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Value investing died the day Microsoft listed, says Scottish Mortgage’s Anderson

14 June 2019

The Baillie Gifford manager says the problem with Benjamin Graham’s definition of a growth stock is that it is not particularly demanding considering the standards of the past 35 years.

By Anthony Luzio,

Editor, FE Trustnet Magazine

The value investing doctrine espoused by the likes of Benjamin Graham and Warren Buffett became redundant the day Microsoft listed, according to James Anderson (pictured), manager of the Scottish Mortgage Investment Trust, who says “it is pretty sad” that no one grasped this sooner.

Early on in The Intelligent Investor, widely regarded as the “value investing bible”, Graham defines one of the main tenets of his philosophy by recommending that investors “limit themselves to issues selling not far above their tangible asset value”.

He goes on to classify a growth company as one that can double its earnings in 10 years’ time, before warning that such stocks are commonly subject to “excessive” enthusiasm that has “introduced a speculative element of considerable weight”.

Anderson said the problem with Graham’s definition of a growth stock is that it is not particularly demanding considering the standards of the past 35 years.

“Since Microsoft went public, its earnings have compounded in the mid-20 per cent,” he explained.

“That in Graham-land just shouldn’t happen at all. And even in the most recent 10 years when it has been both huge and had the most dramatic test of all – being managed by Steve Ballmer for a decade or more – Microsoft has been able to grow earnings in double digits.

“And you know, this is now 33 years.”

Anderson says this longevity is important as sceptics of tech stocks say their growth cycle is a lot shorter than for traditional, capital-intensive sectors such as industrials.

And, he believes that rather than Microsoft proving the exception to the rule, it appears that the likes of Netflix and Amazon in the US and Alibaba and Tencent in China are following in its footsteps.

To help understand why this is happening, he pointed to the work of academic Brian Arthur, who by the mid-1990s was writing material stating the world had changed due to increasing returns to scale.

“This means that getting big is self-reinforcingly beneficial, rather than damaging,” Anderson continued.

“He put this down to the very different economics of what he at that point called knowledge, but I think we all recognise as getting to the position probably best captured in recent years by Marc Andreessen, with ‘Why Software is Eating the World’.

“The way these companies make returns, you have to do a lot of R&D [research & development], you have to put a lot of knowledge into your first efforts.

“But to put it crudely, printing one more copy of a Microsoft program costs basically no money at all. Yet it becomes more powerful, because as we all know, we need to have communication networks within that.”

“So, I think the self-reinforcing characteristics of these companies gets greater in the future, rather than anything else.”


Anderson said this point is vital for understanding why growth has overtaken value as the dominant style of investing over the past few decades.

Performance of indices over 10yrs

Source: FE Analytics

However, he added that he looks back “with great sadness” on Baillie Gifford’s research on Microsoft and other companies in the late 1990s, as it was amazing how slow the firm was to pick up on this change.

He said this was damagingly influenced by the notion that “somehow the late 1990s was a bubble”.

“History didn’t suddenly end at the bottom of 2002,” he continued. “I think people often wanted to turn it into some sort of morality story. I think we know now that although there were plenty of companies individually that were in bubbles, in fact the overall concept was not a bubble.

“The technology part of it was actually the most important and useful guide, rather than the media, let alone the telecoms part, which has not recovered at all over this period of time. I think that fits in with previous cycles of development of deep underlying technologies.”

Anderson said there is a strong chance of the Microsoft paradigm of exponential change expanding into other areas. In some cases, the economics is slightly muddied as sectors such as clean energy require enormous amounts of capital investment.

However, he said that in other areas it is becoming ever more extreme – for example, while sequencing the human genome originally cost $3bn at a time, it has now fallen to $100 and the cost to Illumina, the trust’s second largest holding, is “probably around $5”.

“You have got enormous economies of scale and you can drive the market by cutting prices consistently,” the manager added. “It’s deflationary to the outside world, it plays in to the hands of dominant companies and has implications for the whole of healthcare.”

What is most worrying to Anderson is that if you extend Moore’s Law – the idea of exponential growth – away from technology and into other areas, “it sucks at the lifeblood of just about every big company”.


He said that something that has always bothered him is that the UK is one of the worst-placed countries in the world from this point of view, with the FTSE 100 made up big companies and sectors that have little to do with this disruption.

“Unless we see an era where the many start-ups actually translate into being something at scale, which I don’t really see much evidence of yet, I think the wholesale destruction that will happen in the next 10 to 20 years is enormous,” he added.

“I think that there is far too much belief that somehow these big companies are safe. You know, I don’t think they are any safer, really, than the big banks were in the last crisis.”

Data from FE Analytics shows Scottish Mortgage has made 618.19 per cent since Anderson took charge in April 2000, compared with gains of 335.14 per cent from its IT Global sector.

Performance of trust vs sector under manager tenure

Source: FE Analytics

It has ongoing charges of 0.37 per cent and is on a premium of 2.3 per cent compared with 2.83 and 2.14 per cent from its one- and three-year averages. The trust is 8 per cent geared.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.