Tom Slater on Growth Investing (Podcast)

growth manager. They run concentrated portfolios. He referred to one of the funds they run as growth at an unreasonable price,

but it's worked out really well. That fund is up a hundred and twelve percent, almost a percent more than the S and P five hundred and Really this conversation is very much along the lines of what happens when you rethink the investment process over long, long periods of time and make well thought out, intelligent adjustments to how you go about selecting companies, constructing portfolios, making cell decisions, which Tom points out is where so many investors go awry.

You know, your downside in anyone's stock is limited pretty much to but your upside is far far greater, and as he points out, four percent or so of the total US equity stocks are what has driven all of the gains over the past century, and so it becomes very important not to sell a stock that has potential to keep growing. And if you look at their portfolio grow substantially. They own things like Tesla and Netflix and

Alphabet etcetera. This was really a fascinating conversation if you were at all interested in growth investing, if you want to know why having a large to share and not being a closet indexer is important as an active manager. Well, this is going to be the interview few so, with no further ado, my conversation with Tom Slater of Bailey Gifford. This is Master's in Business with Barry Ridholts on Bloomberg Radio.

My special guest today is Tom Slater. He is the head of the US equities team for Bailey Gifford, where he has been a partner since two thousand and twelve. He runs the long term Global Growth portfolios, which are focused on growth companies that are both listed and private. Tom Slater, Welcome to Bloomberg. Hi Berry, Thank you very much for having me. So let's start a little bit with your background. How did you find your way into

the investment management business. I know you have an experience in computer science and mathematics. Yeah, that was that was my background. I I studied mass and computer science University UM. I was thinking probably about about doing something in in academia. It was quite an interesting and exciting time in in the computer science world ninety six to two thousands when

I was at university. But I had a very good friend that that I studied Mass with and and she went and worked in in the city of London during our final sort university UM. She she came back Frans of Franz Anderson, the name was she came. She came back and she said to me that this this is that, this is the direction we want to be looking at UM. And that's what that was really the first time I

encountered the world of investment management UM. Probably the summer really that that was a heck of a time in terms of the end of that last big stock cycle. Was that your formative experience the dot com boom and bust? Yes, in a lot of ways it was. I started working at Baiby Gifford in in September of two thousand, so just after the peak of the boom, and and then for the for the next three years, of the first three years of my career, watch markets decline substantially. I

think there's this slight danger in quing it formative. And of course there had been a lot of speculative excess in that period, but some some amazing things have come out of it as well. Subsequently, we've had a lot of time for the work of Colota Perez at Sussex University in this in this regard and and the link between financial mania and subsequent technological innovation quite interesting. So

let's switch gears. You're an active manager and you are both selecting stocks and determining how long to hold them. And I want to ask you about a quote of yours that I read where you you had written quote the active management industry has done a poor job of making the as for its own existence. Discuss that. I

think it's a really interesting area. By the the start of it was was looking at this polarization between active management and passive management and thinking through, well, what is the what are we really trying to say about about the case here? And it struck me that both both passive and active had become terms that had become quite corrupted.

So in the in the case of the active management industry, you see so many funds that label themselves as active, that charge fees for active management, but have huge overlap with the index or low active share as it's known. And so what those companies are really focused on is business risk and not producing an outcome that diverges too much from the market, because of course, diverging too much from the market is what leads you to your your

clients to fire. And so I think when you hear those sort of hours from the act of management industry about losing assets to passive management, in some ways the industry has has been the architect of its own demands by providing sufficient value to save us. And that leads to these sort of remarkable results from the likes of Cramers and Petagist so that show that there being a

correlation between active share and performance. So you have this remarkable idea that you don't even need to know what bets your fund manager is taking, simply that the fact they are taking bets is likely to lead to a better outcome, just because the aggregate statistics are dragged down by those who aren't actually offering a genuine act of experience.

At the same time, though, you you the passive management industry, I think has been guilty of coming up with so many induicries against which to manage assets passively that you can't help but concluded it is a little more than a than an asset gathering exercise. There are more indseased than than there are stocks to invest in, which was which was a threshold that was crossed two or three

years ago. And so I think both both sides of this argument have become quite polarized, that they've become at times quite disingenuous. And that's what's what's taking bairy g effort towards this idea of of categorizing ourselves as actual investors, by which we mean that we aim to be long term, supportive, engaged shareholders and companies, which is which is is nothing to do with taking positions relative to an index. So let's talk about one of the funds you're affiliated with,

the US Equity Growth Funds. It's up over a hundred and twelve percent year to date. I have to assume that has a substantial active share given the SMP is up only year to date. Yes, we do not look at the index when we construct portfolios. I think indices are a good way to evaluate the performance of a fund manager, so long as you do it over a time scale which which is commensurate with the way that which the fund is managed. But I think it's an

extremely dangerous way to start constructing a portfolio. So our portfolios are constructed simply of the stocks that we think offer the most exciting possibility is the greatest chance of being exceptional companies, by which we mean addressing large opportunities, having some form of sustainable edge and something special about the culture and the way in which they go about

the task. So I discourage people from looking at the one year numbers because I think one year numbers are filled with noise, and actually extending the time frame looking at three years, looking at five years is much more likely to give investors evidence or otherwise of the skill of the manager. So you use a benchmark that is the S and P five plus one point five. I have to ask where that benchmark came from. If you were in British I would accuse you of showing off.

