The transcript from this week’s, MiB: James Anderson, Baillie Gifford, is below.
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RITHOLTZ: This week on the podcast, man, strap yourself in. I love finding these people, just rock star fund managers who — who just blow everybody else’s doors off, but have somehow managed to maintain a relatively low profile over the decades they’ve been in — in the business, and today’s guest is absolutely an example of that.
James Anderson has been at Baillie Gifford since 1983. His track record is — is superlative. But what I’m really fascinated by is not just the outcomes of his investments, it’s how his process is — is so atypical of what we see in — in the world of investment, very thoughtful, very eccentric, really considers investments in terms of decades. Forget years, decades. I don’t know how else to describe it other than strap yourself in for this one. It’s spectacular.
With no further ado, my conversation with the soon-to-be retiring manager of the Scottish Mortgage Investment Trust and Partner at Baillie Gifford, James Anderson.
ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: My extra special this week is James Anderson. He is a partner at Baillie Gifford, where he runs the FTSE-100-listed Scottish Mortgage Investment Trust Fund. It’s about $23.5 billion last I checked. He has generated returns over the past two decades of over 1,700 percent. Baillie Gifford also manages about $470 billion.
James Anderson, welcome to Bloomberg.
ANDERSON: Thank you. It’s a pleasure to be with you.
RITHOLTZ: Let’s talk about your career. You — you joined Baillie Gifford back in 1983. Tell us how you found your way into finance and how did your financial career begin.
ANDERSON: Barry, I think it’s a combination of a fairly normal British establishment story with a few twists. I came from a very medical family. I didn’t much care for the idea of being a doctor, although everybody assumed that’s because I wasn’t remotely clever enough, which used to annoy me a bit. I did a history degree at Oxford, which may or may not have been relevant, and I then spent a couple of years at university abroad, in particular, a year at Johns Hopkins in Bologna in Italy, which was originally set-up to use the CIA’s (inaudible) spy on the Italian Communist Party is involved by then, but it gave me a first for hearing different interpretations. There were people from approximately 40 different countries and really made me a great deal more curious than I was when I was being talked down straight lines at Oxford.
And — and I think — and I think you would probably agree fund management is great if you’re really curious about the world. Journalism was really the other thing I — I considered. And I didn’t much like London, so Edinburgh it was.
RITHOLTZ: Quite interesting. So — so you’re at Baillie Gifford in ’83, how do you eventually become the manager of the Scottish Mortgage Investment Trust, which dates back to practically the turn of the last century?
ANDERSON: That’s right. And to be honest, Barry, I think that some of the events in the early years of Scottish mortgage is quite fascinating. You — you might be intrigued to read, for instance, its accounts of 1929-30 when it was much more concerned about which member of the Scottish middle-class is — was going to be appointed to the board than it was by what was happening on Wall Street; its account of why Canada or — and Argentina were more interesting than America.
It was interesting the backstories for many year, but I’ve always thought that investment trust are a fantastic instrument. And, you know, that’s come across even more in recent years because of freedom to go where we want and investing whichever form we want, and to try and offer at low cost to retail investors has been something that I — I really value. And so the unpopularity of that form, which existed back in 1983, you know, it was just a fascinating project to try and get involved and to gradually see the benefits of it.
And I much admire my predecessor, Max Ward who had to same thirst for gross investing. Baillie Gifford made a huge mistake because in the late 1970’s Max was, by far, our most outstanding investor. And the core so many of our assets were in the U.K. at that time. Max was persuaded to be in-charge of the U.K. market when his heart was in America. And I think Scottish Mortgage and Baillie Gifford are right to being further onwards if we’d revert to that position.
RITHOLTZ: Last year you happen to say fund management was irretrievably broken. Explain that a little bit. That’s a fascinating quote.
ANDERSON: Yeah. Well, and I’d be very interested to pursue this with follow-up questions on you, Barry, because I think it’s a critically important issue. I — I — I think fund management has inherently become inward-looking, and you know this as well as I do, people measure themselves by how they do to their comparators. If I go back to the early days of stock markets, what we were in the business of was helping to create and nurture great companies, so we’re going to move society, as well as investors onwards. And I think that we’ve lost that sense of purpose over the years, so that is absolutely central to how I say it.
I — I would evidence it by not just all the type of short run performance statistics and short run media coverage there is, but by the lacerating overall facts that both in Britain and America for very long decades now more money has been given back by companies in the (inaudible) markets than has been raised. You know, it’s become a machine for recycling rather than machine for creation.
Now I could go on, but fundamentally, I think that is the great trouble, and this led us to have — have to reinvent a different way of really providing serious equity capital outside the public markets.
RITHOLTZ: That’s really interesting. So, when you say a machine for recycling rather than inventing, are you referring to share buybacks rather than R&D, research and development, and investment, and — and new ideas?
ANDERSON: And share buyback — yeah, that — that’s absolutely right, share buybacks, in many cases, excesses, dividend, insufficient investment, and particularly in capital-intensive business, which, as you know, are not on the whole (inaudible) what’s been on people’s mind for most of the last 30 years. But yeah, I think this is a real problem, and to build these companies, you need a time horizon that is well longer than quarters, years, and possibly even than decades.
RITHOLTZ: There’s another quote of yours related to this exact issue that I found very amusing. Fund managers are addicted to the near pornographic allure of earnings reports and macroeconomic headlines. Is that just a colorful way of saying they’re too short-term, they’re not thinking long-term enough?
ANDERSON: A — that’s certainly part of it, but I don’t think it is underneath even in terms of the moment, the critical part of it. I — I’d cite, for instance, that I spend a lot of time asking companies when they’ve been fortunate enough to be successful, what have been the critical movements, critical decisions. And very rarely, Barry, do they say it was because we had a great quarter in 1993 or because we beat out these expectations in 2005.
And indeed, I think if you — if you drill down from that, very often, the most significant moments of companies’ history have been when they’ve done something that is annoyed in the quarterly report sense. And, you know, I — I would cite, for instance, the extreme drawdowns we saw with — with Amazon around the time of developing Prime, which was plainly a fantastically good long-term value-creating proposition. But yet the preoccupation was with a short-term impact on earnings. And, you know, I think you can drill into that again in a different way by asking what are the questions that happen in quarterly earnings calls.
As you know, very rarely do you see major investors in the company, the focus of those discussions. It is about the brokerage industry, the investment banks, and the next quarter. And I think that is profoundly dangerous and does have an impact. So, I think it actually goes well beyond just the time frame, and I say just, and so that’s unimportant when plainly, it’s deeply, deeply important. But I think you actually get the major discussions, as well as the long-term discussions biased towards whether the next quarter is going to be up or down relative to a set of analyst expectations.
RITHOLTZ: You are early to spot the potential for some really explosive growth stocks, and — and they’re all very different. I’m thinking about Tesla, Alibaba, Amazon. What were the tales of each of these that led you to think, hey, there’s really something special here?
ANDERSON: I think fundamentally there are two important tracks in this, Barry, to discuss a trend, elucidate our thought process of. Now, I think really, you’re looking for the scale, and this has become almost (inaudible) to say, but the scale of the addressable market that is there. And very often, I think it’s — it’s — it’s key to stress this. That scale is not necessarily all that obvious at the start of it, you know, when Amazon was a bookseller, when Tesla was a sporting goods company, or you read about the early days of Alibaba when there were 20 of it, but you can’t really guess to that. But I think that means that a critically important part of this is a management that can accept that type of open-endedness, and that type of time horizon, and that type of business decisions that we were talking about.
Now, if I’d look at this from a intellectual point of view, we’ve had a splendid relationship with a set of academics who’ve tried to focus on what’s really happened in the stock market from that — that point of view. And, you know, I think the history is going right back to the Dutch East India Company that a very small number of people dominate. And this was our experience ourselves that you had to have that ability of the management to think in those broad terms.
But we — we — we acquired ever greater conviction of this when it wasn’t just our own experience, but from the work of Hendrik Bessembinder at Arizona State University …
RITHOLTZ: Yeah.
ANDERSON: … and just (inaudible) outperforming treasury bills and there onwards. And to put this in context, you know, his data on the American market goes back to 1926 in 24,000 companies in U.S. common stock since then. Now, over that time, half the value over T bills has been created by just 90 companies.
