Reinventing Equity Investing: With JamesAnderson

JamesAnderson — Money Maze Podcast, February 2025

Context. A wide-ranging conversation from Anderson's first months at Lingotto. He traces his career from Oxford history to Baillie Gifford to Lingotto, discusses the Bessembinder wealth-concentration data, explains why he sold Apple too early (the innovation thesis was right but the franchise power was underestimated), defends investing in China despite political risk, and laments Europe's failure to build scaling companies — using the Arm Holdings sale to SoftBank as a case study of failure at every level: company, board, shareholders, and government. Co-hosted with Mark Wallace of Rothschild & Co.

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America does as much trade with China in a week as it did with Russia in a year back then in relative terms and you know I I personally don't believe that in the long run either from the point of view of security of the world or for our economic self-interests that we can separate us and norn China One just needs to navigate that quietly at the moment welcome to the money ma podcast if this is your first time joining us I'm the host Simon brewer today we're going to talk to one of the most successful investors of his generation former partner at bayy gford from ' 87 until 2022 he led their Flagship fund the Scottish Mortgage Investment Trust whose early investments from Google to Tesla paid handsome returns to investors and has made him both highly respected and widely admired now he is at lingotto the independent alternative investment management company wholly owned by exor one of Europe's largest diversifi holding companies whose Origins go back to the end of the 19th century and the anelli family when Giovani anelli founded fabria Italiana aobo or fat James we've been very much looking forward to this welcome to the money podcast it's a pleasure to be here thank you and today my co-pilot in this interview represents one of the few families that has survived evolved and prospered for Generations Roth child and Co and I'm delighted to welcome Mark Wallace managing director and co-head of portfolio management for their wealth management practice in London Mark welcome to you

thank you son pleasure to be here as well disclosure I'm a senior advisor to Ross chars I've known you for a very long time and your colleagues I know you've had a very successful Journey as a team and so it's good to have you here at the mic to uh help raise the level of Gravitas in the conversation James let me start by just going back were you an especially curious child I think so I remember annoying my parents very much on a long car journey to a holiday of constantly asking why about everything and so if we if we think about your career Journey um was it did did the pieces fall into place logically or was there a certain amount of serendipity no I I don't think they were logical at all whatever I might like be or tempted to to claim at this juncture uh

I think the Curiosity was there but after a history degree at Oxford I went to University of broader parts of John's Hopkins in in in Italy which I loved and which intrigued me because there were people from I think 45 different countries um and that was when Yugoslavia was one country uh so it was even more underlyingly than that and I felt that difference in interpretation that almost contrasts with Oxford where you know I thought they taught you beautifully to think down one straight line uh rather than getting broader thoughts intrigued me and I then wasn't sure what to do I wondered about journalism actually which I think has the same attraction for the curious but you know I'll be open uh the financial consequences might have been rather different for myself than others so we think about lingot just help us understand post Bailey gfer what was the attraction and how would you encapsulate the mission well the first thing to say is that bayy gford ever since carile gford who was the brains behind Bailey G Bailey had the social connections uh who was a formidable intellect but his intellect was slightly less formidable with the time he got to over 90 so there was a very strict retirement age at B gford and I just wasn't quite sure that I really felt um that I exercised all the demons and thinking about investment if I can put it that way

so I wanted to carry on um and I'd invested in whether it be Fiat as you mentioned yourselves or uh the inheritances of Fiat and particularly the ownership of Ferrari I'd got to known the people there in fact many ways first the late great Sergio Marion uh whose death was a was a tragedy I think and probably being shown up even more um by the conditions of the European Auto industry these days and then got to know John Elan who kindly came saw me literally the week after i' retired from bayy gford um and raised the question of lingotto and that's the combined roots of it uh um John telling the story very eloquently and personally um and uh the admiration for how the exor had got to where it was that you alluded to and you are the CIO of the growth sleeve is that is that it's called The Innovation strategy which again came from John's own idea I think it's a good description and conveys the strategy more easily than other longer sentences could do so it nicely encapsulates the core of my interest over the years and and is is that both public and private Investments it is and we we feel and I I'm fully aware and you may ask me about this I'm fully aware it's not currently a a popular concept but I've tended to think that we can only understand the next level of innovation either for the companies directly themselves or those that they're going to disrupt um by looking from a very early stage in this and

I think you know if anything we feel that we need to keep tugging to be early enough in what we're thinking about uh and how the group thinks as well as um seeing those companies through to maturity yeah yeah and and I I was just thinking about the you know Bailey gord's I don't know 30 plus Partners a lot of analysts have you gone from I imagine a much larger investment organization down to is it is it just you or do you have a team around you no we we've spent the last 12 months trying to build a team but you're right it's smaller numbers and will remain smaller numbers I I'm I'm very ambivalent about the scale parts of this I I loved as one often does and I'm sure you'll have many many similar on these type of things but um when the equally late and great Charlie Monger was talking to one of the next generation of the Burkshire hathway managers or potential ones he asked how many people he thought he would need and he said well I think about five and Charlie's reply was apparently how about one and I I

I think you he's right in the sense you can get further away and the last thing you want to do is not be an investing yourself but I'm very conscious that you know I've been around for some time this is about trying to build an institution like exord that can last for many many decades so having young and talented people is I think really important yeah so that brings us to this first important point which is sort of corporate longevity and I know when you were at Ben gford you heard sponsored the Bess and binder study and we'd had Michael Mo who taken it on and done further work and I think the data point is that just over 70 companies since 1926 have provided half of the return over bonds I guess the question I'm struggling with is what has what has changed and why well I'm tempted in Italian Spirit say you know quote the leopard that in order for everything remain the same everything has to change and I think there are elements of this my first reflection is as that data goes back to 1926 and it's not a bad time for him to be be thinking about it and obviously came through the the Great Depression on on that front I I