I think that is actually an artifact of of MIFED regulations that we have to um have to declare our performance objective, not just a benchmark, but a performance objective for the fund. Um. I think if I have to link that to a characteristic of Bailey Gifford, we have an extremely strong compliance culture. Um. You if you go way back in time, you know, um, after after the Maxwell scandal and the raid on the pension fund, who

is that pension fund given to to manage? It was daily gifted because the firm has a reputation of being white and white when it comes to all of all of these compliance um and management traits. And that's that's really a function of the fact that the firm is an unlimited liability partnership, which I think is a is a very rare structure these days if you look at the front management industry. But the forty yard partners who work directly in the firm are personally liable for the

film's liabilities. And so when it comes to things like MITHID regulations, we tend to follow the absolute letter of the law and declare our performance relative to the one and a half percent above the benchmark, you know, perhaps a slightly more enthusiastic way than than many of our peers might quite fascinating. So Tom, let me ask you, how do you think about both assets under management and how quickly the firm is growing when you're out looking

at companies or starts to buy. Yes, it's a really interesting question. Um. The film was actually founded in so if you look at the full sweep of its existency, the growth hasn't been that explosive. But certainly our assets and the management have have grown reasonably sharply of late. But if you actually look at the flows of our clients, um, there's there's significant flows both in and out, and the

net of those two numbers is just about zero. UM. So the growth and assets has been much more to do with investment performance and alpha generated for our clients than it has from from an exercise around asset gathering. And the reason for those two way flows is a mixture of both the our core base of pension fund clients gradually reducing their exposure to equities over time, and

then also clients rebalancing their portfolios. But in terms of how I think about it, if you if you ask me the question today what is bailic efforts assets and the management, I wouldn't be able to tell you the answer It's a statistic that at one stage in our life used to be available on our Internet, but we purposefully removed it. And the reason we did so is that our objective is not to grow assets under management

in and of itself. UM. What we believe is that if we do a good job from an investment standpoint for our clients, if we provide a really high level of service, that the assets and the management figure will

take care of itself. Um. One of the directors of the investment trust that I managed, Scottish Mortgod Investment Trust, wrote a book called Obliquity and talking about how those things that had the greatest success often did that because they pursued a different goal around delivering an excellent product or service for their customers, and the success followed from

that they didn't target those financial objectives. Quite quite interesting. Well, well, let's stick with the concept of both active share and active management. You know, it's been the decade has really been defined as the rise of passive and indexing. And when we see firms like Vanguard at that six trillion or Black Rocket eight trillion, that they've become the eight hundred pound guerrillas, what should investors know about active strategies,

what types of strategies can work beyond simple passive indexing. Well, I think passive indexing can be a great product for and service. I think UM Vanguard does a fabulous job of producing a really great value for money product for savers UM and doing it with with real integrity. They also have a very significant active management business, and again they bring that that high quality attitude towards the way

they approached the task. I think that in an era where there is so much change going on, where there are companies using new business models, often underpinned by technology, to bring transformational change in industries that have really historically seen very little progress, UM that it creates pockets of growth, creation of value that if you can tap into as an act of manager, can be hugely valuable to your

underlying clients. UM. Now, it's it's it's important that you have clarity around philosophy, process, what you're actually trying to do, and it's it's centrally important that your fees are reasonable and don't detract from that underlying experience at the end investor. But I think subject to those qualifications, active management has it has a huge amount to offer offer savers So let's talk a little bit about active management. This era is known, especially the past couple of years, for the

high valuations we've seen for for multiple growth companies. How should investors think about valuations? The best stocks never look cheap, but names that have looked historically expensive have done excellently well this year. One of the ways we would characterize our approach to investment would be the idea of growth

at an unreasonable price. And what what what it means when I say that is that we're looking for companies that address really big opportunities and where that opportunity is often dynamic, it's often changing, and you have a hypothesis about why this company might be the one to to benefit from that change, but we don't know. But if if the opportunity is big enough, if they if the edge of the company is great enough, if there's something special about the way it goes about that task, then

it can generate a huge amount of value. So if you look at a company like Alphabet or Amazon, you know these these companies have been vastly underestimated for most of their life cycle. UM. I think it was Michael Morrits Sequoia who said, why do we persistently underestimate just how great a great company can be, and so we we don't really look at multiples of near term earnings or near term sales. We look at what might this company achieve? Where could it be five years from now?