Now talking to Hendrik, he would agree that these companies don’t just have huge markets, but they have a willingness to say we don’t know where it’s going to take us. And you mentioned there as we — we — we all often do Amazon within this.
Now, possibly of all the many brilliant things that Jeff Bezos has said and done, I think it was one of his initial comments that there was this witness about his business that everything he and Amazon used got better and cheaper usually by around 50 percent per annum. And then he paused and probably gave a characteristic laugh and said, which I think is really important, “I don’t know where this is going to take me, but I think it is going to be very exciting.”
Now, we don’t know, and surely, we didn’t know about AWS and — and the like.
RITHOLTZ: Right.
ANDERSON: And, you know, I think what you’re thereby looking for is both that type of management (inaudible), in general, and something specifically individual. We’ve been lucky to have on the board of Scottish Mortgage — and sadly now retired — Professor John Kay who — whose work you probably know.
RITHOLTZ: Sure.
ANDERSON: But, you know, a truly brilliant and thoughtful economist who really puts Tom Slater who I’ve talked to him myself on — on our — on our biggest test board meetings and other discussions. But I think one of the — the best sentences that even John has — has written is the start of one of his books where he compares great companies with fiction, and he cites the first line of Anna Karenina, which says that, “All unhappy marriages are different, but all happy marriages are the same.” And John’s take of the second line is it’s the reverse in companies, that all great companies are unique, and all mediocre companies are the same.
And I think if you run through all these examples, and we may well do with some of those, they are unique and they have a different interpretation. So, my challenge to myself, you know, sticking with the Amazon example is instead of we spotted it early, what took us so long because we only became major owners of Amazon in approximately 2004.
I think if you go back and read and try and X out, you know, all the subsequent successes, but if you read what Jeff Bezos wrote in 1997, I think you and I would agree that it is a unique document. And I think you can find that form of thought processes about the future of their companies in all the truly great companies.
RITHOLTZ: Yeah, I think a lot of us read that initial letter to shareholders, but we probably didn’t see it for 15 or 20 years. Not a lot of us read it and really understood it back in 1997.
ANDERSON: That — that may be. I mean, I — I — I — I — I almost think (inaudible) come back to my comments about our ownership, we made it more — more difficult for ourselves, Barry, by waiting those through into (inaudible) six or seven years because, you know, I think what skepticism had only grown over that point. You know, I’m always amused, frustrated now when people talk about the late 1990’s as some sort of just simply a bubble.
I think there was also in here for once I would find myself agreeing with Peter Thiel. There was also a huge amount of clarity around that point. And I think people’s abilities to explore those ideas was there, but yet, if I compare what Amazon was saying, what Jeff Bezos was saying about that point of time compared to what the average telecoms or media company equally sucked up in the whole boom was, I think you could make that as differentiation.
So, you know, I know that appearance of stress and plainly, there’s another one at the beginning of this year that correlations go to one and all companies regarded is the same. But I genuinely believe that the market and the articulation given by individuals and companies of their culture and ambitions does enable you to differentiate.
RITHOLTZ: Really interesting. So, you mentioned Jeff Bezos and Peter Thiel, what is the allure of the enigmatic founder? How much of the buys you made in companies like Amazon and Tesla are because the companies were helmed by visionaries like Jeff Bezos and Elon Musk?
ANDERSON: The cause of what I’ve said about the power of truly great businesses has come from reinterpreting the industries in which they operate, and very often has the examples you cite show they are people who are basically from outside the industry. I think it is very, very hard not to think that is absolutely a critical factor.
You know, I will be intrigued and do know we may come onto one or two counter examples, but I would intrigue it’s how many companies have managed to rise to greatness without having had that at the start of the — their — their life stories. And again, that’s something that basically Hendrik Bessembinder would agree with us.
If you go back early companies, that is also true with them. You know, I find — or we were talking Amazon then, but I think the Tesla story in that sense is even more remarkable. Somebody I much admire within the industry, John Elkann of Ferrari and Stellantis has said very clearly that he didn’t think it could — Tesla could’ve been done by anybody from inside the industry. So, I think that different vision is very rarely comes about without there being one single individual funders.
Now to undermine my own case, Barry, because, you know, I — I — I think the — the new ones in the discussion is important here. Funny enough, one of the companies that people don’t seem to focus on a lot and they don’t seem to ask me a lot — lot all my colleagues, which we probably most admire in the changes that have happened in the world would be ASML in Holland. And I — I consider that both the extraordinary European example of a really deep technology company that has actually succeeded. I also consider it’s possibly in terms of what it enables that most deeply (inaudible) company in the world. You know, none of the Internet companies would basically exist unless ASML has continued Moore’s Law.
But although there are individuals who’ve done absolutely superb jobs, it’s not so much associated with the philosophy of one or domineering founders. And I find that thereby an example that is even more intriguing, how do you get to this level of ambition, this level of attainment, this level of world leadership without having that sort of leader, but I’m (inaudible) of the view that having one of this sort of visionary leaders at the start is hugely important.
RITHOLTZ: So that raises a fascinating quandary, which is how do you separate the true disruptor, the folks like Bezos and Musk from the crowded field of those who, you know, promise — overpromise and underdeliver? And I’m thinking of either Adam Neumann of — of WeWork or Travis Kalanick of — of Uber.
ANDERSON: Yeah. I — well, firstly, I — I don’t think I will have any difficulty of persuading you over this, Barry, let alone the audience. I think one accepts that the hit rate is going to be comparatively low, you know, another one of the points that Hendrik Bessembinder would — would make is that he can stick up a chart of where the returns in public equity markets, whether America or internationally, have come from. And people assume it’s a return structure of the venture capital industry rather than the public equity markets. And inevitably, that means you are, just as in the venture capital world, going to have failures. But yes, of course, you both try and capture the extreme and try and winnow out what the difference is. And, you know, I think it genuinely has to come down to a judgement of the caliber and the persuasiveness of those individual ideas.
You know, to be quite frank with you, we did talk to WeWork, but we didn’t invest. We did talk to Theranos, but we didn’t invest. Now to some extent, you’re relying on a network of people who you will have good conversations with them. We might come back — come back to that later.
But I — I think it is about whether when you put to these people, the difficult is the drawback, so why did they believe in what they’re saying? And why do they think they might have a chance? Then I think you can make a more intelligent answer to that than you think. And, you know, I — I think thereby — and this is, I think, a very easy question for most investment managers. You are, thereby, coming down on it being critically about making qualitative judgments rather than quantitative ones.
So when we were discussing earlier earnings calls and the like, I think that that rush to what you can measure rather than what you can think about and not even analyze, but creatively inquire about is hugely important. And I think your biggest single objective on that is to try and understand whether there is a reason that only the one company you’re investing in can do what was happening. So, we — we worry a lot about companies in which the clones can easily happen on that store.
RITHOLTZ: One of my takeaways from the Bessembinder studies was that a lot of fund managers and — and stock pickers were excellent at identifying the companies to buy, but they weren’t especially good at determining when to sell. And I bring this up in light of you essentially cutting your Tesla stake in half at a time after it had really ballooned up and was very fortunate timing. Was this just a function of rebalancing or valuation or what was the thinking behind the cell in — in a — a substantial stake of — of your Tesla holding?
ANDERSON: I — Barry, I’ll try and answer that directly first, but then I’d like to cover a bit of the intermediary stage because …
RITHOLTZ: Sure.
ANDERSON: … you know, I think it is — it is the holding on that is critically important in this. You know, I — I was very interesting — interested you had a discussion a few months ago I think with Bill Gurley about the importance of the holding all the elements of this which, you know, I think is — is central to it. But let –let me try and run the Tesla one to you.
So, what we’re constantly trying to answer, and I will mention some less successful examples of this than how Tesla seemed at least so far. What we’re trying constantly to ask ourselves is has this company got the possibility to be in the top five percent of outcomes over the next five years and even longer if — if — if we can, and we do — we try to make it longer. So, you’re looking at can it still produce enough return to make it into that sort of very high-level competition.
We did not think Last January that the total market capitalization total enterprise values that Tesla was getting to, that we could see that degree of upside. It was not about a worry that it would go down, which, of course, in the case of Tesla (inaudible) more than the case of many — many companies always existed. It’s that we doubted there was sufficient upside.
