James Anderson: investors must pay "high multiples" for tech stocks

published 14 September 2020

Mega-cap tech stocks: a very crowded trade

Many investors shrink from the valuations of firms such as Amazon and Tesla – which are Scottish Mortgage’s two largest positions – because they are obsessed with value investing or with tracking the market cheaply, he tells the Financial Times. But both these approaches badly misunderstand what drives long-term returns.

“All the excess returns in world markets since 1990 have come from just 1.3% of companies,” says Anderson, citing research by Hendrik Bessembinder, professor of finance at Arizona State University. Outsize growth is concentrated among a tiny number of stocks. For these, “we need to be willing to pay high multiples of immediate earnings because the scale of future potential returns can be so dramatic”, he says. “The valuation will turn out to be [very] low on the stocks that flourish. On the others, we will lose money.”

Baillie Gifford last week sold part of its stake in Tesla, but this was purely because it had risen so much in value that it breached limits of how much of a portfolio can be in a single stock. Anderson remains optimistic about Tesla’s prospects – and about the potential for tech to transform the world. “Over the past 15 years we have made an awful lot of mistakes,” he says. “But our biggest mistake may be that we have not been optimistic enough.”