Scottish Mortgage: Resolute Investors Part 2

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  • 21 mins 17 secs
James and Tom continue their discussion, moving on to talk through portfolio companies which are at the forefront of significant change in their industries.

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One thing I thought with bringing out on DH, maybe push push you to come up with an example of your own. We've talked a bit their boats grubhub on, then delivery hero. I'm Andi. I think just to put those in a portfolio context it. One of the things I think is really exciting in what's going on in the broader economy is that you're seeing some off the modern tools that have driven change in retailing in media applied to different areas of the economy. So what? What What is the cumulative impact of advanced software of ubiquitous mobile communication networks off, ever, ever faster and more powerful hardware? And as you think about where that takes you, probably the one of the industries that would be lowest on your list for digitization will be the food industry. But actually, that's where we're seeing some really interesting opportunities at the moment. And so in that in that front end to consumers, you have delivery hero Grubhub or the one we haven't mentioned met Juan in China, which which in terms of scale and pace of change, probably trumps both of the other two. But it is not just in that area. It's also in the in some of the ways we go about producing food and addressing the challenges that we know we're going to face. A CZ global population grows over the next twenty years and using it, whether it's industrial biology, synthetic biology, mechanization, robot ization. It's led to a whole raft of new ideas and new purchases in the portfolio from Irving Ginko, Bio wigs, Teo Indigo, Agriculture, Tio Teo, plenty of other companies. So if that if that whole food area is one source of of growing enthusiasm and grown problems and I wondered if there was an area you pick out one that you're, you're excited about the prospects for over Lieutenant. Let's let's talk about the food one, because I think you're being on Julia modest there something you've focused on a lot. And I think its ramifications really spreading quite. Why I also think it's with that exciting time, Tom, where actually, it's gone from being. It's something that, with the best will in the world, wass quite speculative, where we were having in words so used to German talk about Sue saying about the future to the point where we got the exponential change genuinely beginning to take place on hit in real terms. So firstly, I think that as may toe on, I think even more than the other two companies that we've been talking about have touched on. This is about the reinvention of food. And you know your comments about scale in China are not just right in terms of them saying, Look, this is ultimately about eight hundred million of customers, three meals a day, think. Think about the scale of that market. But I think it's much more possible for them because the modern urban middle class history of China is so much shorter to envisage a world where we don't take it for granted that we cook our food home after having gone to the supermarket and its hold on. This is certainly what the founder of Meat one thinks about. This is about the transformation of food in China on Don't let me DVD distracted from that. So that's our past there. But I found what your urge me to go and see. For instance, it indigo, absolutely fascinating from this point of view, because I think it is about absolute systemic transformation you know, one level with micro boat by ome micro bile treatment ofthe seeds. They are providing the restitution if you like natural ality. It's not about GM foods and the monster that that is. This is putting back living organisms in the system. It's creating extraordinary improvements in terms ofthe the the crops they are enabling on taking away the stress from them. But it's also meaning that you can eventually have a different models. You know, off identifying what the crop is on with much more spaces. Fifty. So this whole dominance that, as we really live with for the last one hundred years, approximately off the Big Grade Cos the big fertilizer companies, the big biology companies, is being eroded on its giving muchmore potential choice to both the growers and the customers as to where they are actually buying. And I think that is important Example off, if you like these processes of exponential change driving Mohr individuality rather than less, as we worried about in many of the big digital platforms so far. So I think food is genuine important. I don't think you should push that aside and the way will modestly doing. But you know, I think we are tomorrow. I'm moving into an era where these type of development sometimes is combination of huge data with other scientific advantages with other approaches. But I think it's always part of it are actually on the verge of altering the world much more considerably than even what we've seen in the last twenty years and for a ll the fact that it is extremely difficult to navigate to find the right expressions for this, I think that health care needs to be thought about very intensely from this point of view. You and I were, for instance, yesterday on a call with the chief executive of Grail thehe luminous spill off injured Monix, which, you know, has got a very good lead identifying cancer at much earlier stages, which, bring a ll know, would transform our treatment and outcomes and deeply important matters. Now, I think that what Jennifer was conveying this with that in that conversation was it is absolutely critical here to do two things is firstly, to put the agility of a comparatively small company, as opposed to that of the type of her former employees of Rosh, together with vast data sources, so melding arm scale