An absence of complete dogs in a portfolio would suggest we are not taking enough risk, not taking enough chances, and not being bold enough in seeking out the true growth opportunities. Our contention remains that most fund managers are primarily motivated by the need to avoid mistakes. Humility is not usually a defining trait of portfolio managers, and humiliation is to be avoided at all costs.
The most ‘costly’ of these costs, therefore, becomes excessive risk-aversion. Ironically, chasing ‘stability’ has been a very costly illusion for many investment managers over the years; just because something is dull doesn’t make it immune to sudden and seismic disruption.
What are the costliest errors we have made and what have we learned from them? The kind of mistake we find most galling probably doesn’t reflect the traditional perception of a howler. There have been stocks that have fallen 90 per cent in the time we have held them which does generate moderate annoyance and a review once the dust has settled.
A far more annoying mistake, however, is that we didn’t buy Netflix when we first discussed it for purchase. There have been companies we haven’t backed early enough after being put off by a short-term blip of the very type we pride ourselves on discounting.
I spend about 80 per cent of client meetings answering questions about stocks that appear to be going wrong or are in the press a lot. But no one, in hundreds of meetings around the world, ever asked: “Are you being bullish enough with this company’s growth prospects?”. In Q&A sessions, no one pushes us on taking the upside further, on lifting our imagination higher; the questions are always: “But what about (XYZ threat)?”
By far the biggest danger would be a lack of vision to see the great growth stories in front of our noses. It would be to miss out on the next world-leading company, to give up on a success story too early or to lose faith in the stocks that go on to surpass our best expectations.
There are not many of these examples of ‘imagination-lacking’ mistakes at Baillie Gifford and keeping these to a minimum is important for the future of our firm. On the other hand, we expect quite a few duds to fall to Earth as we use our imagination to search for the stratosphere-bound companies of the future. Only if there are too few failed launches should we be concerned.