I think that you know it makes monikas like the mag 7 be ignoring of the long history of this that stock market returns always have been about a very small number of companies I almost think the more challenging part of the best in Bor is about the fact that you know he's varied the numers slightly according to the updates he's done but perpetually over 50% of stocks over their lifetime underperformed t- bills which makes a nonsense of all the capm and everything that we've been talked to think about recent times so you know I almost find that more but you know to go back to your question of the dominance of those companies uh it's both profound uh you know for every $1 invested in Ultra or Philip Morris however you want to Define it and back to the the start of that period uh you now have $2.65 million so you know it it is time in the market and it's always existed from that but I think and I think this is worth emphasizing to our interpretation to my interpretation of it I I I hope Professor bester wouldn't object to this if anything it seems to be getting stronger and stronger so the 72 number that you were citing of providing half the returns it's come down from 90 just over the course of the last five years and if you look at the more recent but still 20year data you'll find that the figures are if anything getting even more concentrated and

I think that's natural enough because you know I would probably say I combine the explanation with best mind as to the underlying causality of this and at that point and you mentioned Michael M Michael being chair of the Santa Fe Institute where I think a lot of the indepth thinking about why this might happen and know there's something very peculiar here isn't there that this has been going on for a long period of time yet still the way the standard interpretation of how markets work standard interpretation how you'd invest hasn't really changed and I would date it really to Microsoft going public in early 1986 and soon after that Brian Arthur at the Santa Fe Institute wrote the first version of through paper saying that once you become dependent on intellectual capital and hence you get increasing returns to scale that this pattern was going to become ever more dominant and I think it has become ever more dominant and so the puzzle to me is almost we've had near 40 years of this why haven't we rethought more because that pattern though it was historically there has only become more acute and I think you can understand why it's become more acute in that world of intellectual capital I spent a lot of time thinking about I think it's such a a fascinating study um the one of the challenges for me I mean do do you think what one has to hold extreme winners to do well you know what what what surprises me is that an equal weight index

I think the equal weight S&P has outperformed the cat weighted since it launched now I know more recently that's not been the case which may point to the fact that markets are changing but I find that quite interesting given the sort of conclusions of the study I think it is but I you know to me it's the positive skew that's implied by this and the huge difference difference in performance between mean and median stocks within that that I take more out of but I agree it is intriguing um what you're saying there and I I wouldn't want to deny it's true but I think within that set of the equal weighted you need to have some winners to really get the the performance too so I don't think it's ultimately incompatible even if I think Market it's it's useful reminder yeah yeah yeah so when we think about your own approach to investing and evaluating you have said I quote you the normal ways of looking at companies is no longer valid at least I think that's what you've said because I found it you know in some of the materials I was looking at um and you you you talked about needing different sets of information in the Nikolai tang and interview I wonder if you could just unpack that a bit I think all this comes with the Proviso that you have to be thinking long term for all this to become truly apparent and I guess we'll probably probably get into that later but

yeah I I can't see how if you are looking at the same sets of inputs you can possibly hope to have differentiated outcomes and you know I I sometimes have put this I think I did with Nikolai me and being off off off off off Mike that there is perhaps a sporting analogy here in that you know as a Scott I can say confidently that Scotland will never win an International football tournament um we don't possess the abilities to do so um I I I I think at Nores bank they replied why not and I thought that probably wasn't worth following up like I I I could but I I I went on to try and say that therefore you play a different game that just as so Scots can be good uh snooker or darts or in the exceptional case like Andy VAR tennis but you you need to play a game that less people are playing and I think that less people for all the reasons we've already touched on are trying to identify those truly impressive companies those outli because if you're looking on one year Viewpoint that's not what you're trying to do you're just trying to beat the index by amount and possibly risk adjusted is again where may may come to and you know

I think you can go in a couple of other directions this the first one would be if you think about those sets of data that most investment research and I'd be very interested in how you both handled this over the years I'm not sure that even if you had perfect answers to them that you would end up outperforming you know I'm not aware of any evidence that tells you there is a great relationship between economic growth and stock market returns I'm not at all sure that there's any evidence that correcting correctly predicting what the FED are going to do is similarly so um and you know I think you can go through this and say but would it help you to know all this um so that was One Direction being skeptical of the data that most people use on it uh it's also about you know what can you positively gain now most of the time is I think think you you will agree that in in in Investments your decisions are really a best 55 45 decisions but I think if you give yourself the longterm and in particular you try and think about the developments of exponential Technologies and the academic research on what succeeds in different areas you can get a lot closer and

I think you can you know very often get it up to very high level of probabilities there example that's always intrigued me on this score I hope not because of the outcomes of it but when we were first looking at Tesla um 2012 13 Whatever by far the best input I found was talking to the people and again it was Santa Fe but in particular A lady called jica jri who also works M who had written with various colleagues papers about the development of LA long run pricing of Energy Technologies and what you could expect in various areas and what not and in very short terms is essentially what it was saying is the record of historical Improvement tends to replicate itself over the next 10 to 15 years so we thought at that time if you combine that with what you were already seeing from Tesla and others that you could see where um electric vehicles battery technologies more broadly defer were going to get to we s believe that there was a 75% chance that that would improve through somewhere between 15 and 25% and of course you know why 15 to 25% eventually meet something gaining at 2 to 3% even the hands of Toyota over years you're pretty confident at some point even if you can't predict which year it's going to I think within three or four years it was clear that the rate of improvement in battery technologies was actually much greater than that and you could therefore have a higher probability Lev close probably close to 90% that that pattern of improvement was going to happen now

that strikes me as far more valuable uh than either if I may say so broker estimates or the very odd way in which we go about predicting in stock markets which is about spot estimates um and very often to third decimal point I still got a pretty large collection of sums on Teslas produced for me by generous hedge funds who sent them to me say you know this is why you're wrong uh Etc and it wasn't that they came to these numbers but they had such confidence and Strikes me as strange the world is inherently complex and unpredictable and I think there far part of this is about needing different scenarios because however good you might think you are or hope you are you the world will overwhelm you at times so you need to have different scenarios from the highest to to the lowest and the highest is actually really important because most truly great companies get way further than you can expect you know in some sense since teder was actually quite a predictable one but you know could one ever have guessed AWS

