1. EXPLOITING PARADIGM shifts

    US GROWTH COMPANIES IN A NEW ERA

    Tom Slater, Investment Manager. Fourth Quarter 2018
  2. Thomas Kuhn, the American physicist, historian and philosopher of science, suggests that most normal science doesn’t aim at novelty, let alone aim to shift paradigms. Written over 50 years ago, Kuhn’s The Structure of Scientific Revolutions is as relevant today as it was then. In it, Kuhn coined the phrase ‘paradigm’ as we now commonly use it. His account of the history of science talks about development following a pattern: normal science which operates within an existing paradigm, then the emergence of anomalies, which lead to crisis, and then the resolution of that crisis with a new paradigm.

    This sits well with our research approach, which recognizes that routine information carries little value. It is predominantly noise and is over-analysed. At Baillie Gifford, we de-emphasise the easily available and seek out different sources of information. Our long-term investment horizon means we need to understand what might happen in the world over the coming decade, rather than what’s going to happen next quarter. We believe we can identify deep and enduring secular changes that are happening in society. We believe technological and societal advances are often predictable, at times almost inevitable, and ultimately exploitable for the benefit of our clients. We think coupling this insight with our extremely patient approach to investing gives us an advantage over most other US equity investors.

    One alternative source of insights for the US Equity Growth team comes in the form of ‘reading days’. As a team, we step away from day-to-day research every six months or so and discuss a wide variety of books covering broad topics and themes. Among other things, this helps us to identify patterns, concepts and potential lessons from disciplines other than investing that other US equity investors may not be thinking about. Most recently, we got together in July and discussed books covering ancient history, military strategy, sociology, biology, anthropology, animal behaviour, technology and even a fascinating book on the lessons we can learn about team decision-making from honeybees. Kuhn’s book was among those up for discussion.

  3. “… the most striking feature for the
    normal research problems is how little
    they aim to produce major novelties,
    conceptual or phenomenal”.
    Thomas Kuhn (The Structure of Scientific Revolutions, 1962)
  4. After the Crisis

    I think there are some parallels in The Structure of Scientific Revolutions with the investment world. In Kuhn’s terms, a crisis involves a period of extraordinary rather than normal science, a proliferation of competing articulations and the willingness to try anything. Over the past 15 years, I think the combination of advanced software and ubiquitous mobile connectivity has underpinned a change in paradigm (Kuhn didn’t use the term paradigm shift). Amazon, Alphabet and Facebook have fundamentally changed the structure of the global economy. They are the new exemplars.1 Through this lens one could say that we may now have passed the crisis phase and we have seen a return to normal science. The companies that aimed at a further paradigm shift are too late. Hence, one could argue, the irrelevance of companies like Twitter or Snapchat in this context.

    Normal science is more aimed at proving results within a paradigm. And that strikes a chord with me when I think about some of our more recent US equity investments and why these businesses are succeeding when the likes of Twitter et al have not. Whether it is Grubhub (online food ordering and delivery), Redfin (real estate), Shopify (software for online retail), Chegg (online education resources) or Stitch Fix (online personalised clothing), I don’t think we’d suggest that these companies are aiming to usher in a revolutionary new paradigm. Instead they are using the tools of the current paradigm to prove new results.

    If these companies aren’t the ones born out of crisis to usher in a new era, why are they interesting investments? Another of Kuhn’s concepts was incommensurability. He proposes the idea that after a revolution, scientists in a field of work now operate in a different world. He then suggests that you cannot compare results achieved in one paradigm with results in another. You can’t consider Einstein’s E=mc2 in the context of classical mechanics. It has no meaning. The analogue for me is that you can’t compare Grubhub to a takeaway food company of yore or Stitch Fix to a retailer. They exist in a different paradigm. However, many investors do make these comparisons. They’re possibly misguided because these companies belong to the era of the mobile internet. We can’t transpose results from the old paradigm to the new paradigm. This is what those who dismiss Chinese bike sharing or San Francisco’s scooter explosion as being similar to previous iterations are missing.

     

    1. While we think of a paradigm as “a distinct concept or thought pattern” its original meaning is more akin to “leading example”.

  5. – Amazon, Alphabet and Facebook
    have fundamentally changed the
    structure of the global economy.
    An Amazon fulfilment centre prepares for Black Friday © Getty Images Europe
  6. Coping With Change

    Kuhn also makes some observations about the scientific community during a paradigm shift, which may be relevant to the inability of traditional companies (and the investment management industry) to cope with change:

    “Men2 whose research is based on shared paradigms are committed to the same rules and standards for scientific practice…For these men, the new theory implies a change in the rules governing the prior practice of normal science. Inevitably therefore, it reflects upon much scientific work they have already successfully completed…A discovery like that of oxygen or X-rays does not simply add one more item to the population of a scientist’s world. Ultimately it has that effect, but not until the professional community has re-evaluated traditional experimental procedures, altered its conception of entities with which it has long been familiar, and, in the process, shifted the network of theory through which it deals with the world.”

     

     

    Do you think the investment management community has ‘re-evaluated its traditional procedures’ and ‘altered its conception’ of the global economy ‘it has long been familiar’ within this new paradigm in which we exist?

    Furthermore, we may be witnessing several ‘crises’ at once; i.e. a number of paradigm changes occurring almost simultaneously and driven by converging factors: the internet and the cloud, the ongoing shift to mobile devices, exponential progress in big data, machine learning, genomics, and exponential performance gains and price declines in solar and wind power and energy storage. All of this is underpinned by the continuation of Moore’s Law3, which we expect to continue beyond the next decade, and the rise of China as a global superpower, challenging the US hegemony, and thus pushing innovation to new levels in both countries. The opportunities to find exceptional growth companies that are driving paradigm change, as well as those exploiting the tools of the new paradigms once they have emerged, appear promising.

     

    2. The casual sexism in academia 50 years ago is striking.
    3. Moore’s Law is the observation that the number of transistors in a dense integrated circuit doubles about every two years.

  7. Revolutions Matter More

    Finally, I believe this framework shines a light on the importance of the companies that are pushing to change paradigms. This is one justification for taking a large holding in Tesla or Illumina, the gene sequencing specialist. It is the reason that Baillie Gifford’s cluster of investments in unlisted industrial biology companies is important. The progress of industrialising genetic engineering at companies such as Ginkgo Bioworks in Boston and Bolt Threads in San Francisco may upend vast swathes of conventional industrial processes and have profound implications for the world. Revolutions matter more than normal science in the long run.

           

  8. Risk Factors

    The views expressed in this article are those of Tom Slater 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 the fourth quarter of 2018 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

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  9. Tom Slater

    Investment Manager
    Tom graduated BSc in Computer Science with Mathematics from the University of Edinburgh in 2000. He joined Baillie Gifford the same year and worked in the Developed Asia and UK Equities teams before joining the Long Term Global Growth Team at the start of 2009. Tom became a Partner in the firm in 2012. Tom was appointed Joint Manager of Scottish Mortgage Investment Trust in January 2015 having served as Deputy Manager for the previous five years. In 2015 Tom was appointed Head of the US Equities team and is a decision maker on Long Term Global Growth portfolios. Tom’s investment interest is focused on high growth companies both in listed equity markets and as an investor in private companies.