Elon's 3 Key Skills, by Tesla's Biggest Investor: Tom Slater, Baillie Gifford, Scottish Mortgage

Um, it was chance. Um, I didn't know what I wanted to do. I'd taken some summer jobs doing computer programming. Um, and then I had a friend from maths, and she worked in the city as an intern, um, and also was dating a guy from Baillie Gifford. And it was the combination of those two things that put me onto the idea.

Um, I think it started with an interest in companies and what makes them work and why some are successful and why others aren't. Um, and it was more that, I think, than an interest in the stock market per se. It was, and I guess this idea that you couldn't, you know, it was a craft that you couldn't master effectively.

Yeah. Um, you know, with computer coding, you know, the toolkit's really important, and obviously you can continue to increase your skills, but you know, there is a certain extent to which you can become a master computer programmer. But in investment, it's all, you know, just when you think you've got it, you will, you know, you will be proven completely wrong.

I struggle with this one because I think a little bit of knowledge can be really quite dangerous. Yeah, yeah. Um, you know, these people that are at the cutting edge, um, you know, thinking you actually understand what they're doing is quite dangerous. So I think, um, that it's brought, I think it's probably brought something of a mindset to investing. You know, there's a book a few years ago called Thinking in Algorithms. I can't remember who wrote it, but I guess that, you know, there is something about the mindset of the way one approaches, you know, programming computers, which has a relevance. And then I do think there's an affinity or comfort with tech companies, um, which comes from that background. But I, you know, do I understand better than you do how Google's algorithm works? No, definitely not.

Uh, no. No. No.

I think biggest conventional investment trust. 3i, I think, is bigger.

Um, well, I don't think, um, you know, as you suggest in the question, I don't think there were these big transitions. Um, you know, the trust had a very difficult year in 2008 with the financial crisis. Um, and it was then that I joined the management with James. I guess that, you know, providing some support in what was quite a difficult time. We obviously in that instance rebounded pretty quickly in 2009. Um, and then, um, you know, we obviously worked together. And the way I think what's relevant here is the way that we worked together, which was, um, we basically would back each other's judgment. Um, and you know, where we had stocks or investment ideas that we were enthusiastic about, they would go into the portfolio. Um, and I would tie that partly to the philosophy about this is about finding winners and running them for long periods of time. So it wasn't that we would, you know, have long debates on stocks and try to come to a view. Um, you know, it may sound odd, you know, when you know he was obviously at that point in 2009 a far more experienced investor than me. Um, but it was, you know, it was about putting those ideas in together. And then over the next six years, you know, I guess it's learning the investment trust industry, which is, you know, has its own idiosyncrasies. Um, and then James went on sabbatical in 2014, I think. And then post that we moved to a co-manager structure. Um, and then to your point about, you know, is there a set of stresses that come... Lawrence Burns obviously joined as the deputy manager in 2022, maybe earlier. But, um, and so he and I now manage the trust together. And, um, I don't think there's much distinction there really from a stock-picking standpoint on the deputy co-managers. The thing is, it's all just titles. But, um, I think the stresses of the past couple of years have less to do with that than just a very difficult market, you know, a tough performance period for us in the aftermath of COVID, particularly in 2022. Um, and dealing with those issues.

