly different, even though they’re just kind of the same thing.

Ben: Which, again, comes back to your point that if everybody becomes an influencer, even if we only have very small followings, then we would just have this massive proliferation of influencers, which means we need an aggregator for influencers?

Julian: Right! Exactly, yeah!

Ben: Julian, thank you so much for coming on the podcast!

Julian: Thanks for having me. It was fun!

Aligning the Stock Market with the Planet (#24)

Aligning the Stock Market with the Planet,
w/ Luciano DIANA

Your host Ben Robinson, is speaking with , Senior Investment Manager at —one of the leading independent wealth and asset managers — where he is running the Pictet Global Environmental Opportunities Fund. In this episode we cover: should government stimulus packages be conditional on companies investing in energy efficiency? Why plant-based products are a space that you need to be paying attention to? Why we should be bullish about the ability for market forces to solve climate change? And more!

Podcast also available on:

Apple PodcastsSpotifyGoogle PodcastsAnchor.fmSoundcloudStitcherPocket CastsTuneInOvercast

Luciano recommends:

  1. One book: 
  2. One influencer: 
  3. Best recent article: , NY Times, April 28th
  4. Favourite brand: Vacheron Constantin®
  5. Productivity hack: Never let your inbox rule you. Action, delete or file

Full podcast transcript:

 

What happened with COVID-19 was a stark example of what we don’t want, right? We don’t want to solve environmental problems by shutting down societies because the pain is too big. So, the only real practical way forward is to invest in technology. And this is what we’re doing. — Luciano Diana

Full transcript:

[00:01:29.02] Ben: So, Luciano, thanks very much for coming on the podcast! Maybe we could start by you telling us how you got into environmental investing?

Luciano: Sure! Hi, Ben. I got into cleantech renewables research when I was at Morgan Stanley, back in 2005, and that was because I was very interested in the wind sector, the solar sector, I was part of a mid-cap team. Nobody was really covering those talks, so I carved out a small list of companies to research. And then, a few years later, when I joined Pictet, I started managing the Clean Energy Fund for a few years.

[00:02:11.16] Ben: When did you say that you started to look at it at Morgan Stanley?

Luciano: In 2005.

Ben: Even as recently as 2005, there wasn’t really much kind of invested interest or coverage of cleantech?

Luciano: There were just a few mid-cap names — definitely no large caps that were involved in renewables. And yes, it was a bit of a cottage industry. At the time, I also covered things like biofuels in a lot of companies that actually don’t exist anymore; I did a big piece on the carbon trading market that started around that time — the European Emission Trading Scheme, the carbon offsets, all that stuff. And so, it was very interesting work. I spent most of my time as an analyst to educate investors on industries — in fact, as much as on individual stocks. So it was quite a lot of fun!

the definition of what is environmental has broadened a lot since my days in 2005. So, back then, the view was quite narrow: solar energy, wind energy — and those are part of the solution, but they’re just one of many types of technologies that you can adopt to make an impact — Luciano Diana

[00:03:06.29] Ben: Just looking at the investment perspectives, which I downloaded from the Pictet website, one of the things it says is, “With our Global Environmental Opportunity Strategy, investors can help safeguard the planet while retaining the prospects of long-term outperformance.” How much of a paradox is it, to think that you can get a sustained rate of return from economic growth at the same time as you can protect the environment?

Luciano: That is the key reason why this fund is having success. And generally, investments into ESG funds with an environmental tilt are growing because we are able to get both objectives of the financial return and also the environmental impact. And the key to that is that also, the definition of what is environmental has broadened a lot since my days in 2005. So, back then, the view was quite narrow: solar energy, wind energy — and those are part of the solution, but they’re just one of many types of technologies that you can adopt to make an impact. Today, the way that we define an environmental investment is anything that can improve the natural resource efficiency, or address pollution. And that, then, ranges from energy efficiency to water technologies, to waste management, to software companies that are addressing the digitalization of manufacturing. So, it’s a very broad investment theme. And so, this diversification is very important for performance. So that’s the magic formula for our investors because we have an objective to outperform global equities by 3–4% per year or over an economic cycle. So, we’re not aiming to get 10, 20% plus volatility for the fund that is roughly in line with that of global markets. And then, we also have a positive impact.

