Legendary Growth Investor James Anderson's Playbook + More Quality Stocks
Legendary Growth Investor James Anderson's Playbook + More Quality Stocks
Get inside the mind of a stock-picking genius and 4 more growth picks
This is my second report from the Quality-Growth conference in London. I start with an interview with James Anderson, former Senior Partner of Baillie Gifford and now Managing Partner at Lingotto, the investment arm of Exor, the Agnelli family vehicle.
Premium subscribers can then read on for a continuation of the 25 quality stocks tipped by a dozen serious professional investors. As I explained last week, the premium subscription is just $20/month, gives you my takeaways from multiple such investment conferences AND saves you c.$5k in entry fees and several days’ attendance time. I asked one of the principals of a multi-billion investment fund why they subscribe to the service:
“It's a no-brainer. I don’t pay the entry fee to the conferences; I don’t need to use up all those days of analyst time; I can read what you summarise in much less time than it would take the analyst; and I trust you more than the analyst anyway.”
Many of you know that I deliver forensic analysis training to institutional investors, usually in groups of 5-15 in their offices. Many smaller funds with just one or two analysts wanted to have the same training and can now do so in two ways.
A Zoom-based course with sessions of 60-90 minutes at 12.30 EST/17.30 London over an 8 week programme.
Those of you in New York can join me for a one-day session at a midtown location on November 13.
Both course formats enable attendees to improve analytical skills by learning how to be faster and more effective at analysing financial data and valuing businesses. Over 800 professionals have taken these courses since I started this business and my clients range from some of the world’s largest institutions ($1tn++) to some of the world’s largest hedge funds ($10bn+++) to some highly successful boutiques ($0.5-10bn). The feedback has been exceptional. Here is what the founder of a $1.5bn long short fund in London had to say:
“One of our key skills is shorting stocks and identifying accounting issues. Stephen’s accounting seminars provided a thorough refresher on a number of accounting issues to look for, excellent training to make sure the whole team were comfortable with all the nuances and tricks that corporates use, as well as some more subtle angles that were thought provoking. An underappreciated topic in the investment world…”
Chris Dale, CIO Kintbury Capital
Book now for either course as places are limited.
James Anderson
Anderson retired in 2022 as Senior Partner of Baillie Gifford and manager of the highly successful Scottish Mortgage investment trust. John Elkann of Exor persuaded him to join the group in May, 2023 as a Managing Partner of their investment arm, Lingotto Investment Management. Lingotto has $5.3bn of AUM from Exor and insurer Covea with 4 core strategies. A separate equities strategy is run by Matteo Scolari who used to be at Eton Park and is another brilliant equity investor for whom I have enormous respect. I would love to be a fly on the wall at the Lingotto water cooler.
The Interview
Anderson was interviewed by Fabio Cecutto who heads the listed equities research at Willis Towers Watson. After 40 podcasts, I have become quite attentive to interviewing techniques and his approach was a new one – he started with some quick fire questions including favourite holiday, food and gelato (Umbria; langoustines; and limone).
James left Baillie Gifford which has a fixed retirement age and John Elkann then approached him. He greatly admired how Exor engineered the Ferrari spinoff (although Ferrari didn’t make the list of the firm’s top 10 winners).
Anderson shared a huge amount of wisdom. In investing, you want to find an easier game. The Scots are not good at football but they can be good at sports that fewer people play – darts and snooker (these have the additional advantage that you don’t need to be fit and you can practice in the pub, useful for us Scots).
Investment is similar – there are lots of smart people involved and it’s better to play a simpler game.
Professional Investors are Trained the Wrong Way
He quoted Nick Sleep,
“You need to find more realistic models of the world”.
He flagged that the stockmarket is nothing like the Capital Asset Pricing Model suggests and there is no evidence of an equity risk premium.
He believes that there is a training problem in the industry. It has become professionalised but this has drawbacks because we are trained the wrong way. There is a focus on risk-adjusted returns and Sharpe ratios which can keep you out of the extreme winners. He regularly compares the number of people doing the CFA exams with the number of people who have read the Bessembinder study which is his favourite. This study showed that just 90 companies created half the wealth in the stockmarket over a 90 year period – from a universe of 25,000.
I use this study in my Forensic Analysis Course (don’t forget to sign up!) and when I ran the second edition at Baillie Gifford, I was mystified at the merriment that ensued. I hadn’t realised that Anderson had been writing about it and that it had become central to their marketing. I now research my clients more thoroughly. See the slide below.