And I think over that time you can only think probabilistically. There isn't an answer to that question. But if you if you can identify one of those small number of companies that are big winners in markets, um, then they can justify paying what what may appear to be optically high short term multiples because some of the growth opportunities that are bound today are so open ended, and you see a lot of when it takes all or when it takes most economics. So I'm looking at the Bailey

Gifford US equity growth funds. The top ten holdings are fairly concentrated. It's about fift the portfolio with a lot of names that I think a lot of people would recognize Tesla, Amazon, Shopify, Wayfair, Netflix, Alphabet, MasterCard. I have to ask about check and Trade Desk, two companies I am not all that familiar with. Yeah, if you look at those two companies checkers and Education Platform, I think there are. There are a lot of challenges faced by

the education system. And what CHECK has done is through a director consumer model based around questions and answers products

um it. It is helping students to get measurably better outcomes in in in their examinations, but around that and on top of that it can build um all sorts of products associated with student access and and in an environment where college education is so expensive and inflation is so high, actually providing a cost effective solution that demonstrates value for money for students is something that I think

has a huge potential runway. UM You you've talked a little bit about this year and the unusual traits of this year. You know, I think what this year has shown a spotlight on is um the challenges the education sector has faced in embracing digital tools, digital methods of delivery. Here in the fur management industry, here I am working from home using a whole array of cloud based services. It's it's probably made me more productive, not less productive.

But if I look at my children and their educational experience, you know, as these UM state at home orders have come through, you know, it's really shown a spotlight on on how slow the education sector has been to embrace some of these tools. Now check is a company that it's run by its founder, a significant amount of equity tied up in of their own wealth, tied up in

the equity of the business. It's run with a very long time horizon, exactly the type of characteristics that we're looking for in the in the long term growth businesses that we invest in. I would say, and you know if you when you when you talk to you talked a bit about some of those UM top holdings, and you know, if I was to pull out at difference perhaps in the way we approached the task versus versus some of our peers, it would be in the in

the longevity of the holdings. So you know, um, Amazon, we bought in two thousand and five, so the holding period as far as been fifteen years, and you know has two thousand and thirteen, it's been seven years. So it's the time horizon, not not the recent growth that I think is the is a really important and defining characteristic. Quite interesting. So Tom, let's talk a little bit about Passive. You've talked about why Active doesn't do such a good

job of explaining their own existence. Kind of left the field all alone to passive. But I want to come back to another statement you made, quote the average active manager will underperform the market. Unfortunately, this statement is mathematically inevitable. Isn't that essentially the underlying argument in favor of passive Yeah, I mean, I guess what what I is getting up is.

You know, if you if you say the market is is made up of active and passive approaches to investment, then after fees, you are guaranteed to see those brooches underperform whatever the benchmark is. And since the fees on active management are higher and see some passive management, you would expect that that in some day or to as a group underperform unerformed by a greater amount. But I think you you know you You have to come back to some of the challenges around what is active management.

And there are some some rules of of um not even rules of fun. But there are some some interesting academic results in this area. One we've touched on is that simply having a higher active share chorities positively with performance outcomes. But I think in the subsequent academic results have shown that time horizon is also important in this and as as you extend the time horizon. The academic evidence is also supportive of better outcomes for for active management.

So I don't know, I don't think the averages matter a great deal. It's much more about can you can you find investment manager with the philosophy and process that you believe in? Do they keep their fees to a minimum so that you as an individual have to have the best chance of our performing because the fees are the one part that we do have sitt and t about. And then it's you know, when you when you when you believe you have found the manager that meets this

great area. If little changes, then stick with them through inevitable performance cycles. You know, the the oldest client I manage money for a betting g EFFITS is Scottish Mortgage Investment Trust. We've we've managed that that fund for a hundred and twelve years through the Great Depression and two World Wars and unfortunately the performance numbers that come out

of that are not gifts compliant. But over that hundred and twelve year period, you know, it is has been a phenomenally attractive thing for investors to be invested in an in an actively managed fund, quite interesting for Americans who may not be familiar with what the Scottish Mortgage Trust investment trust is. Can you explain a little bit exactly what that entity is. I can't. Yes, it's it's a closed ended investment vehicle listed on the London Stock Exchange.

It's capitalized around twenty five billion dollars. It's a member of the foot See Index UM. But it's really a collective investment vehicle UM that was raised in originally in in in the fund structures that invested in that time.

But it's an incredibly flexible structure UM. It has an independent board of directors who are who are of extremely valuable source of council and advice for us as the managers who do a great job of protecting the interests of the tens of thousands of independent shareholders in the trust.

And it's a very flexible structure being being closed ended in a permanent pool of capital, allowing us to invest in both public and private companies really on the basis of where we find the most exceptional opportunities with without worrying about a company's public or private status, and in an environment where many companies are able to grow very rapidly with very modest capital requirements, often staying private for longer.

