Actual investors look to the future. Not the past.

‘Look to the future’ is hardly an original maxim, and it’s a rare investor who doesn’t claim to live by it. More remarkable is how often the future is seen as a mere continuation of the past. What has been will continue to be.

According to this mindset, share prices are determined by extrapolating past operational performance into the future. It’s an easy mental shortcut but a spurious basis on which to calculate a company’s worth. Such projections often ignore the potential impact of changes in the market or of technology shifts in the wider world. From healthcare to energy, we’ve seen how the game can change completely.

We call ourselves Actual – not just active – investors, because the companies we seek are those investing to secure their place in the world of the future. The best companies adapt, evolve and innovate, and we encourage them to do that, not just to aim for quarterly earnings targets. For Actual investors, extrapolation is unimaginative and usually misleading. It can also be destructive of value for index investors as swathes of once-reliable stocks are displaced by businesses exploiting newer technologies.

Take energy, for example. Solar and wind are becoming cheaper than fossil-fuelled energy, even without subsidies. Solar panels and wind turbines are cheaper than ever to make and more efficient to operate. They make sense economically regardless of carbon pricing policy, which is likely to toughen as greenhouse gas emissions attract political attention. Renewable energy is where future growth will come from. But despite the end probably now being in sight for the legacy technologies of ‘big oil’, investors remain rooted in the past, leaving the major producers still enormously valuable in stock market terms.

For Actual investors to ‘look to the future’ should be more than: ‘This oil company looks cheap this week, but the oil price will go back up and it still has billions of barrels under the Gulf of Mexico’. Valuing on the basis of reserves makes no sense. Oil likely to stay underground has no value.

As ‘the future’ will be unrecognisably different from the present, it’s better to invest in a business because of what it can become, not because of how profitable it is now.

Many investors avoid yet-to-be-profitable companies for fear of looking stupid if they never generate free cash. Actual investors don’t care so much. Or rather, we care more about how a company might make money in the future. If we can envisage that, we ask how much capital it needs to be able to sustain itself through its own cash flow.

Healthcare offers a good example of how our lives will be transformed. From trial-and-error methods of drug discovery, we’re getting better at understanding the genetic causes of disease and tailoring therapies to the patient. The cost of the gene sequencing that enables this has collapsed, thanks to firms such as Illumina. Along with telemedicine – turbocharged by the Covid-19 pandemic – it points to a massive disruption of healthcare, so assuming the continued dominance of today’s ‘big pharma’ makes little sense.

Imagining the new healthcare world means backing the companies likely to thrive there, such as vaccine maker Moderna or cancer drug developer Genmab. Some companies we own are not yet profitable, nor would we expect them to be at this stage. Working at the frontiers of medical science, some will bear fruit, and others will be proved wrong. But waiting until a company is profitable before anticipating further growth is not what Actual investment is about.

Future-mindedness doesn’t just mean prospecting for exciting new companies. Familiar and unloved businesses that have shown minimal growth and whose stocks are undervalued can sometimes reinvent themselves. They sort out internal problems, outfox competitors caught on the wrong side of the capital investment cycle, or successfully move into an adjacent business.

Netflix offers an extreme example of the last of these, a DVD rental business that disrupted its own model to become the world’s largest content streaming service. CEO Reed Hastings sidestepped future failure and imagined a new kind of entertainment service.

None of this is to argue that the past never matters. Baillie Gifford was founded in 1908 when we invested in Malayan rubber to supply tyres for the Ford Model T. The automobile age and many subsequent waves of innovation taught us how new technologies attract capital and how the cycle of investment and return plays out. We learned to imagine how future industries and companies could emerge.

Looking to the future will always be an imprecise art, but it’s important to practice it. We should assume that almost anything in any industry can be done better. Actual investors support those companies looking for a better way in the hope that the value of that discovery will be recognised.

Please remember that all investment strategies have the potential for profit and loss and your or your clients’ capital may be at risk.
 
The information on this Website is issued by Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 (the “Company”) which is licensed by the Securities and Futures Commission of Hong Kong (the “SFC”) under the Securities and Futures Ordinance (“SFO”) for Type 1 (Dealing in Securities) regulated activity with CE Number BGB803. It allows the Company to market and distribute the Baillie Gifford’s range of collective investment schemes to Professional Investors (as defined by the SFO) in Hong Kong.
 
The information contained in this website has been compiled with considerable care to ensure its accuracy at the date of publication. However, no representation or warranty, express or implied, is made to its accuracy or completeness. Nothing in this information or elsewhere in this website shall exclude, limit or restrict our duties and liabilities to you under the SFO or any conduct of business rules which we are bound to comply with. The information on this website has not been reviewed by the SFC. These Terms and any non-contractual obligations arising from or connected with them shall be governed by, and these Terms shall be construed in accordance with, the laws of Hong Kong.
 
This website is informative only and the information provided should not be considered as investment or other advice or a recommendation or offer to buy, sell or hold a particular investment. You can read details of our Legal and Important Information here. Please remember that all investment strategies have the potential for profit and loss and your or your clients’ capital may be at risk.
 
This website does not collect personal information. "Cookies" may be stored on your computer for easy navigation. A "cookie" does not allow us to identify you, but stores information about navigation through our website (such as pages already visited, time and date of visit) which we can remember during the user's next visit to our website in order to improve your browsing experience. If you have any enquiries in relation to our data protection policies and procedures, this Website or the information on it, please click here to contact Baillie Gifford.
 
Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 is incorporated in Hong Kong.  The Company’s principal place of business is Suites 2713-2715 Two International Finance Centre, 8 Finance Street, Central, Hong Kong . Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 is a wholly owned subsidiary of Baillie Gifford Overseas Limited, which is wholly owned by Baillie Gifford & Co. Baillie Gifford Overseas Limited and Baillie Gifford & Co are authorised and regulated in the UK by the Financial Conduct Authority.

Any stock examples, or images, used on this website are not intended to represent recommendations to buy or sell, neither is it implied that they will prove profitable in the future. It is not known whether they will feature in any future portfolio produced by us.