James Anderson: investors must pay "high multiples" for tech stocks
Investors must be willing to pay “unreasonable prices” for high-tech growth stocks to take advantage of the huge potential returns that these companies can deliver, says James Anderson, the co-manager of the £13.5bn Scottish Mortgage Investment Trust.
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.”
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
-
Which UK region has the most in savings? Average savings by area
The amount people have in their savings differs from region to region in the UK. How does your nest egg compare to those living nearby?
-
Doug and Mary Perkins: Specsavers’ clear-sighted founders
Helped by the deregulation of the sector in the 1980s and brilliant advertising, Mary Perkins and her husband Doug have taken Specsavers to the top of the optometry market
-
Investment opportunities in the world of Coca-Cola
There is far more to Coca-Cola than just one giant firm. The companies that bottle and distribute the ubiquitous soft drink are promising investments in their own right.
-
Streaming services are the new magic money tree for investors – but for how long?
Opinion Streaming services are in full bloom and laden with profits, but beware – winter is coming, warns Matthew Lynn
-
The next phase of the AI boom
The technology is about to become far more widespread, says Dan McEvoy. Here’s how to profit
-
'Pension funds shouldn't be pushed into private equity sector'
Opinion The private-equity party is over, so don't push pension funds into the sector, says Merryn Somerset Webb.
-
The strange world of quantum computing
If we can harness the potential of quantum physics, modern computers may come to seem like plodding calculators in comparison with the machines of the future
-
Greg Abel: Warren Buffett’s heir takes the throne
Greg Abel is considered a safe pair of hands as he takes centre stage at Berkshire Hathaway. But he arrives after one of the hardest acts to follow in investment history, Warren Buffett. Can he thrive?
-
Who will be the next Warren Buffett?
Opinion There won’t be another Warren Buffett. Times have changed, and the opportunities are no longer there, says Matthew Lynn.
-
Will Comstock crash – or soar?
Opinion The upside for Comstock, a solar panel-recycling and biomass-refining group, dwarfs the downside, says Dominic Frisby.