no I don't think you could but you shouldn't have excluded it from your your your imaginary version of what Amazon might become I wonder if um as investors we tend to think a lot about the kind of downside and the you know the buffet do not lose money but um perhaps we don't think enough about the upside and I know some somebody talked about a pre parade is it rather than a sort of premortem yes what could go what could go right yeah and well absolutely and I think that you know if I may again the the Amazon one is interesting from from from from this point of view because you know basos himself as you'll probably recall said you know right at the beginning of Amazon that uh there was this weirdness about his business that everything improved by 40 to 50% per anim or so and even paused and I think gave his usual laughter about it said I don't know where this is going to go but I know it's going to be exciting and I think that does give you pause for thought and you know the same um that's true across the globe the same it wasn't me who did initi was excellent colleague but with tensent I remember buying it but on buying on the back of data that was way too conservative about where which might take us and the like so so totally yes and

I think that outweighs it and you know I would invert this as well that I you know all my greatest mistakes have been selling or not buying companies actually more in my own personal case selling rather than not buying truly great companies way too early on um rather than the it's gone all which is very painful but I think does become too dominant yeah and and and that um that's selling I think is it's such a difficult decision to get right I mean have you leared anything from selling to early I mean obvious answer is you shouldn't but I mean there are cases presumably when you well definitely cases when you should so how does one improve that selling decision I mean I'm increasingly of the view that there are very very few and that you know again C manga that unnecessarily impacting not not aing compounding is pretty because some which I thought at the time were very good cell decisions if you had more patients would not have been so um you know reducing Amazon um back back in the early 20s from from from that point of view um but yeah

I think it's absolutely the selling too early and you know my my single greatest self-examination on that front was Apple um selling apple back in 16 or 17 at a Time Buffet was was buying it as well but you know it's an interesting one because in process terms I'm still not convinced I was wrong because what my attention was and it was absolutely me in in this case uh was on will Apple be able to generate enough Innovation to be able to grow substantially in the coming years and the answer to that has plainly been no there has been no innovation you know we've all got a slightly better camera and that kind of thing but nothing has happened but of course what had been built and what beer to Tim Ki exploited is that the franchise was even greater and that that's what I was under estimating in that period so you know even there I think that for all the verdict on Innovation was correct it was underestimating the sheare power of some of these companies that's been critical although that's not been translated into underlying growth has it with apple right now so so in fact what we're saying here is there is there is a there's a recognition of the persistency of those other revenues but in terms of you know a the valuation if the gr beyond that if the growth doesn't come through then your decision to sell might well look very smart well that's going Simon but I I

I think that you I might go back to what I think all three of us have come to some agreement about that these truly outlying companies are predominantly driven by their extraordinary free cash flow Generations that we have underestimated both in scale and in longevity and plainly that has come through it and the sheer magic of being able to generate those cash flows and use them in the absence of innovation to buy back vast quantities of shares has been what what's powered the continuation of it and I think one needs to you know so in some senses yes there's some limitations in other senses it does live up to the general hypothesis and I suppose just to add to that as well I mean thinking about if you look at a great compounding Journey it's it's not going to be you know steady I you're going to have periods where where you know the company is sort of pausing if you like and then periods where it's enjoying these big growth phases and I I'm just thinking about the long term look well I Mark we make perhaps take it in a a slight I don't think it's quite a tangent but it's going back to something wondering whether I should have said and answered the previous question so I don't think it's many a lot of these cases it's not even it's pausing it's that it seems to the market as though it's going in reverse and

I think that is one of the most tempting Avenues at the moment so all the companies in the at least technology portion of the best and binder data there are some others where I don't think this is quite so true have had huge draw downs and

I think that is because the the founders of these companies or those with moral Authority with inside the company are prepared to be misunderstood in another P terms for long periods of time but sometimes the market doesn't just misunderstand it willfully goes in the wrong direction and so to take a current example uh which is plainly as significant as the ones more commonly talk about but Nvidia so in 2006 which in retrospect was a great year for the stock market misunderstanding because it was also the year when Amazon share price went down Lots because of inventing AWS which Brokers didn't like at all Nvidia market cap fell I think 83% in 2006 and the market cap was down to something like $2 billion which obviously since the outside has been fairly terrific but why was it going down and I think this is the really interesting and perhaps exploitable part of this it was going down because it was spending a lot of money inventing Cuda the software on which subsequent success is profoundly based Now isn't that an example of the superficiality and short- terness of the stock market because people were responding simply to the fact uh that earnings were under pressure and even more that the share price would go down therefore the share price goes goes down more but you know when you were asking about pre parades shouldn't that have been something one should try and built into the system of saying where might the market be completely wrong and what shouldn't make you sell because

I think even not selling at that point it wasn't own based to ad at that that date but um you know I I

I think that what the St Market forces on you is even more extreme than we tend to think about and this probably is a tangent but if I may um one of the books that's interested me most in the last year as being Cataline GCO of mrna's fame um autobiography at which she even by the standards of what we're talking about is more critical than investment in Academia and the pressure for annualized returns in order to get grants in order to get uh attention in order to get big Publications in order get money Etc and how dangerous what she calls these ceremonies actually are and I think that's right I think we're in the tyranny of assuming that for some reason investment results should fit and tell you something because they fit The rhythms of the seasons rather than and you know Suddenly at the end of the 18 years she wins a Nobel Prize for it and becomes an eent Herrin um you know I think that that is quite similar to a lot of investment so if we go all the way back up to the top of idea generation with the paradigms that you've expressed how has your sourcing of ideas changed I I think first thing is that it's about trying to follow the logic of what we've been talking about even more firmly I think that the opportunities for this type of investment have got greater because

