Scottish Mortgage: Resolute Investors Part 1

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  • 19 mins 59 secs
James Anderson and Tom Slater discuss some of the key investment lessons they have learnt and how these impact the distinctive way in which they invest.


Baillie Gifford

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What do you think you've learned over the past year, tom ? I think we both know that one has to be very cautious and saying one learns anything, because next year it might be that the opposites opposition comes to mind. But i think there are two features that stand out, not be very interested how you intern reacted to these. The first is that i spent a lot of time at conferences like hearing other investors, talk other investment institutions, many of whom i have in the abstract great respect for but i've never bean is convinced, as i am, that we're thinking about investment in a very different context. With all respect, i think that just about everybody else finds it very difficult to get out of the narrow process off thinking about investments in terms of modern portfolio theory, in terms of the agenda set by the cf a in terms of the short term pressures. So that would be juan the second, which i think it's related to. It takes us closer to our days. A day is that i'm not a tool shore good. We shouldn't be more confident about expressing our belief that investing comes from involvement in the extremes involvement in thinking about cultures about big, exponential opportunities. In the long term, the best combined data that we've talked about elsewhere, on which people listening could refer to seems to me absolutely compelling. And i'm amazed at how little engagement that has bean with this. So there's the two factors that really strike me. I think i am. The focus on the extremes is something that i find hard, even having done a lot of work on it. It is easy to be drawn back to no, you know what you might think is a balanced portfolio or thinking about risk in a different way. But it strikes me this idea that you, you you or to focus so much of your time on things that could produce an extreme outcome that don't have an attractive central case if you like. It's not the three. Easily. Forecastable is of interest of no interest precisely because it is easily forecastable. Extrapolation isn't interesting. So if if you try to orient everything you do about it trying to find that very small number of outliers, it causes you to think about things in different ways. You know, dio, you sell people ask about self discipline a lot. Well, if what we're trying to do is find stocks that over the next ten years will produce extreme returns, they they they are the main driver of everything. Then sell. The spent almost doesn't matter. The things you get wrong become irrelevant in the context of the portfolio on that time horizon. But it really doesn't matter if you sell to early a stock that is one of those rail out liars. And so anything that you do that trunk eight's the returns off the very small number of stocks is extremely damaging. So how do you how do you capture that in process particular times when it may not actually seem rational ? Teo. Otherwise, well, it was your times when it doesn't seem rational that i was going to pick up on you before you ask that question because i think that applies to elements which would be in very prominent in the last year and, i suspect will remain so for some time to come. The first is a time to general market angst on we know, even if the market acts dissipates, that feeling of ags preserves preserved by market participants for a long period of time. And of course, in those periods of market angst. Actually, that exponential success that ability to an extreme appears not to matter for a brief period of time because stock fundamentals are completely ignored. It a buried a paddock. So i think that's one element of the other element of it, which i know. Has proven just how difficult this is to both of us. In coping with what's going on, though i hope we have coped with it would be the tessler example. Now i think the accumulated stress coming from market participants from the media from the generalized and extraordinary prevalent this can't work makes it very difficult to concentrate on is you say, that possibility of the extreme, which is surely being present and remains present in every way. It strikes me that one of the most pernicious elements perhaps not the most comment over one of the most pernicious elements of the media coverage has been this demand for certainty. And indeed, times journalists write articles criticizing our very acknowledgement of doubt. Now i find that disturbing, and i do think that'll the rosling type critiques of water tracks. Journalists are entirely emphasized and proven by this extreme case that we'd be going through. I think i would link that to your earlier point about you. Point one of what you've learned this year about point our differences and approach to the way other people go about this test. Andre, the one i find quite challenging on this, is that if you look at these companies that that have delivered these extreme returns, it's never bean delivered consistently. Consistency is something that doesn't much with extreme retton's instead of a long holding periods. You see these the punctuated by periods of extreme doubt of extreme poor performance on dh. Actually, one of these things that striking about the performance poor performance the stock has no not being extreme compared that to amazon in two thousand eight two thousand nine, when the stock hard compared to a luminary in two thousand eleven. When the