Yes, I mean, it is, it's captured in that same idea of backing enthusiasm. And, um, I think of it this way. So, let's imagine that you and I were managing the portfolio and we had to agree, um, when we bought a stock. Um, and I have an idea, and I, you know, with any stock idea, you're not going to have 100% conviction. You're going to have some things you're enthusiastic about and some doubts. Um, but if we come together to discuss this stock, and if the outcome is, uh, you know, if I want to buy the stock, I need to persuade you, then that's going to naturally lead to some behavioral consequences. I'm going to overstate, um, the positives of the investment case. I'm going to, you know, whether deliberately or not, I'm going to deemphasize the negatives because I've made up my mind what I want to do already. Um, and maybe I convince you, and maybe you buy the stock. Then the next behavioral trait you run into is, um, this pressure to be consistent. You know, the people, you know, as humans, we value people who are consistent, who don't change their mind a lot. Now, if I've, um, you know, if I've gone in all positive on the stock and emphasized the positives and we've bought it, it's very hard for me to turn around and say, actually, no, I think we should sell it. Um, so let me maybe best sort of captured through an example. Um, so, um, I don't know, let's take Meta, the owners of Facebook. You know, if I come in and say to you, I think we should buy Meta. It's got all these fantastic opportunities in AI and X, Y, Z. Um, we really should buy it. It's really cheap. Let's do it. And you say, yeah, okay. If contrast that with if I come along and I know when we start the conversation that if I want to buy it, we're going to buy it. You know, that's not up for debate. So, what we're trying to do is have a discussion of the investment case. I say, well, what I like about Meta is that, you know, you've got these really great under-monetized assets in WhatsApp and Messenger, and I think AI can lead to this really big positive. On the other hand, I'm a bit concerned about the blue top app because, um, you know, it seems to be well behind TikTok in terms of the curation algorithm, and, you know, there could be developments there which would undermine the case. Then we've had a frank discussion of the pros and cons, and then, you know, if we, you know, a week, a month, to a year later, I come back and say, look, actually, some of those concerns about the blue top app were right. I think we should sell. And, you know, it's just much easier for me to have that conversation with you. And so I think having that sort of mechanism, let's back enthusiasm, it relies on a couple of things. I think it relies on, um, everybody being committed to a clear philosophy. You know, it's no good me coming up with my high-growth idea and you coming up with your deep-value idea and saying, how do we put those together? And we've got to back each other so they go in the same... You know, you've got to have a commitment to a shared philosophy. And then I think you've got to have trust in the other people that are doing it because, you know, we know we'll get things wrong. Um, but it's saying, well, actually, over time, on average, I trust this person's judgment, and I may disagree with them, but I've got enough evidence to suggest that it's worth backing them.

Might be more difficult, I suspect. Yeah. The, to my mind, it's not something that, um, is connected to growth or value. But I, you hit on an important point. If you look at the structure of our delivered returns, um, it's not about being right more often than we're wrong. It's how much we make when we're right and how much we lose when we're wrong that matters to us. Um, but I think if you're, you know, if you have a different structure of returns, I think some of those behavioral characteristics still apply. Um, you know, if we're debating a valuation case, again, that's, you know, does it help for me to be trying to sell you on the idea? No. If you trust me as an investor and I know I can make the final call, then actually I'm probably more likely to listen to your concerns about it if you have considered that, you know, is there some aspect of the case which actually you weight more heavily than me? Then once we've got away from this dynamic of trying to persuade, then actually I'm probably going to be more receptive to your ideas on it.

Yes, I think there's, for me, two variables. Um, one is, um, you know, how much agreement is there on it. Um, and the other would be how strongly does the proponent feel about it. Um, so, you know, if I feel very strongly about an idea or a transaction we should do, then even if you disagree, you know, I think you would still have to take that into account. Whereas if I'm just over the line on an idea and I get everybody else just over the line, again, it's always a matter of degrees. It's not binary.

I think that is probably... I think it probably leads to more, um, self-censorship. Um, so again, go back to that, you know, you're having a group discussion. You know, I've been doing the work on a stock for the past month and I quite like it. It's got its merits, but, you know, probably the outcome of that is I bring it to the group and say I think it's a buy and allow myself to be talked out of it. You know, but I want to show everybody I've done the work. And whereas if I could bring it to that group and I know that if I want to buy it, we will buy it, then I'm probably not going to bring those ideas that I don't feel as strongly about.

Yes, I think it just... and again, I see this as a positive, but, you know, when you come together to have a stock discussion, you know, you want it to mean something. You know, I don't... this is a good idea that somebody's put some work into, so let's give it some airtime. That, you know, I can understand the dynamics that lead to that discussion, but I don't think it's a very productive use of time. So I'd rather people killed things higher up in the funnel of their work and only, you know, I do think it's things that people feel strongly about where you can have the most valuable conversations.

Um, I slightly struggle to answer the question because I've never run a value fund.

Yes, yep, I have. And I think, you know, if for me actually that point about big winners is, you know, partly, and it partly is our style at Baillie Gifford, at Scottish Mortgage, is growth. But actually I think a large part of it is actually about time horizon. Um, because, you know, we're all taught that stock market returns are normally distributed and outcomes of stocks are normally distributed. But actually if you extend the time horizon to 10 years, you get this log-normal distribution. You get these outliers. And there's nothing then that says those outliers have to be growth stocks, and indeed, you know, some are, some aren't. Um, so I don't see that it is a growth versus value thing. It's a time horizon thing. And I think if you, you know, if you would identify attractive opportunities, underpriced opportunities, then they can pay off many, many times over a 10-year time frame.

