This piece covers investor Gavin Baker's bear-market playbook. He says the easy trades are done, so you now need to take uncomfortable risks. He warns that software's 'recurring revenue' is fragile—a dentist slashed her software bill in half with one call, proving customers stop paying software first when cash is tight. He highlights Zoom (video-call verb), Domino's Pizza (high leverage but big rebound), and Roblox (gaming as social platform).
Gavin Baker (Founder and CIO of Atreides Management, LP) discussed bear market investment strategies and the profound impact of COVID-19 on the investment landscape on the Invest Like the Best podcast. The core argument is that while current market information uncertainty is high and value spreads a
Gavin Baker (Founder and CIO of Atreides Management, LP) spoke with Patrick O'Shaughnessy during the COVID-19-induced bear market. The core thesis is: The current market presents a rare window where "information fog" and "extreme valuation dispersion" coexist, prompting active investors to trade aggressively rather than hold passively—but they must remain wary of the fragility of "pseudo-recurring revenue" in the software industry. The most impactful judgment in the entire discussion: The creed that "software is safer than senior secured debt" is about to be disproven—when customers face zero revenue, software bills will be among the first expenses to be defaulted on.
Gavin Baker argues that bear market investing unfolds in three stages, and the market has now entered the most dangerous middle phase.
Stage One (Past): Profiting from the most obvious moves — selling airlines, cruise lines, and hotels, while buying Target, Walmart, Costco, Amazon, and Netflix. "At the start of every bear market, doing the most obvious thing works," Baker notes. This defies investors' intuition that "obvious moves don't generate alpha," but the early bear market is precisely the opposite.
Stage Two (Current): All obvious sorting is complete — good balance sheets vs. bad balance sheets, beneficiaries vs. losers are all priced in. "Now you need to start taking some non-obvious risks." Baker illustrates with his 2009 experience: he chose to meet redemptions with safe, liquid stocks, while actually increasing his weight in high-risk, high-leverage names. When the market began to rebound, these "bad companies" (e.g., Domino's Pizza, which had extremely high leverage) became the best performers.
Stage Three (Future): Before the market bottom, aggressive stocks will begin to outperform defensive stocks. Baker cites historical data: the best-performing stocks after June 2009 were Netflix, Booking.com, Ulta Beauty, and Domino's Pizza — "none of them were safe companies."
Falsification Condition: If government stimulus fails to reach small businesses quickly (Baker questions the SBA's processing capacity — it handled only 58,000 loans last year with just a few thousand employees), Stage Two may be prolonged.
Baker argues that the software industry will face unprecedented pressure, because "there is no true recurring revenue, only more recurring revenue."
Core Mechanism: In 2008-09, software accounted for only 7-10% of IT spending, and CIOs could cut hardware and servers to protect software budgets. But today, software accounts for roughly 30%, and together with cloud services, nearly 50%. "If budgets have to be cut, software will definitely be on the chopping block."
Key Evidence: Baker's friend (a private equity partner) has a sister who is a dentist. She attended an industry webinar where the second biggest piece of advice was: "Call all your software vendors and demand deferred payments or price cuts, or threaten to switch." She cut her software bill in half within an hour, with zero resistance. Baker adds: "I told this story, and within two days, multiple friends had their relatives do the same thing — all succeeded."
Mechanism Breakdown: When airlines, hotels, and restaurants face zero revenue, they simultaneously refuse to pay rent, debt interest, and software bills. If a software company threatens to shut off service, it risks government intervention — "the government could declare a software fee holiday." Therefore, "when pressure hits, software companies will blink first."
Exception: Zoom is a beneficiary — it has become a verb, four-year-olds use it for birthday parties, and families use it to reunite. Baker believes Zoom's UI/UX is 50 basis points better than FaceTime and Hangouts ("50 bps can be the foundation for tens of billions in market cap"), and it has opportunities to expand into messaging and privacy-friendly social networking.
Reader Note: Baker is a growth stock investor, and his holdings may include software companies. The above judgment carries a "holder's perspective" — he acknowledges that he is reassessing the resilience of the software industry.
Baker argues that the metaverse is the "ultimate form of the internet," and video games serve as the infrastructure leading to it.
Definition: The metaverse is a series of interconnected virtual worlds. "I firmly believe that within my lifetime, most people will spend the majority of their waking hours in them." Today, these virtual worlds are mostly referred to as "video games."
Key Data: Verizon data shows a 100% increase in video game traffic; Telecom Italia data shows a 75% increase in video game traffic, while social media traffic grew by 0%. "People are connecting through games, not through social networks."
Mechanism Breakdown:
Extrapolation: Game platforms with identity and payment layers (Xbox, PlayStation, Steam) will be well-positioned. "Roblox has already achieved this, and Fortnite is on its way."
Falsification Condition: If short-video platforms like TikTok (rather than games) become the carriers of the next-generation social network, the game-centric theory of the metaverse may be weakened.
Baker argues that WeWork's model has been "unfairly maligned," but COVID-19 will fundamentally alter its value proposition.
