The value of any investment and any income from it, can fall as well as rise, meaning that investors may not get back the amount invested.
We previously discussed how we’ve tried to change the balance of our geographical research away from criticism towards understanding, and from malign national generalisations in favour of studying creative cities. We’re happy with how these processes are going. We particularly welcome the much clearer links both of these changes of focus give us into corporate growth from an early stage.
But there’s still much more to be done. What’s critical for us is being able to identify at an early stage those companies that have a small but realistic chance of being worth hundreds of billions of dollars. This is a profoundly different task from starting from the largest components of a market and betting which ones will do best over the next 12 months with the least possible divergence from the index.
What we most need is to be as good as we can be in understanding change.
Without going through this once more in detail, let me just say that such a limited time-frame makes the existential division between compounding success and deterioration to corporate death close to irrelevant. Even the worst traditional retailer, mainstream media company, doomed oil company or sleepy car manufacturer will make it to 2018 and probably even to 2020. But, if what we’re interested in is identifying the corporate giants of the next 10-20 years the promising information set looks very different.
What we most need is to be as good as we can be in understanding change. We need to learn how it happens, what it requires, when it happens and when it doesn’t happen. Only after this can we start to think about the specific instances and the returns to success as the world changes. Some of this is to do with enlarging the number and power of the mental models we can use for assessing the possibilities of change, some of it comes from historical analogies as mentioned elsewhere.
What’s critical for us is being able to identify at an early stage those companies that have a small but realistic chance of being worth hundreds of billions of dollars.
But much of it is to do with the direct study of change. It would be an exaggeration to say that there is a complete science of change, but there are already a meaningful number of hypotheses. As an example we’d highlight much of the work pioneered in and around the Santa Fe Institute concerning power laws, exponential progressions and scalability. We’ve also formed a link with Sussex University to fund new explorations in Deep Transitions inspired by their history of excellence in this area. We’re embarking on a link with Delft University of Technology who, in their knowledge of robotics and advanced transportation, typify the ill-considered and under-valued research available in European centres of excellence. Such initiatives increasingly need to be at the core of our efforts. It may not be what most perceive to be central to fund management. It’s usually not incorporated in markets. But that is why it’s useful – and important. There’s more in heaven and earth than quarterly GDP and quarterly earnings.
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. As referenced above, private companies may be more difficult to buy or sell, meaning short-term changes in their prices may be greater. Those considering investing in any of the areas highlighted in the article should undertake their own research and seek advice if unsure. For those looking for information on Scottish Mortgage specifically, please visit www.scottishmortgageit.com