on DH, agility and speed. But it's also melding those cultures is net. How do you cope with health care? Onda the same time with the profoundly huge data sets that are available. So it's not just in a sense, a challenge, large and small. It's also challenge of two very different cultures. And I think that, you know, let's be, let's be challenging to ourselves on this score. I think the likes of Grail in the Lunar it is so far proving much more feasible to Mel those two cultures and at the same time build the type of platforms that analogy isto. What we've seen in the digital world thus far. Toe address, many different potential situations, many different illnesses in future, going well beyond cancer, but improper in all probability. Now that's something I think we have to be honest and say that many of the smaller therapeutic come even though they're using revolutionary technologies such as geology, are finding just as much of a struggle is their traditional companies. So I think you know, I would emphasize healthcare is critically important, but I think it will take a lot of thinking about what the right ways and investment terms to do this. And I think we have to accept that there will be an error rate in return for the very extraordinary returns that we've discussed already. I think that takes us in some ways. Quite back to one of the earlier topics is we expect that things will go wrong. Not not we way find it unfortunate outcome or or something to be too ashamed off. But the starting point is we will get a lot of the's wrong, and it's not about being right more often than you're wrong. It's about what you make when you're right on what you lose. And I think we ought to be prepared. Andi, indeed encouraged to hold our hands up two things. We get wrong because I think it's it's about having a process which which accepts that is inevitable. Yeah, until, to be honest, I'm uncomfortable, even with word wrong I think that justice, for instance, Nate Silver would talk about predicting political races. We're dealing with possibilities, probabilities and with very extreme payoffs. If if we're saying that something is a thirty percent chance but would make ten fold our money if it goes our direction, if the seventy percent of other scenarios happens, is that wrong? I'm not sure it is plain. Plainly will prefer the thirty, but wrong. I prefer to use wrong from the point of you off something that I think we need to concentrate on and we haven't been talking about. But I don't You know, I'm not suggesting you would disagree. I think wrong should be the type of word bad that should be applied. Toe week research are where we haven't tried to understand the drivers, the payoffs, the complexity and the rewards involved. And I think at times bad research does exist, and I think I would much more want to focus on that. Even even give the hostage to fortune of saying it is wrong to invest in something that simply doesn't turn out to make you money. This process over outcome and things to be concerned about the failures of process. No, not failures on Do you know, I think we're on that side of it. Far from hope that sieving indulgent, I would want to still be extremely caf Andi. Also to have a culture of saying we continually need to try and get better than this, you know, right? Even if one can have a degree of satisfaction as to the last ten years. I think we shouldn't be any under any illusion that you don't have to keep moving on. And I think that moving on versus providing the patients that you very clearly being talking about is one of the challenge of this. But I think we should never be satisfied with a caliber agreed. And I think if I if I were looking out of the next ten years, I think one source of optimism for me would be the type of inputs to the process that we that we've bean building over the past ten years. You know that you go back to the example we've we've been using around the food industry, You getting Shing Juan that the founder of Met Wan to talk to us about the future of food and China and just being thoughtful about what he has to say is such an important input into the process. Likewise, the management of Alibaba and and the fact that you have some of the leaders within the portfolio cos on DH there are prepared to engage on long term conversations. I think that's absolutely right. You know, we were talking earlier about the difference were aspiring to and how we think happens now. I think it's in a sense quite natural, but still deeply pleasing. The management's do react to that, sir, and your example of mate Juan. I was walking back from lunch that we had just for us but a local hotel after our meeting on we would he was He was grilling me on what companies have actually in the history of capitalism produce something that is socially as well as economically good. Andi. We were talking there by about extremes when we got home. The best invited, which had never seen. So we send it to I think you do build connections with people by that type of attitude of mind. But, you know, I think it's also isn't it about something that we haven't touched on yet? Which is beyond the ability Trumbull, those deep relationships of trust with company management, which, by the by a much more enhanced bad times, aren't they the uneasy times anybody could be loyal when markets going after forty percent a year or whatever. I think a lot of it is also about getting right intellectual inputs and you know I'm orm or believe that actually, this is a really hopeful element of our process that extend what we've been exploring mostly over over over the last ten years. Is trying to be really long term to thinking about the symmetry of returns. I think we can now be much more confident. There is also the potential for an information advantage. I think that trying to build the type of connections that we have with academic institutions, with great individuals, academics