Now, to bring that up today, I have to say that, if anything, we have been — I’d almost say taken aback by the excellence, the brilliance of Tesla’s execution since that period of time. And I don’t think it’s just in quarterly earnings terms again to go back to that. I think their ability to build out the factories, to build out their expertise in the batteries is broadly defined their ability to internationalize. Their ability to, in fact, increase their leadership over the industry rather than (inaudible) is truly remarkable. So, you know, you’re being kind enough to say it was not nil time to reduction, which it wasn’t in terms of having held on before, but it’s perfectly possible you’ll be wrong.
And that’s much in my mind, Barry, because, you know, I think, if anything, although we pride ourselves hugely on our ability to endure and to back companies for — for years and years and years, I think our longest holding is in Atlas Copco in Sweden, which I first bought in, I think, 1985, and – and we still own it, but sometimes we’ve given up and made very bad mistakes on that point of view.
We know we were large owners of Apple. I, myself, did the exercise of trying to see whether I thought it could be in the top five percent of outcomes over the next 10 years. And I didn’t think it could do — could be. Now that’s approximately five years ago now. So, you know, there is a fallibility about this process, but it’s absolutely about it. Does it have the chance from here to continue to replicate the style of performance that, with successes, we think is — is the outcome?
RITHOLTZ: That’s quite fascinating, and — and it leads to another question. I’m hearing you describe yourself as less of a pure bottom-up stock picker and less of a sort of macro market cycle economic guy than someone who is trying to visualize what the future might look like and — and which companies can help shape it. Is that a fair assessment? I don’t want to oversimplify this.
ANDERSON: No, but I — I — I — I — I respect that, but I think it’s a — a decent simplification or if I might try and put in a slightly different terminology, what we’re looking for are the era-defining companies, and I’ve never really understood this attempt to define it purely as bottom-up or top-down. Now, I think — and we haven’t really talked about this yet, but I wouldn’t be surprised if we — if we do in the coming minutes.
I — I think that we are also doing an element of top-down envisioning of what the world looks like, but it’s not from, you know, to go back to the analogy with the quarterly earnings, it’s not from what is the Fed about to do. And, you know, to be frank, even if I knew what the Fed was about to do, I’m not sure it would help me make good decisions, but it is trying to think what are going to be the main driving forces of our economy over the years to come, and where can there be those forces of change, and where can we get insights into them.
So rather than looking for what a bunch of market commentators or hedge funds are saying, we try and talk to academics and scientists who can give us some checkpoints on whether, you know, those fundamental endpoints are happening. So, you know, we continue with Tesla one on that theme. You know, what was critically important to us remains critically important to us in thinking about that scale at the market that we were addressing earlier was do we have that confidence that the whole panoply of technology is connected with making electric vehicles better and cheaper can continue to compound somewhere between 15 to 25 percent per annum that we had back in 2013-14.
And, you know, to me, that’s both a far more valuable background to investing. But also, you know, here I’d be particularly interested in your thoughts. A far higher probability of being right, you know, I think that back in 2014, we had approximately 75 percent confidence interval that that 15 to 25 percent across all the different parts of the industry was the improvement rate.
Now, if you have that 75 percent and it’s competing with an industry improving at three percent of it, as long as you’ve got patience, it’s going to work out in your favor. So, I think you’ve not just got a more impactful set of findings, but I think you’ve also got far greater probability. And, you know, come — if I bring that up-to-date, so a year or so ago, I think the probabilities of that 15 to 25 percent were moving up towards somewhere around 90 percent. In most stock market bets, you know, you’re lucky if you get 55 percent.
RITHOLTZ: Well, that — that’s really interesting. So — so I want to stay with the concept of evaluating early-stage emerging growth companies and ask you how important do you find it is to listen to scientists, technologists, and other people who have an expertise that might be beyond what your particular skillset is.
ANDERSON: Oh, absolutely. And I — I mentioned curiosity earlier. I — I think you’ve got to be interested in everything that forms that. Now, I — I know in a certain sense people in recent years have paid a lot of attention to the psychology and the behavioral factors in markets. But I — I think you can do it with a different set of thinkers.
Some of them are directly scientists. There’s some I — I would almost classify, Barry, as being most important to us. I put it as the philosophers of change. For instance, not just in reading, but also in extraordinary helpful direct conversations. The work of Carlota Perez at Sussex University have been extremely valuable to us. You know, how do technology, finance and innovation work together?
And, you know, I won’t go through them all because plainly, you’ve had many distinguished guests in the past who talked about this a lot, and many have done more to create it, but the whole emphasis of the work rounding the Santa Fe Institute about the process of change from hard technologies, like the work of (inaudible) on — on batteries to the more general conceptual work of Brian Arthur and Geoffrey West, I think, you know, thinking about how the world changes is hugely important to us.
And, you know, I — I — I’ll make two observations about the Santa Fe Institute on that stall, one would be a huge offer of thanks to Bill Miller for his work in establishing and financing it. And secondly, I think most of the successful investors over the last 15 to 30 years have owed a lot to the Santa Fe Institute and its very different take on economics on change, on increasing returns, on disequilibrium.
And, you know, I think we’re — we’re all in the sense as Kim (ph) said. You know, we’re — we’re often much more in practical circles at the whim of a (inaudible) dead economist, but hopefully, most of these people are still very much living. Well, they are still very much living.
But, you know, I think we owed much more to not just economist, but philosophers to scientists, and thinking about the process of change than we care to acknowledge in markets. And I think, you know, if — if I go back to when you were asking me about what I see as problems in stock market, I think a lot of it is this other element of the self-referential. We believe only finance, only market developments are worthy of study. And I think that is a tragedy in — in both for the world, but also in terms of trying to do reasonable investment. You will not — to make the point even more forcibly, you will not find much of what I’m talking about in the CFA’s requirements of new investors.
RITHOLTZ: So, let’s stay with that because a question I have for you a little later, there was a headline not too long ago, quote, “CFA Study Casts Doubt on Whether Passing the Test is a Key to a Fund Manager’s Success,” which raises a broad question what makes for a good management manager. But in doing my research about Baillie Gifford, I get the sense that CFA is in a particularly desirable designation for your firm. What do you do to attract and retain the best talent in Edinburg, which is really more of an academic center than a financial center? And how have you been able to do this so consistently?
ANDERSON: Well, Barry, it’s something that I absolutely a lot to our predecessors. And — and this sort of intrigues me as to how they managed to come to this view of themselves and instigated across the firm to such a strong way.
We — we always believed that you need this broader set of background so we’re always deeply skeptical of whether it be finance qualifications or whether it be academic training in — in those scenario words. You know, one of the investors who are most involved admired in Baillie Gifford and work with — for a long time, although she’s a Japanese specialist, Sarah Whitley was a psychology graduate and, you know, I think embodied many of these values. So that principle was always absolutely there.
What we’ve tried to work on over the last 20 or 30 years is trying to broaden that out. You know, naturally, one needs to get rid of the prejudices that were, 30 years ago, established around employing females, employing people of different ethnic background, but I think it has to go much more broadly that you’re looking for a great cognitive diversity — diversity of real sort and approach and where you are. I think that is absolutely critical.
Now, one level, it’s not difficult for us to do. You know, we have many thousands of people or, you know, as you probably expect applying to us (inaudible) do many other fund managers, but it then becomes a question about having the bravery the right ones and persuading them either to come to Edinburgh. And on that one, I will make some comments.
You know, I think that Edinburgh has got fantastic attributes and fantastic drawbacks. You know, I can wander out five or 10 minutes and I can visit the graveyards of David Hume and Adam Smith, and that whole intellectual heritage, which, you know, in a sense, you were being fair enough by saying academic, but I think it ought to be much broader. You know, there is an intellectual heritage, and we need to get back to the bravery that Scotland demonstrated then, which was actually inherent in the history of the investment trust rather than become again into the inward-looking and rather parochial place. And I think that’s a battle you have to fight, but there is enough of the good here.
You know, for instance, what they do at the Edinburgh Fest, intellects that come here is still incredibly valuable to us, but we also have to offer the option to people working elsewhere. So, we have offices in America and China, as well as probably less imposing one in — in — in London. So, you know, I think we need to combine the history of the firm with the evolution, with the good of Edinburgh rather than limitations. And equally, we have to be prepared to follow great people around the world.
