Interview with Tom Slater, Head of U.S. Equities at Baillie Gifford

0:25Tom Slater, Head of U.S. Equities at Bally Gifford. I'm Motley Fool producer Matt Greer. 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. Hi, Fools. Welcome to another Motley Fool Conversation. I'm Andy Cross. Joining me today is Tom Slater. Tom is head of U.S. equities at Bailey Gifford, where he is a partner, a co-manager of the U.S. equity growth fund, and Scottish Mortgage Investment Trust, a FTSE 100 listed company that really, frankly, has nothing to do with Scotland or mortgages.

1:03Tom, welcome and thank you for joining us here at The Motley Fool. Thank you so much for having me. 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 investment 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.

1:39Yeah. 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 not easy. You know, sort of 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 and 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.

2:25We 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. 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. Tom, when I think about Scottish mortgages, a hundred year history and you mentioned the few really driving the bulk of the returns, it reminds me of the Henrik Bessenbinder study from Arizona State that showed that basically over very long periods of time, like 100 years, a few of the companies, around 4%, drive the bulk, if not all, of the returns in the market.

3:24Now, that's over very long time horizons. But even if you shorten those over 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 Bailey Gifford? Yeah, you get this, and we're all taught that this is this normal distribution of returns, that 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 you get a very different distribution of returns as you say there's there's a small number that really really matter over that time period and once you you know once you take the veil away once you see that then I think it changes the nature of 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.

4:30And 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, 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 the small number of big winners that matter. trading at schwab is now powered by ameritrade giving you even more specialized support than ever before like access to the trade desk our team of passionate traders ready to tackle anything from the most complex trading questions to a simple strategy gut check need assistance no problem get 24 7 professional answers and live help and access support by phone email and in platform chat.

5:20That's how Schwab is here for you to help you trade brilliantly. Learn more at schwab.com slash trading. Tom, you finding those companies is one thing. You mentioned the real holding on is the real, I think, a lot of challenge for 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 within a reasonable allocation strategy for those companies that have so well, especially for investors who might have been building out positions over time, doing all the right things? Yeah. I mean, I think it is difficult.

5:55As 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 take Amazon, we're just about coming up on our 20th anniversary of owning Amazon stock in Scottish Mortgage.

6:41If you think about that original opportunity, it was in the book market, in e-commerce, and selling books 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 enabled us to hold that stock for 20 years. 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, When you look at technologies like this, do you always feel like it's day one at Scottish Mortgage when you're analyzing companies?

7:17No, 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 Bezos and his approach to think about investment and about the world more broadly. But I don't think it needs to be day one. You know, specifically, we're investors in businesses, not investors in technologies. So we're thinking about the business model. We're 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 mindset, about fighting against all of those things that slow companies down as they get bigger.

8:06How 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 as early as early technology, but yes, you want special companies that can fight against those facts of life, those tough realities that are faced with companies as they get larger. 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.

8:50responsibility how do you how do you manage your uh 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 um looked at an own ferrari for example and they had a recent report that sent the stock down maybe 10 percent how do you how do you help guide and manage around that volatility around growth companies i think what what this speaks to is that it went in investing one of your own worst one of your worst enemies is yourself um and managing your your own emotions managing your own process um to deal with that is really important and the starting point for me is just being up front with people about what you're trying to do.

9:47Scottish 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 timeframes. I pretty much own all the stocks today that I will own in a year's time. There's not a lot I can do if those stocks are out of favor over the next year. You know, there's a lot of randomness in that. So, you know, don't own these shares if you can't stomach volatility, if you have a time horizon that's shorter than that, if you want, you know, if capital preservation is your key objective.

10:26And 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, you know, 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. Talk a little bit about the discipline you have on trying to identify those that really, when you look at those five to 10 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?