I think that you know if you think about it the last 40 years have really been about the impact of Moors law on continuing what we've got I think although obviously Moors law is associated with a lot of this but at the very least what Mor law is affecting what AI is affecting uh what burgeoning new Industries or synthetic biology and the like are affecting is is the area that this may happen in is a lot more that you know to go back to Brian Arthur that from Microsoft it's gotten that so intellectual capital is going to be more and more dominant and I think that you know a lot of this is about being absolutely prepared to be committed to that type of thought of it and you I think we're in a very haunting and important moment at the moment which is combined with a lot of Market phenomenons meant that in some ways the markets are paying a lot of attention to this you know at the level of Nidia Etc and the platform companies but at the other level there were in the early 20s just growing up some technologies and some companies that at the very beginning of this process and you know as Brian Arthur would say again what you need to be willing to do is identify the moments when these companies move from being competitors in their technology to being the dominant companies to being if you like the Microsoft of their area and

I think the stock market has been astonishingly impatient with those for various other reasons as as well but you know time Horizons to my mind have been the lowest I've ever seen over the last few years and the desperation for companies to turn whether private or public to turn cash flow positives been greater and I think you know one needs to have a balance within your idea flow and your portfolios between those that are already generating that huge cash flow but which are obviously much more recognized by the stock market and all those that aren't and I think you know healthc care is one of the great areas this but you know Healthcare investing always seem to be very damaging in many ways and they focus on the next product the only product rather than potentially building platforms but I think where we are with the immersion of of AI genomics Etc means that actually some of these companies might be tremendous but you have to grit your teeth and endure in the short run because you know no illusions that the stock market is prepared to look through the chasm intervening between that and that gen generation of prophets so it's broadened out but at the same time

I think it's trying to be ever more serious about what actually the process tells you you should be doing and when we think about these companies I was feeling quite confident in saying that they have been led by charismatic individuals who have some unusual characteristics I wanted you to maybe describe what it is that you sense uh and then the where I'm struggling a bit is when you start talking about genomics and AI maybe I'm thinking that maybe maybe the individual becomes less important and it's the collective organization behind it I suspect you're being modest there Simon because you know this is a complex feeling we we all need to work through it and try and unpack it and please I absolutely believe that the skill set has always needed to be much more broader than these individuals and I I used to get a lot of intellectual Challenge from John Kay about this Etc and how far it was most and I think I hope what I'm saying is different to form them into great companies and thereby great share prices it's very often about the small number of individuals the skill bases but know that is absolutely requires much much more the one individual um I I'm glad you didn't just say Founders in what you were saying because

I think it is broader and I think sometimes exceptions are fascinating from from this point of view and exceptions in more than one way uh has been one of the factors that's made me intrigued by asml in Holland over the years you know how is it that a European company is doing the hardest piece of technology probably in the world um and without whom actually many of the companies that we're talking about the platform World couldn't really have progressed in the way and at the same time this wasn't as you'll know a Founder company but in vaim and Brink there was someone with the moral Authority in Nick sleep's great phrase about this um who I think can lead that but I don't think I do buy into the notion that beyond that beneath and doing all the hard work and high skills that it is going to be different um in healthcare for instance and we can talk some other industry as well if you like but I I think instead it's more about some leaders of healthc care companies having to imitate and develop what we've seen in the technology industry so I think firstly very often you need them to have the moral and practical authorities by only much greater U amounts of the equity in these companies uh you know one example in my mind a company that's recently gone public Tempest um in healthc care data broadly defined or AI for health care as you sometimes call it and

I think you know it's really interesting that this is the company that's probably probably making the most progress so far in that area its founder as you may know is gentleman called Eric leoski who was previously known best as the founder Groupon now he made various reasons shift into to being very motivated about healthc care but I think the fact that he thinks in that tal audio with profound influence profound share ownership is important for escaping that terrible terrible bind that I was trying to indicate earlier about healthc care being too much about Investors having the dominance of the company and being just about the next product rather than anything else and you know I I think equally there are people learning from that so another example would be Chris gripon recurs you know AI data company been around close to 10 years now about really trying to work through all this but I think that you know Chris has got used to speaking as a Founder in the more classical terms and I think that will be important in getting through these these hard years so your Approach at lingot if I understand it correctly is been to really laser in on three areas is that right I I think we do try and concentrate our research in that but you know I'm only slightly uneasy Simon in I do think it's important that if we see new areas developing that we add it we're not trying to say it will always be these I think one needs to acknowledge what is out there and

how do you wear up that because Mark and myself were talking about this sort of the growth opportunity to an aggregate level and then you could take I think you mentioned Airlines you know Buffett doesn't want to go to Airlines we know what an enormous Marketplace it is how do you how do you balance the growth with the the need for the sort of profit pool like this yeah yeah well so perhaps an interesting light on it because you know heck I'm what I'm trying to do mostly is to try and learn from great thinkers and people who who managed to do this rather than having imposing my own views on top of it so I was very interested um Sam Alman came to talk at Italian Tech week um a couple of months ago um and it was predictably interesting but uh he he was asked by John Elan you know how do you identify the profit pools of this in short uh and and he talked about addressable size of markets they talked about addressable size of markets which I think we'd all acknowledge is critical but you know the next question was how do you differentiate between those who are bullshitting and those that are actually asking you genuinely and

I think it is as Sam molon said you want people who've actually got detailed plans of what they're going about rather than just a volume of noise about this and this unites people who wouldn't necessarily thinking that way now for all that we know about Elon and we come to come to know there was always been a plan for Tesla um about what was going to be done and you work through that by stages and you worked in detail um and you know there was a vast attention from working for the first principles in that um onwards so I speaking to to Peter gson the sadly now departed boss of North Vault who' been at T as you probably know for many years and he said you know in a meeting Elon once asked him how do you get from atoms to the price of Y series take me through all the different points that that's a long way from what we're talking but I think you need distinctive cultures and very usually I can't really come up with many examples of either the best in binder stocks or stocks that I've been lucky enough to own that don't have a the industry works this way but what we believe is something completely different and I think that is almost always the head path I'm not sure that I would necessarily put your airline one on that because you know it's the establish M of competitive advantages in a more classical form that doesn't really exist there does it um and you know even there you have to think a bit differently like Michael O