Um, so I don't, because, um, you know, I think that one of the things that's really important about a fund or strategy is having identity. Yeah. And, um, you know, your clients, your investors have a clear reason why they want to own you. They understand what you do. And then they can make the allocation decision for themselves. Um, and, you know, you can think of it as sort of circles of competence, right? The sort of classic Buffettism that, you know, his circle of competence is much wider than that of the rest of us. Um, and but I think it's really important that you have an understanding of what you think you can do and you stick to doing that. Um, but I think that if you... one of the... there was an academic piece of work that looked at concentration of the US stock market over the past 90 years. Um, and it showed this ridiculously small number of stocks, 90 stocks, had contributed to half of the excess return in US equities over 90 years. Um, but, you know, the one that sticks out to me from that list would be General Motors. Now, you know, you wouldn't say that was a growth stock. Um, and indeed it went bust, you know. But actually if you looked at, you know, over that 90-year time frame, with the growth that it achieved plus the dividend payouts, made it one of the 90. So I don't, you know, I think if you can get an under-appreciated long-term compounder, it absolutely can be one of those, you know, manifold return companies.

Um, I think that the differences are subtle but important. Um, I mean, the killer one from a returns perspective is the flows. Yeah. Because we all know that people will tend to allocate and take away capital at the wrong time based on historic performance. And I think what it does mean is that you're not forced to sell or reduce stocks, um, at the wrong point in the cycle. Um, I think another important part of it is the relationship that you can have with companies because you do have permanent capital.

Um, just because, you know, you can have a time frame which is more aligned with theirs. Yeah. Um, and that's important in public markets. It's even more important in private companies because, you know, the typical structure there is a 10-year limited life fund, which means, you know, three years of deploying capital, three years of being a shareholder, and three years of trying to sell stuff. Um, and so, you know, if you sit down and say, well, I've got permanent capital, I don't really care when you list as long as you're actually making operational progress, then I think that's a different conversation. So there's certainly advantages to it, and, you know, the flip side, there are challenges as well with discounts and so forth.

Um, well, I think first of all, thank you for all that you do in terms of helping our investors get better at their jobs. Um, I think, um, I think the... so, start by just, um, you know, we try to think a lot about culture when we're investing in companies. And we've tried very hard to get better at that. And, you know, if I do the sort of extremes of it, you know, I can look back at meeting notes from, you know, company meetings from like 15 years ago or something, and people would write, good meeting. This was a good meeting. You know, and what does that mean? That means you got on well with the management. You know, did you have a good chat? And but it's trying to get away from that. And so one of the simplest frameworks that you might look at a company culture on would be, say, like there's two axes. One is, is the culture weak or is it strong? You know, and it sits somewhere on that spectrum. And then on the other axis, you might say, is it aligned or not aligned with what the company's trying to do? Um, so, you know, take Salesforce.com as an example. Um, you know, you meet the people from Salesforce and they're extremely hard-driving, promotional. Um, you know, they have a certain way of speaking, and I don't personally feel very comfortable with it. Um, but equally, you'd say it's really identifiable as a really strong culture, and it's really aligned with what they're trying to do. Um, so that's, you know, a very simple way into that discussion on culture. But, you know, take that back to Baillie Gifford. Um, I think we do have a strong culture, and I think part of that is the focus on, um, in particular on the investment side of the business and recruiting graduates. You know, yes, I started 25 years ago as a graduate, but I'm not unusual in a Baillie Gifford context for having done that. In fact, that's the norm. Um, and, you know, so what I think that leads to a strong culture because, you know, I see it in a lot of other firms because investors move between firms, they take a bit of that culture with them, and so you get a, you know, it tends to have a mean reversion element to it, whereas, you know, because you're getting relatively few people later in their career, it doesn't. So, and then I think the next ingredient would be that, um, we very deliberately try to recruit people with a mix of academic backgrounds. Um, and so it's not, you know, your first question was around, did I always want to be an investor? You know, we want to have some of those people who always wanted to be an investor, and people who've, you know, one of the big efforts in our graduate recruitment is actually trying to find people who hadn't even considered the investment industry as a possibility. You know, students from arts backgrounds, for example. So we put a lot of work into that. So you want to bring in people with a diversity of academic backgrounds and interests. And then you can give them the tools to think about investments. So I think that's another piece of it. Um, so I do think you have a strong culture, and the reason for bringing that breadth in and those different perspectives is trying to align it with our way of investing, which is to be very long-term. Um, you know, you don't want people with, you know, a telephone in each hand and 12 screens in front of them, you know, yelling into the phone. You know, if you come to the office, it's a bit more like a library. Um, you're encouraging people, you know, it's perfectly acceptable, part of doing your job, that you would turn up to your desk and open a book in the morning and read. Um, the, you know, you find an area you're interested in and excited about, go off and work on it for the next two or three months. You know, identify who the important players are, who the academics that you could learn from, go spend time with them. Um, and so I think it's some of those ingredients that lead to something that's a strong culture that's aligned with what we're trying to do.