RITHOLTZ: Fantastic descriptor and — and really helps to explain how Baillie Gifford has been as successful as it has been and taking such a nontraditional approach.
You know, we’ve been talking about mostly U.S. companies for a while. Let’s talk a little bit about what — what you see that’s attractive overseas. In fact, you — you’ve recommended Chinese and other emerging markets — markets before, emerging stocks before. Tell us will be about the mindset you have to have to invest in these or is it the same process no matter what country you’re investing in.
ANDERSON: Fundamentally, Barry, it is the same process but, of course, the standards of proof need absolutely to be there. And I — we — we — we — we were talking earlier about the importance of science and academia.
Now, what I think the corollary of that is, is what’s critically important to us in determining where we are searching, where we’re looking for is that we need to see evidence of, if you like, that rising educational standards, those rising academic stars in the markets that we’re talking about. And we need those to be, if you like, in charge of society.
So, you know, I — I’ve always felt very comfortable — uncomfortable. I don’t know about you with this label emerging markets. It’s always been made up of some countries, which emerged 2,000 years ago and then retreated with countries that are genuinely moving forward.
And I — I never liked to talk, in particular, the whole brick discussion that used to happen. You know, I think the differences between Brazil and Russia and to a quite large extent India and China are profound on the level we’re talking about. You know, there are some extraordinary brains within Russia, but I do not think they are central to the economic system based as it is on comparative extortion and — and energy production. So, I think, you know, you start with making that.
But at the company level, and I found this intriguing, we make exactly the same discussions. We have exactly the same set of 10 questions that we ask the companies in these areas, and we’re looking for the similar outcomes that we have in America or, to some extent, in — in Europe. And, you know, I — my — my real emotion about this is that — and I’m sure we’ll come back to this despite the difficulties that this can sometimes leads in operations in the ones shouldn’t be naïve about, that the companies have absolutely lived up to their bargain.
You know, for instance, we’ve been large investors since well before it was a public company in — in Meituan, the service company, now the food delivery and service companies. Now, I remember so acutely, and it follows on nicely from our discussions about Edinburgh. When the founder of Meituan, our first visitors here — obviously, we’d see them in China before. But when he first visited us here, he organized a room that looks out over historic Edinburgh, the castle. But before he would speak to me about the company, he required me to give him all somewhere between half an hour and an hour for disquisition …
RITHOLTZ: Right.
ANDERSON: … on the differences between the Scottish – the Edinburgh Enlightenment and the English Enlightenment.
Now, fortunately, as I was mentioning, I’ve studied quite a lot of history and I’ve had studied quite a lot of Adam Smith over the ages so I could just about all the way end up that, you know, the notion this is a standardized company that (inaudible) to its slides about its next quarter or whatever is a long, long way away. And, you know, I think many of the individuals we’ve had the privilege of meeting in China absolutely stack up with some of the remarkable people in America that we — we talked about them.
RITHOLTZ: So, let me ask the — the question that seems to be challenging so many. When we look at what took place with China last year going after the leadership of their own tax sector, essentially raising questions as to whether or not there — there is a — well, at least a — a rule of law the way we think of it in the traditional Anglo sense. You know, it led some people to wonder if China was uninvestable, how do you respond when the leadership of a country basically puts a series of — of policies …
ANDERSON: Yeah, it …
RITHOLTZ: … and programs that, you know, the — the whole tax sector there really has gotten (inaudible).
ANDERSON: Yeah, right. And again, you know, I — I — I — I appreciate having the chance to explore these questions rather than just simply provide one word I agree or I disagree, I know two words I have answers to — to you.
So, can — can I go back …
RITHOLTZ: Sure.
ANDERSON: … (inaudible), Barry, and I perhaps should’ve — should’ve said it when I was talking about the attractions of decent conscience. I would’ve considered myself, my colleagues in Shanghai maybe gifted large to be incredibly naive if we hadn’t thought about these issues beforehand. You know, the Chinese government does not conceal, but it has a leading role in society. And, you know, surely, we ought to have known that. So, you know, I — I think that we — we — we did have a mentality around this that we had to accept that there were risks (inaudible).
But if I then move on, I would differentiate in — in three ways that I think are — are critically important for why we are where we are now and what we might want to do going forward. The first one is I think there was a set of companies, which both the Chinese authorities and moreover, many in society, many writing in the media domestically, many authors who I’d listen to, and I mentioned the Edinburgh Book Festival recently who have made it absolutely clear that they thought the educational system and the tutoring system was a very bad thing for Chinese society. And in retrospect, it’s coming.
Now, Scottish Mortgage did not hasten to add investor in these companies, but we did have holdings in some, particularly TAL of the educational companies that needs to be honest about and in some mandates for which, you know, I have some responsibility as well. So, I don’t want to concede that, and I think that was a very bad, very serious mistake because we were not listening to what the available information, the available flow of government was saying about those areas. So, you know, bad mistake, absolutely agreed.
I will, at that point, bring in your uninvestable. You know, it both amused and annoyed me that many analysts in investment banks, having recommended all the educational companies, subsequent to the announcements then said they were uninvestable. It was not a great way to handle it, you know, they had made a mistake. And I think we need to be — they need to be on this slide, we need to be (inaudible) spell that.
The second part of it would be about regulation of the e-commerce world that I’m wary as I’ll come onto and saying that is all of technology, but let’s deal with that for the moment. In my view — in our view, all of us in the West, whether it be Europe, whether it be the U.K., or whether it be still more America have to think through very seriously what the correct societal attitude, regulatory attitude, government policy is towards the Internet companies and the e-commerce companies. You know, I think their untrammeled dominance has many both economic and societal problems with it.
If I look at it in that light, I think the governance that the Chinese authorities are looking for and currently obtaining from those Internet companies is justifiable and more than justifiable. I think in the long run, it makes for a better functioning of the whole sector. It doesn’t crush new competition. It doesn’t have such malign social impacts. And, you know, I still don’t think that America has faced up to those issues in broad terms. And, you know, I — I think that will be fascinating to see what happens over the next 10 years.
I don’t, if I may — and I know we’re all struggling for the — the right words — view the policy and the attitudes of the Chinese government as in any way either illegitimate on forecastable or something that one doesn’t regard as perfectly intellectually and practically humanitarian legal from the point of view of the overall set-up to society. Yes, it happened a great deal quicker than we are used to in the West and without as many abilities to control it. But, you know, how far does that tell us that really the West has a problem with over-dominant companies.
So, you know, I am not a whole-hearted opponent either for the long-term good of the technology sector or at least the Internet sector and what has happened in China. And I think it may actually be good policy and not bad for economic outcomes in the long run.
Lastly, I would sort of probably (ph) implying differentiate between this and hard technology. You know, I think it’s a point that Dan Wang of Gavekal makes extremely — you know, extremely articulate manner, but it’s one that we would share. We don’t necessarily think that the Chinese government sees Internet — consumer Internet companies as the peak of attainment in technology — technological and societal thoughts.
You know, I — I think those who think that perhaps it’s not a good thing for the brightest brains in the west to be spending their time on getting us to click on more adverts possibly have a point. And we don’t really see, for instance, if we look either in a beneficial sense about what’s going on in batteries — autonomous vehicles and the like or the more worrying sense in — in A.I. that — you know, that there is actually a desire on the Chinese part to say that. I think there’s a desire to say we don’t think the untrammeled dominance of the few Internet and e-commerce-dominant companies is a good thing for society at large.
RITHOLTZ: Really quite interesting. Before we leave Asia, what other countries in the region do you find particularly intriguing? Vietnam, Korea …
ANDERSON: Yeah.
RITHOLTZ: … what — what catches your fancy?
ANDERSON: Well, firstly, I — I would stay close to — to China, and I think it’s consistent with what we’re talking about. Perhaps it is China. You know, I think what TSMC has done in Taiwan is truly remarkable. Now, we don’t really see that as part of an overall pattern, but I think it would probably also incline you to — to — to guess that probably Korea has been the place that’s most interested to this point of view.
But could – could I just add one more …
RITHOLTZ: Sure.