I remember him coming to see me you very early days of it plainly there was that difference in thinking but you know I think in the airline industry you'll be much better looking at it over the years at those dominant manufacturers you know Boeing is a best and binder stock for all the ghastliness of the last few years and I think we can all identify what's going on there and Airbus has done pretty well for all the Auditors the way it's constructed so you know I I I find that a more natural um industry economics competitive Advantage ones but I think you are looking for this profoundly different interpretation of your industry almost to get to extremes yeah and and and I think sort of I wanted to ask you about that the information you look at and I think it was maybe ni I think talked about this long shelf life information and where are you where are you getting that from I mean I'm just are you is this sort of academic papers and what sort of things are you reading to to find this information I genuinely find Academia the best source of this because you know of course I read you know Kurt SW and all this type of stuff about the long run future but I think so much of that is about if you like giving you ideas and often very imaginative ideas of what has the growth opportunities

I think it very rarely tells you about the Dynamics of that the potential for leadership of it and actually I find in that sense a lot of Academia is very very um tough-minded and practical which is not necessarily what we think about it may be what drags you to towards a higher probability level you know just site you know a slightly different example I've been fortun enough to talk a lot and sort of read to touch with carot Perez who you know brilliant books about financial um and technological change and she's still writing at over 80 um and you I think some of those types of thought process give you a very different feeling uh from how we get to Innovation and how we influence it ourself by what goes on in stock markets you know I don't want in this way would say you I think there are numerous very great thinkers in the investment world again they're slightly differentiated but you know I I think from George Soros to Bill Miller you know to Nick sleep there are people you ought to listen to in your own industry but again they mostly have very differentiated takes on how to do it it's not what you see on CNBC here so so when we think about risk sizing and capital um again Mark

I think you and your team might be the largest have been the largest owner of boire hathway outside of the US um and you spent a bit of time in the UK in the UK you talked a little bit about how they approached resk when you met with the barire hathway team well it was just interesting talking to one of the newer Berkshire haway board members and asked them what was surprising to them on joining the board and they said it was you know Warren puffett talks a lot about risk but actually seeing him in action and how focused on risk he is is is is really surprising and I I I suppose it it slightly depends what game you are playing and

I think you know as Buffett has said he well he's got almost 100% of his net worth invested in Bur a lot of his friends are so he you know that's one of the reasons why he's so focused on risk whereas you know thinking about you know you and I I I would imagine you you you wouldn't be advising us to put 100% of our net worth in your strategy or perhaps you would but no that's that that's so right you know I and I think at various times colleagues of mine haven't really liked this but I've always felt when clients and that clients now as much as clients then ask about risks the only appropriate reply is tell me what your risk profile is cuz I I I I wouldn't know I would absolutely argue that investors of whatever ilk need to have attention on the maths of the markets and best and binder terms and they need to think about their own timelines involved in this um but the if you like none of this points in the direction of risk as being volatility around an index and

I think you know that's terribly important and actually one of the elements that gets me depressed about the investment World these days is is a twofold of that most investing institutions aren't actually thinking about individual companies you know it's factors and ETFs and all that but also that institutions who you feel should should be able to be really longterm and who tell you that they're being longterm actually what bothers them is the outcomes over the next 12 months and their peer group comparisons you know I think a lot of about endowments and the like from that point you know

I don't think these are people are acting in in in consistency with their own avowed risk philosophy but have you also would it be fair to say had the luxury of presiding over what are at one level more permanent Capital vehicles that's absolutely right but I think as well uh one should think about in terms of the caliber of thought and loyalty going on behind it um you know Scottish mortgage was after all a retail vehicle and not all retail investors I think a lot of them are but not all retail investors of long term I would you know huge amount of credit uh to the board and some individual board members members for being willing to back the long you know I I I mentioned John Kay earlier but sidonald McKai as Economist and chairman beforehand was fantastic about this and gave the opportunity but you know a less known one of the B give part of this I was also the manager for close to 20 years the Vanguard international growth fund or the portion of it run by Bailey Gord and the Vanguard board were fantastic from this point of view they completely understood that where they were selecting uh active investment managers as opposed to doing their own highly skilled um index like tasks um they were wanting those people to be different and to think differently and they absolutely encouraged that and the challenge was always intellectual challenge it wasn't about you know what the results have been over the last six months and you know they were deeply deeply valuable about that and

plainly it's one of the parts about lingotto that appeals to me and you know it brings an extra element in it because you know when we are lucky enough to talk to the people at exor and John elen in particular you know these are people who have deep experience in trying to build industrial businesses that's not something I've had the fortunate opportunity to be involved in the same way so it gives an extra way of it you know for sure the future of Ferrari was not constructed in 12 months and it it's um

I think it's such a a sort of fascinating Point around the kind of time frame and and you know short versus long term and thinking about you know what period as an investment manager you you should be judged over and you know I think for most strategies it's pretty long and I like the question if you didn't know anything about the manager what period of time would you have to look at to be pretty sure that they were a great manager and you know I think it's a it's it's you know it's really is a long time yes and it's probably 10 years rather than five so you know if I'm thinking about you know as an investor coming to you and you know what what what period over which should I judge your performance well I mean firstly I absolutely agree with you you're probably familiar with a piece of work that was done a few years ago which I think was entitled God's portfolio which have you had perfect forn knowledge for the next five years you'll still be underperforming at some point during that you know there will always be a time when when that is so I in some ways

I mean I suspect we would agree quite quite a lot of this I the what might be an extra Nuance I can add and I I felt this in investing in individual companies as well EU you should be absolutely committed to living up to the values that you espouse and if you see people going in a different direction so if I may a moment Tri back to the the Vanguard experience the first year we managed money for Vanguard we done extremely badly and classic V form you know assembled all the senior people there and then that then then then then then CH sort of paused and said I've got something very serious to you to say to you and I looked at my colleague and he looked back at me and we all thought we knew what was coming and he paused for even greater effect um and said want to tell you that we're really pleased with you because we've done a lot of work on what you've actually invested in we think you've been living up to exactly what you described as the process it's just that process hasn't worked over the 12 months and you know it always bothered me even after very brief times of of of of owning a share of the company changed its philosophy changed its culture in those ways and

