Actual investors emphasise what might go right. Not wrong.

What counts as a mistake in investment? For Actual investors, often the biggest cause for regret is looking at a company and failing to imagine how it could grow into a world-beating enterprise.

One such error occurred in 2009 when Baillie Gifford considered investing in Netflix but passed up on the grounds that it probably wasn’t a very exciting business. Thankfully, by 2015, we had realised our mistake and did invest in time to generate strong returns for our clients.

As for the times when hopes and expectations about a company we’ve invested in don’t materialise, we don’t necessarily see them as wrong decisions. Sometimes, things just don’t turn out as we thought they would and fretting about unforeseeable events can be a distraction from looking for the next potential winners. The important question is whether we should have made a different decision based on the information we had at the time, and if so, what we can learn from that. One thing we know for sure is that waiting until there is no uncertainty associated with an investment is a surefire way of being late to the opportunity.

Understanding and embracing asymmetry is key. No investment we make can lose more than the money we put into it, whereas we can make many times our original investment on behalf of our clients. To do so requires patience and alignment of goals between management and investors. It requires imagining ‘what more could happen from here?’. It means ignoring the inevitable steep drops in share price that almost all long-term winners experience along the way. Perhaps most importantly, it needs clients who entrust us with their money to manage to be resilient to short-term volatility and focus on the long term, as we do.

This house style of ‘running our winners’ is not unique to Baillie Gifford, but it is one that has, in recent years, gained academic credibility. In a study we commissioned of global stock market returns between 1990 and 2018, University of Arizona scholar Professor Hendrik Bessembinder established that the top 1 per cent of all listed equities globally combined to account for the total net gain in stock markets. That is, 61 per cent lost money for the whole period they were available as investments; 38 per cent collectively offset those losses, and the best-performing 1 per cent accounted for an amount equivalent to the entire net gain. Some might say that this is an argument for passive management. We would say it’s why Actual investors need to focus on the relatively small number of companies that have long-term compounding capabilities and management ambition to match.

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