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Motley Fool Hidden Gems Investing
Interview with Tom Slater, Head of U.S. Equities at Baillie Gifford
00:23:47
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- [00:05]
Tom Slater
Inevitably, your most successful holding will become a big part of the portfolio and you will be tempted to chip it away in the name of risk control. But that goes against the structure of returns. It is those small number of big winners that matter.
- [00:25]
Matt Grier
That was Tom Slater, head of US equities at Bally Gifford. I'm Motley fool producer Matt Grier. Now at the Motley fool, we love learning from successful investors. So this week, Motley Fool Chief Investment Officer Andy Cross talks with Tom Slater about finding long term winners and navigating short term volatility.
- [00:45]
Andy Cross
Hi, Fools. Welcome to another Motley fool conversation. I'm Andy Cross. Joining me today is Tom Slater. Tom is head of US equities at Baillie Gifford where he is a partner, a co manager of the US Equity Growth Fund and Scottish Mortgage Investment Trust, a FTSE 100 listed company that really frankly has nothing to do with Scotland or mortgages. Tom, welcome and thank you for joining us here at the Motley Fool.
- [01:07]
Tom Slater
Thank you so much for having me.
- [01:09]
Andy Cross
Yeah, we have so much alignment around our investing approach, so I'm really looking forward to digging in to here and we'll get to the markets and stocks in a second. Tom, But I do want to start with that philosophy a bit because the approaches between your, your investment approach and the Motley Fool's approach around long term investing really resonate. And so I really want you to share your investment approach, your time horizon and when you look at investing over five and 10 years and the focus on innovation and transformation technologies.
- [01:40]
Tom Slater
Yeah, well, to make it really simple in the first instance, our aim is to find the world's most exceptional growth companies and own them for long periods of time. So that's, you know, it's simple but it's, it's not easy, you know, sort of peeling, peeling back the layers on that a little bit. You know, we spend our time looking at companies and thinking what might go right, not what might go wrong. In an industry that is full of skeptics and people picking holes in arguments, we think it's important to think critically. But in the context of the upside, how much can we make if we're right about this? We're looking for businesses which can grow to many multiples of their current size. We think the world's greatest businesses are just about always underestimated. And we think returns and markets are really concentrated, that it's not about what happens to the average company, but it's about the contribution of a small number of really exceptional companies. And therefore we should invest our time and effort in trying to identify those companies, trying to understand the leadership, what makes them tick and trying to learn from those people about what's going on in the world because they are building the future of the economy.
- [03:00]
Andy Cross
Tom, when you when I think about Scottish mortgages 100 year history and you mentioned the few really driving the bulk of the returns, reminds me of the Henrik Bessembinder study from, from Arizona State that showed that basically over very long periods of time, like 100 years a of the companies around 4% drive the bulk or if not all of the returns in the market. Now that's a very long history time horizons. But even if you shorten Those over like 10 year rolling periods, you do see that concentration in trying to find those exceptional winners. And I think that resonates with what you're trying to do at Baillie Gifford.
- [03:39]
Tom Slater
Yeah, you get this. We're all taught that this is this normal distribution of returns that the there's the spread around an average and we don't really have much hope as individual investors. But actually if you extend the time frame, that isn't true. So our average holding period in public markets is around 10 years. And when you get to that sort of time horizon, you get a very different distribution of returns. As you say, there's a small number that really, really matter over that time period. And once you take the veil away, once you see that, then I think it changes the nature of what you're trying to do because it becomes much more important to try to find the companies capable of being those big winners and then where you do find them, the second really difficult task is that you just don't interrupt the compounding. You're not tempted to chip away at them if they become a big part of the portfolio because inevitably you, your most successful holding will become a big part of the portfolio and you will be tempted to chip it away in the name of risk control. But that goes against the structure of returns. It is those small number of big winners that matter.
