Hello, I'm Hamish Maxwell, an investment specialist with Scottish Mortgage, and welcome to this session on blue sky and base rates. Since 1909, Scottish Mortgage has lived through oil shocks, bubbles, financial crises, and pandemics. One lesson stands out in particular: while the short term can sometimes feel overwhelming, real value is built over the long term.
Ten years ago, Scottish Mortgage manager Tom Slater, indulging his inner maths geek — which I hasten to add are his words, not mine — published his study Blue Sky and Base Rates. By analyzing historic returns of the market, Tom explored how often stocks rose significantly in value over five-year periods. This revealed patterns in returns and base rates, or the likelihood of certain outcomes based on past performance.
It showed that just a few companies create most of the market's wealth, and that exceptional operational performance is key to success. That analysis has now been revisited, and its lessons could not be more relevant. Tom and Lawrence join me to discuss the findings and how patience, imagination, and a willingness to back transformative companies even through uncertainty can shape long-term success. Tom, Lawrence, thanks for joining the discussion.
Tom, I'll start with you. A week can sometimes feel like an eternity in markets. So, how do you shift the focus from that narrow perspective to the five to ten years that really matters?
I think you're right. A week can feel very painful, but it doesn't equate to real big business progress. You know, Rome wasn't built in a day. It wasn't built in a week. And actually, you have to look over longer time horizons than that. So all the work we do is looking to underwrite an investment case over five to ten years. And then what we're monitoring is the signs of progress towards that vision — whether it's the development of the addressable market, it's the competitive position of the company, and how it's moving towards that goal. And it's in doing that, and maybe distancing ourselves from the noise and the inevitable volatility along the way, that we can remain resolutely focused on actually the developments in the business, not the volatility in the stock price.
Sure. Lawrence, when you back companies building something genuinely new, progress can be uneven. So what's the investing lesson in the fact that growth is never in a straight line?
I think it's that you have to remember that the price for pursuing outliers is volatility. Almost all of the great companies, because they've been trying to do something that has never been done before, there have been times where people have questioned that path, that progress, and the journey has been bumpy. And so I think for us it's going in with that mentality up front that this isn't a bug of a few companies' journey. This is a feature of how great companies are built, that there are periods of stock market volatility on that journey. And I think for us, you know, the more recent and most poignant example of this is Nvidia has been a huge stock market success. It's near a $4.5 trillion valuation. The trust has done very well. It's made a 100 times return since its initial investment. If you look at the share price graph, it looks very attractive, but people forget the journey was a lot more difficult than it appears. If you go back to 2022, the share price fell 60, 70%.
You wouldn't have ever been able to get that outlier return if you decided to give in at that point, if you sold out. And so for us, it's just reminding ourselves that a company going through difficulty does not mean that they don't go on to be incredibly successful. And you see that again and again. Apple's had two drawdowns of over 70% in its history. Amazon's had three of over 45%, the worst being over 90%. This is a feature of the path that great companies go through.
Yes, keeping that in mind that it's not a bug, it's a feature of the long-term progress. Tom, you've remarked before that only one in 10,000 companies survives to be 100 years old, and Scottish Mortgage and of course its manager Baillie Gifford are among that small cohort. So what have stability and adaptability meant in practice for the trust?
I mean, stability is the core of the culture of the trust. It's about long-termism. It's about having an independent board. It's about acting in the best interests of shareholders. And adaptability is how we work within that culture and refresh our growth themes, search for new ideas, reassess the way the world is going. And I think stability without adaptability is stasis. But adaptability without stability is just drift. So it's being resolutely long-term, you know, staying true to the core pillars that support the trust that have led to that hundred-year history. But using that stability to embrace risk, to accept the volatility that Lawrence was referring to in that pursuit of outlier growth companies.
Yeah, indeed. The foundations to avoid the stasis and drift. Thank you. Lawrence, back to you. On the one hand, headlines, and on the other hand, structural growth. How do you keep the focus on the latter?
