/ BAILLIE GIFFORD /
WE ARE
RESOLUTE
James Anderson, joint manager, Scottish Mortgage
Investment Trust
W
E’RE OPTIMISTIC.
WE’LL RETURN TO
THIS SOON. But we’re
also resolute. This may
be even more
important. That’s because it may be
even more unusual. If fund
managers find it professionally hard
to be optimists, they find it harder
still to show resolve. It’s not the way
the financial services industry
works. Instead it encourages
participants to be endlessly restive.
This is not unnatural. Activity
pays. It pays for brokers, it pays for
investment banks, and it pays for
consultants. Fund management is
the modern equivalent of an isolated
citadel being attacked by a furious
fusillade of weapons. Instead of
canon and burning oil we have
corporate earnings canisters fired at
us, macroeconomic data lobbed over
our defences, politics used to terrify
us (if central banks have not already
made us cower).
If the scary news-flow shows
dangerous indications of flagging,
brokers are always there generously
to provide recommendations for
changes. By far the easiest response
is to surrender. Brokers will then be
very nice to you and the media will
be delighted to convey your hasty
12
outbursts of activity to an admiring
readership. You will join the club of
never being wrong for long. You may
even be right for long enough to
be rewarded with a large bonus for
your performance over the last 52
weeks because that surely couldn’t
be random chance could it?
But this isn’t at all helpful for
clients. It is isn’t at all helpful for
fund managers trying to invest well.
But then even the term ‘investor’
has been terribly debased. It should
usually and usefully be replaced by
‘traders and speculators.’ Investors
are interested in the ultimate value
of an asset as eventually revealed
by its free cash-flow. Traders and
speculators are concerned by
whether its price is going up or
down in the next few hours. That’s
very different.
Sadly our media cannot be
bothered with the distinction.
Even more sadly the supposedly
authoritative Financial Times is
bottom quartile in this regard. Pick
up any edition at random and take
a look at the confusion. I picked
up today’s. On the page entitled
Markets and Investing it assures me
that the dollar was bouncing back
”as investors shrug off geopolitical
tensions,” that “investors anticipated
that tropical storm Harvey would
generate demand” for equipment
rentals and – confusingly – “that
investors have speculated” that
Kraft Heinz would buy Mondelez.
Meanwhile, Jameel Ahmad of FXTM
told the FT that “‘Sell volatility,
buy the dip’ has been the investor
mindset.’” I could go on but this is
exhausting and I apparently need
to hurry off to take a position on
each of these issues and then trade
on them all to be a real investor. No
one wonder investing is so hard and
we’re so well-paid.
But that’s what is so perturbing
about finance. There’s no evidence
that acting in this frenetic manner
has any social utility. There’s no
evidence that it is productive of
impressive returns to clients. Instead
all the evidence suggests that the
great investors are dull, patient and
resolute. They accept that it’s just not
possible to predict all those events
and moods that the Financial Times
sees as essential to investing.
Resolve isn’t just needed to
block out noise, it’s that even in
the greatest of investments and
companies there will be repeated
and tiring periods of stress, difficulty,
disappointment and deferred profits.
Jeff Bezos was once said to be close
trustnetdirect.com
to stepping down at Amazon. Wall
St and the Square Mile will do their
considerable best to convince you
that these inevitable ascents of
modest hills present Himalayan
challenges and that you would
be far better selling now because
quarterly earnings have ‘missed’ by
a cent or a penny (it never seems
even to occur to them that it could
be their estimates that have missed
earnings).
But even this doesn’t do full
justice to the need for resolve. The
reality of stock market investing is
that outstanding returns are reliant
on the ownership of a remarkably
small number of stocks over very
long periods. We’ll frequently
return to this theme. For now I’ll
simply repeat the ever wonderful
93 year old Charlie Munger “The
“The temptation to give in to
sentiment is even stronger at
moments of market panic than it
is in owning individual stocks”
first rule of compounding: Never
interrupt it unnecessarily”. That
takes resolve.
The temptation to give in to
sentiment is even stronger at
moments of market panic than
it is in owning individual stocks.
Scottish Mortgage suffered heavy
falls in 2008. One broker still
regards it as essential to warn all
and sundry of this sinful period
in all his reports. Yet there’s
nothing that I’m prouder of in my
career. Enduring those months
was absolutely central to our
subsequent performance. As Seth
Klarman says, the first question
he’d ask any fund manager on a
selection panel would