[00:05:14.10] Ben: You sort of alluded to it there, when you listed the kinds of investments that you could make, but how broad is our environmental products and services? Like, for example, could you invest in Tesla? Could you invest in Zoom? What are the boundaries, exactly, of environmental products and services?

anytime that you digitize a process, you have some kind of raw material efficiency there — Luciano Diana

Luciano: Yes. So, the definition is relatively broad. And there is one framework that we use for our investment universe. It’s a scientific framework that was developed in 2009 — in fact, it was published in Nature Magazine back then — by a group of scientists coordinated by the Stockholm Resilience Center. And that tells us that there’s nine environmental domains that really matter. Climate change is one of them, but also, biodiversity is there, the water cycle is there, chemical pollution is there, and others. And each one of these domains has a boundary. The scientists are telling us more or less where the boundary is, and the economy needs to stay within the boundaries to avoid a nonlinear and unpredictable change.

Luciano: So, we, first of all, look for businesses that stay within the boundaries, to begin with. That means they have a low environmental footprint, and that means that they’re not predicated on overconsumption of natural resources to exist. That’s the first step. The second step is we look for the solution providers among them. So, it’s not enough just to have a low environmental footprint — like, for example, maybe a healthcare company could have a low environmental footprint — but we also look for solution providers for the environment. So, any solution, again, that addresses resource efficiency or pollution control. And if we find a company, a business that satisfies both of these conditions, and that has a sufficiently high proportion of its revenues in this domain, then we consider that eligible for our universe. And we ended up with 400 companies, which doesn’t seem much, but 400 companies that have at least 20% of their sales in some kind of environmental solution, globally — and these are listed equities, by the way, so this is a clearly listed equities fund.

Luciano: And then, within that, you find many technologies. You mentioned Tesla — for sure, electric cars are there. Volkswagen is not, also BMW is not, because they don’t do, at least today, enough electric cars; they still have a big legacy in combustion engines. You mentioned Zoom; Zoom is part of the theoretical universe, like Citrix, for example — any solution for remote working because remote working has a positive impact, avoiding commuting and all that. And then, for example, I mentioned before: software. Software is important for us when it’s linked to an engineering application. We’ve invested in virtualization software for a number of years. We invested in building information management software, in companies like Ansys and Autodesk. They really bring digitalization into the manufacturing, into the construction sector. And anytime that you digitize a process, you have some kind of raw material efficiency there.

the challenges that we have in terms of the damage we’ve done to the environment, those are huge challenges, so we can never go fast enough — Luciano Diana

[00:08:46.21] Ben: Have you seen a change in the kinds of investors that invest in your fund? Back, when you started it, I can imagine investors largely consisted of either funds or individuals that were interested in ESG. Would you say it’s gone way more mainstream now?

Luciano: Absolutely! It is becoming more mainstream. So, the fund was repositioned in 2014 — that is the key date, September 2014. Today, we have roughly $3.5 billion under management; mostly it’s retail and wholesale clients. We have large distributors within Private Wealth Management organizations, fund selectors, and some institutional clients as well, such as family offices and pension funds. So, definitely, more mainstream and not necessarily clients that want to use this as a satellite approach to their equity allocation but more and more as just an approach to global equities.

[00:09:53.00] Ben: I can imagine that doing what you do marries your professional interests with your personal interests, in the sense that we’re all affected by climate change and I think you’re somebody who’s very interested in it, in a personal capacity as well. Would you say, generally, you think things are moving fast enough?

Luciano: They are not moving fast enough because the challenges that we have in terms of the damage we’ve done to the environment — things like the concentration of CO2, the amount of plastic that we throw into the oceans — those are huge challenges, so we can never go fast enough. But what has changed and is encouraging and it’s very important for our theme is that the awareness on these issues has stepped up dramatically over the years. So, when we started, we thought that this would happen, we thought that young people would start to also get angry and complain about the state of affairs and how the older generation is treating things — and Greta Thunberg happened, so for us, it’s not really a coincidence. It was bound to happen, at some point. That’s very encouraging. We’re seeing how consumer preferences are changing. We’re seeing how the private sector is investing. And all of this has to do with more information, more awareness, so that’s the keyword for us.

