Jeff Bezos says that as a CEO he should' live in the future' not the present. This should be even truer of fund management. We have no responsibility for overseeing the daily life of companies and our investments progress as the future gradually unfolds. As a Growth investor this is even more critical. Current cash flows are a minimal portion of the value of the companies that we invest in today. Very often earnings are absent. Very often this is for the good as our companies are investing rationally and ambitiously for the future.
But how do we gain the confidence to make such judgments? The normal run of information is reliant on the past and present. But the value lies in the far future. This is psychologically, as well as practically, demanding. The inevitable uncertainty is challenging. Markets prefer certainty. Markets prefer current earnings over investment in an uncertain future. But this presents great opportunities if we can learn to cope with these challenges from which many shy away. The objective is to find and exploit the opportunities that do exist -and will continue to exist -precisely because they are harder to embrace.
The objective is to find and exploit the opportunities that do exist -and will continue to exist -precisely because they are harder to embrace.
The best description of what we do is therefore 'Growth at an Unreasonable Price'. Sometimes the price is unreasonable because the future is not as bright as we thought it could be. Sometimes this disappointment is the result of inevitable complexity, sometimes of corporate missteps, sometimes of our analytical failure. We can try to limit the latter two but the first is inevitable, painful and needs to be respected as an ever present reality.
On the other side lies the joy of Growth at an Unreasonable Price. It's when exponential progress, dramatic transformation and brilliant entrepreneurialism come together and prove that an ostensibly horribly expensive stock turns out to be extraordinarily undervalued. The initial price is then unreasonably low by any standard and the return to patient investors is absurdly large. This is what we search for and what justifies all our efforts when we succeed. The irony is that our earthbound minds usually end up being far too conservative in these instances. Tencent is a good example: we never recognised in our research in 2007-9 what it could become. Its key WeChat social media platform was yet to be invented, we worried that Tencent would seem stale to the next generation and we even failed to grasp the might of the gaming business. But we gained enough insight to want to buy the stock. The apparently demanding multiple of over 40x prospective earnings proved a complete distraction.
What this style of investing demands is creative imagination rather than cold data analysis. Since it's the latter that fund managers are trained to do from their first day, the willingness to learn anew is vital.
What this style of investing demands is creative imagination rather than cold data analysis. Since it's the latter that fund managers are trained to do from their first day, the willingness to learn anew is vital. Therefore we have to keep trying to get better at understanding the process of change - or more particularly rapid, exponential and transformative change. Of this there's more to help us in history than we usually believe. Though change can be both quicker and more international than in past eras, the basic power laws of major waves of innovation and their ultimate reliance on the provision of capital at scale are analogous throughout history. Studying the geographical diffusion of printing in Europe after Gutenberg might seem slow motion but the associated explosion of knowledge and its implications seems closer to our world. Or to finish as we started, let's return to Jeff Bezos in the early days of Amazon ' We have this weirdness in our business, the raw materials that make our business...get twice as cheap every 12-18 months' and as even he acknowledged trying to work out what this means after 5 or 10 years for consumers is hard. But it's what we need to envisage and imagine.
The views expressed in this article are those of the author. Its express purpose is to highlight areas of intellectual thought and debate which inform the investment philosophy that underpins Scottish Mortgage, in the hope that they may be of wider interest. The author(s) therefore make(s) no suggestion that this article constitutes independent investment research and it is not subject to the protections afforded to such.
Further, it is not intended to be considered as advice or a recommendation to buy, sell or hold any particular investment. Those considering investing in any of the areas highlighted in the article should undertake their own research, seek advice if unsure, and be aware that the value of any investment and any related income, can fall as well as rise, meaning that investors may not get back the amount invested. For those looking for information on Scottish Mortgage specifically, please visit www.scottishmortgageit.com for a Key Information Document.