It’s a fundamental tenet of efficient market theorists that stocks incorporate all available information. It’s an equally fundamental tenet of most investors and almost all the talking heads in the traditional media (oddly, selected social media is rather better) that ‘information’ comprises detailed exegesis of new economic releases and current quarterly earnings data. That focusing on such information leads to no evident success in investing might be taken as evidence that the theorists are correct in their assertions, but couldn’t it be that both are equally misguided? It’s evident enough that financial markets suffer from a deep inability to price patience and compounding because of their dominant short-termism, but perhaps the weakness extends even more dramatically and less expectedly to the types of information that are available today.
If the efficient market hypothesis is gently recast as ‘stocks incorporate extraordinarily efficiently, minute-by-minute, the type of noise heard by traders in London and New York’ then its claims become reasonable. When a few data points are all that matter to most then this becomes unremarkable.
Financial markets suffer from a deep inability to price patience and compounding because of their dominant short-termism.
But does the stock market incorporate information that relies on different sets of sources, different geographies and that only makes itself plain over years, if not decades? This seems much more doubtful. What it suggests to us is that the principles of applying patience and looking for returns that become pleasingly asymmetric, if the time horizon is lengthened, should be extended to applying a radically different approach to research. If what we fashion our research efforts around is not just about getting away from the efficiently incorporated noise but also about actively trying to understand a completely different set of mental models, then perhaps an informational advantage that isn’t the illegal fruit of insider trading is quite possible. This would be exciting.
The first part of this process of research reorientation has been geographical re-thinking. It’s often been suggested that it’s no coincidence that more great fund managers hail from outside major money management centres. Omaha springs to mind, but this isn’t so much about reflecting on the Edinburgh ghosts of Smith and Hume and their lessons of local historic genius, but about changing our approach to understanding less familiar places and societies.
It’s not good to adopt the traditional investment habit of rapidly touring a country, visiting a few companies (around 90% of investment houses claim that as a competitive advantage in itself) and quoting the analytical insight of taxi drivers. It’s even worse if the British vice of viewing countries as imperial playthings – the Boris Johnson approach applied to investment – takes its toll. What we try to do is instead to bury ourselves in the mentality of a society. We’re trying to internalise its strengths rather than criticising it. Criticising is undoubtedly easier but it won’t help you find the asymmetric upside.
It’s cities not countries that transform our world.
But what this has done to our minds is that we’ve become disbelievers in nations. Whether it be Tom Slater residing in Northern California for several months at a time or my spells in Berlin, we went principally with the intention of acclimatising to their societies. However, we both returned much more convinced that cities or, at most, regions tell us far more than traditional macroeconomic pontification based on national statistics. There’s an eccentric but provocative book titled ‘The Geography of Genius’ by Eric Weiner (yes, Edinburgh does feature) which stresses the simple reality that it’s cities not countries that transform our world. As Weiner says it’s usually small places too.
This seems even clearer in assessing what’s really our objective, answering the question: what and where creates great companies? London, New York and Tokyo don’t score very highly. We’re better off in Seattle, Shenzhen and Stockholm. I’d go further and suggest that the awful record of most US active fund managers over the last decade and more is primarily the bitter outcome of the unwillingness or inability of the East Coast establishment to understand or empathise with the ethos of the West. It’s been better to be an outsider.
I’m now spending a portion of the year in Amsterdam. That’s fascinating in itself in observing a different past and more hopeful version of the present world than London and Washington currently offer, but even generalising from Amsterdam to Holland seems misguided. The collection of cities around the historic Randstad (and with modern transport extending it a little) have characteristics of their very own. I’m afraid this seems to me to be a much more constructive arrangement than the utter dominance of London. It may not be surprising that this geography originally gave us Philips and now gives us ASML (and at distance TSMC) around the Eindhoven version of intensely international capitalism. Cities matter.
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.
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