Capital at risk
Actual investors build relationships. Not just portfolios.
Being a quality investor is about sharing a vision of how to deploy capital for growth says Baillie Gifford partner Stuart Dunbar.
Where does wealth come from? It’s not from people trading shares that already exist in public stock markets – that’s just moving ownership stakes around. Sometimes investors will have legitimately differing views on the long-term prospects for a company but often it’s just speculative trading based on patterns, trends or short-term news flow. Stock markets have strayed a long way from their original purpose of creating permanent pools of capital which allow risk sharing and long-term wealth creation.
Real-world investment is about deploying capital into tangible activities to secure future revenue and profit. It’s about everyday decisions such as whether to build new production lines, how much to spend on research and development or distribution, how to attract and retain talented people or any number of other things. That’s why it’s crucial to gain an understanding of the motivations and ambitions of the management of the companies in which we invest. They make those decisions. The best seize new opportunities and constantly adapt to changing circumstances, but few companies do so successfully for long time periods.
The importance of ‘quality shareholders’
All too often, management succumbs to the pressure of short-term shareholders who simply want to see smooth quarter-to-quarter earnings growth, even if it means underinvesting for the future. We seek to invest alongside management and other shareholders who can resist such pressures.
We consider ourselves to be ‘quality shareholders’. That means taking the long view, encouraging management to overcome risk aversion, aligning their own incentives to our preferred timeframe of five years and longer, and giving them time to execute on business strategy. We are fortunate to have access to and be able to learn from those who have greater vision than our own. We listen, and we invest in those we consider outstanding.
Why relationships matter so much
Success is ultimately driven by inspirational founders, entrepreneurs and managers with the ambition and farsightedness to see ideas through to realisation. It’s not about trading more smartly than others in the constant cacophony of stock markets. Without meaningful relationships with these key people, we can’t do the best for our clients.
Of course, our commitment to building positive relationships doesn’t mean we can’t sell an investment. This may be because of a disagreement over management or strategy, or it may be due to external events nobody predicted. In any case, if we do sell out of a company, we usually tell management why. What matters is to have the kind of relationship that makes that conversation possible.
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