11:08Well, maybe I'll start by telling you what it isn't. It isn't the technology. um you know we don't think we have a deeper insight into the the technology that these companies have than than anybody else um you know when we bought tesla in 2013 it was not because you know we we knew something about batteries or self-driving software that that that nobody else did um so instead i you know where our focus is is first of all on the the culture of the organization you know why do the people turn up to work what is it that they're trying to achieve why should they have a sustainable edge and and what they're trying to do versus other people you know go back to the Amazon example you know it was that relentless drive on the long term it was you know the 2016 shareholder letter that you talked about about how they and so and it was the 96 shareholder letter you talked about how they how they were gonna make trade off is how are they going to make decisions um you know the i think that was so much more important in the outcome over the the subsequent 20 years than any of the sort of products and services that were available when you analyze the company back in 2004 so um trying you know and and and there are quantifiable aspects of of that you know you know 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 in markets is so short that they don't care about these things.

12:50So you might pick up insights that other people are not even bothering to look for. 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 thinking you can help us understand your approach to understanding and getting comfortable with Elon's management style of his various entities? Yeah. So we bought Tesla shares in 2013. We're still shareholders today. So very long term owners of Tesla.

13:34I 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 these endeavors require a lot of people working together to be successful. So I think that's the really important part to think about.

14:23And is that a thread across the other investments you look at, whether it's Meta when you think about it, and they're founder-led? Because we spend a lot of time thinking about founders and investing behind founders. So the likes of Mark Zuckerberg at Meta or Jensen Wang at NVIDIA. The importance 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? Absolutely. If I look at the portfolio, I think about 80 % of it is founder-led or family-controlled.

15:03So I 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 time frame. They're not beholden to whatever the street is demanding for the next quarter. And they can take decisions without worrying too much about that. I think also they have the moral authority to drive change in their organization. I think Toby Luka at Shopify is an exceptional founder. and you look at some of the decisions they've made in recent years for example so 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.

16:09And I think it's very hard for professional teams, management teams, who don't have that moral authority often to drive that adaptability within organizations. So I absolutely agree with you. I think it's a really important indicator. Support for the show comes from Fundrise. For the past 70 years, there's been a room in finance most people couldn't enter. A room where you could have invested in some of the biggest names in tech, companies like Airbnb and Uber before their multi-billion dollar IPOs. I'm talking about venture capital. Fundrise recently took a sledgehammer to those closed doors by launching a venture capital product that's available to anyone.

16:48Their mission is to give everyone the chance to invest in the best tech and AI companies before they go public. You can visit fundrise.com slash fool to check out Fundrise's venture portfolio and get in early today. All investments involve risk, including the potential loss of principal. Past performance is not indicative of future results. This is a paid advertisement. 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 invest in thousands of businesses.

17:20So 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 maybe shed some light on your approach, but also help us to be better investors ourselves? Well, we're really wary of thinking about dividing the world up into sectors or dividing the world up 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 is being 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 and own 5 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 largest holdings and so actually freeing yourself from that index maker's lens of viewing the world allowed you to have a proper allocation You know, people would say, oh, it's really risky.

18:31You own Google and you own Amazon in large size. Well, you know, 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 at the end. 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?

19:21Yeah, 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 think tinkering around the edges of indices adds much value for investors at all. But equally, it's not something we target. It's just an output of having a process which doesn't start with the index, which is concentrated. You know, we think very few stocks matter. So it's not a target. And then beta, 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.

20:05And we don't think it has anything sensible to say about the likely return over the next 10 years. 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 at the next 20 years, you're very excited to continue to be an owner of that business in Bailey Gifford and in Scottish Mortgage. Well, I think one area I pull out is e-commerce. And we've been talking about e-commerce for 20 years and um you know you might think it's one of those trends that's run its course but if i if i look at globally where some of the big opportunities are you know we have a big holding in micado libre the latin american e-commerce platform we own c in southeast asia coupang and in south korea um we own pdd the owners of timu um and i think that you you this trend is long established, but particularly away from developed markets where there's efficient, modern, formal retail.

21:14These 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 The consumers' first experience of financial services isn't coming from 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 has so far to run. And these opportunities are completely undervalued relative to the next 20, 30 years of growth that's available.

21:56Tom Slater from Bailey Gifford and Scottish Mortgage Investment Trust. Thank you so much for joining us today here at The Motley Fool. It's been a little 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. Thank you so much for giving me the opportunity. 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.

22:33All 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 Greer. Thanks for listening, and we will see you tomorrow. pardon me