It's a structure that allows us to many maintain the opportunity set of investing in the world's greatest growth companies. So let's stick with the idea of private. Generally speaking, we're seeing companies staying private for longer. As you mentioned, they're they're not I P O in as often, and there's clearly no passive, comparable sort of fund for pre public companies. How different is making the stock selection decision about private companies compared to what we see for publicly

traded firms. We have to be clear about what we're trying to do here. We're investing in growth companies and companies that we aren't venture couplists. We're not going in and funding two people in a garage, um where where. But we are investing in companies that have chosen to stay private, possibly because you know, in in today's world, where your addressable market is, there's three billion people globally that have a smartphone where you can address that market

without investing in significant couple capital. You know you can pay five percent of revenue to an Amazon Web services, pay thirty percent to an app store, and then suddenly you know that that three billion people is an addressable audience. And as a result, with very modest capitals and investors, you can see that the most successful companies really growed

to phenomenal size very rapidly. And so our observation was that these are companies in another era that we you know, we've we may well have been investing in any way because because they would have come to public markets at a much earlier stage. So I think in terms of

the decisions about investment, there's there's very little different. There are some technical differences around the leagal negotiations around the type of shares to you, but but I think that's sort of slightly tangential to the to the core task of picking the picking the investments. I think the other thing to to to to comment on is you know

the costs at which this can be done. You know, the the ongoing charges of Scottish mortgage investment trusts is around thirty six basis points or just over a third or one percent, And think for our shoolders to get access to some of the world um most promising private companies within that type of cost structure is game changing, quite quite fascinating. So the equity markets in the US have been dominated by the fang stocks or the phantom stocks.

If we throw in Microsoft, Facebook, Apple, Alphabet, Amazon, Netflix, Google, I guess, I guess we could add even another Egg if we change Google to Alphabet. These are the companies dominating today, but they weren't the dominant companies twenty years ago. Are these going to be the dominant companies twenty years from now? Well, I think the first thing we ought to be careful of is how we talk about these companies.

I try to ban the use of the term fang internally, and the reason is that it creates this idea of equivalence that this is, you know, these groups, these group of companies driven by the same growth drivers, but also affected by the same risk practice. You know, if you if you go back and in fifteen years we were all talking about the bricks. She was like, I think an acronym coined by Jim O'Neill. But it was it

was an emerjoring markets Brazil, Russia, India, China. Now, if you if you actually look at what's happened since that brick acronym was coined, China has created an economy a new economy two times the size of the other three combined. So so they were really never that alike as as economies in the first place. And so we try to

think about these these companies separately from one another. Amazon remains one of our largest holdings, and you know, I think there we see a runway to to a much bigger business as you as you look at some of the different components there, from from the general merchandise business to it's it's moving to grocery in the retail space, to it's so it's move into new geographies such as India, but also it's it's in this this sort of intangible quality of being able to move into areas that there

are somewhat adjacent to where they are, but where it's very hard for people to to to imagine their progress. So, you know, I strongly believe Amazon Web Services is just about the most important business that exists in the world today. Now Wall Street is very good at value doing you know, today's products, today's markets, it's very bad anticipating or valuing imagination and ambition, and that has been such an important

driver of value growth at Amazon. So I think these companies, you know, over the past decade when everybody's been searching for who is the next Alphabet, who is the next Facebook, who is the next Amazon? You know, what we've we've seen is actually those companies have reinvented themselves. They've got stronger as they've they've got bigger that they've sucked it in economic activity from across the Internet and also from

the real economy. I think it's you know, it's a it's a much more nuanced question for for some of those companies as you when you start out, you know, trillion dollars of capitalization. So what excites me is that you see some of them, the technologies that have driven this transformation in retail, this transformation in media media over the past twenty years, being applied to areas which have

us see nothing like that piece of change. And I think that creates a whole new raft of opportunities, you know, in in areas from I know, from insurance to to real estate to um the automotive industry and and you know, I think sort of one of the things that's so exciting for a growth investor at the current time is just how we're seeing the broadening of the impact of More's law of ubiquitous mobile communications of advanced software across huge suites of the economy. M So let's stick with

the concept of a WS and some of their competitors. Obviously, Microsoft is a key competitor. A recent I p O Snowflake is a company that won public and they seem to be in a similar space and they quickly scaled up to like a hundred billion dollar market gap. How do you look at motes that these various companies create. Is Amazon now just a behemoth that can never be taken down? Or will anyone ever managed to penetrate the motes that they've built? I mean, I think ever is

a long time. But some of the things we do know about about Amazon web services businesses. Firstly that the addressable opportunity is very very large, trillion dollar plus market for for I infrastructure. We know it has a very strong first move of advantage that it's got to a scale long before others. If you if you listen to Jeff Bezos the Amazon CEO talk, you know he was saying was he was amazed at the at the head

start he was able to get in this business. I think, um, I think few people appreciated just just how fantastic the economics that could be. And I think scale is a self reinforcing advantage here. You know that it it allows you to invest in infrastructure and better service and the bigger data sets means better machine learning, which means better outcomes for companies, which means you attract more companies. So so I think it is it is in infrastructure, it's

in a very powerful position, you know. I think Microsoft has has been has done very well at using its distribution um into the enterprise space to to really get itself back into the game. And I think, you know, it remains to be to be seen how how Google is offering under the leadership of Thomas Curion competes from here,

because it's obviously a company with phenomenal technological pross. But this shift in enterprise from on premise to the cloud is one which I think plays out over the next ten or twenty years and is of enormously large size. So I think they know the capitalizations that you mentioned sort of attached to things such as Snowflake reflect the fact that investors are starting to incorporate that just just

a longevity of the shift into their thinking. So we're talking about some pretty gigantic industries and companies, But when we think about growth going forward, all these companies today, they didn't many of them anyway, didn't really exist five, ten, fifteen, twenty years ago. So that leads me to the question, where are the big opportunities out there that aren't already

dominated by these behemoth firms. Yeah. I think one of the interesting dynamics that we're seeing in the market today is around the companies that are providing scale as a service. And what I mean by that is that the biggest online players have had phenomenal resources at the disposal, which

has been very hard to compute. But if you look at something like a Shopify, what that company has all as created is a platform for merchants to compete on a more equal footing with the likes of Amazon and or Mart, by providing them with the tools to create their online store, the same sort of browsing experience for their customers, the access to a payments gateway, increasing the

access to two day fulfillment. And so they've created that scale themselves, and then as they've got as as they've as they've attracted more and more merchants, they can then negotiate better and better terms with their suppliers and pass that on to the smaller merchants. So they're they're really selling scales to those underlying customers. Now Shopify doing that in the retail area. But if you take a company like Strip in payments, you know they're navigating the payments infrastructure.

Is it is a phenomenally challenging thing because there's different regulations, there's different banks in every geography that you go to, different business practices. You almost impossible for small businesses to incorporate payments on a global scale into what they're doing. Um. But but what Strype has done is navigate that incredibly complex world and then make it extremely simple for for individual companies to then incorporate that capability into their app,

into into their their website. And you know, I could go on with this. You know, companies like Trilio doing exactly the same thing in communications and providing a gateway into this these incredibly complex communication networks. So I think there's one really interesting angle is around those this set of companies selling selling scale as a service into into

small emergence. I think the other angle I would go at it from would be about about those companies that can harness this this new world that we live in, this this technology lead world to to to use new business models in in in established industries. UM. So you know, insurance is an interesting one. You know, we invest in

Lemonade the iPod recently. UM. You know, I think, what what what they've done in creating a completely digital experience for their for their customers, UM in terms of accessing their insurance products, in terms of making claims UM just is is really challenging for business models that are based on mainframe computing and expensive expensive distribution. UM. That I could go on in redfin in real estate as as

another example of that. You know, if you if you can create, if you if you can tap into a direct relationship with the consumers through your website, if you can have an agent directly employed agent force, but give them all the the digital tools to make them more effective in their jobs, then I think that gives you a big competitive advantage over over traditional income bunch. Quite quite interesting. So I have to ask about the impact

of the COVID nineteen pandemic. How has that affected your thought process about the companies you want to have in your portfolio? How much of what you own has really been in the right space to deal with a work from home shelter in place pandemic. And what happens to those companies sometime next year once we see widespread distribution of the various vaccines that have been developed. Yeah, this is a really interesting area. And UM I think for sure a lot of the companies that we own have

been beneficiaries of the circumstances we find ourselves. And we own Zoom, the video communications platform, which we we bought in early two thousand and nineteen. But if you stick with that one for a for a moment and maybe explore from the shoes, you know, the the the insight that we had when we we we participated in the I p O of Zoom was that video communications in the enterprise UM was massively under penetrated. You know, if we were having this conversation, you know, a couple of

years ago via video conference. Sorry, what what I think we would have done is that that your I T team and my I T team would have arranged a meeting they have. They'd have gone into a know, a room that's somewhere in our offices that's only used for video conferencing and and spent about half an hour trying to set up the call and then being on hand when we actually tried to do it in person the next day. UM. But so so, the constraints on much broader use of video conferencing was that it was a

dreadful product. And as you created a much more engaging user experience, as you as you made it possible for people to just do video conferencing, you know that that you would see an explosion in the scale of the market and also a viral selling dynamics that if if if I phoned you via zoom and you had a good experience, you would say, what's this product? I'm going to use it? And I think you know that that was that that dynamic was unfolding through two susand nineteen.

But but in with the impact of the virus, usage has has exploded. UM. And I think now they talked about maybe three million users of this service. UM. I think the last number I saw was that they had eleven million paying customers. So what what happens going forward? Well, you know, if if the vaccines are as effective as we hope, then then I think we'll all be having a lot more in person meetings. Um, you know, because everybody is set up of being cooped up at home,

you know, they want to get out. So so the unprecedented level of demand that we have today, of course the clients. But then the question is, you know, everybody knows what zoom is. And I'm not talking about you know, people in the in the I. T. Departments of the enterprises. You know, it's it's it's become a verb. Um. You know, millions of sales people and marketing people and people in

education understand this product now. And so of the billion knowledge workers that are on the planet, how how much of that is addressable for this company that starts with eleven million licenses? And I think those are the really challenging questions. You know, it's not will demand decline, of course, of course it will decline as as as we come out of blockdown. And I think if you, you know,

you expand that more broadly. One of the frameworks that I've I've found really helpful and it's worked on with by by one of my colleagues, Dave Putschnowski is a fascinating analyst, but he's drawing on an idea of accumulated accidents. So this idea that what were the structures UM that were the norm before COVID hit. There weren't the sort of local maximum or the perfect way that something should be done, but instead just the product of accumulated accidents

over time. Because I think those are the things that are UM were unlikely to go back to UM as as COVID starts to unwind UM. And and you know, let me talk about as an example. You know, in advertising, you know, a great deal of television advertising is sold at the upfronts in New York each each spring, and and and it's where the advertisers will go and bet on the content slate of of of the broadcasters and and and spend sense significant chunks of their marketing budget

for the year. Now, in a world where you know, we have connected television a huge amount of data about about the audience that content has been broadcast too, particularly connected television platform site rock, who does a ceremony like like that persist or do you do the much more effective data driven advertising products of the of the digital age now start to make significant inroads into into that market.

And so I think it's that's that's a really helpful framework to us and trying to think about and what the what the post COVID world looks like. So let's stick with that theme of data analytics and how much more information both clients and investors get. You know, we mentioned earlier you graduated from Edinburgh with a degree in computer science with mathematics. How much quant do you use

in your investing process? Or or s differently, how important are all the metrics that are available today to be crunched versus twenty years ago to your process? And answer that in two ways if I may, I think the fist is that our process is very qualitative. Um what what we're trying to think about? What are the big drivers? You know, where could the revenues of this company be five or ten years from now? Um? What? What? What are the competitive advantages? You know? Which is really getting

into questions about about profitability and margins? Um? But but what is the corporate culture? What is it about makes that makes this business special? Why can't somebody else did? And we think if we can answer some of those more qualitative questions, I think it gets you. It gets

you to to to broadly correct answers. You know, the left of the decimal point if you will and and I see much more value in that for us than then this what we see in in markets, which is this this constant attempt to predict what a company will learn this quarter or next quarter more accurately than everybody else. Um, which is a game. Think firstly that we have no advantage in and it's so important for an investor to be able to articulate what they think their own advantages.

We spend so much time asking it of companies, but so little time asking it of ourselves. But we have no advantage in that that more precise estimation of of short term learning than anybody else. But what we do have, you know, being in Edinburgh having a bit of a distance and perspective on what's happening in financial markets, is maybe that ability to be patient in the in this most impatient of industries, and we think that's more likely

to to add value for our clients over time. UM. Another take on it would be, UM that if I as observing what's been happening in our companies over over the past five years, maybe a little longer, is just seeing the impact of machine learning and artificial intelligence and what this these technologies are capable of and it's that ability to ingest huge amounts of quantitative data and spot patterns in a in a way that a human just

isn't capable of. UM. And so we've we've we've been having an experiment within beating iff it, looking at you know, could we apply these same technologies to recreate the human investors that we have UM and so so are systematic investment strategy which we wear. We started incubating in the past couple of months. UM we're after after after three years of investment in the team and the technology and the algorithms, is our own experiment to try and disrupt

ourselves in going about the task of investment. Quite interesting. I have to ask you a question about a little bit about some of your background relative to being a US and a global investor. You worked on a Developed Asia team at Daily Gifford, and you also worked on the UK equity teams. What was the takeaway from that experience when you're either looking at US investing or global investing and how different UM is investing in those areas

versus let's say the US. I think for most of of my career, UM, the the emergence of China as a global economic superpower has has been an absolutely central phenomenon in the world of investing, and not only it's it's economic rise, but the emergence of companies on on the East coast of China with with the innovative capacity and entrepreneurship to match some of those that you have

on the west coast of the US. UM. And so I suppose UM, the one of the things I take take away from from my experiences is is just an appreciation of that phenomenon, UM helped by some of my Chinese colleagues, Helped by the fact that and we've now opened an investment office in Shanghai, UM where one of one of my partners has moved out from from Edinburgh. UM that some of some of my Chinese colleagues have

moved back to China as part of that effort. And and a really important part of understanding what's going on in the world is understanding some of those developments. UM. I think and looking at the US with an international perspective can can yield insights that others aren't looking for. UM. So you know, I and I link it to to Netflix because I think there's there's there's a few few few points in there that are irrelevant to our process.

And what we're trying to do is look for big winners on the sort of time horizon that we have. So ten years UM you see this this um um power or distribution in stock market returns, you see a very small number of big winners. And so you know, what we're trying to do is identify companies with that sort of potential and then where we find them, aim to be very patient and long term owners, accepting that at times we will look very out of favor with

the market UM. And one consequence of that approach is that actually the biggest mistakes that you make are UM, not stocks that you own which go down, which are inevitable. You know and make lots of mistakes UM, but it's it's the ones that you you you look at, your do the analysts on and you don't buy UM that then turned out to be big winners. And I put Netflix into that category for us UM. We were looking at it back in I think it was two thousand

and twelve, around about the time they split. They they announced the plan to split the streaming and the DVD business UM and which which which was taken very badly by both their customers and stock markets, and we we didn't. We didn't take the plunge and buy the stock at that point, which is which I see is as as

one of my biggest mistakes over the past ten years. UM. But then so look looking at the stock maybe three years later, UM, and it was up a lot at that point, and of course it's it's very difficult to to buy a stock that's that's gone up several folds since you last looked at it. But but what stands out for me and what allowed us to make that purchase despite the stock price having increased, UM, was looking

at the progress of the international business. UM. You know, the the US investor base in Netflix at that time was almost singularly focused on the U S subscriber editions and any single quarter and because the international business wasn't

wasn't making much money at that time. And I think our insight was that, you know, it had seemed for a long time that that Netflix wouldn't get away with what it had managed to achieve in the US in other markets because the incumbents would see what had happened and they wouldn't let wouldn't let it happen. And our insight was that there's you know, they might to turn on all these markets in one sweep, and that the traction that they were getting would ultimately lead to an

extremely profitable business. And so it was that that x US piece, when everybody else was focused on the U S subscriber base, that that I think was our insights at that point. So let me raise an interesting question about this. You mentioned a number of different companies, a number of different stocks. How did they fit into managing a portfolio? It's obviously the analysis of a single stock or any stock is so only very different than constructing

a portfolio. How do you think about weight portfolio weights? How do you think about different positions? You run a fairly concentrated portfolio, so there aren't a whole lot of openings for any one given company. Yeah. The way that I think about this is UM. It comes back to this, this asymmetry of returns for the concentration of returns in

a small number of companies UM. So I was doing some work on this back in two thousand and twelve, two thousand and thirteen, and the starting point for me was actually trying to think about UM about outcomes for individual companies. UM you know, and how if you know, if I was looking at Amazon and said I had a hundred percent upside and somebody else is looking at Alphabet and said it two upside, how could we think about those different outcomes and how would you attach probabilities

to them? And the the the way I looked at it was was actually inspired by purnaments, but looking thinking about base rates. So so let's look at the past thirty years of the SMP five what can you say about stock ritins? And there was one rule which emerged which is actually quite consistent of two time, which was that in any five year period, about five percent of

stocks go up fivefold, at least fivefold. And and so one of the things we we we focused on is has this company got the potential to go up at least fivefold? And why is it more likely for this company than than a stock picks a random um. And you know, the the implication of that for portfolios is quite interesting because you know, what you're saying is that if you have a buy a whole portfolio, you know a huge proportion of the return is going to be

concentrated in the top two or three successful holdings. So come back to come back to this point about what is a mistake. People rightly focused on cell discipline and you know what caused you to sell a stock. But actually the biggest danger for a long term by an old investor is that you sell a stock prematurely um and that you don't capture that outsized impacts of that

that small number of companies. UM. There's a there's a really interesting piece of work UM done by an academic Arizona State University very recently, Professor Bessembender, and he looked at ninety years of US stock market data and what what that showed is of the twenty six thousand companies that you could have invested in over that period, UM, all of the return came from from just four percent of the companies. But in fact it was even more

concentrated that than that. So there was about I think I think his numbers where there was about thirty two trillion dollars of excess value created by the US equity market over that ninety year period, and of that half of the excess value creation came from just ninety companies. So so stock markets are driven by a really small number of exceptional companies. And so what we mustn't do as long term investors is truncate the impact of those big winners. So so go back to to you know,

talking about it in UM. You know, through specific examples. Since since buying Tesla in in seven years ago, I don't know how many times I've been told to sell it. You know, it's it's a hard seven or eight drawdowns of at least thirty in that period um, you know, and and every time it goes up, you know, the people know when are you're going when when when you're

going to sell UM. It's it's actually not unusual to see a big winner like tess or if you look over that time frame, you know, that's been the case of Amazon over the past fifteen years, That's been the case for us with ten Cent, the Chinese gaming company over the past twelve years. Maybe with not quite the same attraction of headlines that that Tesla has had, but the structure of returns is clear. It's that small number

of big winners. And so you know, we go to directly answer your question about about the structure of the portfolio. We where we still see a past a significant upside, where we see an involving opportunity we're very loath to um sell stocks that we think are capitalizing on the opportunity in front of them, and we allow them to become a big part of the portfolio. Quite fascinating. I know I only have you for a limited amount of time, So let's jump to our favorite questions that we ask

all of our guests. And since we were just talking about Netflix and Amazon, let's start with that. Tell us what you're streaming these days? What are you watching? What are you listening to do while we're all stuck sheltering at home. Yeah, so, I think like most people, I'm I'm enjoying the fourth series of The Crown on Netflix at the moment um, addressing a really interesting period in in in the British monarchy. I've also been enjoying Ted Lasso on Apple tv UM and just a great a

great commentary on the power of positive thinking. I think there's there, you know. I think we're just in a fortunate position that there's so much great content out there at the moment. I think what the piece that I, um, I'm really looking forward to that's been delayed by the coronavirus is Dennis Fielder's adaptation of June which I think is coming next year, but one of one of my favorite science fiction books. And we were in Jordan a couple of years ago and what we run where where