stock hard you go through these periods off off skepticism and andre often if there is a real world driver of that, then it may be precisely in those time periods that the advantages of the company of becoming entrenched it is in more difficult market conditions than the the price proposition of amazon. The difference yeses others becomes more important and habits change. Andi teo to the thing that i think people find very difficult is lots of people like to say they're a long term investor and then you look at the turn over in their port for you. You look at how they behave and actually enduring these sharp downdrafts and share prices something they're very bad that you you need to pull your horns and you need to take less risk in periods of where is actually enduring a sort of based case. And even being prepared teo increase your positions during these periods is absolutely fundamental to benefiting from that ten years returned from these extreme outliers dogs. That's right. But gosh is that there's a lot think about within that. Firstly, your comment that it's very often at times of stress, whether it be stressed in the economy or stress in the individual companies or sectors business models is surely right, you know, looking back on two thousand eight nine, the period of extraordinary intentional markets intention in the global economy. Many of our companies have, in retrospect, said that is precisely when their dominance was established on they put out many companies out of business. My current analogy of that wood less be the kessler one. In this case, perhaps what's going on in china ? You know, people have this insistence on selling chinese assets because it must be awful, mustn't it ? Terror of saw. It isn't a catastrophic the growth rate right ? Slow to six percent. Now, i think under those periods, that's precisely the sort of dislocation that actually probably works greatly in favour ofthe. The alibaba's made two arns tencent's of the world. So i completely agree with that part of it you're comment about. They're not trying to be consistent. It's, i think, deeply, deeply important, um, perhaps to an even greater degree than what we've just been touching on there. This's basis way had to be willing to me, misunderstood. Andi, i think actually, when we're both chat professor person behind and that's what we get back to that is extraordinary, dangerous, tohave companies who hate earnings points. You know, i favor put case in point. I think it's right to say the ibm is only missed earnings expectations three times in the last decade for his amazon hit it less than half the times. But look at the relatives share fries performance. I think. Actually, there is a lot of evidence that managing for the quarter is, in itself inherently damaging. I totally agree. And if you do, if you further extend your example, pull in ali baba. You know, they recently held on investor day, and there were hundreds of investments from lots of different investment firms coming tio. Hear what management had to say. And observation from the chat amongst the other investors was that there was a lot of encouragement for the cup to the company to generate cash. You want to be demonstrating to the market that you, khun, generate cash ? Andi. This assumption that the market on dh that implicit in the question was that was what all investors would want and should want and should want. Indeed. Now, if you look at what alabama has actually done over the past three years, it's generated a phenomenal amount of cash. I think off the order of thirty four billion dollars and it's spent about thirty billion now isn't a phenomenal you know that you have a company with this type of resource to build out the consumer economy infrastructure in china, that it's not complacent that it's not waiting for the next competitive, come in and and invest in take share. You know that it that it's prepared to invest. It's probably an important part of its social contract with the government that it does invest. You know that it's got to be cognizant of the environment that it operates in but it. But it seems to me in a period of massive change where you still having these forces of urbanisation, you still see a massive growth in consumption, that the opportunity is still big. You want to be spending now to take take advantage of it. And the last thing it should be doing is giving the cashback teo to us to allocate the companies that don't have that scale of opportunity. Yes, my response in your impressive sets of figures there would be possibly like that. Beav mohr extreme. I genuinely believe that although one has to come up with one zone's assessment of whether the possibility of this prophet being reinvested satisfactorily prosperously on with high return is actually happening, that is part of our day to day tours. We should put that in the context that you are not just the chinese contact, but more general one. I do think there is a case for arguing. The prophet is what you get when you run out of ideas on you know you also mentioned social contract. You mentioned it in the specific chinese case. But on press you a little intern. Isn't this something that goes beyond the norm and shows how mental habits of investment management firms are in themselves, posing a great danger to the economy ? Because i think that he is extraordinary, difficult these days for a company in the western world the very least to reinvest there you were talking primarily about the influence of western investors on alibaba. I think it's a much more damaging and deep suited force in the west. We need go no further than tesler to suggest that's true. The notion that actually you might