#57 - Growth vs. Value Investing with James Anderson of Baillie Gifford
August 5, 2020: Learning about the perspective of value and growth investing through James Anderson’s 5 part series comparing the teachings of Ben Graham to the philosophy of growth investing he has developed at Baillie Gifford.
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Episode Notes:
Graham or Growth? Notes on the 5 part series:
Graham viewed companies as going through a lifecycle of growth than decline. Part of this macro-cycle seems to be a view that growth companies would also be hit harder in downturns as the exuberance that led to its growth wanes.
"In its last year as a private company Microsoft made net profits of $24 million. For fiscal 2018 it earned $30.27 billion. That’s at a 24 per cent compound growth rate over 33 years with operating margins still over 30 per cent.” => wow. 33 years of growth… albeit with plenty of hiccups but possibly demonstrating an organization that had the ability to adapt and innovate. It also runs contrary to the common view that the lifecycle of an average business is 40 years… I guess because this is no longer an average business it will last longer!
A possible look at how a reliance on mere 150 years of financial data… surrounding a specific country.. is used to predict/support a strategy… in one way limits our scope of possibilities. The past may merely be “the frozen accidents of history”. Leads to a fascinating example of how Annie Oakley did a trick of shooting a cigarette that a volunteer would hold… and one time that volunteer was Kaiser Wilhelm… WW1 may not have happened if she had missed.
"The actual outcome that occurs is just one choice amongst an infinite number. Moreover that one now frozen occurrence influences the future path in often unfathomable ways. Soccer commentators are fond of mouthing the cliché that ‘goals change games’ but in business too reversing time and chance is impossible. We can write all we like about the underlying causes of Microsoft’s astounding success but it rested on accidents."
"Both the Value driven dictums of Graham and the extremes of Microsoft and other platform Growth stocks may be the near random outcome of an almost infinite set of possibilities in each period. Neither should be treated as permanent laws of finance."
“Surely, nothing can be more plain or even more trite common sense than the proposition that innovation is at the centre of practically all the phenomena, difficulties and problems of economic life in capitalist society”. - Schumpeter / Is innovation the first principle of growth?
"But what if the world coming into view is so profoundly different from our prior existence that we simply can’t contemplate or analyse it in any meaningful sense? It’s possible that the transition that we are facing is just as wrenching and disorienting as the emergence of the industrial revolution appeared to agricultural labourers. It’s not just that the rules of the games will be unknown but that the nature of the economy and corporate life will be mysterious. Against such a potential background of existential uncertainty it’s surely wrong to have confidence in any patterns of past behaviour persisting as iron laws of returns.” / Seems perfectly applicable to the world experiencing the COVID-19 pandemic… something Anderson wouldn’t have foreseen when he wrote this in 2018.
A must learn: Carlotta Perez of Sussex University and her brilliant Technological Revolutions and Financial Capital.
Per the works of Geoffrey West (former president of Sante Fe Institute and theoretical physicist), organisms scale sublinearly while cities scale superlinearly. Corporations are commonly attributed to scaling like organisms where they grow, stop and die. A kind of reversion to a mean in some ways. West also concluded companies that mature will revert to market growth. But, Anderson suggests the possibility of companies breaking that paradigm and scaling superlinearly.
Looking at companies as similar cities… as centres of ecosystems. Something more than having mere ‘moats’.
A quick case study on the negative lollapalooza effect for coke and how it may not be able to reach the $2T market cap mark by 2034 (as noted by Munger in the past). A thought into how companies have to be able to continuously adapt and innovate.
Margin of Potential Upside = looking at whether the upside is substantially higher than the downside. Looking at Coke and Facebook… both are highly addictive and innately have a margin of safety because of how entrenched the products may be in our lives. Yet, this addiction may mean people are better off without these companies. But, if one were to ask which one has better opportunities for substantial upside, FB has many more options/levers to pull for that thread.
When betting on donkeys, the carrot and stick method may work. This is what Anderson notes in reference to investor desires for precise/specific strategies. Many employed by activists who believe they know better. This may be so if the company in question is a donkey. But, if one is investing in high growth racehorses, Anderson points out the overriding/singular principle is encourage the companies to focus on the qualitative goal of building long-term competitive advantages. Not to be focused on metrics. The idea is that there are so many unpredictable opportunities and outcomes so to believe set metrics give any kind of certainty to the future is… we’ll… hogwash.
“I think that the world so brilliantly described by Ben Graham is unlikely to return. That’s partly because he and his exceptional followers have been so influential. As Charlie Munger (aged 95) remarked about ‘groupie’ fund managers who follow Berkshire principles they are “like a bunch of cod fishermen after all the cod’s been overfished. They don’t catch a lot of cod, but they keep on fishing in the same waters. That’s what happened to all these value investors. Maybe they should move to where the fish are””.
"The venture capital alternative is equally relevant in thinking about returns. Recent research demonstrates clearly that the return distribution in quoted equity is much more akin to venture principles than has been imagined. One consequence is that one success matters more than one failure. The value tradition finds this challenging: we’re back to Rule 1 being not to lose money and Rule 2 being not to forget Rule 1. At a portfolio level that may not be wise.” / A consideration for a VC-approach to public investing.
The combining factor for growth and value is the need for a long-term view and a need for creativity.
Full series: