James Anderson: “The secret to successful investing is understanding change, how it happens, how much happens and its implications.”
James Anderson, fund manager for Scottish investment firm Baillie Gifford, does not mince his words about the short-termism that plagues much of Wall Street and the financial media. “To be blunt,” he wrote in his year-end letter, reported by The Guardian, “the world of conventional investment management is irretrievably broken.” Anderson managed a highly successful £16 billion fund focused on disruptive business models for close to two decades, until announcing his retirement earlier this year. In the letter, Anderson—whose work I genuinely admire—pillories the flavor-of-the-week mentality that’s endemic across Wall Street, saying that far too many professional investors have become “addicted to the ‘near pornographic’ allure of earnings reports and macroeconomic headlines.” Perhaps what I appreciate most about his letter, though, is his public plea for his successor to “remain eccentric” and his own self-assessment as being “insufficiently radical” over the past two decades.
“Anderson criticized the value investing philosophy of the veterans Benjamin Graham and Warren Buffett, and the short-termism of many conventional fund managers. “Distraction through seeking minor opportunities in banal companies over short periods is the perennial temptation,” he said. “It must be resisted. This requires conviction.” He continued his attack, saying: “It is inherent to the notion of efficient markets that all available information is incorporated in share prices. Only new information matters. “This is used to justify the near pornographic allure of news such as earnings announcements and macroeconomic headlines. In turn this is reinforced by the power of near-term financial incentives.” He said the secret to successful investing was “understanding change, how it happens, how much happens and its implications” over the long term, and stressed the importance of listening to scientists and other experts. For example, when the trust invested in Tesla seven years ago “that electric vehicles would win had become intensely likely,” he said – but others chose to focus on negative headlines about Tesla and its chief executive, Elon Musk. Since then, Tesla shares have soared from about $6 to $590.”
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What if SpaceX’s Starship changes everything?
A principle component of any successful disruptive technology boils down to price: If a new product can be manufactured at a price point that is an order of magnitude below the incumbent pricing structure—and exhibits a superior value proposition for the customer—exponential growth can follow. I thought about that Clayton Christensen concept this week as I read Robert Zuberin’s insightful essay in Nautilus on SpaceX’s “profound potential” to “change everything” through radically lowering the costs of space flight—while improving the spaceships’ efficiency by multiple orders of magnitude. Zuberin, an aerospace engineer who has worked on some of NASA’s most ambitious projects, calculates that SpaceX is “aiming to manage 200 flights, which is possible with 20 operational Starships each turned around to fly again every 36 days. That would work out to $5 million per flight, 1/200th the cost of the Shuttle with five times its payload, for a thousandfold improvement overall.”
“Let me underscore just how transformative, and how profound, Starship could prove to be to our future in space, and to our understanding of life. I’ve been in this business for a decent chunk of time. In the late 1980s, I was on the team at Martin Marietta, now Lockheed Martin, that did the preliminary design for what is now called the Space Launch System, NASA’s flagship vehicle. It was originally devised as a quick and dirty way to create a heavy-lift booster out of the then-operational Space Shuttle system components. Starship is nothing like the Space Launch System. It’s unlike anything NASA has made before. It represents an entirely new concept of space operations, and the impact it very well may have on science is extraordinary.”
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A decade-long disruption across energy, food, materials— and knowledge.
A few months ago, I spoke with Stanford lecturer Tony Seba about renewable energy, virtual power plants, and the ultimate long-term decline of extraction-based models around energy production. In Seba’s latest article—which he co-wrote alongside Deepak Chopra and James Arbib—Seba expands on this subject, arguing that the next decade of technological change will be so profound and multifaceted that analysts, investors, and even society at large need “radically new mental approaches to manage this emerging reality.” In particular, Seba focuses on the notion that technological innovations across energy, food, and materials are far from siloed—which creates enormous potential for new and innovative business models to flourish.
“…it’s the convergence between different sectors that produces the most profound transformations. Trapped in silo-thinking, conventional analysts fail to grasp how synergies across the sectors of transportation, energy, information, food and materials will rewrite the very rules of civilization itself. These disruptions are not merely technology substitutions, an electric car for a gasoline car, but a fundamental change to the system. The disruptions affect the value chain, infrastructure, business models but also bring in a new set of possibilities across society. In much the same way that the Internet permanently transformed dozens of other industry sectors—solar, wind and battery storage will make clean energy so cheap and abundant that it will unlock radical innovations we can barely imagine. Scaled up to 100% of supply, energy ‘superabundance’ will be available at near-zero marginal costs. The energy system will shift from domination by centralized utilities to inherently decentralization, enabling the emergence of self-sufficient communities, companies and regions, while creating new jobs, products, business models, and organizational capabilities.”
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Bonus this week: My colleague Dan Crowley and I were recently interviewed by Tilman Versch for his podcast, Good-Investing. We talked about investing frameworks, disruption, and more. View it here.
“What Cloudflare had in its favor, though, was the most potent advantage on the Internet: the service, much like Google a decade-earlier with its link-based ranking system, got better with use. This was because Cloudflare paired its content delivery network with DDoS protection; the latter was extremely attractive to websites, gave Cloudflare an in with ISPs who valued the protection to build point-of-presence servers around the world, and, critically, gave Cloudflare better-and-better data about how data flowed around the world (improving its service) even as it improved its CDN capabilities.”
“If you view investing as a single game, then you think every deviation from that game’s rules, strategies, or skills is wrong. But most of the time you’re just a marathon runner yelling at a powerlifter. So much of what we consider investing debates and disagreements are actually just people playing different games unintentionally talking over each other. A big problem in investing is that we treat it like it’s math, where 2+2=4 for me and you and everyone – there’s one right answer. But I think it’s actually something closer to sports, where equally smart and talented people do things completely differently depending on what game they’re playing.”
“As equity analysts, we tend to imagine the great growth prospects of the company, estimate the intrinsic value and how much upside there is from current prices. This makes our mouth water and that’s not an exaggeration: just the thought of making money activates the same regions in the brain as cocaine does. So it’s certainly tempting, but it also means that 90% of the time we’re focusing on what can go right. On the other hand, you’re completely caught off-guard when something like say, a pandemic, comes along and you never thought about what that could mean to your investment. How many DCFs have you seen with multiple scenarios and probabilities? Not many.”
“Americans are paying down their credit-card debt at levels not seen in years. That is good news for everyone but credit-card issuers. Large card issuers that cater to borrowers ranging from the affluent to the subprime say that overall card balances—and thus the firms’ interest income—are falling. To make up for it, issuers are spending more on marketing and loosening their underwriting standards.”
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Reflection doesn’t come naturally to me, but writing—especially for others—makes it non-negotiable. These aren’t just lessons. They’re pieces of a year that shaped me.