I think you know that was more often a tell than anything else so we're here in Europe um you mentioned asml we've had arm we've had Spotify but but there is a sense that Europe's being left behind for all sorts of reasons some of those are macro um but I'd like to just get your sense of where are the gaps is it from the the insufficient VC Community was a who was on the show you some time ago lamented the dominance of Bank lending as opposed to equity financing but you know money flows to where the ideas are so so are we mischaracterizing the European problem well the first thing I should say is you know I fought against this pessimism I nether thought it was helpful on itself nor did I ultimately believe it for long periods of time but I am profoundly depressed at the moment about it um we can talk about some of the individual reasons I think as Simon I might just say one thing I think it's for all the fact that the problems across Europe are embracing almost all geographist and almost all sectors I think the explanations may actually vary quite a lot between those different systems which still remain quite independent and that's not necessarily A B bad thing but you know if I can take it first in British context so the the single example which made me most depressed was the arm one and

I mean the arm one at the time when Mr son first brought har rather than the more recent part of this and if was the the largest shareholder and I felt though that all the evidence was it went wrong at every single level so we talked to the company there was no one inside the company who was really prepared to take on the challenge um you know and say look we can do this we can invest for the next five years and at the end of it we will come out with an incredibly valuable company you then look to talk to the board and I would remain very critical of the board um you know I think it was constituted mainly of people who sold companies and they saw that as one of the Avenues out of it they didn't see rebuilding it uh you then think about the shareholders you know having sort raised dropic of whether one could go in a different direction and inverted commer save arm in a British context at that point I got very little support um legal in general to be fair to them were absolutely supported the idea but that was about the sole example and then and in some ways summing up it all the worst part of it was uh the government

I think it was Theresa May era but I'm not sure it made a huge amount of difference who wanted us um Unfortunately they um they addressed the correspondence to a very determined CL region called jerro caran who wasn't really the right target for them on this score um they they wanted us to write a letter saying what a trial for Britain because you know somebody wants to buy it now I think we get very few chances of building truly outstanding companies I mean it's in line with the logic there being small numbers of them in global scale so I think that you know Britain it's a problem at almost every level I do believe that across Europe we need to have much bigger um Venture Capital you know probably 50-fold in terms of what we're actually doing but I'm very interested and you alluded to him um you know I think one of the most thoughtful people about this in Europe is Daniel e at Spotify who as you'll know is also trying to invest for the future and he's young enough he's got plenty of years about it and on time you I enough to chat to him about it and he said that he found the biggest issue when he setting up these new companies which he very often shares and and the like is he quotes needs to reprogram the brain of the founders and

I think that is right right isn't it the level of ambition you need it's not these people may not be capable of it but it's not how they are thinking about what's going in and I think at the same time they need to know it's extraordinarily hard that it's not five or 10 years you know I think we've got in a sense the whole e-commerce era was I think dangerous from this point of view and it made people think they could do it suddenly and then they could retire with lots of money whether they were 40 or whatever um no I think the asml example to go back to is a much more power powerful one of it you know for Martin vend it was 40 Years of commitment to this and extraordinary levels of hard work um and you know I think we do have a real problem at that level too A lot of the uh it's fasc lot of these conversations I I think around that you know challenge of of really thinking longer term kind of across Society I guess I don't know how we don't know how we changed that no I I don't because so much has cut against that over you know my lifetimes um and you know I a lot of Reflections on and I think it's something we find hard to take but you know the neoliberal turn in many ways brought many useful things but I think it also did have a dangerous effect on these long-term visions of what what you need to do and

I think it's also as you probably implying by that cultural another one of the ones that Sam Al was talking about you know he's kind enough to be interested in what were the problems in Europe as well I is you know he was pointing to this terrible terrible uh fear of failure and that I don't think it's America I think it's much more just that Western Fringe Of America doesn't have that and now I've been reflecting a lot about this as a SW shareholder northv and I know a lot of the people involved pretty well I think that you know I've been frightened by the sheer ferocity of both the attacks they faced in Sweden and because you know they were trying to do something that was incredibly valuable importance and the lack of assistance in solving it I mean all these companies just about that we've talked about were within very small number of months or events of complete failure themselves I mean Tesla was there within weeks of going bankrupt there had been a potential successor for Jeff Bezos recruited I mean everything Apple yeah well absolutely sorry yes as you know from the earlier conversation I'm probably not not thrown to think that out too much but I I worry about this more in Germany than anywhere else right I you know

I think that having said all that about Sweden at least s all great entrepreneurs plainly some of the stuff that's happened in Denmark's been fantastic um plainly you know Poland and the like are doing quite well at the current juncture but I see nothing going in the right direction in Germany from any of these points of views would it be fair to say because I think you've been involved in one of the I'm going to say nuclear fish but maybe that's wrong around Oxford there is a lot going on around these universities so so when you are clinging I won't say to the green shoots of recovery but to the to to the strands of optimism do you see it around the university communities mostly oh and well I think this whole university question is is absolutely fascinating um yes I do and I think that's similarly slow so in in in Continental Europe as well um you know I I think some of the Swiss universities for instance and German universities maybe even German universities might be a bit better on on this point of view but but I I would also say for doing the UK examples that it's a very mixed picture in America too you know when we talk about American universities it's a bit like when we're talking about America as though it's just one Silicon Valley it's not and