[00:11:13.25] Ben: We haven’t yet reached the inflection point where all these nascent trends growing consumer activism, growing corporate responsibility, start to compound. Would you argue we haven’t reached that point, yet?

we cannot expect to leave the planet alone by shutting down our current society — Luciano Diana

Luciano: They are converging. I’m not sure about the compounding, but they’re definitely converging. So, they’re getting aligned. In most regions of the world, we see a very good alignment. I would caveat that the United States is a special case because of the current president and his policy toward environmental protection. That’s the only situation where policy is going backward instead of forward. But even there, if we take a long-term view, we think that eventually, the direction will turn 180 degrees. And so, the alignment will be pretty consistent across the regions. That’s powerful! I think there’s a sense of urgency. I think you might have questions later about COVID and the pandemic. We have almost put the entire economies to hold for an emergency which had the probability of being very severe in the short term. The hope is that we can mobilize, also, to address climate change and to build more resilience in the system.

[00:12:36.08] Ben: One of the challenges with climate change is that it’s always there, is a threat, but it’s not present in the same way as, let’s say, the pandemic is, where it’s constantly in the headlines. It’s like, one day we hear about a fire, another day we hear about a drought, but it’s not kind of this all-consuming, headline-grabbing issue that stays permanently on our consciousness. So, do you think that’s one of the issues which is, on the one hand, you’ve got kind of fatigue because we hear about it so much, but conversely — or paradoxically — it doesn’t stay sufficiently in our consciousness that we’re always reminded of it and we’re always acting on it?

Luciano: It’s not there every day but I would argue that in the last year or two, we’ve seen enough shocking events around the world to remind us about how dire the situation could become if we don’t act: the Amazon fires, the bushfires in Australia, and the hurricanes, and so forth. What I would also add is that it’s becoming more clear that climate health, the state of the planet, and our health are interrelated. So, more and more studies are linking air pollution with deaths in different cities. Even with this pandemic, there is an element of linkage there, seeing that people that are weaker in their lungs tend to be affected more gravely by the pandemic. There’s also the argument about climate change potentially favoring the spread of diseases. So, all these linkages are emerging one by one and I think the picture is getting clearer in people’s minds.

I think there will be some structural changes. Not huge. So, I wouldn’t go as far as saying that office work is dead, that we’re all going to work from home. There’ll be more flexibility. — Luciano Diana

[00:14:20.24] Ben: You mentioned earlier, but in the sense that the pandemic has accelerated digitization, I guess it’s been helpful in accelerating the energy efficiency.

Luciano: Yeah. So, there’s a couple of dimensions there. One is the pandemic and the other one is the current oil price. Maybe I can address both of them separately. So, on the effect of COVID, indeed, we are accelerating some technology trends that we were already seeing and we were investing in, and we think that’s going to be good because, ultimately, the environmental footprint of society might improve if we go in that direction. That’s one thing. When it comes to energy efficiency, we think that is going to continue but then, we have to also factor in the price of oil, the price of electricity — and whether that’s going to slow down investments in certain parts of the world for capacity, in general, we know that renewables have taken share, for example, versus fossil fuels. But, we also know that due to the lower economic activity and the pandemic, the overall level of investments in the energy sector has gone down by 20%, I think — there was a study from the EIA that was just released a day or two ago. So, that has to do with a slower economy, and the oil price is just a symptom of a slower economy. So, in the short term, it might not be the case that we’re going to see an acceleration, but that, in our opinion, is just a temporary effect. Again, when we do thematic investing like we do within our fund, we tend to look at the long term. So, a one or two-year-time horizon is too short term; we look at three years and plus. And if we look at three years and plus, then for sure, energy efficiency will continue to remain very important.

the worst is over and the markets tend to really have a huge amount of relief when they know that the worst is behind. — Luciano Diana

[00:16:21.00] Ben: What you touched on there is one of the biggest paradoxes about the environmental movement, which is almost like we have to continue to consume in order to create the incentives to be efficient.

Luciano: Yes, that is a very deep and philosophical question about where is society naturally going toward. Human beings need to reach a better state, they strive for better economic conditions, and therefore, society moves in a certain way: more mobility, different types of consumption. What happened with COVID was a stark example of what we don’t want, right? We don’t want to solve environmental problems by shutting down societies because the pain is too big. So, the only real practical way forward is to invest in technology. And this is what we’re doing, is really to try and get technology to save the day, and realistically, not trying to look for moonshots that don’t have any economic chance of success. Potentially changing our habits a bit, but not to the point of, sometimes I say, going back to the caves, the genies out of the bottle. And so, we cannot expect to leave the planet alone by shutting down our current society.

