There’s no investment alpha in the average. You are NGMI by being middle of the pack.
I read the June 2020 investor briefing by James Anderson of Scottish Mortgage AGM— one of the best performing investment funds in Europe.
It’s one of the most powerful presentations on investment philosophy that I’ve found recently. I got so much out of it that I re-read several times and also watched the matching Youtube video.
Here’re some notes 👇
1. Investment alpha is in the extraordinary decisions.
Investing has become an ultra competitive field. Reading financial statements and running valuation models are not gonna cut it anymore. Every CFA can do those.
On top of that, you have quant trading, chartists, automated algorithms— people have invented every possible way to squeeze short-term information asymmetry out of the market.
If you’re going to invest by judging fundamentals, you have to be willing to embrace the extremes. You will fail if you are conventional.
This doesn’t just mean going out on the risk curve. The decision to take on those more “risks” need to be supported by a view about where the world is going. More on this in a sec.
As Anderson put it, “Investment performance is a matter of capturing the extraordinary. The extraordinarily successful, the extraordinarily great, the extraordinarily unusual.”
2. There is no value and growth investors, only good and bad investors.
It used to be that the so called “value investors” make decisions based on current-day fundamentals, while “growth investors” base decisions on future growth potentials.
That distinction no longer exists in a world of disruptive technologies and fast changing business models. Every company needs to stay on top of disruptive forces, or they won’t survive.
“Most companies do not matter at all and do not, over the long term, produce returns. We are just as uninterested in the average growth company as we are in the average value company.”
3. Good investments make you uncomfortable.
Exponential techs are volatile. The winner is not clear in the short term. Even a good investment would see 35-50% drawdowns. Those times are painful and you’d need to have a longer-time conviction to survive them.
Anderson cited Amazon and Tesla as examples. His company was heavily criticized by shareholders and media for holding those, the valuations of which at different points in time were irrationally high to the average observers.
Anderson says, “We would infinitely rather endure drawdowns, disappointments and temporary setbacks than abandon our backing and our experiences of and with great entrepreneurs and great companies.”
This is a sentiment of old-fashioned value investing, being adapted to the exponential age.
4. Conviction comes from science and deep research, not from market hearsay.
Price data and news items are not a sustainable source of return, since so many people watch and analyze those to a tee.
Focus instead on understanding the ins and outs of the underlining tech trend. That will give you the conviction to endure short-term volatilities.
For example, if you understand that battery technology is improving 25-50% per annum and will continue doing so, then Tesla is a lot cheaper than it appears to casual onlookers.
5. Find the new Moore’s law.
Moore’s Law predicted that the cost of computing would be halved every couple years. It has been the underlining driver of the IT revolution to this day.
Now we’re seeing similar laws happening in other fields, e.g. energy storage and genomics.
That means the cost of a lot of other things are going to go down exponentially. Decide which companies will be the beneficiaries of those reductions, and you’ll have your investment thesis of the century.
6. Climate change and healthcare will be the next extraordinary investments.
Climate change and healthcare are two great challenges of humanity right now.
Thankfully the underlining tech of those fields are starting to show Moore’s Law type of improvement. Companies that leverage such improvements to solve these big challenges will make extraordinary long term investments.
The Covid vaccine development was a good example. Experts initially predicted that we might wait for many years to see an effective vaccine.
In reality, the genome of Covid virus was sequenced and analyzed in just a couple weeks, which made fast vaccine development by companies like Moderna possible.
We’re only seeing the tip of iceberg of the exponential productivity increases that will happen this century. These will be the biggest investment alphas out there. No investors could afford not to pay attention.