the film is set. So I think that that's going to be an absoluties and spectac in a movie. Yeah, I believe that's tied up for HBO max if I if I recall what I what I heard about it most recently, and I loved the first book, had a hard time getting through some of the latter books, but it has defied an outstanding film version. Hopefully this is the one that will break that unlucky streak. So let's talk about mentors. Who are some of the people who

helped shape your career? Well, you mentioned I started to to fistival I like most of the the investment partners at Batting, I said, I've I've spent my whole career at the same UM and UM starting back in the UK department with with imccombie and and Jared Callaghan, Charles Plowden, who I think our UK team back at that point was just a powerhouse in the UK equity market and

embraced the tools of free cash, fill yields, etcetera. That was so effective through through the two thousand's and I think I learned a lot about them the morality of

investing from the UM. I think I think UM becoming a becoming the deputy manager and then co manager of the Scottish Mortgage Investment Trust, and I'm working with with James Anderson, who's who's been at Badger for for thirty six years, UM and just just what I've learned from him about UM both UM retaining just absolute curiosity and focus on companies, UM focus on process and and differentiating process and and and and having ambition in what we're

trying to do. Such an important mental for me. UM as as as well as in fact Max Ward, who was the manager of Scottish Mortgage before James and again exemplified the power of positive thinking and an optimism which I think is so crucial to to generating long run investment. Retains quite interesting. Let's talk about everybody's favorite question. Tell us about your favorite books. What do you like to recommend?

What are you reading right now? But I think when it when it comes to investment, I believe some of the best books about investing aren't aren't written about investment at all. It's it's you know, getting to read about people interacting with complex systems and lots of other settings. Um so The Psychologry and the Psychology of Military and Competence by Norman Dixon, or Deep Survival by Lawrence Gonzalez,

or or some of our old Granda's books on medicine. UM. You know, I think there's there's lots of interesting tips in there for for an interested investor. But it's just one crucial point to remember, which is that in in investment the upside is unbounded and the downside is constrained. Whereas then I think all of these other settings, you know, the downside is catastrophic. You know, you kill the patient, you you die in a survival situation, you lose the war.

Um So, so long as you can make that mentally. But I think that's some of the most interesting, um um interesting literature on on an investment. In terms of what I'm currently currently reading through UM just finished readas Things book on on the culture of Netflix. Um some

fascinating observations in there. UM. I'm reading Linked at the moment, which is about the impacts of complex networks and in so many fields of endeavor, but all all of those I listened to on audible when I'm when I'm outrunning. That's become my reading time these days. Quite interesting. What sort of advice would you give to a recent university grad who was considering a career in either finance or growth investing. I worry about graduates who are considering a

career in in finance or growth investing. I think being interested in financial markets is not likely to be a good indicator that that somebody is going to be a good investor, right. I think a much better indicator is whether they're interested in in companies, whether they have that curiosity about business models, what makes the company work fascinating entrepreneurs.

I think all of the piece around interacting with financial markets there's a sort of you know, there's a there's a skills that you can teach somewhere, but but financial markets are not interesting, intrinsically interesting in and of themselves. What's much more interesting at the the lying companies and if you can, if you can make good judgments about those things. I think the finance piece looks after it's

after itself. When I used to I used to run the run the graduate requiitment for investors at Bata Gifford, and one of the things we tried very hard to get away from was um business business studies or economics graduates and try to get much more into the liberal arts um where you know, I think you could get people with curiosity, but that that went consumed with that,

that ambition to work in finance quite quite interesting. And our final question, what do you know about the worlds of growth investing today that you wish you knew twenty or so years ago when you were first getting started. I think it would be the extent to what the what you do influences your fuse. You know, it's it's you know, it's a it's the wrong way around to think you can you can sit and then think about

things and then natural influence what you do. Instead, it's you know, you've got to You've got to You don't sit behind your desk and pontificate. You've got to get out into the world. There are so many interesting sources of information. You know. Some management is is it gets most of its information from a very small number of people. It's situated mainly in London and New York, but there's

a whole world out there. I've moved my family out to Secon Valley on three different occasions, and don't extended trips and the you know, the people that you meet, the entrepreneurs, the investors, you know they they they can shape the way you view the world. Um in a way. That's that's that's extremely helpful. Um to to the job. So get out and do things and meet people. Quite interesting. We have been speaking with Tom Slater. He is the

head of US Equity Growth Investing at Bailey Gifford. If you enjoyed this conversation, well be sure and check out any of our prior nearly four hundred such discussions. You can find them at iTunes, Spotify, wherever you get your podcast fixed filled. We love your comments, feedback and suggestions. Give us a review at Apple iTunes. Write to us at m ib podcast at Bloomberg dot net. You can check out my daily reads at Rid Haltz dot com.

Check out my weekly column on Bloomberg dot com slash Opinion. Follow me on Twitter at Rid halts. I would be remiss if I did not think of the crack team that helps put together this conversation every week. Maroufle is my audio engineer. Michael Boyle is my producer Altico Valdrun is our project manager. Michael Batnick is my head of research. I'm Barry Ridults. You've been listening to Master's Business on Bloomberg Radio.