Ben: It’s almost like we need to create the demand, to create the profit incentives for entrepreneurs to come in and develop the technology that will save us?

Luciano: Yes.

[00:18:05.03] Ben: While demand has been temporarily reduced because of COVID, is this the moment where you think the government should step in? Like, for example, should stimulus packages be conditional on companies investing in energy efficiency, for example?

Luciano: Yes! There’s definitely a great opportunity within any crisis, and also, in particular, when there’s huge amounts of money being thrown at the economy. Not to put any conditionality would be, really, a shame. We are encouraged by what we’re seeing in Europe for the moment — the $750 billion package where a quarter of that seems to have some ties attached to it. We will see what happens in the United States. There’s also the potential for a huge Green Deal at some point in the future. And, in China, definitely, we’re seeing the subsidies going in the right direction. What I would say, though, is that, as investors, we don’t want to overplay the role of governments, and we don’t want to over-rely on those. Going back to the beginning of this conversation when I was mentioning renewables back in 2005, they were not yet ready as a technology, they needed a significant amount of subsidies, and therefore, there was huge volatility, also, in their businesses, when the subsidies were changed by governments. So, that lesson, as investors, has to be always there in the background — and that’s why, when we talk about technologies such as software for resource efficiency, digitization, these technologies make economic sense, and ultimately, they are adopted because of cost-saving reasons. So, whether the economy is in a good state or in a bad state, the companies always need to save money.

[00:19:56.17] Ben: I know you didn’t want to talk about moonshots, but are there any technologies that are not broadly on people’s radars, that you think could be game-changing? Things like carbon capture and technologies like that. What’s emerging that we should kind of be excited about?

Luciano: So, the carbon capture is indeed the holy grail of solving climate change, but it’s still too far away for us to look at, as investors, in public equities. So, we’re looking at the different initiatives, but the cost per tonne would require a price of carbon that the governments are not ready to accept. What I find very interesting — and that could have an equally important contribution not just to climate change, but to biodiversity and many other dimensions — is the plant-based products. So, it’s an industry that pretty much didn’t exist five years ago or even four years ago, and now it’s out with some valid products for consumers. So, very small, but with a huge potential impact. So, at the moment, there’s only one company that attracts a lot of attention in the stock market, which is Beyond Meat, but there’s others that are going to come into the market. So, I think as investors, while it’s early stages, while it’s not really clear who’s going to emerge as a winner, this is a space that I would definitely pay a lot of attention to.

[00:21:36.03] Ben: And is there a geographical bias, in terms of where the best companies and the best technologies are emerging from? And if there is, is there any way to rationalize that? Is it because of government policies and because of either just these places have startup hubs? What does the geographical picture look like for these technologies and companies?

Luciano: It’s quite skewed towards North America. So, if we look at our portfolio, for example, it’s been maybe 60%, roughly, exposed to that region, on average, over the last five years, and then, potentially 30% Europe and the rest of the emerging markets. So, the reason for that is innovation. At the end of the day, American companies tend to invest more in R&D. They have products that are leading-edge, and they tend to be also fairly well-managed businesses. In Europe, we have technology, but not as much, so clearly, on a relative basis, less than North America. And, in a way, the personal disappointment at the moment is that we are not able to find enough opportunities in emerging markets. So, we know that there’s a disconnect between the environmental issues that are present there, and the solution providers that domestically are developing solutions. That’s a function of, again, on average, not having enough companies that innovate. In China, there’s some great internet businesses, but we haven’t seen great environmental businesses that are really doing technology. It’s mostly companies that are applying technology that comes from elsewhere in the West and then deploying it, for example, for water management or renewable energy. So, we’re still lacking a bit some champions there.

[00:23:40.08] Ben: Should we put a price on the sea?

