Why are we optimists? We’re optimists because we are in the greatest era of opportunity for growth investors that has ever been seen. We’re optimists because what matters is the creation of enduring companies with massive opportunities, sustainable advantages and alluring returns. The inanities of our political leaders, the impatience of finance, the mediocrity of post-crisis economic activity may all be sad but we leave others to bemoan them and to believe they can predict the daily twists and turns of Trump’s mind, economic data and stock market sentiment. We are not clever enough to do any of this. We are merely lucky enough to be able to listen to brilliant entrepreneurs and thinkers and fortunate enough to have a Board and shareholders who recognise the need for patience.
It’s the future that matters to us. But what we are projecting is but an acceleration of the pattern that markets have already espied beneath their daily gyrations. For all the pessimistic angst and exaggerated reverence for past stability and low volatility, the tale of the 21st century thus far has been that of the rise of the first obscured but then persistently dominant digital technology giants. This isn’t the usual narrative. The finger-wagging usual narrative remains “Remember the Tech, Media and Telecom bubble of the 1990’s - it is a warning!”
We’re optimists because what matters is the creation of enduring companies with massive opportunities, sustainable advantages and alluring returns.
Media bubble it probably was, telecoms bubble it assuredly was, but for technology it was more a cheery chirp of a forthcoming dawn than a terrifying day of judgment. Reminisce all you like about the idiocies of Lastminute.com or the strange enthusiasm of Time-Warner to let itself be acquired by AOL but this is a very partial and terribly unfinished story. The split adjusted high of Apple at the peak of the Nasdaq in early 2000 was less than $5. Today at $160 and with a market value of over $800bn Apple is the world’s largest company. For those tempted to point to this being a mere share price it might be worth adding that Apple is now the largest dividend payer in the world ($13.2bn at current run-rate). It has returned a total $211bn - or more than eightfold the 2000 market capitalisation – to shareholders since 2012. This still leaves over $250bn in cash. Value investors ought to salivate even now. As demonstrated by such dominant examples you’d have needed to be a fantastically bad investor in the like of Socks.com to have suffered more than you gained from the technology bubble by now. I scarcely need say that Apple looks sedentary if we shift the lens to China. Tencent, which unlike Apple we still own and is amongst our largest holdings, debuted on public markets in only 2004 but is now valued at almost $400bn. This makes Tencent worth more than twice that lumbering left-over of colonial Britain that is HSBC. Such is wealth creation in 21st century Communist China.
So why is this happening against such a seemingly stagnant economic background? Why isn’t there more enthusiasm and joie de vivre amongst investors? Why aren’t there more optimists? It seems to us that by profession fund managers are ill-disposed to dream. Career risk, the shame of being wrong, exaggerated respect for mean reversion and the terror of seeming naive in front of colleagues, clients and remuneration committees are all too prevalent. Fund managers are therefore much more risk averse than most of the population. We’re still haunted by the mythology of the TMT bubble in a way more normal humans cannot understand.
Why isn’t there more enthusiasm and joie de vivre amongst investors? Why aren’t there more optimists? It seems to us that by profession fund managers are ill-disposed to dream.
But these behavioural failings are equalled by analytical failings. We aren’t trained to think about dramatic exponential change for ill or particularly for good. Understanding such innovations requires imagination more than financial analysis. It requires the use of multiple mental models and acknowledging possibilities, not financial modelling and claims of certainty. These limitations appear to have meant that for long years the virtues of the great technology platforms have been underestimated. This is otherwise inexplicable. For the strengths of these companies are hidden in full sight. They are not hard to analyse. The scale of their markets is global and as visible as mobile phones; the economics of digitalisation and software are both advantageous and friendly to massive scale benefits; the networks and social connections they create and exploit are drug-like in their strength and persistence. This isn’t complex. It doesn’t require a genius to exploit the opportunities though these companies boast an uncommon number of brilliant founders close to deserving that description.
So the remarkable stock market success stories that have risen to dominate the lists of global market capitalisation over the last 10-15 years seem eminently justified by their business successes and probable longevity. But we would like to make a broader and potentially more important and even more rewarding claim. The brilliant businesses underwritten by digitalisation and globalisation have the opportunity in the decade ahead to transform hitherto stagnant industries from healthcare to transport to agriculture. We look forward to setting out the arguments for such positive transformations. If we are right mere optimism may not suffice.
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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