just need some capital to reinvent the car industry or even its most basic to build a gar factory appears to have passed many investors by, and it creates outrage amongst the short community and their allies in the media. So i think we have a huge problem in the social contract that investors have in the western world. In the the point of having this gap capital is to create forward progress of the corporate and social and economic levels. Yeah, a recent example of this will be grubhub. So they they reported their third quarter two thousand eighteen results. Um, on dh, they said, well, what ? What the business does is provide a front end to restaurants for consumers to order, order food from restaurants on back end infrastructure. To deliver that feed to customers on that proposition is proving extremely popular with both of the communities that customers love the convenience of it. They like price restaurants like the extra business on dh. What what we've seen in recent months is that grubhub have bean signing up big chains of restaurants that can't do this themselves, want access to the network, and it's allowing him to grow the network out. Andi results have been really strong, a zoo consequence, and so they that the revenues of growing strongly the business is doing well, and they came out in the third quarter results and said exactly that and therefore we are going to invest behind this community. We're going to invest in marketing on building awareness of what we're doing. We're going to invest in the infrastructure to push further and faster on the stock market's verdict is tio knock it off the shares share price so there's no thought given to well is this attractive investment to be doing or is it ? Is it, you know, the cost of doing business ? It's simply that there won't be as much immediate profit on dh. The malign consequence of that, i think, is what message does that send to the managers of these companies ? If you're matt maloney, the founder chief executive of grubhub, what does that encourage you to do in future ? I think i think that's why finding really special individuals that run these companies that have some mechanism for allowing them to ignore the short termism of the market and the money and influence of some of these companies allocators is is really important. It's can you find somebody that has the ownership in the control that allows them to ignore it ? But also how do we do the job off of encouraging them to go down that route ? I don't think any longer. It's acceptable for us just to say you know where, where long term investors ignore the market and get on with it. It is making sure that you reiterate that message because it's card to counter the impact on a management team or inside a company of the share price cratering every time they say they're going to invest. I think that's absolutely right on dh before trying to give some thoughts about what we have to do. What we should do to john respond in those situations a word or two on the european analogy, if you know what you're talking about. Their but with some twists that i think, perhaps or dominant in the way that this has become a problem in europe. But in this case, i include the uk has part part of europe. So in the case of delivery hero, which your where is internationally, in fact, globally influential company in precisely the same industry is grow apart. We got a position where investors were inverted commas, disappointed by the earnings. So not so much the opposition are going to invest. But why wasn't there an immediate payoff to this ? Now the main answer appears to be because of the weather now. Okay, one concave checking. That is the real explanation. But i think it is important. As you say, you have not just the management but the ownership in the support structures around them. So on one level, i think the management you dickless salzburg is very prone to say, look, we will try and keep to the long run. But i think there is a miasma of other people are surrounding the company from their brokers, perhaps people with less determination inside the company to do that. So in that case, i think it's very important that the much criticized i would say much maligned oliver summary rocket original parents stood up and said, one summer is not relevant in thinking about where this goes, and i think that is important. And i think you know, having these built long term shareholders is critically important. I think there is a great problem in the european context in the uk context about getting people to think about compounding and think about the right metrics. Your company would much admire spotify. So daniel ek is very happy to say i believe that we are mission driven company with a long term vision of where the music industry's gay. The trouble is as yet the company hasn't really come up with enough metrics to make it judged on those scores. So i think our role in that case is toe pulled up on this, hopefully very supportive way. Say, if you're asking us to view it is a long term transfer major project. You've got to give us some clues about what the relevant metrics that because they sure as heck quarterly profits or even quarterly subscribers in terms of your influence on the music industry, how you went a little too the mentality of the artist's thie consumers, onda labels all altogether. I think that we need to try and encourage both ourselves and the outside world be more thoughtful about what, therefore, are the relevant metrics. It's not good enough for us just to complain if you like. It's to say, hey, api multiple for the next two years is really not a good way of assessing this company that i completely agree.