Luciano: We should definitely think a lot more about the oceans than we did in the past. David Attenborough’s documentary has done wonders for the awareness on plastic, and we should look after our marine life much better. When it comes to awareness, ocean acidification is a big problem. I don’t think that most people in the audience would know about it. It’s also linked to the intensive agricultural practices that we adopted all over the world. Basically, there’s a link between how much we fertilize our fields and when we overfertilize them, the nitrogen that is contained in the fertilizer is not absorbed by the soil so it ends up in the rivers that end up in the oceans, and that creates what’s called dead zones — so, zones where algae bloom, algae grow, they decompose and they absorb oxygen in the process. So, the ocean, as we get more and more of these dead zones around the world, along the coasts, actually is losing oxygen — and that has consequences on the types of marine life and fish that can thrive. So, we get a lot of jellyfish in the Mediterranean, for example; that’s a very resistant type of fish, but maybe tuna is a species that needs more oxygen than others. So, when we talk about the ocean, absolutely, we need to make sure that we limit the amount of plastic that we throw in there, we need to limit the amount of nitrates that we throw in there with intensive agriculture, and also be a bit more responsible in the way we fish.

[00:25:40.25] Ben: I suppose what I was getting at was like, in the same way as we’re starting to put a price on carbon, which should then get absorbed into the cost of production and should somehow internalize externalities, is the answer to the problem of polluting in the ocean to put a price on the ocean? Or is that you kind of think these things are too simplistic?

Luciano: Realistically, it would be too hard to put in practice. It’s the ultimate common good for countries. So, I think it’d be nice to think about a solution there. What we need to figure out is a way to get a carbon price, first. I would be very happy if we did that. And we know that we had several challenges in Europe, and we haven’t even started to think about a North American solution.

[00:26:33.20] Ben: Do you think that the pandemic can have a lasting change in terms of business life? So, business travel, commuting. And then, I think you told me earlier, that you’ve been attending a virtual conference. How does a virtual conference work in the investor world? Do you still have one-on-one meetings with the corporates, for example?

Luciano: I think there will be some structural changes. Not huge. So, I wouldn’t go as far as saying that office work is dead, that we’re all going to work from home. There’ll be more flexibility. As you say, if I just look at my job, some type of travel might be avoided. This format of virtual conferences is absolutely a novelty in the investment management ward, but it’s working very well. I think the feedback from both companies and investors is very positive. Basically, yes, you can meet management on a one-on-one basis, on a small group basis on Zoom — these days, that’s what the default platform is, really — and get pretty much everything out of it as you would with a physical meeting. That could take away maybe a quarter of our yearly travel because then, we would still need to go and see clients, we would still need to go and see companies on-site because there’s lab visits or facilities visits, so obviously, you cannot do them online, but this type of corporate axis could change.

[00:28:07.00] Ben: So, do you think virtual conferences might be something that becomes a new habit or a new function of investing?

Luciano: I think so. Maybe not all of them. I don’t think every single conference out there will turn into a virtual event. But I wouldn’t be surprised if one out of three, for example, becomes just virtual. That’s going to be positive.

[00:28:33.17] Ben: I wanted to ask you about the stock market, in general. So, between the 19th of February and the 23rd of March, the S&P lost a third of its value, and since then, with no underlying improvement in the economy whatsoever, it’s recovered. What do you put that down to? Is that a bull trap? Is that just the market looking through the recession? How do you explain where the S&P is at right now?

Luciano: We had the perfect vision in the market — not in the economy, but in the market. And ex-post we’re all geniuses and we all sound very smart. When you’re in the thick of it, it is a different story. So, when the market started to correct, there were a huge number of question marks about the virus. And we don’t do that anymore, but we were talking about parallels for the Spanish flu, and so forth. So, the panic on the way down, in my opinion, was justified by simply a complete lack of information and the unprecedented nature of the lockdowns. March 23rd was exposed to the point of peak panic. Why has the market rebounded since then? Clearly, the response from Central Banks has been unprecedented. So, there was a technical factor there — there was literally money being pumped into the markets to buy assets, equities, bonds, pretty much across the board. So, I kind of could follow the psychology of the market until just maybe a couple of weeks ago and in the recent couple of weeks I’ve also been a little bit puzzled by how far we’ve gone because when we look at the state of the different economies, we’re definitely seeing an improvement. But, I would say that in the US, we still have a few question marks about where all the unemployed people are going to end up if they’re going to be all reabsorbed quickly or not. It’s been pretty brutal over there and the money hasn’t necessarily reached unemployed people’s pockets. Maybe it’s available on paper but not in their bank accounts. So, the effect on the consumer economy in the United States is still a bit of a question mark.