- [04:56]
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- [05:28]
Andy Cross
You finding those companies is one thing you mentioned the real holding on is the real, I think, a lot of challenge with so many investors, especially in a hyper focused investing climate that is so short term. How do you build that discipline to be able to continue to hold those winners while within a reasonable allocation strategy for those companies that have done so well, Especially for investors who might have been building out positions over time, doing all the right things?
- [05:52]
Tom Slater
Yeah, I mean, I think it is difficult. It is, as you say, it's a discipline. What I find quite helpful is you're tempted to look at reducing stocks that have gone up. But I like to frame it through two questions. The first question is, has the opportunity for that company got bigger or smaller? And the second question is, has the likelihood of capitalizing on that opportunity got greater or less? And it's only once you've answered those questions you can come to the issue of valuation risk. Has the stock got riskier? Is it more highly valued? Because it may well have got cheaper even though it's gone up? So, you know, if I, if I take Amazon, we're just about coming up on our 20th anniversary of owning Amazon stock and Scottish mortgage. If you think about that original opportunity, it was in, it was in the book market, in E commerce and selling books and then, and then media. And every time it's gone up, we've been able to come back and answer the question, has the opportunity got bigger? Yes. Has the likelihood of success increased? Yes. And it's able. This enabled us to hold that stock for 20 years.
- [07:03]
Andy Cross
Tom, just building on that about Amazon, when you think about the legendary investment letter that Jeff Bezos wrote about it always being day one, do you, when you look at technologies like this, do you always feel like it's day one at Scottish Mortgage when you're, when you're, when you're analyzing companies?
- [07:17]
Tom Slater
No, I don't think we're always looking for day one. I mean, Amazon is an exceptional company in so many ways and we've learned so much from it, from Jeff, Jeff Bezos and his approach to thinking about investment and about the world more broadly. But I don't think it needs to be day one specifically. We're investors in businesses, not investors in technologies. So we're thinking about the business model. We were thinking about the ability to grow revenues. We're thinking about how profitable an opportunity might be. We're not trying to predict whether a technology will or won't work. But I think what he's trying to capture with day one is around this idea of, of mindset about fighting about, against all of those things that slow companies down as they get bigger. How do you keep the pace of innovation? How do you stop creeping bureaucracy? How do you stop creeping inefficiency? And so not day one in terms of is it early, is it early technology? But yes, you want special companies that can fight against those almost those facts of life, those tough realities that are faced with companies as they, as they get larger.
- [08:31]
Andy Cross
And Tom, speaking of tough realities, the reality of investing, especially in long term and especially in innovative technology and companies that are literally changing the world like you all do and we do also at the Motley fool in so many ways is you do have the outside risk of the ups and downs and of that volatility. How do you manage your, your personal and your team? How do you coach your team on managing some of the emotions that come with the high flyers in those emotional times? And not just during, like Covid, when there's loads of money going into the markets, ups and downs, but, but even just when you go through earnings reports, I know you have looked at an own Ferrari, for example, and they had a recent report that sent the stock down maybe 10%. How do you, how do you help guide and manage around that volatility around growth companies?
- [09:24]
Tom Slater
I think what this speaks to is that in investing one of your own worst, one of your worst enemies is yourself. And managing your own emotions, managing your own process to deal with that is really important. And the starting point for me is just being upfront with people about what you're trying to do. Scottish Mortgage Investment Trust is focused on trying to deliver its shareholders long run capital appreciation. We're very upfront with people that this will be volatile. Don't judge us over short time frames. You know, and you know, I pretty much own all the stocks today that I will own in a year's time. You know, there's not a lot I can do if those stocks are out of favor over, over the next year. You know, there's a lot of randomness in that. So you don't own these shares if you can't stomach volatility. If you have a time horizon that's shorter than that, if you, if you want, if capital preservation is your key objective and so you get the clients you deserve, you get the investors you deserve. Be upfront with people and be transparent and very clear about what you're doing. And the consequence of that is that when you encounter the inevitable volatility, people don't get immediately on your back saying this isn't what I signed up for. This isn't what I expected. So I think that's really important as a starting point.