Um, I think that what I would say is that there are some pillars of that process which are unchanging, but actually if you look at where the firm has had success, um, you know, there has been this constant process of change. You know, you mentioned I worked in our UK team earlier in my career, and, you know, in the 2000s, our UK equity desk was the biggest desk in the firm. Um, you know, we had some nascent international businesses, um, but, you know, our investment process evolved. We had success with, um, international strategies for US clients, um, emerging markets as it became, um, then global strategies. So actually the evolution of the type of strategies we were offering generally, you know, the performance requirements became higher. Portfolios became more concentrated. Um, you know, the mix of the client base transitioned from UK to global. So I would say that, you know, one of the constants has been change, and actually adaptability would be one of the pillars. Right. Interesting. And at the same time, I think the investment process has moved on a lot. Um, you know, I think we were, um, you know, there was a lot of, if you go back to the early 2000s, there was a lot of focus on tracking error and volatility controls, and again, actually challenging some of that orthodoxy and doing things differently was a really important part of that transition. So I think some of the ingredients are unchanged, but actually change has been, and actually being prepared to be adaptable, has been a really important component of the culture.

Um, so one of the things that has been important for us in investing for Scottish Mortgage is trying to learn from the brilliant people that run some of the companies that we've invested in. Um, and, you know, I think also, you know, I'd link that... So just because people look at their track records and investors and try to think what they can learn from other investors. But actually, you know, if I look at, for example, at the management of Tencent, um, you know, Tencent have probably been some of the best investors in the world, if you look at the past 10 or 15 years. You know, these people don't necessarily sit in the classic structures that we might look for great investors in. Um, but, you know, probably more than anyone else, the person that we've learned from over the past 20 years has been Jeff Bezos. Um, and I remember sitting in a room with him in Seattle. And, um, there was a group of his long-term shareholders, and somebody asked him, you know, as you look out over the next 10 years, Jeff, what do you think the biggest changes are going to be? And he said, um, well, I'll come to that. But actually, you're thinking about it the wrong way round. What you need to think about is what will still be the same in 10 years. And, you know, I know that 10 years from now, people will still love low prices. They will still want convenient delivery. Um, and so I think that framework is important. So I think when you go to your question, um, low turnover, I think is, you know, because you're looking at companies that you think there's something about the culture, there's something about the way that they approach the task, there's something about their adaptability and flexibility that means that if you have identified enduring advantages, that they should be able to survive that transition in circumstances, and that should drive low turnover. But I agree with you that low turnover should be the output, and, you know, it's not no turnover. You know, it's not sticking with things forever, but also it should vary because there should be times when, you know, um, take an... if you have a stock that's done extremely well, then, you know, one of the ways you've been successful is finding those stocks that have done really well and continuing to hang on to them as they continue to do really well. But in order to do that, you have to be asking the question constantly, what is the upside from here? Yes, it's done well. Yes, I've made money, but what is the upside from here? And when that question becomes more challenging, you know, it should drive turnover. You should be selling.

So in Scottish Mortgage, um, we have, uh, the constraint written into the investment objective is that we will put no more than 8% of the portfolio into a stock at the time of purchase. Um, the tool that the board monitor is the equivalent number of holdings. So, you know, um, it basically says, you know, if you take an 80 stock, you know, the 80 or 90 actual holdings that we have today, you know, what does that look like as an equally weighted portfolio? How many stocks would it have? So you try to adjust for the concentration in the positions. So to explain that in really simple terms, if you had a two-stock portfolio and you had 50% of the portfolio in each, then your effective number of holdings is two. If you had 99.9 in one stock and 0.1 in the other, then your effective number of holdings is one. Um, and so they look at the effective holdings. So they adjust for that skew in the portfolio. Um, and there's, you know, there's both a hard minimum on that and then a rule of thumb that we manage the portfolio to.