ANDERSON: … thing, Barry, you know, I — I quibbled earlier at the notion of emerging markets. And I think, you know, we’re probably both agree in the short-term. But one of the elements that I feel incredibly strongly about in the world at large is that really, it’s not about countries, whether it’s in inverted commerce, emerging markets or in inverted commerce of the west, it is about individual citizen regions. And — and I say that both in the current context and, you know, historically, this has been the way.
You know, for a long period of time, it’s not quite so at the moment, but for a long period of time, we didn’t have anything resembling, a portfolio of American stocks. We had a set of West Coast conceptualized as a business. And, you know, I think the difference between your capitalism and San Francisco capitalism, it may have soften somewhat now, but was so strong for some reasons that I think that’s important to consider.
You know, I would say this was true about China, too, you know, predominantly, OK, Beijing has become more important, but predominantly as is be the Guangzhou or Guangdong, and Shenzhen portfolio or set of individual companies rather than anything else. And, you know, I would even say that was true in Europe. You know, we were talking earlier about the auditors of America, but, you know, I — I’m really interested in why (inaudible) or Amsterdam, or Stockholm, or Berlin can do things, which doesn’t seem to happen elsewhere in Europe.
So, you know, I think I — I’m much more a believer in the culture of individual cities. And for a long time, it’s been a real frustration under the COVID lockdowns.
One of my practices was was to go and spend for the year in a different city each year on — and to (inaudible) usually carry on for two or three years, and I did this in Berlin. I did this in Amsterdam. I was just starting doing Paris. I was wanting to do it in — in one of the cities in China we’re talking about.
And, you know, I think trying to understand the culture of individual citizen regions is probably much more relevant than talking about countries at large. And I feel that quite strongly about — about the — the USA, for — for instance. And I think that fits with history.
There was something (inaudible) book called — what’s it called, “The Geography of Genius” in the past. One of the points it was making is that the truly great ideas, they rarely came from the major cities, they came from quite small places. And, you know, I think from — from Athens to Edinburgh onwards, that — that was the case in point. And I think that, you know, it is the differences in these individual citizen regions that — that is truly important in investing.
RITHOLTZ: That’s quite fascinating, that’s — Eric Weiner wrote the book …
ANDERSON: That — yeah, yeah, yeah.
RITHOLTZ: … “Lessons from the World’s Most Creative Places.”
So, let’s talk …
ANDERSON: Yeah.
RITHOLTZ: … a little bit about Europe, which has been lagging for what seems like forever — or is Europe ever going to reach a — a point where it can outperform, or am — am I being too optimistic to expect that anytime in our lifetimes?
ANDERSON: Well, it — it, Barry, probably seems even longer to me because I spent my — most of my first 15 years or so as an investor in — in Europe. And so, you know, it’s been something that that’s intrigued, frustrated, and occasionally given hope to — to me for a very, very long period of time. And, you know, I — I attended to carry on having — having quite a big interest to them.
Well, let’s think about what we’ve been discussing. I think the real issue in Europe is much more about scaling. You know, I think there are plenty of decent companies, some outstanding companies. You know, one of my worst miscalculation, sins of omission over the years has been that I got very annoyed by — way back in time.
Moet Hennessy, the M.H. of LVMH, buying the L.V. part because it was the L.V. part that I admired. And I felt that the Monsieur Arnault would manage to — how should I put it — rather aggressively take over L.V. And, you know, plainly, he’s done a fantastic job and his colleagues have done a fantastic job in — in LVMH. And, you know, we’ve owned Kering and Ferrari for much the same point of view.
But I think the real failure has come in consumer-facing technology. I expressed my admiration earlier for — for what ASML is doing, which is truly profound, the mental (ph) there. And I think it’s about the inability to scale that really matters here. And I think this has got deep cultural roots. And to be honest, and I think this is not how most people think about it, it bothers me more in Britain than it does in anywhere else. And it’s not that we don’t have the ability in academia or in science to generate companies. It is that somehow, and I think the capital markets have a lot to do with this, Britain does not possess the ability to scale companies.
And, you know, I think that is such a deep and serious problem that — that needs to be much more willingness to address it. I’ll give you a couple of quick examples on that point of view. You know, a very contemporary one is — is Arm. And, you know, it may or may not be that Nvidia are giving up and taking them. But, you know …
RITHOLTZ: Right.
ANDERSON: … when Arm was first taken over by SoftBank, you know, we tried. We were Arm’s biggest shareholders. We tried to persuade them they shouldn’t be selling out, and it was important to have critical mass world-leading technology companies.
Now, we got very little support from that at all levels, and I think that is symbolic of the problems. Equally, as you may know, we’ve been investors in Illumina for a very long period of time, that one of my other directors on the board of Scottish — Scottish Mortgage, a gentleman called Patrick Maxwell who’s a professor of Physic at Cambridge lives three or four doors down in Cambridge from the person who actually invented the core net technology behind Illumina. They invented it literally in a pub in Cambridge, but, you know, they couldn’t commercialize it, they couldn’t scale it. And that, you know, I think the depth of the problem in Britain is — is — is very much there.
You know, come back to places that might do better on this — this score. You know, I am and I have my biases here, but I — I think that Scandinavia or in, particularly, the — the environs of Stockholm has more chance of doing this. You know, the record of company-creation, of long-term company creation, of companies that can globalize is still being maintained in Sweden.
You know, again, quick two countervailing examples. Now, there are plenty of challenges for it but, you know, Spotify is genuinely the world leader in terms of podcasts, as well as audio. And, you know, I think that has come about through having (inaudible) somebody who thinks in much the same individualistic and global terms that we’ve been discussing in China and America equally, and perhaps this is one looking forward.
I think Europe needs to have more soft confidence in its different models. And we’ve been backers of Northvolt, the major battery company in Scandinavia, where the progress has been deeply encouraging. And I think it’s by focusing on those sorts of individual strengths that really matters. So, I think you got to build the exceptional counties (ph).
One — one last point that is something that I hope in the future spend some time, some thought process, perhaps some involvement on. You know, I think you and I would say that in America and in China, there are networks of people who could act at scale. And I don’t think that really exists in Europe. Europe is still way too atomized. There’s not enough communication between the truly exceptional in different countries on the industrial level, on an entrepreneurial level, on a looking to the future level. And I think we need to do a much better job on that, and it’s just impossible to have the sort of scale that really Europe needs without those connections being built much more in the future.
RITHOLTZ: There’s a couple of other places I want to ask you about in the world, namely India. But before I get to that country, are there any other regions, be they cities or nations that are catching your eye as, hey, there’s some really interesting intellectual capital here and some fascinating things occurring?
ANDERSON: Yeah. Well, let’s — let’s do an American one, and I don’t think I would have said this three or five years ago. I thought that three or five years ago that both innovation in biotechnology and health care in America was fairly limited, and that where it was happening, it was emigrating under the power of combination of genomics and machine learning to be a West Coast phenomenon.
I think what’s happened in Boston since that is pretty ore-inspiring (ph) and actually touches back on some of the questions that we’re talking about. So, we’ve been shareholders in Moderna for some period of time and both at the Moderna direct level, as well as the flagship one, we’ve done a lot of talking with Stephane Bancel and Noubar Afeyan about, you know, what can be done and what are the advantages in different places.
And, you know, one of the things that stays with me is an article that Stephane Bancel wrote for Figaro in France – the Figaro – about why it happened in Boston rather than – or in America rather than in France. And a lot of that was around the backing from a venture capital community, and I think that’s what some of the health care venture capitalists have done to add to that expertise by making it much more scale with much bigger resources has been something that’s potentially going to enable serious development in health care and health care plus technology companies over — over the coming years. So, you know, that’s a revival that I think we ought to note.
Barry, I find India very difficult. You know, to me, there are far too many companies that are reliant on their connections, their political health — heft, their wealth and their far too short-term run for my real liking. And it’s become mentally quite a problem for me. So, what I said to some of my younger colleagues is to ignore me and — and to go on and seek whether there are companies that fit this because, you know, I — I found it difficult historically. I don’t think of necessarily wholly been wrong, but I think it needs a — a more open mind than I have at this juncture, so hopefully, useful (ph) out in this case.
RITHOLTZ: That’s really, really intriguing. So, for the past decade or so the U.S. stocks have been really dominant. Lately, we’re seeing signs that the rest of the world is starting to, on a relative basis, perform pretty well. What are the odds that the — the U.S. streak of outperformance is coming to an end or at least cyclically this time, and — and we’re going to start to see the rest of the world on a relative basis outperform what’s taking place in the U.S.?
