In The Importance of Imagination, Anderson underlines the points about earnings and that often in the companies he invests in earnings are absent and this isn't a problem. That's because those companies are investing rationally and ambitiously for the future. However, this isn't easy psychologically:
"Markets prefer certainty. Markets prefer current earnings over investment in an uncertain future. But this presents great opportunities if we can learn to cope with these challenges from which many shy away. The objective is to find and exploit the opportunities that do exist -and will continue to exist -precisely because they are harder to embrace."
Anderson therefore embraces the notion of "Growth at an Unreasonable Price." What does this mean? It means that while sometimes the price actually turns out to be unreasonable because the future is not as bright as we thought it could be, if we can respect that as an ever-present reality then we can focus on the upside opportunities available under Growth at an Unreasonable Price.
"It's when exponential progress, dramatic transformation and brilliant entrepreneurialism come together and prove that an ostensibly horribly expensive stock turns out to be extraordinarily undervalued. The initial price is then unreasonably low by any standard and the return to patient investors is absurdly large. This is what we search for and what justifies all our efforts when we succeed. The irony is that our earthbound minds usually end up being far too conservative in these instances."
Tencent (HKSE:00700, Financial) and Amazon (AMZN, Financial) are good examples. These are stocks that have for a very long time been viewed as expensive based on price-earnings multiples but their stock prices kept on rising because these companies just kept on executing their strategies brilliantly and crucially, and they were also able to constantly increase their opportunity sets exponentially thanks to great leadership, ambition and the ability to grasp the opportunities on offer in an ever changing market environment.
So, investors need to have creative imagination. George Soros (Trades, Portfolio) and Nassim Taleb have said similar things about the importance of being open minded as the distribution of future possibilities is usually wider than we envisage. As Anderson puts it:
"We have to keep trying to get better at understanding the process of change - or more particularly rapid, exponential and transformative change. Of this there's more to help us in history than we usually believe. Though change can be both quicker and more international than in past eras, the basic power laws of major waves of innovation and their ultimate reliance on the provision of capital at scale are analogous throughout history. Studying the geographical diffusion of printing in Europe after Gutenberg might seem slow motion but the associated explosion of knowledge and its implications seems closer to our world."
This reminds me of something Stanley Druckenmiller (Trades, Portfolio) said about the next couple of years being priced into value of stocks so we need to look further out. Anderson talks about five to 10 years into the future and although this is difficult it's what investors need to envisage and imagine and that's why if we can do this successfully, Growth at an Unreasonable Price can pay off wildly.
Optimism
Anderson's blog is titled Resolute Optimism and we've already discussed the resolute part. Anderson is an optimist because he believes we are in a new industrial revolution and therefore it's a great time to invest in enduring companies with massive opportunities, sustainable advantages and strong returns.
While many commentators, myself included, think the macro environment of negative real interest rates has spurred the bull market in the growth factor, Anderson says he is not smart enough to predict politics, economic data and stock market sentiment. But his own competitive advantage is his ability to connect with brilliant entrepreneurs and thinker to learn about new technologies and new markets being created in the fourth industrial revolution. An important point is that he also has the fund structure, i.e. a board and shareholders who recognise the need for patience. This is such an important point in all areas of finance: asset-liability matching, or more specifically reducing the mismatch. This is what went wrong with Woodford Investment Management, the funds were investing in illiquid assets, but the investors thought they were investing in liquid assets, and eventually this mismatch caused a collapse.
Anderson thinks that the ghost of the Technology, Media and Telecom boom and bust of the dot-com era scares many investors away from investing in these areas today, noting:
"Media bubble it probably was, telecoms bubble it assuredly was, but for technology it was more a cheery chirp of a forthcoming dawn than a terrifying day of judgment."
While there were many terrible companies which rightly collapsed in the bust back then, some excellent companies were incredibly cheap back then. Buying and holding Apple (AAPL, Financial) at the peak of the Nasdaq bubble would have been an amazing investment. Tencent listed in 2004 and is up over 100 times.
So why are there not more investment professionals who share Anderson's optimism? It comes down to the structure of the investment industry:
"It seems to us that by profession fund managers are ill-disposed to dream. Career risk, the shame of being wrong, exaggerated respect for mean reversion and the terror of seeming naive in front of colleagues, clients and remuneration committees are all too prevalent. Fund managers are therefore much more risk averse than most of the population. We're still haunted by the mythology of the TMT bubble in a way more normal humans cannot understand."
So, this is a behavioural issue. As discussed in the section on imagination, many investors are limited by their analysis tool set. I have completed the CFA program, and Anderson is right, if we take the CFA program as a proxy for the analytical training for investment professionals it's finance theory heavy, and light on business and innovation strategy. However, Anderson believes understanding innovation requires imagination more than financial analysis. Again, we need to recognise uncertainty and Anderson recommends the use of multiple mental models and acknowledging a wide set of possibilities. If we learn more about innovation and technology, then we can become more successful as growth investors.
"These limitations appear to have meant that for long years the virtues of the great technology platforms have been underestimated. This is otherwise inexplicable. For the strengths of these companies are hidden in full sight. They are not hard to analyse."
Personally, I think finance theory isn't totally to blame. In theory the value of a company is the present value of cash flows from the company's assets plus the present value of the growth opportunities, i.e. assets or markets said company doesn't current account for. It's more likely investors are to blame. Too many investors it seems purely focus on only the present assets and opportunities, perhaps out of a need to be conservative. It seems that Anderson has the ability or the optimism to put greater value on the present value of the growth opportunities because he notes the global scale of market opportunities, the economics of digitalization and software are attractive and highly scalable, and the network effects cause many of the revenues to be sticky, or as he puts it "drug-like in their strength and persistence." This was written in 2017, so one wonders if potential new regulations pose a risk to many of these firms, but that is beside the point. Great technology platforms have such a large future opportunity set and this point is perhaps underappreciated:
"The brilliant businesses underwritten by digitalisation and globalisation have the opportunity in the decade ahead to transform hitherto stagnant industries from healthcare to transport to agriculture."
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