Original logic: Similar to Aramark and Compass Group outsourcing cafeterias, companies outsourcing non-headquarters office space to specialized service providers can obtain cheaper, more flexible space. "The real estate heads of the world's largest companies are very excited about WeWork."
Broken mechanism: These companies create value by "bringing the Ian Schrager hotel model to office space"—packing more people into smaller spaces and compensating for density with luxurious common areas. "In a world where virus prevention becomes a priority, this model must change."
Possible way forward: Space-as-a-service providers may be the first to install temperature sensors and become health standard setters—"making lemonade from lemons."
Comparison with other controversial business models:
Baker uses two historical analogies to illustrate risk management principles in a bear market.
Augustus vs. Julius Caesar: Caesar was brilliant but reckless — he entered the Senate without bodyguards and was killed before turning 50. Augustus "may not have been as smart as Caesar," but he was ruthless in managing risk — "if you were suspected of being a traitor, you would be invited to commit suicide, on the condition that your family would be taken care of." "When managing risk, you should be Augustus, not Caesar."
Summer vs. Winter: From Game of Thrones — "summer knights" cannot survive in winter. "We are no longer in summer. It is now winter. As an investor, you need to think and act differently."
The Value of Optimism: Baker cites Martin Fridson's It Was a Very Good Year — the ten best-performing years in the 20th-century stock market all occurred after truly terrible periods. "Pessimism always sounds smarter, but the past 200–300 years of human history tell us that optimism has always been rewarded."
| Position | Guest Stance | Key Data |
|---|---|---|
| Zoom | High attention (no position held) | Has become a verb; four-year-olds use it for birthday parties |
| Walmart | Bullish (benefiting from e-commerce acceleration) | Completing 12-18 months of e-commerce capex in just a few months |
| Target | Bullish (same as above) | Same as above |
| Costco | Bullish (same as above) | Same as above |
| Kroger | Bullish (same as above) | Same as above |
| Amazon | Neutral (intensifying competition) | Facing competition from omnichannel retailers accelerating e-commerce |
| Netflix | Neutral (benefiting from stay-at-home) | One of the best-performing stocks since June 2009 |
| Domino's Pizza | Bullish (high leverage but benefiting) | Had extremely high leverage in 2009 but became a rebound star |
| Booking.com | Historical reference (2009 rebound star) | One of the best-performing stocks since June 2009 |
| Ulta Beauty | Historical reference (same as above) | Same as above |
| Discord | Bullish (no position held) | Usage surged during quarantine; could become a metaverse platform |
| Roblox | Bullish (no position held) | Has already achieved metaverse platform status |
| Fortnite | Bullish (no position held) | 40 million people watched the Marshmello concert |
| TikTok | Attention (impact on social network landscape) | Began disrupting existing social networks in February, accelerated in March |
| WeWork | Neutral (unfairly maligned, but model needs reshaping) | Head of real estate at the world's largest company was once excited about it |
| Apple | Critical (missed opportunity) | FaceTime's UI/UX is inferior to Zoom |
| Critical (same as above) | Hangouts' UI/UX is inferior to Zoom | |
| Critical (same as above) | Video chat product is inferior to Zoom |
1. "Software is safer than senior secured debt" will soon be proven false (Gavin Baker) — When clients face zero revenue, software bills will be the first expenses to be rejected. Dentists cut software bills in half within an hour, with zero resistance.
2. Three-phase bear market theory (Gavin Baker) — Phase 1: Profit from obvious moves. Phase 2 (current): All obvious sequencing is complete, requiring taking on non-obvious risks. Phase 3: Aggressive stocks begin to outperform defensive ones.
3. "There is no real recurring revenue, only more recurring revenue" (Gavin Baker) — Software's share rose from 7-10% in 2008 to 30% today (50% including cloud). CIOs have no hardware left to cut, so software budgets will inevitably be slashed.
4. The metaverse is the ultimate form of the internet, and video games are the infrastructure (Gavin Baker) — Telecom Italia data shows game traffic up 75% while social traffic is flat. Gaming platforms with identity and payment layers (Xbox, PlayStation, Steam) will be well-positioned.
5. Omnichannel retailers will complete 12-18 months of e-commerce capex within months (Gavin Baker) — The internal "brick-and-mortar vs. e-commerce" debate has been ended by COVID-19, making e-commerce competition in 2021 more intense than in 2019.
6. Be Augustus, not Caesar (Gavin Baker) — Caesar was brilliant but took risks and was killed; Augustus coldly managed risk. In a bear market, one must be "cold-blooded, ruthless, and unemotional" like Augustus.
7. "Pessimism always sounds smarter, but history tells us optimism has always been rewarded" (Gavin Baker) — The best-performing decades in the 20th-century stock market all occurred after truly bad periods (Martin Fridson research).
8. "Chaos is a ladder, but also a slide" (Gavin Baker) — Littlefinger's lesson: Chaos creates opportunity, but one must also recognize the range of extreme outcomes. For growth stock investors, the single biggest risk is a valuation regime shift (from EV/Sales to GAAP P/E).