ANDERSON: So, Barry, I — I could’ve fed you some comments that may not necessarily be wholly popular with your listeners, but I — I think it’s important to say, you know, absolutely, America still possesses the combination of the right individuals often coming from outside in the world are some of the examples we’re really talking about, the scale of the market, the scale as financial operators that it will remain formidable. But I have to say I have increasingly had some reservations.
You know, I’m not — we were — we were talking a few minutes ago about Chinese regulation. I — I wonder whether the lack of regulation of the American Internet world and the complications even in health care, which I was talking an upbeat way about a few minutes ago, mean that the ability of new young companies to rise in America is more constrained than it was.
You know, we are effectively talking about entrenched oligopolism, in many cases, which are not necessarily helping the up-and-comers. You know, to make the point firmer, what kicked up by (inaudible) is much more interesting in the social media world than what anybody in America has accomplished. It would seem to us — seemed to me over the last few years. So, I think there is some erosion because of the excess dominance of the companies that we all grew to — to know and, in many cases, (inaudible) over the past.
The second one, which is much, much more controversial, but I think one cannot exclude, I — I found it very difficult in the last two years or so when people ask me (inaudible) about illegitimate anti-democratic actions as they’re perceived to be in China to wonder in all honesty whether America will be a democracy in five years’ time. They had a particularly ironic session when, on January the 6th last year, I was being asked about this type of action even if it was in the early days of it in China when what was going on in America was going on.
You know, I — I — I’m surprised that capital markets are not more bothered by what’s happening in American politics and society than they are. And I think it’s consistent to say given what I’ve been talking about that it’s rational in terms of deep underlying movements to worry about a society where life expectation is falling, and I believe in writing saying that life expectancy in China is now (inaudible) fast in America. You know, these are deep systemic problems that, you know, I do get concerned about. When did those start influencing the markets? That — that’s — that’s much more difficult to say. But if I was sort of 20 years earlier in my career, I think I would be concerned about these issues.
RITHOLTZ: You — well, a lot of us here in the U.S. are — are similarly concerned about those issues, especially the movement away from democracy and the movement towards politicizing parts of the election that used to be apolitical or nonpartisan, and — and that certainly is a — a deep concern.
I’ve similarly wrestled with the question why hasn’t the markets consider this a potential threat. And I keep coming back to two alternative theses, one is, well, it’s unlikely to happen in the market is discounting it. That’s the sort of a sanguine approach. But the — the more frightening conclusion is the markets have considered it and, you know, think that people are still going to be buying iPhones and — and Tesla’s, and so the market doesn’t care.
ANDERSON: Yeah. Well, I was — I was talking about John Kay earlier and, you know, I — I remember one discussion we had where we’re discussing potential regulation of the major social media or Internet companies in America, and he instead of being said, “You don’t seriously mean to tell me that you don’t think American companies don’t already dominate American democracy.” And I — I must confess, it may be bad as well then to — that that’s sort of effectively in the choir (ph) where we are. But, you know, I — I still think preserving the forms of democracy and hopefully, some of the substance as well does ultimately matter an awful lot.
RITHOLTZ: I think you’re absolutely right about that. Let’s talk a little bit about private markets. You pioneered Baillie Gifford’s moving towards a mix of both public and private markets. Tell us about that experience, what was that like.
ANDERSON: It’s been a scintillating experience, Barry. And, you know, I feel immensely privileged that we seem to manage to make the adaption from public markets to private markets much more easily than I would expected. You know, I thought this would be a decades’ long project that we were barely beginning started on at this juncture, but in many parts of the world, it’s moved more quickly and more, I think, helpfully and hopefully that I would expect it because, you know, as we touched on earlier, you know, I — I think we now live in a world where it’s very hard, and I think this was, in many ways, part of the issue with Tesla all along, very hard for public companies to do heavy investment over a long period of time in contentious ideas. And I think it’s much better done in private markets.
You know, in some ways, I think that we’ve been helped at, to be honest, the process we have, the tech questions we ask companies very much can be applied to the set of companies that we’ve invested in private markets and that, you know, we got used to the style of returns in public markets, which are reliant on some extreme winners and accepting there will be individual problems. So that — that helped but, you know, I think it’s well.
The fact that we — we tried very hard not to interfere. Yes, we’ve absolutely taken interest, but I don’t consider — Tom and I don’t consider we can possibly run companies better than their current incumbents, and we try and be supportive at different times. It may ultimately be a good thing that, by and large, if and when companies do go public and we’re not pressing them to do so, but on the whole, unlike many traditional venture capitalists, we can usually buy more stock rather than look …
RITHOLTZ: Right.
ANDERSON: … to have an avenue to sell out. And I think that’s important in conceptualizing our position.
RITHOLTZ: Really intriguing. Lately, private companies have been really attracting a lot of attention from both the professional investing world and — and the — the labors in the private sector. At what point do private markets risk overheating?
ANDERSON: Oh, I — I mean, I think, Barry, I — I would probably argue that they started overheating in December of what we’re — what we’re talking about December 2020 and January or February of 2021. And I think that, you know, the warning signs (inaudible), at that point, you know, and can talk about anything for the SPACs onwards to individual valuations quite serious.
But I think I would want to differentiate between the cyclical and the structural and, for sure, what you’re talking about means that you’re even more vulnerable to the cyclical. But I would be absolutely amazed if after some resetting of prices and expectations, if this industry doesn’t continue to grow and become more important. And I think a lot of that is because, actually, it has generated the ability not just in America, but in China and, to a certain expense other countries of the world, the ability to inculcate to help create these great companies that we’re talking about at scale. And I don’t think that’s going away. I think it is a better way of doing finance.
You know, I — I always said — I mentioned at the beginning that I was semi-trained as a historian, I think. And, you know, there was a British Foreign Secretary in the 19th century who said that he had to create a new world to reestablish the balance of the old. And if, you know, we go back to our discussion about the failings of public equity markets, I think we need private equity markets to do what the 19th century would’ve regarded as a critical element of creating companies.
So yeah, absolutely, there can and will be setbacks and over exuberance, but do I think it’s going away? No, I don’t think it’s going away at all.
RITHOLTZ: There are some quotes of yours I want to throw your way because it’s really — some of these are really quite fascinating. Let’s start with, quote, “The secret to successful investing was understanding change, how it happens, how much happens and its implications over the long-term.” Now, that sounds pretty simple, but I am going to assume it’s a lot more challenging in execution and conception.
ANDERSON: You know, I — I — I — I — I absolutely think it is, but, you know, equally, I think that there are certain advantages of doing this. You know, I think the puzzle to me of so much of finance and there’s so much of intellectual discourse about the economy has been that, effectively, everybody is trying to think about as being an equilibrium and mild adjustments that you could have within that …
RITHOLTZ: Right.
ANDERSON: … you know, whether it be in traditional value investing, whether it be in the conception, the economy effectively always mean reverted to the whole academic professions over the last 30 or 40 years and — and there are formulas for doing this.
You know, I — I cited Santa Fe earlier. I — I just think I — I probably going to misquote, but I would say to Brian Arthur about this as saying the most important element and the most interesting time to invest is when there are major (inaudible) equilibriums. And that’s what happens when you get this process of change that is so much more dramatic than — than we tend to think about.
So, I — I — I think that, you know, (inaudible) because we tend to be very static. It’s partly a time frame problem, but it’s partly because that’s the way we’ve been trained, and thereby, it’s a lot less competitive to think about this process of change, you know, as opposed to the 150 different people who will be telling you what the Fed is going to be doing next week to try and think of those ingredients in structural change and how it can scale is, I think, a field where it’s a little bit easier.
You know, to — to make a different analogy, you know, it’s — it’s pretty impossible to think that Scotland would ever win a world championship, say, in soccer because everybody competes with it. But if, on the other hand, we translate it to sort of British sports like darts or snooker, that is possible for Scotts to be good. You should competing games where, you know, there — there isn’t that much of a — of an enduring competitive disadvantage at any rate and possibly where, you know, you’re doing something that not many other people are doing.