- [10:51]
Andy Cross
Talk a little bit about the discipline you have on trying to identify those that really when you look at those five or ten year periods, what are the characteristics of those companies and of their teams that you're looking for that help you narrow into the list to hopefully find some of those companies that can benefit from the power laws?
- [11:09]
Tom Slater
Well, maybe I'll start by telling you what it isn't. It isn't the technology. You know, we don't think we have a deeper insight into the technology that these companies have than anybody else. When we bought Tesla in 2013 it was not because we knew something about batteries or self driving software that nobody else did. So instead where our focus is first of all on the culture of the organization. Why did the people turn up to work? What is it that they're trying to achieve? Why should they have a sustainable edge in what they're trying to do versus other people? Go back to the Amazon example. It was that relentless drive on the long term. It was the 2016 shareholder letter that you talked about how they. Sorry, it was the 96 shareholder letter. You talked about how they were going to make trade offs. How are they going to make decisions. I think that was so much more important in the outcome of the subsequent 20 years than any of the sort of products and services that were available. When you analyze the company back in 2004 and there are quantifiable aspects of that, how much skin in the game do they have? How much of their own wealth is tied up in the stock? How are they compensated? How are they incentivized? And then there's a lot of other factors that are much more intangible but they are worth looking for because the time horizon of most participants and markets is so short that they don't care about these things. So you might pick up insights that other people are not even bothering to look for.
- [12:57]
Andy Cross
Tom Tesla is a well known and widely owned and recommended from the Motley Fool. Any reflections on the balance that Elon Musk has navigated around the management of different entities that he is invested into and helping to lead as an investor in one of those private companies. Is there any just thinking you can help us understand your approach to how understanding and getting comfortable with Elon's management style of his various entities?
- [13:26]
Tom Slater
Yeah, so we've, we, we bought Tesla shares in 2013. We're still shareholders today. So very long term owners of, of Tesla. I think what I would emphasize is the Management team beyond Elon. You know, he brings some extraordinary talents to bear at his companies and there are other areas that, you know where you need other people to input. And my observation with Tesla is when that company has been working and delivering at its most successful, it's because there's a broader team around Elon that have been helping with that delivery. Now that is in no way to diminish his role. I think he's crucially important. But it's, you know, these endeavors require a lot of people working together to be successful. So I think that's the really important part to think about.
- [14:23]
Andy Cross
And is that a thread across the other investments you look at, whether it's Meta when you think about that are founder led because we spent a lot of time thinking about founders and investing behind founders. So the likes of, you know, Mark Zuckerberg at Meta or Jensen Huang at Nvidia. The importance of from the culture side, which you led at when you were looking at companies, the impact they have can be outsized. Do you spend time understanding the underlying structure between how they go about managing those companies and inspiring their teams?
- [14:57]
Tom Slater
Absolutely. If I look at the portfolio, I think about 80% of it is founder led or family controlled. So really agree with you on that point. And I don't think you have to have a founder led company to have a special culture. But I do think it's often a really important indicator because I think founders often have the ability to just extend the timeframe. They're not beholden to whatever the street is demanding for the next quarter and they can take decisions without, without worrying too much about that. I think also they have the moral authority to drive change in their organization. I think Toby Lutca at Shopify is an exceptional founder and you look at some of the decisions they've made in recent years. For example, this is a business which is an operating system for retail. They've moved into providing delivery infrastructure. There came a point where as interest rates rose and as the tech landscape started to change, that that was no longer appropriate for their business. You've got a founder there who can just take the difficult decision and say, right, we're stopping doing that and emphasizing this. And I think it's very hard for professional teams who, branchman teams who don't have that moral authority often to drive that adaptability within organizations. So. So I absolutely agree with you. I think it's a really important indicator.
