At Marcellus, we embrace the risk minimisation approach to investing which reflects our team’s highly sceptical view of most things in the market. Whilst scepticism does help avoid loss making prospects, it does sometimes lead to passing on potentially money-making opportunities. Here’s a century old investment firm which is taking the opposite approach of positive thinking and has reaped the benefits of that. Baillie Gifford, a Scottish fund management firm, has a rule for its analysts and fund managers that “..for the first 20 minutes, anyone speaking about the idea has to be positive, contributing only to the bullish case of a stock”. Such an approach has helped the firm benefit from the emergence of new tech firms right from rubber plantations that would benefit from the discovery of automobiles in the early 20th century to the more recent success of Tesla.
“One of Baillie Gifford’s first trades was to lend to rubber plantations in the Malay Peninsula, believing Henry Ford’s pioneering Model T automobile would revolutionize the world. After World War I, the firm decided America was a compelling “emerging market,” and built positions in railroads including Union Pacific and Atchison, Topeka and Santa Fe, eventually investing 20% of its assets in the United States. In the 1960s, it was an early investor in emerging Japan….
…Name a hot coronavirus stock, and Baillie Gifford discovered it and built a massive position before the virus spread. The firm has long-held multibillion-dollar positions in Alibaba, Amazon, Tencent, Microsoft and Netflix. Newer buys include Zoom, Covid-19 vaccine hopeful Moderna, digital health upstart Teladoc and online textbook seller Chegg. It’s a large shareholder in Wayfair, which first plunged as Covid-19 spread, then rose eightfold when sales skyrocketed as quarantined customers made home improvements. Baillie Gifford is also a top holder of surging Covid stocks Grubhub and Peloton, the cycling platform many are using to burn off their “quarantine 15” weight gain.”
The Forbes article cites three things that have perhaps allowed Baillie Gifford to succeed in this approach. First, this approach like most successful ways of investing necessitates a long term thinking. This is engraved in the minds of its people. They even have an “imposing sign over the entrance [to its headquarters] reads “ACTUAL INVESTORS THINK IN DECADES. NOT QUARTERS.””
Second, an element of positive thinking like the 20min only bullish case rule “The optimism rule is designed to thwart what the partners believe is a natural tendency for smart people to be skeptical and shoot down ideas prematurely.”
Third, an institutional approach to discovery. Baillie Gifford works very closely with academia spending a lot of its research budget to stay ahead of the curve across fields including investing, philosophy, tech, genetics, etc. It publishes a magazine that shares its findings from its work with academia – one such piece was featured in an earlier edition of Three longs and three shorts.
“While private equity firms and corporate chiefs have spent the past decade making companies lean and leveraged, Baillie Gifford’s stock pickers ignore all that and seek out companies investing in research and technology. They particularly like projects that might not be immediately profitable but could propel the economy a decade from now. Quantitative investing is all the rage, but the Scottish firm is moving in the other direction, trading little and spending its research budget sponsoring literary prizes, investigating new philosophical ideas and endowing university chairs in genetics and computational biology.”
And it goes without saying, such an approach dumps valuation tools such as PE multiples. Indeed, a distinct characterstic that differentiates Baillie Gifford from say a VC firm punting on new technology is factoring in ‘staying power’ (a PE multiple doesn’t capture that).
“The firm pays little attention to traditional valuation metrics such as earnings per share or price/earnings ratios. It’s singularly focused on three things—growth, competitive advantage and staying power—and it doesn’t mind parking its investors’ money in stocks that would make value investors seasick. Here’s a sampling: Zoom, the now-ubiquitous video-chat company, which has a price/earnings ratio of 400; e-commerce upstart Shopify, at 50 times revenues; online furniture merchant Wayfair, which lost $1 billion in 2019, double that of the prior year. But these very stocks, plus a good number of the 30 to 50 others held in each of their 14 mutual fund portfolios, are exactly the companies benefiting from existing trends accelerating during the crisis.”
Obviously, this approach is beset with setbacks. So, it does require a positive approach, conviction and long term thinking. “When the internet stock bubble popped in 2000, Baillie Gifford suffered a setback, but as investors fled companies like Amazon, the firm backed Jeff Bezos’ vision. It was Amazon’s remarkable resilience and success that birthed the firm’s think-happy-thoughts-first, be-critical-later approach. Its timing was perfect.”
Even during the current Covid crisis, the company is taking a positive approach : ““One of the things we feel is absolutely incumbent on us at this moment is to encourage the companies we back to be brave,”….Baillie Gifford has gone so far as to mail letters to its portfolio companies, encouraging CEOs to forestall layoffs and cost cutting. It even offered new capital so they could maintain their growth plans.”
One aspect where Marcellus shares a common belief with Baillie Gifford is the big getting bigger view “Technology giants like Amazon, Google and Microsoft are now carrying the S&P 500. “We started noticing that big companies got better and got stronger, and their returns got greater as they grew, rather than the reverse,”
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