RITHOLTZ: So, in other words, look for areas where there’s less competition and you have the ability to compete where others aren’t. Is — is that the thinking?
ANDERSON: Les competition and also, you know, (inaudible) comes back to something we touched on before where your probability of being right and the impact of being right has — has — has a greater both chance and a greater degree of importance. You know, I think that’s too much of the information we’re dealing with in markets or what purports to be information is fundamentally unimportant. And, you know, I can imagine we might come back to that, too.
RITHOLTZ: Well, let’s stay right there. What do you think is fundamentally unimportant that others have a great reliance upon?
ANDERSON: I genuinely do not believe that it makes a great deal of difference to the long run value of the company as to whether earnings are beaten or missed. I genuinely don’t believe it creates a lot of change to your long run terms of investment that you could predict what’s going on in the minds of the Federal Reserve, in the minds of what GDP growth will be. You know, there is very little evidence to my mind that these are either significant in the long run or that they — you — you have a great margin of success.
You know, in — in — in all of these, I think that you are fighting a battle over — it’s — it’s the Catholic church’s pre-reformation (inaudible) of, you know, accounting the angels on a pin head. And I just not sure it’s either doable or worthwhile.
You know, to turn it round, Barry, I — I tend to think that — and I had a conversation with some of you. I think it’s been a guest of yours in the past with Dennis Lynch who I much admire …
RITHOLTZ: Sure.
ANDERSON: … on this score about this sort of saying if I had just known in — when I started in 1983 that Moore’s law was going to continue for the rest of my career of Baillie Gifford, did I need to know anything else? You know, I — I needed to be able to translate that into the individual companies and, you know, I might not have known that it was there (inaudible) the Japanese or that it was Amazon rather than some of the others. But fundamentally, I think if I had taken that seriously at that juncture, I’m — I’m — you know, how much else we want to need it to know?
RITHOLTZ: That computers were going to be big one day and — and semiconductors will going to continue to become increasingly powerful at — at a decreasing cost. I think even when people understood then intellectually, they — they had a hard time first believing it that would last for as many decades as it has.
ANDERSON: Yeah.
RITHOLTZ: And second even with that knowledge, you know, are you — are you investing first level in the P.C. companies or even the semiconductor companies, in the P.C. companies or the companies like Google and — and others that figure out best to use it. It — it really raises some fascinating questions.
ANDERSON: Oh, totally. Well, I — I would add in, Barry, which I suspect he would agree with that I don’t think the human mind is very good at exponential change.
RITHOLTZ: For sure.
ANDERSON: You know, I’ve talked about (inaudible) different aspects but, you know, this is — this is Geoffrey West on Scale talking about the exponential chessboard, isn’t it? And where you get to is — is you add more than the grains of rice or — or multiply out at Moore’s Law. So, you know, I think it’s partly that. I think you could have got some degree of confidence over the longevity of it.
You know, again to cite ASML, you know, they will tell you that, in fact, Moore’s Law existed in 1900, it’s just a good (inaudible) in 1965 like, you know, this doubling has continued. And also, you know, to quote something they said to my absolute amazement, I guess, in three or four years ago now, but it was when they were finally taught next generation of technologies was — was there. They said neither you or nor I would claim though it would’ve been same for us, but next 10 or 15 years would, therefore, be easy in inverted commerce. That’s a direct quote.
So, you know, could you have come to a view? I totally agree with you about it then becomes, but this is what I could’ve spend all my time on thinking about the second, third round effects and how you get to the companies that create it. Yeah, I — I absolutely agree with that. But, you know, I think if you’re on with that confidence that the process is going to get (inaudible) that all that stuff we talked about about Jeff Bezos say in the late 1990’s was always there. You have kept your mind open to all the exciting opportunities that could happen and can still happen.
RITHOLTZ: Really interesting. One of the quotes of yours that I found fascinating was someone compared you to Warren Buffett and your response was, “You think of yourself as more Munger than Buffett.” Explain that if you would.
ANDERSON: To me, Charlie Munger manifests that extreme curiosity about everything and has been very much and, you know, I would bow to you — defer to your experience of this an essential part of pushing Warren Buffett and Berkshire Hathaway into areas where they might not have ventured otherwise. And, you know, I think he has an astonishing ability to be honest about some of the feelings. You know, for instance, his words about how Google has this — you know, I think he said the greatest competitive advantage out there and the — and therefore, they ought to have understood it is I think quite revealing of — of the whole process.
I probably also slightly empathize with — I think Buffett is more, to my mind, a creature who is comfortable with broad scale popular and media exposure. I think Charlie Munger is rather less so, and I probably feel more similar in that degree as well.
RITHOLTZ: Well — well, I could tell you from my personal experience researching and prepping for this conversation, it’s not like there was a broad pool of public statements I had to work with. You’ve been pretty behind the scenes for a long time. I don’t know if your co-manager Tom Slater, who’s scheduled to take over after you retire, is — is going to continue in that vein.
Although I have to ask, I love your comments. It’s the fund manager’s job to remain eccentric. How is Tom Slater going to remain eccentric?
ANDERSON: Yeah. Well, I think, you know, it’s been — first, it’s been a great joy to work with Tom. We often — you probably know or recall that Tom has a more mathematical background than I do, but very often, we leave each other the chance to come to a view, and it’s quite interesting how often we agree, but for different reasons. And, you know, I found that particularly delightful over the years.
I think Tom is a 100 percent committed to the idea that we need to keep evolving. He might not have used the word “eccentric,” but I think the desire to keep pushing on Tom and indeed the next — next — next likely assistant Lawrence Burns share that view.
I think, you know, if there is a word of caution here, I think that it’s very important that Baillie Gifford, as an organization, allows Tom to have this freedom because, you know, and perhaps this is back to the Munger thing, I think you need the ability to stand out from the ordinary to occasionally, know your colleagues quite a lot in doing all this. And I think it’s quite important that Tom has given support and patience to — to do that.
RITHOLTZ: Really quite interesting. Before we get to our favorite questions that we ask all of our guests, I have to throw a curveball question at you. You — you’re a well-known fan and contributed to Edinburgh’s heart of Midlothian Football Club. What are your thoughts on private equity and sporting clubs? This seems to have become quite a — a hobby horse for a lot of people in P.E. What — what do you think of what’s going on in football these days?
ANDERSON: To — to be honest, Barry, I — I’m perfectly happy to talk about it, but mentally and practically, I separate the two fields a lot. I feel very uncomfortable with not just the private equity, but still more the greenwashing of areas on pleasant states that is done through sport and particularly through soccer in Europe (inaudible) Edinburgh.
RITHOLTZ: Explain what — what do you mean by — when I hear greenwashing, I usually think of companies pretending to do ESG, environmental, social, government investing when it’s really just a press release and no follow-through. What’s the greenwashing in British football?
ANDERSON: Yes, I am — I am explaining it more broadly. But the most prominent and most successful football clubs — and this is much more England and Scotland — are effectively owned either by Russians or by Middle Eastern states with questionable human rights records. And I think that they are effectively doing the functional equivalent to what you’re talking about there with ESG in trying to make themselves cuddly and approachable by spending hundreds of millions on football clubs rather than anything else. But, you know, my take on football — and I would — not at the same level, but I worry about the financial imperatives of many of the American sort of private equity-derived owners as well.
My belief is that soccer or football is an intensely important part of local communities and of the — the increasingly rare ability of an activity to go through all the different groups, classes, income levels of society, and to attract everything from recent immigrants to people very badly down on — on their luck. I have no interest in trying to make money out of it. And indeed, I’ve structured (inaudible) my activities of donations rather than anyway wanting to have ownership.
And, you know, it’s something that I believe should be done more broadly. You know, I’ve done this with — to no particular, but all — all clubs in Scotland by making donations at that level — at the lower level. My wife and daughter are both on the boards — or the board of Scotland’s most successful female football club, so it’s — it’s much more about the societal centrality of it than it is about the financial parts, which I feel uneasy about to be frank.
RITHOLTZ: Really intriguing answer, and I was not expecting to go in that direction. All right. I — I know I only have the studio for another 10 minutes or so, so let me jump …
ANDERSON: Yeah.
RITHOLTZ: … let me jump to my favorite question that we ask all of our guests, starting with what was keeping you entertained during the lockdown? Any — any favorite Netflix or Amazon streams or any podcast? What — what kept you entertained when we were all stuck at home?