The rise of passive investing is going to continue and it’s a challenge for the industry. But, when it comes to thematic investing, what we see is, really, the active approach is still successful. So, thematic investing is about looking for secular growth themes, is looking for different types of innovation, so it requires a very dynamic approach to identifying opportunities and that’s what passive investing doesn’t have as much. So, an ETF tends to be more rigid, of course, you have a certain universe; maybe once a year, whoever manages that product does a refresh of that universe and then keeps those stocks and maybe rebalances them every quarter. As an active investor, there’s a lot more dynamism. — Luciano Diana

Luciano: So, you could say that maybe the market overreacted a little bit on the way down and now it’s overreacting a little bit on the way up. The fact is that now we know the virus is not the Spanish flu, that it has affected a certain part of the population. So, in its current form, it’s unlikely to affect children and adults in the same way as it affects elderly people. And I would argue that, also, if we have a second wave — which is not yet a base case scenario — it’s a risk, but it is not considered as a base case scenario — our toolbox and our preparedness for that will be much higher than we had at the beginning. So, even if we have a second wave — and this is what I’m getting my head around, as well, these days or I’m trying to get my head around — are we going to have a second lockdown phase? I doubt it’s going to be the case. The measures to address that will be much more targeted. We will have testing, we will have tracing, we will have, hopefully, some pharmaceutical solutions there. So, the worst is over and the markets tend to really have a huge amount of relief when they know that the worst is behind.

[00:32:25.02] Ben: And you don’t think that, as poor earnings are announced, that somehow we’ll have a couple of legs down in the market?

Luciano: At this point, no. I think that the second-quarter earnings are going to be awful, but the market will absolutely look through them. And again, I’m trying to second-guess what the average investor is thinking, but we’re looking at 2021. If anything, I’m not so worried about what the companies are going to report. I’m maybe a little bit worried about things that were not present in the list of risks two-three months ago that they are now. And one is the geopolitical tension between China and the US, which has gone in the wrong direction. So, if we had issues with the trade war in the past, and the stock market reacted to that, then we’ve reached a deal. If we were to go back on that agenda, if the deal fell off, that’s a risk that would worry me because that would be a left-field sort of situation. And then, the other thing that I find interesting, and, to a certain extent, a bit sad is that we’re seeing the markets back at all-time highs, but actually, this is a time when the virus is hitting the population at large, the worst. Actually, in the last week or 10 days, we’ve seen the highest number of new cases since the beginning. And the reason why the market doesn’t necessarily care so much about that is because it’s not really touching the developed markets — it’s not touching the US, is not touching Europe or China or Japan, and now it’s about Latin America, it’s about Africa — and the companies that are represented in the stock market don’t have huge exposure to that part. But, from a human perspective, this is peak suffering. So, to have the stock market in a euphoric state, when hundreds of thousands of people are getting hit for the first time by the virus is, in a way, a bit sad, but that’s what it is in the financial markets.

in order to tap into innovation — and environmental technology, for example, in our case — we don’t feel that we need to necessarily look at very small companies. We have some holdings in companies that are already very well established to maybe $20–30–40 billion on market capitalization, so pretty large. And they’re the ones who are actually driving the most innovation in their respective space. So, finding opportunities in small caps is definitely there, but it is not an absolute necessity if you want to capture innovation. You can also get that from slightly larger companies. — Luciano Diana

[00:34:56.15] Ben: And I suppose another factor is — I don’t know if this is the right terminology, but they call it decapitalization — this idea that companies have been buying back more and more of their stock, fewer and fewer companies actually tend to list — you know, that divorce between Main Street and Wall Street, and that divorce between the developed world markets and the developing world has never been bigger because the stock market is less and less representative of the average business?

Luciano: Absolutely! And I think that was part of the knee-jerk reaction of several investors at the beginning of the drawdown in the markets. When you read the news about restaurants and cruise lines and airlines are really feeling the brunt of the hit, that’s only 6–7% of the market capitalization. In terms of employment, it’s a much bigger sector, so it may be 20% or so if you put everything together — the travel industry and tourism. But in terms of stock market capitalization, it is much less represented.

[00:36:05.02] Ben: We’re starting to see data come out about how stock pickers did during that kind of wobble or correction. And, basically, stock pickers did no better than passive funds. And so, I suppose the question as a fund manager I wanted to ask you was, how much are you concerned about the rise and rise of the passive investing in ETFs and index funds? Does that worry you or do you think there will always be a role for the stock picker?