I think the number of universities in America that really got this right is incredibly small so you know MIT Stanford Caltech but you know can we get to 10 I'm not sure that we can get to 10 with for all the fact there are many many great universities in America I am by the by a trustee of Johns Hopkins um plainly there is this astonishing amount of both healthc care knowledge um but also the advanced physics lab which is not nearly so well known um but you know profoundly important in space exploration for instance um you know until comparatively recently they hadn't really embraced this idea of moving it from from academic knowledge to companies and in many ways they thought it ran against the principles of Academia um where are we in in that and particularly in Britain um you know I think a lot if we're logical about it has come out of Cambridge but it seems to me the problem and this perhaps fits with the arm example is about scaling and I would absolutely your reference fusion um yeah toac there's this great basis of knowledge but I think they are trying finally to scale and industrialize this and the abilities they've got in the magnets world is a specific way of getting uh involved in the global um supply chain for this and having something that's not just dependent on making that ultimate aim which would be great for us all of fusion and

I think that you know uh the reason I initially got involved was actually could a call from Warren East who's a director who we will know from um Rolls-Royce Etc so I think you know there is more evidence that they're thinking about these scaling problems um and particularly under uh the new leader work Matthews um you know I think there is progress on that but that's where we need it I mean go back to the Cambridge example how many healthc care companies um haven't really developed on that um and you know a couple of anecdotes one can either talk about you know being taken to see the exact Pub in Cambridge where parody of parodies um you know the technology behind aluminous sequencing was invented but we couldn't exploit it or in other terms I was down there talking to a a a healthc care company and they said you know it's so much difference compared with America our uh competitor in in in in in trying to help in the coronary World um just got written a check without without apparent Paws for $100 million uh we couldn't possibly do that and I looked at them because it was us who had written the check so you know it's sometimes the other way around that people don't have the ambition or don't think they can do it right which of course leads us into this public private debate now I know you Lo longer with kinic but one of your former colleagues said we sometimes can actually save companies from going public and I thought about that and I and I

I suppose I was uncomfortable at one level but just what's your reflection on the implications of staying private for longer it's a trend we all know should we care I think we should care and you know I just be clear I'm with shinovi for another few months but I've said that I'm stepping down um come come the spring can I put it as an abstract question who do any of the three of us think are likely to be the best owners of our Equity if you are I me say you're one of the the founds we're talking about do we think it would be private Partners or public Partners now I personally think on the whole and certainly historically in most cases the answer to that has been your private backers you know I I think I would argue that seoa have been a better owner of companies or anything you know and I think many of them have even stayed with these companies long after they're public um and I think you know I'm not going to take a offit any of the individual public owners of equity but I think you know we have generally turned into something to not do what we originally thought was the point of capital markets of investing in companies to help them grow but take money out um rather than anything else and that's what the math tells you after all that there is more more money taken out than the reinvested in in that that way I I do have some worries to whether that will remain true of the private markets um because you know

I think it's become very obvious over the last few years and particularly given the linkage into some of the institutions that we were talking about and not being long-term enough you know are the time pressures on Venture Capital getting greater you know the need to or perceived need to raise new funds and get the money back I I you I think that may be deteriorating but I I think in all these cases it comes down to that identity of interest and identity of support um from Individual owners and the answer very often comes down to who's going to help you best on on on that score do you think um think there are some advantages of public markets I think it was um Bill Gurley a benchmark who said that you know they provide a certain discipline to some of these compan compes

I don't know whether you would agree with that I find that incredibly difficult and I was actually happen to be C next to of Santa Fe conference recently I didn't quite pluck up my courage to ask ask him about this but you know where would I where where would I come down to that I think absolutely yes but I think probably on balance more has gone wrong in public markets um than has gone right that doesn't mean there aren't some owners there aren't some some problems that are helped by that but you know I do find myself you know I always wanted both at B gford and certainly at lingot to say look if you go public we will try to own more stock rather than want to see it as an exit which I think is you know uh a great to be able to have that long-term capital to get to go back on on that behind you but I do find of very much reiterating do you understand quite how much the challenges are there and I I cited Chris Gibson earlier and I remember you know when they uh when they recursion went public uh they did a a genuine job not just saying this of trying to just have owners uh who were going to be long-term in the backing and you know next time um I I saw Chris after the night fed out of the markets I said to him what happened to all those people course you know the chef R is down hugely Etc um didn't they stick with you and he said no and

I think it was out of 20 of them it may have been out of 25 but only one had been a seller but what you get is this intensity of the shorts the people trading the stock every day forcing your share price down so you know very often it can escape even good guidance from that point of view um so yeah I I you know don't get me wrong I'm a far bit for me to equival with with Mr Gurley but you know I think the number of times when it's good for companies is probably less than the number of times which is acutely bad and I know a model we quite like as public Equity Market investors when you have some sort of dynastic sensible shareholder who who really can drive that longer term agenda probably I think that that's that's in my view worth absolutely I think you need you know perhaps this again reflects slightly on what we were mulling of the particular versions of Britain as a subsector because I think through this case it is Europe um you know I think that you do need families or Founders and

I think it's very hard to get the right ownership without those so before we move to some closing general questions the lens through which this conversation has happened seems to be largely West than one oh wonder if on your travels because we grew up seeing these extraordinary Technologies come out of Japan for example where there's no shortage of great technical skills and growth in universities how how much of your work either allows you or does end up focusing on those other geographies that are so important oh no no it's it's it's a very good reminder Simon I I personally always found Japan quite hard because it was that absence of willingness to discuss or argue in public that was difficult my ire colleagues Bailey gford Sarah Whitley was fantastic at it and you know huge admiration for what she doing but I find did I found it difficult myself I have always myself been intrigued by China and believed these Technologies believed the founders were deeply supportive and and loyal in actually some ways Beyond even what they were doing in America and I've been very troubled by what's happened both in domestic politics and in the international one I still absolutely believe that one should remain interested and to a certain extent committed in China

I think you have to accept that from either domestic or west Western particularly American reasons that you have to factor in that you may lose basically 95% your money but if the upside there I think what the Chinese have done particularly in the clean Technologies makes it very hard to see how we solve climate change without them but that also generalize um there a different academic was saying to me recently at Santa Fe that you know if you look at it and people's mental model is comparing it with um shutting ourselves off from the Soviet Union that's not right because you know we do as much America does as much trade with China in a week as it did with Russia in a year back then in relative terms and you know I I personally don't believe that in the long run either from the point of view of the security of the world or for our economic self-interest that we can separate us in northern China One just needs to navigate that quietly at the moment right so some closing questions um I mean which investment over the years has given you the greatest pleasure or gives you the greatest pleasure if I may

