The value of an investment, and any income from it, can fall as well as rise and investors may not get back the amount invested.
Clients often ask us if we have a target price or an expectation of returns for investments made on their behalf. The answer is we don’t know what will drive profits or what growth rates your holdings will be delivering in five- or ten-years’ time.
Instead of attempting precise predictions, which will almost certainly be wrong, we prefer not to be prescriptive. We look at the size of the opportunity ahead, for signs of a durable competitive edge and special qualities in management.
Often it’s that last factor that determines the long-term success of an investment. Special managers not only execute well on a business opportunity but can also identify new ones and pivot accordingly. This potential can never be captured in a price target or analyst’s forecast.
Looking outside of Japan, there is no better way to illustrate this point than to reflect on the success of Amazon.com. In 2020 around $50bn dollars were generated from AWS, the company's cloud computing division; Amazon Prime, its subscription service, boasted 200 million members and over 100 million homes have purchased an Alexa smart device. In 1997 AWS, Prime and Alexa had yet to be conceived. Despite this, Jeff Bezos's first shareholder letter in 1997 provided investors with insight that Amazon could one day become a very large company. There were notable references to “relentlessly focusing on customers” and “making investment decisions in light of long-term market leadership”. No analyst using a conventional valuation model in 1997 (or 2007 for that matter) would have come close to predicting today's circa $1.7 trillion market cap.
Back to Japan. We invest in several companies that have special management teams and now generate significant value from businesses that were not part of our initial investment case. By identifying and backing these teams and maintaining a long-term view, our clients have greatly benefitted. Manufacturer Nidec began as a leader in hard disk drive motors but is now a serious player in industrial robots and a major force in electric car motors. Sony was once a dominant brand in electronics hardware but the conglomerate is now a leading provider of gaming, music and film content as well as making the camera modules used in smartphones and autonomous vehicles. It has even released a prototype for its own self-driving car.
In 2016 we took a holding in online legal platform Bengo4.com (pronounced bengoshi) for small cap clients, as we were drawn to its online legal portal. A few years later it developed an electronic document signing business which is now the main growth driver and we bought the shares more widely.
Staying open-minded matters, as predicting these successes would have been impossible. Price targets or defined return expectations would most likely have prevented our clients from benefiting.
Risk Factors
The views expressed in this article are those of Andrew Brown and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication was produced and approved in September 2021 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
Potential for Profit and Loss
All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.
Stock Examples
Any stock examples and images used in this article 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. Any individual examples will represent only a small part of the overall portfolio and are inserted purely to help illustrate our investment style.
This article contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.
All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.
The images used in this article are for illustrative purposes only.
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