Wealth Creation $tn by Group
Source: BTBS Forensic Analysis Course Slide on Henrik Bessembinder study
Anderson pointed out that in the academic’s more recent study (which I believe he/Baillie Gifford commissioned), the 90 had reduced to 70 companies. And he believes that there are certain common characteristics which are forward-looking and predictable in these winners (more on this at the end for premium subscribers).
He pointed out that asset managers are often managed by non-investors and thinks a lot of the problems in the industry arise from this.
Investing is Difficult
He believes that we aren’t sufficiently long term as an industry. But he acknowledged that you have to have clients who understand what you are doing – he cited Vanguard who chose Baillie Gifford as they wanted managers who were very different from the index, and he acknowledged the board of Scottish Mortgage, and particularly John Kay, who were very supportive.
He also accepted that emotionally, it’s very difficult. Intellectually too. He talked about Nvidia which fell precipitously in 2006. Costs were up; fixed assets were up; profitability and returns were down. It’s hard to stick to these companies when things go wrong. But they were spending the money on what turned it from a $2bn to a $3tn company.
I love when investors talk about their mistakes and he admitted making a terrible mistake in 2016. He sold Apple because he thought Tim Cook wasn’t interested in innovation. His assessment was correct, but Cook has built a sales and profit machine and it has proved an investment mistake.
He talked about Amazon and how anybody who read Bezos’ first shareholder letter should have realised that there was a very different and very special mind behind it. He bought Amazon in 2003 and famous investor Bill Miller asked what took him so long - he acknowledged that Miller was right.
Artificial Intelligence
Anderson pointed out that AI was making great strides before the stockmarket got involved and he highlighted two issues:
1 You must take seriously what Altman et al say. Jensen Huang, Nvidia boss, talked on a podcast 2 years ago about how big the winners would be. It’s dangerous to look for reasons to sell.
2 If over 10 years, AI turns out to be anything like what people think, it will be solving really deep problems. He cited a senior Tesla engineer who said who wouldn’t believe that AI can solve autonomous driving? It may be hard work for the next year or two but for example, AI can solve massive computational biology problems.
He does not see this as reminiscent of the late 1990s. These highly profitable companies can carry on spending regardless. Nvidia is highly profitable already. (This is in contrast to the dot.com era when the companies were young and capital-hungry and many went bust because they ran out of money.)
He discussed the robotics market. One of the academics at the Santa Fe Institute explains that in the first development of a new technology there is a battle for power. Once you know who is dominant, you should invest very heavily. Intuitive Surgical is one of Bessembinder’s winners (and was one of Baillie Gifford’s top 10 – a 10x in 14 years).
China
The interviewer asked him about China and offered the quote:
US innovates; China replicates; EU regulates.
Anderson thinks this is overly harsh on China where he used to be very positive on the tech stocks – “there have been incredible entrepreneurs there”. But he acknowledged that the potential in individual Chinese companies needs to be weighed against the chance that you could lose 100% of your money. This could be action in China or from the US government. The reluctance of US investors to invest in China is a real issue. He expressed surprise at the strength of the Chinese market’s recent rally.
He sees concern in the UK and Europe about our tech sector and regulation; that concern at least is a positive, but he doesn’t see any enthusiasm for taking risk in Germany.
Lingotto owns BYD and he thinks it will be difficult for the world to decarbonise without China’s help. He dismissed criticism that BYD is subsidised and pointed out that it has battled a much more intense competitive environment than western auto makers. But he is sad that he isn’t investing so much in China in his new role.
Legacy
He genuinely believes that investment is important. Investors are there to assist great companies and help drive the world forward.
Premium subscribers can read on for
The common attributes of Bessembinder’s 90 great winners
Anderson’s 3 worst mistakes
The surprising difference in strategy between Scottish Mortgage and his current fund, which has widespread application to any portfolio.
Plus further analysis of the 25 compounders I started last week.
I should perhaps disclose that Baillie Gifford is a valued client of Behind the Balance Sheet (although I didn’t know James, when he headed the firm). They are a research client and they use us both to help develop their younger analysts and to train some of their most senior investors. If you want the same training, you can join me in New York on November 13, over Zoom for our 8 week programme from October 21, or have me come to your office. Simply email me at info@behindthebalancesheet.com.