Luciano: The rise of passive investing is going to continue and it’s a challenge for the industry. From a personal level, looking at what I do and looking at what we do with thematic investing at Pictet, I’m not concerned because we don’t see ETFs have been really taking the majority of the floors in our space. So, when it comes to thematic investing, what we see is, really, the active approach is still successful. I don’t have the exact numbers, but I think ETFs don’t represent more than 15% of our space. So, thematic investing is about looking for secular growth themes, is looking for different types of innovation, so it requires a very dynamic approach to identifying opportunities and that’s what passive investing doesn’t have as much. So, an ETF tends to be more rigid, of course, you have a certain universe; maybe once a year, whoever manages that product does a refresh of that universe and then keeps those stocks and maybe rebalances them every quarter. As an active investor, there’s a lot more dynamism. And in times like the drawdown, the key is to be able to take advantage of these locations that these situations create. So, an active manager can say, in wanting to buy that stock for a long time, “Valuation was not attractive enough — I have the opportunity, and then I go for it too.” So, obviously, it’s always easier said than done, but that’s the attractiveness of the active approach: that you can take advantage of these situations.

it pays to focus on the innovators and the companies that typically don’t have huge capital requirements to grow. That’s also another thing: even if capital is very cheap these days, the strongest performers that we had, have had that characteristic — high returns on capital, but with not a huge amount of capital employed. — Luciano Diana

[00:38:29.20] Ben: Do you think the other big opportunity is in your old hunting ground of smaller mid-cap stocks? Because, if MiFID is increasing the cost of covering smaller mid-cap stocks, don’t you think, almost by definition, there’s more arbitrage, there’s fewer people looking in detail at those stocks and therefore, that’s the place where you can uncover real value as an active investor?

Luciano: Absolutely! So, that is definitely true. MiFID, too, has caused a big change in the industry. We are seeing the need for more internal research, so, we ourselves are beefing up our teams internally, and, of course, we rely less on the sell-side. So that’s true. What I would have to say, though, and if I look at also my fund, in particular, is that in order to tap into innovation — and environmental technology, for example, in our case — we don’t feel that we need to necessarily look at very small companies. In other words, we have some holdings in companies that are already very well established to maybe $20–30–40 billion on market capitalization, so pretty large. And they’re the ones who are actually driving the most innovation in their respective space. So, finding opportunities in small caps is definitely there. What I’m saying is that it is not an absolute necessity if you want to capture innovation. You can also get that from slightly larger companies.

[00:40:08.21] Ben: Last question: what you’re saying is sometimes big is better, right? And that’s particularly the case where you have Demand and Supply Side Economies of Scale. But, in general, do you think the market is good at pricing Demand Side Economies of Scale, or is this idea that a product can get better and better the more people use it? And is that a possible area for value arbitrage?

Luciano: It’s a possibility. We don’t have, in our universe, the big platforms, like you would have — so Google and Facebook are not part of our universe — so we don’t really have examples of that economic power. But, what we do see is definitely that the economic modes of certain companies that have technology, they tend to get stronger and stronger every year as these companies mop up smaller competitors, and they acquire them. Because then, you have the flywheel of good free cash flow generation, which allows M&A to happen — and so, we have quite a lot of those stories where yeah, indeed, large is better because you consolidate the industry around you. So, yes, I think the answer to your question is, in our opinion, it pays to focus on the innovators and the companies that typically don’t have huge capital requirements to grow. That’s also another thing: even if capital is very cheap these days, the strongest performers that we had, have had that characteristic — high returns on capital, but with not a huge amount of capital employed.

[00:41:50.09] Ben: Fantastic! Can you leave us with one reason why we should be bullish about the environment and bullish about the ability for market forces to solve climate change?

Luciano: We should be bullish about the environment because we all want a better planet and our children, they will demand us to do that for them, and their awareness is going to be at a different level to what we’ve experienced in our lives. That’s number one. Number two is that we have the technologies so we don’t need to look for moonshots. We have technologies that can improve things and that can lead to performance. So, as investors, we can expect to have portfolios that outperform the markets, have a positive impact, and don’t require us to take more volatility or can use as a core component of our long-term investments.

Ben: Perfect! Thank you so much for coming on the podcast!

Luciano: Thank you for having me, Ben!