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“If you invest in companies like Nintendo or Disney you are an actual owner of a slice of Super Mario, Pokemon, Star Wars or the Avengers. There are plenty of fans out there who want to watch the next Marvel film – they watched the last one they want to watch the one that’s coming – only Disney can make that for them, nobody else can do that and that means nobody else can compete away the kind of returns that Disney can make from that franchise – and actually that’s a very nice position to be in.”
“In recent decades, the ability to interpret financial statements has been complicated by the shift from tangible to intangible investments…Tangible assets are depreciated over their useful lives, which shows up as an expense on the income statement. And intangibles are recorded on the balance sheet and amortized only following an acquisition. But that today’s investments do not show up in the same spots as in the past means that financial statements do not provide the same information. A sensible solution to this challenge is to capitalize the investments that appear on the income statement and amortize them over their useful lives. This means treating an intangible investment the same as a tangible investment. But this raises two big questions: which income statement items are appropriately considered investments and what is a proper useful life for those assets?”
“One of the things that I’ve said is that 100% of the information that you have to value the business is based on the past. Even if it’s an earnings forecast it’s a past earnings forecast that you or the company might have made – or a growth rates forecast. But 100% of the value depends on the future and so to the extent that the future replicates the past all that past data is very valuable…growth investors tended to behave the way that I think value investors should invest, which is that basically the growth investors have patience with the inevitable hiccups in company growth rates. They are willing to pay a lot for something based upon the current visible fundamentals – only when those fundamentals change, they flee.”
“Contributing to…euphoria are two further factors little noted in our time or in past times. The first is the extreme brevity of the financial memory. In consequence, financial disaster is quickly forgotten. In further consequence, when the same or closely similar circumstances occur again, sometimes in only a few years, they are hailed by a new, often youthful, and always supremely self-confident generation as a brilliantly innovative discovery in the financial and larger economic world. There can be few fields of human endeavour in which history counts for so little as in the world of finance. Past experience, to the extent that it is a part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present. (John Kenneth Galbraith, A Short HIstory of Financial Euphoria, 1990 – emphasis added).”
“They [Kahneman and Tversky] showed that when people move through the world they are not probabilistic thinkers. They’re not calculating the odds of this or that happening – even when the odds can be calculated they’re thinking in stories and the stories have predictable patterns to them and those patterns will distort your judgement. It was the classifications of the distortions that they did so well. You sort of have to read it to get it all, but ‘how your mind might mislead you’ is a really useful thing to know.”
“Right now, it’s kind of sunny, things are doing fine, everyone thinks the Fed can handle this…That hurricane is right out there, down the road, coming our way.”
“I think that once we can get to a point where we restructure a lot of the debts of businesses that have been able to keep going because they could service their debts at almost negligible interest rates, then we can shift resources from those kind of companies to more productive companies and more productive sectors in the economy. Then productivity growth will pick up and the natural consequence of that is that the normal level of interest rates will itself go back to the sort of level that we saw before.”
“It follows that I do not see evidence that this year’s price falls mean that yesterday’s stock market darlings, have automatically become no-brainer bargains. But I do see signs that the price falls are creating opportunity. Our “quality value” approach to investing rests on the idea that a crude classification of companies as either growth or value is too simplistic. On a bottom-up basis, we see many companies that we judge as high quality now available to purchase at valuations that look undemanding versus history. Put simply I believe that there is a rich opportunity set, but that it is naive to think that everything that has fallen in price must be a bargain.”
“Your author some years ago opined that there was no such thing as ‘professional’ investors. The reason being that professions learn by their mistakes and from their predecessors. (Engineers today build concrete bridges, not wooden ones and thankfully the medical profession stopped using leeches c.100 years ago). Where is this learning and evolving in professional investment decision making? Yes, this generation is better at information gathering, spreadsheet building, using AI etc. But there is no evidence at all that we are any better at the end decision making than were our grandfathers. The reason for this of course is our emotions and inbuilt biases. In the investing world these inputs ultimately show themselves in the output extremes of greed and fear.”
“Bear markets are the ultimate behavioural test: The outcomes of bear markets are more about us than they are about the market. Investors entering a bear market with identical portfolios will have wildly different results based on the decisions that they make during it.”
“‘The inflation protection offered by premium spirits is an important aspect of our optimism in both Remy [Cointreau] and Diageo – and why the latter is pretty much the biggest holding in the portfolio.’ The above reasons alone ‘are not enough, to our minds, to justify our continued holdings in these companies’, Train added. ‘In addition, we must believe the sceptics are wrong and that the brands are, in fact, not mature and can continue to deliver real (above inflation), secular growth through the rest of this decade and further.'”
“We own amazing businesses in our portfolios that have high equity duration. They have high equity duration because we believe they are going to be around for a long time. Higher interest rates hurt all financial assets, but they hurt longer duration assets more than shorter duration assets. This is just simple math. However, we never lowered our discount rates when interest rates were lower. We remain positive as we believe our values are stable in the face of rising interest rates and our work on corporate merger comparables support our valuations. In addition, our companies have pricing power, which should allow them to maintain margins and continue to grow their free cash flow streams at attractive inflation adjusted rates.”
“I think Central Banks have actually been…let’s put it this way: less independent in a post-COVID world and I think Central Bank independence is to some extent being questioned by the market. Effectively, once Governments get their hands on the printed money, they’re not going to give up that very readily.”
“Daryl Rattigan arrived at Lehman Brothers 18 years ago for a three-month assignment from his law firm. Eventually the bank gave him a full-time job at its real estate finance arm in London. Then the bank suddenly collapsed. And he’s still there, almost 14 years later. It turns out that when global financial institutions die, it can take a while. These deaths require caretakers. The spirit of a bank, even in life, is debt, and debts don’t settle easily into a grave.”
“Under the terms of service, the NFTs purchased and the digital goods received are almost never one and the same. NFTs exist on the blockchain. The land, goods and characters in the metaverse, on the other hand, exist on private servers running proprietary code with secured, inaccessible databases. This means that all visual and functional aspects of digital assets – the very features that give them any value – are not on the blockchain at all. These features are completely controlled by the private metaverse platforms and are subject to their unilateral control…Ultimately, even though you may own the NFT that came with your digital purchase, you do not legally own or possess the digital assets themselves. Instead, the platforms merely grant you access to the digital assets and only for the length of time they want.”
“U.S. shoppers are buying what they can find—and afford. Well-known brand names and flashy ad campaigns are no longer enough to command U.S. consumers’ loyalty in grocery stores, retail executives said. As inflation spreads and stretched supply chains leave gaps on shelves, shoppers are becoming increasingly fickle, with availability and price determining what goes into their shopping carts.”
“Merryn talks to Baillie Gifford’s James Anderson about his career at Scottish Mortgage; the roles and responsibilities of the wider fund management industry; the stocks in his portfolio; plus answers to some of your questions.”
© Quality Growth 2021