of scientists throughout the world is truly important in this. And I think you know, we're only just getting that to be a CZ, much the heart beat of what we're doing as a CZ well to, you know, I think that is to me being incredibly exciting and you know it some degree it's about the balance of imports, you know, this versus the daily economic ones. But I don't think it's even really that I think the very notion of efficient markets tells you that it's only new information that matters. The fact that you know justice Moore's law for the last whatever number of years and here's going to whichever source you believe has driven extraordinary change on which great businesses have been built transforms into what we were talking about. There, about the application data toe to the food industry taste into the health industry. But I also know the rates of improvement in battery technology or solar power. You know, nobody thinks that quiet, silent progress. The rustling sense makes a difference. But it's profoundly more important than what the market's doing today or what feds going to do off. Haven't say what Mr Trump is going to tweet. But you know, I think almost we're trained to say that can't be relevant because inefficient market contacts we know that already, don't we? So it can't have any input on. I'm really quite excited about where this can take us. It's easier. You're looking at some of these Long run, as you say, quietly progressing trends. What's interesting is the compounding. The batteries get five, seven percent more efficient each year. Where does that take you? In five years? In ten years? No point in that in that progression Is it going to attract a news headline because it's not exciting enough? Been equally, it's predictable, and that's on DH. That's the value to the long term investor that you can look at some of these trends and actually say with a reasonable degree of confidence relative to other things. I think that that's absolute, right. I mean, I may think your your your sum is cautious about the compounding rate, but they certainly made. Makes the point on, you know, absolutely. It's predictable, but It's also important, isn't it? So, you know, compare and contrast. If you told me and you probably can are being a very clever person, what the Federal Reserve was going to do it each of its meetings for the next year, I still couldn't tell you what was gonna happen in the stock market, whereas this is very directly going to have an impact. I compare and contrast what you're saying there. To what? Thie, remarkably, the boss of BMW's development said only a week or two ago, a claiming that it was impossible ever for battery cars to be better, more efficient, lower priced internal combustion agent seems to me that that's just something we can say as your suggesting that that's just wrong. Wait, do have this predictable tio what we're dealing with on the great importance of it. And that, in a sense, encapsulate some of the challenges that incumbents have. When faced with some of these trends. It's that the incentive structures, control structures, expertise that has mattered in the past matters less in the future that is dominated by software and connectivity and algorithms and networks. And it's extremely difficult for people that have thrived in the previous vision of the world. Teo Teo change their habits, attitudes, incentives to cope with an entirely different operating environment. If you know that if you look at the change in retail of the change in media, it's it's not that that cos adopted to new technology of I have seen these sustaining innovations which have helped their businesses, is that they've bean blown away, demolished by the rise of these entirely predictable technology trends. Because so much of the stuff that has been built in the old paradigm doesn't makes sense that you know well, I mean, to site one academic who has Bean very helpful to us and who I think it was fair to say we've built a good relationship Brown author about this. So we got him. Look at one of our poor failures from risk perspective recently, but in parsing, he made the comment that he had actually been a consultant at the time when film was being digitalized. And he said, Don't believe any of this stuff that they I didn't realize it was going to happen. It is, as you imply it is just when you have killed half the structures, the profitability that you had in the past to dominate industry to change that is profoundly difficult. You know, I have pressed various other academics, provide me with examples. They, they proudly come up with all the tiny ones immune so machine industry or whatever. But basically it hasn't really happened that one generation camera that to the next generation on, you know, to me one of the great frustrations of the moment is there is this obsessive belief in the from management industry that somehow mean is going to revert. Now, that's not got anything to do with what will happen over short term times. Cause course. You get master market dislocations of exaggerations and the like. But I think the notion of, in the long term the ability of companies to generate the profits that would enable that mean reversion toe happen sustainably. It's frankly coming on the huge question. You know, I think this is a really big issue, which I would love to hear. Other people in the industry who, in a sense, coming at it from a different perspective and last to assess more seriously rather than just simply say mean will revert. How are the business models of these companies going toe enable that reversion to happen on? You know, I think it's a serious issue for many people's overall portfolios because I think there is this notion that these companies, of course they've lost it a long period. Time course, eh? Share prices have bean comparatively stable that they will be both those in the future, and I I just think it's an illusion.