ANDERSON: Yes, yes, well, it’s continuing to be a battle (inaudible) …
RITHOLTZ: Yes.
ANDERSON: … really, oh, gosh, the two most recent Netflix productions we’ve been — we’ve watched are actually both films. We were watching the — the abandoned daughter, the film of the Elena Ferrante book, which deeply annoyed me. Fantastic acting, but why did it need to be made into the story of an American academic rather than the middle-class individual from Naples, elites who undermine everything from my point of view, and I think suggests just how far, you know, there are still for all the thoughts that Netflix and Amazon can provide international insights. There are biases of that.
And the other film we watched (inaudible) oddly enough was “The Hand of God,” the Sorrentino version, which is about Naples and thereby, we much, much, much improved it.
If I may risk a local one …
RITHOLTZ: Sure.
ANDERSON: … the documentary — the — the documentary on Amazon about Andy Murray, the tennis player, resurfacing is, I think, a fantastic description of just how hard, how competitive that sport — that individual sport can be. And I — you know, I think it’s — you know, gives me pause for thought when we think we’re struggling in markets any one day or anything like that, what — what these people put themselves through is truly remarkable.
And the podcast, last one, I suspect it’s been cited to you before, but I haven’t come across it. I’m a great fan of what the Long Now Foundation do.
RITHOLTZ: Sure.
ANDERSON: And I think their seminars (ph) and long-term thinking, and the podcasts on that are just absolutely top class and have been for years before the pandemic and during it.
RITHOLTZ: You know — you know it’s funny you mentioned the Netflix film that they decided to move locations from middle-class U.K. to the U.S. There was actually a hilariously filthy series some years ago called “Episodes” about two British comedy writers who had this, you know, very thoughtful sort of Merchant Ivory like series in the U.K. within this series. And the show is about them relocating to Hollywood and trying to retain some shred of their original work and dignity in the face of all of the just, you know, aggressively horrific Hollywood clichés, and it’s surprisingly funny and just absolutely filthy. I know if you’re familiar with it, but if your taste run in that direction, it’s really entertaining.
ANDERSON: Thank you, because I — actually, but the lack of a long tail (ph) is important. Sorry, I must let you get on, yeah.
RITHOLTZ: Well, no, it’s a perfect example of one of those things that just about any plot, concept or idea, there’s going to be a variation of it somewhere that either does or doesn’t work or does or doesn’t appeal to a — to — to a specific set of taste. And the challenge is always in identifying what — what works for you.
Let me go on to my next question, which is who were some of your early mentors who helped to shape your career.
ANDERSON: Well, I — I mentioned, Barry, Max Ward earlier internally who’s being fantastic. There was a — a chairman of the board of Scottish Mortgage called Donald Mackay, who was a Scottish economist, who corrected me saying it, he absolutely tried in the spirit of what he quoted frequently (inaudible) to like it the way I couldn’t as to try and raise our horizons from the local and the index plus to the world. Incredibly grateful.
The — the — the last one I would mention because, you know, we’ve been focusing on Scottish Mortgage, et cetera, that is not — not — not a problem, but another part of my career that’s been, you know, really, really beneficial to me, which I’ve enjoyed immensely is we run money for Vanguard in the International Growth Fund as one of the managers. And the first year we went to see Vanguard close to 20 years ago after having been appointed were done really badly in the performance terms. And the then boss of Vanguard sat us down in a big formal room with all his colleagues and said, “I got something to say seriously to you.” And I looked at my colleague, the colleague looked at me, and we both thought we were about to be reprimanded or even set.
And he paused and said we’re really pleased with you because you did exactly what you said you would do. It just wasn’t working at the markets over that period of time. And, you know, as a piece of help from a client, that was an enormously important moment to me that, you know, you go back and say, “Look, they believe in what we’re doing. They’re going to have confidence in the long-term. They know that ups and down happen, and I am so grateful for — for that.
RITHOLTZ: You’ve mentioned a few books along our conversation. Tell us some of your favorites and — and what are you reading right now.
ANDERSON: Some of the favorites are, I think, consistent with what we’ve been talking about. So, I mentioned “Scale” by Geoffrey West. I think it’s a fantastic book. I — I do think though that one that is underestimated hugely in this score is the late great Hans Rosling who was another person we talked to a lot. His factfulness as opposed to, you know, what we all perceived to be going onto the world, which he wrote, as he was dying, is a book, which I think is incredibly valuable and important in investing and thinking about the world. You know, what he says a phrase that stays with me, “the secret silent miracle of human progress” and how we’ve actually been advancing on this score is — is I think very, very important.
So the last one, a category of people whether in books or podcasts or blogs or whatever who we found really interesting in recent times, which is, if you like, left-wing commentators on what’s going on in the world and going on in China or in Russia, you know, people like Adam (inaudible) and Branko Milanovic, I think, they bring the depth of commentary, a depth of understanding to some of the issues that, you know, I think we could all do with more of and a deeply interesting people.
But if you ask me what I’ve been reading, you know, in a way, it’s connected with all this. I — I was mentioning that we’ve been trying to go to various cities by the time, and we were — we were about to spend time in Paris. And I become rather addicted to the works of 19th century, a French novelist, Zola. You know, I think they — they make our (inaudible) seemed so pathetic.
You know, the dramas, the tragedies, the triumphs were so much more ethical than our own, and I think that, you know, I find it fascinating there’s a contrast with the U.K. novelist in the same area who, you know, everything always ends up happily or they joined the middle classes or, you know, it’s just by the social inconveniences. And, you know, I — I — I’d love to see something, you know, the — the novel of America or Britain today being written. I don’t see much of that, you know, we — we could do with a turn bull (ph) for (inaudible) these days if I come back to the 19th century versions of it.
RITHOLTZ: So — so when you — you’re referring to Emila — Emile Zola, things like “The Masterpiece” or “The Ladies’ Paradise,” or “Belly of Paradise (sic)” …
ANDERSON: Yeah.
RITHOLTZ: … “Belly of Paris,” I …
ANDERSON: The Ladies’ — yeah, The Ladies’ Paradise is, I think, a fantastic example of that. You know, it is about creating the Amazon of its day, but I think its ability to tell the story is wondrous on this. But then the other end, you have something like the kill or — or which is, you know, about the deep tragedies involved in this. And “Germinal” which, you know, how terrible the existence it was. And, you know, I think this telling a story of a whole society is something that our novels today lack, and I’m not quite sure that they need to lack.
RITHOLTZ: Really quite, quite, quite fascinating. We’re down to our last two questions. What sort of advice would you give to a recent college grad who was interested in a career in fund management?
ANDERSON: It’s precisely that. I think it is absolutely essential that they’re interested in the task, the curiosity, but it’s not about the financial rewards. I’ve seen far too many people are doing it and get stuck in it because it’s a good job in inverted commerce. It provides rewards and status of the like. You have to be obsessed about the financial part of it, so I’d ask them to examine their conscience about what they were not given five years to decide that.
RITHOLTZ: Really interesting. And our final question, what do you know about the world of investing today that you wish you knew 40 or so years ago when you first got started in — in the field?
ANDERSON: It’s about extremes. And, you know, the – the – the conventional will not work over the course of time. And, you know, I think as we’ve discussed, Barry, in depth, you sometimes don’t know what the extreme will be. You’ve got to have that consciousness that is about extreme, either about information or about companies or about individual teams. And I — I think it’s — it’s embracing those extreme, so it is central. And I really didn’t realize that at all when I started.
RITHOLTZ: Really quite fascinating. We have been speaking with James Anderson, partner at Baillie Gifford, soon to be departing co-manager of the Scottish Mortgage Investment Trust.
If you enjoy this conversation, well, be sure and look at any of our previous nearly 400 prior discussions. You can find those at iTunes, Spotify, wherever you find your favorite podcasts.
We love your comments, feedback, and suggestions. Write to us at mibpodcast@bloomberg.net. Sign up for my daily reading list at ritholtz.com. Follow me on Twitter @ritholtz.
I would be remiss if I did not thank the crack team that helps put these conversations together each week. Jared James is Audio Engineer. Atika Valbrun is our Project Manager. Michael Batnick is my Head of Research. Paris Wald is my Producer.
I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.
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