I mean in a sense actually the greatest satisfaction was being able to work through this and with the help of others as a philosophy and say you know Betty G like to think of itself as long term but I hope none of my colleagues will really really dispute or dislike me saying it wasn't really because we used to have meetings about quarterly performance and all that that that type of stuff but I think being able to turn this into a genuine long-term philosophy with I think some differentiated I hope some differen points matters a lot to me as a philosophy I I think I would say though uh for me it would be Amazon because I I think both the interpretation was broadly speaking correctly but it was a very pleasurable experience because I think either in getting the opportunity to listen to him or just simply reading which is obviously open to everybody what the Amazon shareholder letters said every year was truly to be aware of someone who thought deeply differently and you know I don't think in a sense we taken those as writings about investment as much as we should you know there were seen his writings about Amazon they weren't a philosophy of investment

I think they were actually underlyingly a really impressive set of documents about how to think about investment I might just ask you personal if I may um Edinburgh is placed close to my heart on my family from there um you know the birthplace of the Scottish enlightenments just think your views on Edinburgh as a financial center and maybe nowadays geography matters less you know maybe no longer you have to be in Silicon Valley or London or Edinburgh I don't know um because of the internet and the kind of passage of information but you know do do you think Edinburgh has a future as a financial center yeah well I I genuinely love to discuss this more with you some some some other time but just you know some some quick thoughts um on the whole I think investment actually being better for being out of these men you know the cheap easy example is is buffed absolutely and I think you can build these relationships without being in the same place um but

yeah I I I'm very ambivalent about it in lots of ways both good and bad um one of the things I've really just given up doing I was chairman of something called the panier prize name after panier house um ad Smith's last home as you'll know and there's nothing quite or inspiring about sitting in there in the same room where um Smith um Benjamin Franklin who got reprimanded by Jefferson for spending too many times drinking wine and that kind of thing and probably who though we could the timings obious not quite right sitting there drinking gallons of wines and putting putting the world to WR uh and you know we don't live up with that but I think there is some of that intellectual Heritage there and I think that if you like seriousness to start there was a very odd but rather good book called I think the geography of Genius written a few years ago which was really saying it's about small places and after all sinicon Valley is pretty small isn't it um from that kind of VI rather than the giant places that produce ideas I worry a lot about whether in either Finance or more generally um Edinburgh Scotland is bold enough you know and I would I would include Glasgow as well and you know because the industrial Heritage Etc I

I don't think we've much idea or much thought around what the future of the Scottish economy looks like and you know you get all these things like the Saudi Arabia of wind but yet it's not Scottish companies making the equipment and the like you've got to build the companies and in finance from you know what s so sadly but you know so drastically happened with the banks to what's happened to Standard Life and and the like you know I think people haven't found their own identity they've been sort of sucked into doing what's expected of them um rather than trying to forge an identity of their own I think that's a terrible pity and although I've understood I think I've understood that the macro considerations play less of a role in your thinking because you're so focused on the company and its Journey do you or shall I say at least under what circumstances does the macro feature in either your policy or in your worries I I wonder whether it's feasible to turn this around to some extent in that know if we think back over our careers haven't the type of companies that we've been talking about actually defined the macroeconomics of our own era much more than the and downs and perhaps that's just something one hopes at the moment given the politics of of the world I think it comes back to the question was asking earlier

I mean what do I see my role as being and where you know I might have any ability to help investors you know I'm not sure it's about coming to judgments about macroeconomics or Donald Trump or xining or Putin or any of that um um so

I think you know to a certain extent one should stick in one's own lane from from that point of view and it's simply saying I'm not sure that I can add much much about apart from saying that it is these deep exponential changes as inv voided by these companies to perhaps change our M and perhaps lead to the politics we we all have yeah interesting and finally lots of young listeners um who are thinking about careers and you've pivoted within Finance while staying in finance what's the advice that you would offer up to people thinking about careers oh for all that I'm sure machines will also be competitors of us in active investment in the future I think if you are curious if you get enjoyment out of it and if you can try and sort of think whether there is some way that you can have a differentiated process of investment it's a great career the thing that made me sad is was too many people go into Investment Management because it's a knife Li with good rewards and good social acceptance uh um those are the wrong people to be investment you should do it because you think you might have a real commitment to it so we always sum up um I've written down lots of things J because I've been really looking forward to um to to to listening to you today I've quoted I've written down here in in parenthesis that European entrepreneurs almost need to reprogram their brains because of timelines opportunity set scale of scale of you know potential um and because the world is so inherently

complex one almost needs to think about different scenarios when you're going through the you know the investment process I think there a very two particularly interesting points oh did you take anything that you would share well lots lots you know I think this the the importance of that that first principles thinking I think is so so vital um particularly when there's so much information around us um just to really really think and I've got lots of uh reading to take away with me so thank you perhaps I could have one more on that funny enough I got on to this last week at lotu um one of the best bits of writing about first principles which you you may have came across but Charlie Monga gave a lecture one of the universities and

I think it was half but I swear by it but how could you have told that Coca-Cola was going to be a great company in 1874 and of course none of it's about detail third desal Point thinking about is is the principles underlying it one of the best pieces I've ever read James it's been a great pleasure thank you so much for coming today wish you the best of luck with Ling Gotto and your other unit adventures and uh you know I think just uh really thrilled to have had you here today thank you very much thank you s Mark I've enjoyed it immensely and you've awesome very thought-provoking questions which I too will go and think about all content on the money ma podcast is for your general information and use only and is not intended to address your particular requirements in particular the content does not constitute any form of advice recommendation representation endorsement or Arrangement and is not intended to be relied upon by users in making any specific investment or other decisions guests and presenters may have positions in any of the Investments discussed