- [16:29]
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- [17:19]
Andy Cross
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- [17:19]
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- [17:37]
Andy Cross
As we look to wrap up here. Tom? Yeah, thank you for that answer. I just want to talk a little bit about allocation before we get to some specific stocks. When you think about Scottish Mortgage and the allocation strategy, you don't, you don't invest in thousands of businesses, so you do have to make allocation decisions. Is there any process or steps that you take to starting positions, maximum minimums, anything along those lines and the logic behind that that could, could maybe shed some light on your approach, but also help us to be better investors ourselves?
- [18:08]
Tom Slater
Well, we're, we're really wary of thinking about dividing the world up into sectors or dividing the world up into, into regions. And the reason for that is I think you've got to go where the opportunities are greatest. So I'll give you two examples. A really successful area of investment for us over the past 20 years has been in China. If you'd started with the world index and said, China's 2% of the index, I'm going to have a big bet known five, then you wouldn't have had Tencent as one of your largest holdings, you wouldn't have had Baidu as one of your largest holdings. You wouldn't have had Alibaba as one of your, your largest holdings. And so actually freeing yourself from that index maker's lens of viewing the world allowed you to have a proper allocation. People would say, oh, it's really risky. You own Google and you own Amazon in large size. Well, Google's an advertising business actually, and Amazon's a retailer. Their revenues come from different places. I don't bucket them in the tech sector and think about a big allocation to tech. So staying away from that and actually focusing on where the opportunities are I think is really valuable. Yeah, so we don't start with what's our allocation to anything really. It's where do we see the biggest opportunities, where do we see the biggest probability, adjusted upside and those will be our biggest holdings. The end.
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Andy Cross
And Tom, do you think about active share or any of those beta, any of those kinds of more traditional academic Wall street kind of measurement sticks?
- [19:51]
Tom Slater
Yeah, we think about active share. You know, we think if we're going to charge active management fees, we ought to have a high active share. We want to give an exposure that's very different from the index. We don't, we don't think tinkering around the edges of indices adds much value for investors at all. But it equally, it's not, it's not something we target. It's just an output of having a process which doesn't start with the index which thinks, which is, which is concentrated. You know, we think very few stocks matter, so it's not a target. And then beta, you know, we don't, we don't look at at all. Again, it's in that category of things that if you looked at it, it would put you off investing in the way that we do. So you don't. And we don't think it has anything sensible to say about the likely return over the next 10 years.
- [20:42]
Andy Cross
Great. Tom, let's talk about putting your long term, which I know you always wear your long term investing cap on. But talk about a few businesses that when you look out the next 20 years, you're very excited to continue to be an owner of that business in Baillie Gifford and in Scottish Mortgage.
- [21:01]
Tom Slater
Well, I think one area I pull out is E Commerce. We've been talking about e commerce for 20 years and you might think it's one of those trends that's run its course. But if I look at globally where some of the big opportunities are, we have a big holding in Mercado Libre, the Latin American e commerce platform. We own SEA in Southeast Asia, Coupang in South Korea. We own pdd, the owners of Temu. And I think that this trend is long established, but particularly away from developed markets where there's efficient modern formal retail. These companies are able to bring a completely different experience to a rapidly growing middle class. And I think that opportunity is going to continue to run. But at the same time, a number of these companies are moving into financial services and so consumers first experience of financial services isn't coming from the the traditional banking sector. It's coming from these companies who are able to deliver that service much more efficiently than their traditional incumbents. And I think that that has so far to run and these opportunities are completely undervalued relative to the next 20, 30 years of growth that's available.
- [22:26]
Andy Cross
Tom Slater from Baillie Gifford and Scottish Mortgage Investment Trust, thank you so much for joining us today here at the Motley Fool. It's been a real pleasure to hear your long term investing approach the way you think about investing in businesses and people technologies, but focus on that long term patient investing and letting those winners continue to run in your investing approach. Really enjoyed having you here with us.
- [22:51]
Tom Slater
Thank you so much for giving me the opportunity.
- [22:53]
Matt Grier
As always, people on the program may have interest in the stocks they talk about and the Motley fool may have formal recommendations for our guests. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For the Motley fool money team, I'm Matt Grier. Thanks for listening and we will see you tomorrow.