Follow These Three Guideposts to the Next Decade's Biggest Winner
The Scotland-based investing juggernaut you've never heard of... 2,000%-plus gains in the market's best-known companies... Follow these three guideposts to the next decade's biggest winner... Thinking in decades – not quarters... How to maintain an edge over competitors... The key component to keeping the dream alive...
Whether we like it or not, we can't deny Tesla's (TSLA) incredible run higher in 2020...
Longtime Digest subscribers know we've often been critical of the electric-car maker and its polarizing CEO Elon Musk. But make no mistake, it's one of the hottest stocks of the year...
It's up a split-adjusted 386% in 2020. (As we told you on Tuesday, Tesla just completed a five-for-one stock split this week... giving investors more shares for the same total price.)
A pair of other tech-focused stocks have shined in the first eight months of the year, too... Latin American e-commerce company MercadoLibre (MELI) is up about 90% after pulling back with the broad market today, while music-streaming firm Spotify Technology (SPOT) is up around 75%.
These three stocks also had something else in common as of last month... Their largest outside shareholder was a global investment firm you've probably never heard of.
I (Mike Barrett) am talking about Scotland-based Baillie Gifford...
Despite being around for more than a century and currently managing roughly $324 billion on behalf of its clients, the firm remains unknown to most individual investors.
It's easy to fly under the radar when you're headquartered in Edinburgh, Scotland... rather than one of the world's major financial centers – like London or New York. These days, the Scottish capital is perhaps best known for inspiring many of the characters and locations featured in J.K. Rowling's iconic Harry Potter book series.
But don't be fooled by Baillie Gifford's low-key nature... It's a juggernaut in the investing world. As of the firm's just-ended second quarter, roughly half of its equity holdings were concentrated in nine big winners. Chances are, you'll recognize all of these names...
- Tesla
- Amazon (AMZN)
- Alibaba (BABA)
- Spotify Technology
- Shopify (SHOP)
- MercadoLibre
- Alphabet (GOOG)
- Netflix (NFLX)
- Facebook (FB)
Now, of course, simply owning these nine stocks doesn't make you an investing genius...
Even casual observers know they're some of the best-known names in the market. Millions of investors own these stocks, too – either directly, or through mutual or exchange-traded funds.
But Baillie Gifford is special for one key reason... It gets in early.
For example, the firm started buying Tesla shares seven years ago – three years after it went public – for a split-adjusted price of roughly $7.30. Today, Tesla's stock trades around $407... meaning Baillie Gifford is sitting on a gain of about 5,500% with its initial purchase.
Baillie Gifford began accumulating Amazon shares in 2004, when the stock traded for less than $50 per share. Today, the stock trades for roughly $3,370 per share – a 6,600% gain.
And in 2010, three years after MercadoLibre went public, the firm started building a position at $53 per share. Today, MercadoLibre shares trade for about $1,100 – a gain of nearly 2,000%.
In my last Digest back in July, I discussed how anyone with a brokerage account can buy the market's "crown jewels" at low prices. And now, I hope Baillie Gifford's incredible results can provide further inspiration as you continue on your investing journey...
But first, we need to know how the firm does it. What's the secret to Baillie Gifford's success? In today's Digest, I'll let you in on it...
Baillie Gifford's 'find the next big winner' game plan has three guideposts...
- A long growth runway
- A durable competitive advantage
- Staying power
If a company checks all of these boxes, then there's a good chance that Baillie Gifford owns its stock. So to help you find what to look for, let's take a deeper dive into each characteristic...
We'll start with a long growth runway.
Many investors have trouble thinking beyond the next few quarters. That's because it's hard to imagine how a company might look three, five, or even 10 years down the road.
But Baillie Gifford embraces the challenge. And to make sure no one associated with the firm ever forgets it, the following mantra is prominently displayed on a large sign above the entrance to the company's headquarters...
Actual investors think in decades. Not quarters.
And as the company boldly states on its website, a century of investment management has taught it that "patience is vital." The biggest winners come from anticipating where growth will occur not just in the next quarter or two... but over the next decade or two.
For example, Baillie Gifford correctly anticipated that e-commerce would become the force it has... and that the trend would play out over at least a couple decades. That's why it patiently accumulated MercadoLibre shares over a four-year span from 2010 to 2014, and Amazon shares over an eight-year stretch from 2004 to 2012.
The focus on growth over a long horizon also explains why Baillie Gifford was content to be a large Tesla shareholder back in 2013 and 2014, just as the electric-car maker's operating losses started to soar.
Once again, the firm correctly anticipated the shift toward electric cars as something that would play out gradually... and eventually make Tesla a big winner. As long as the trend remained intact, Baillie Gifford was willing to ignore the company's lack of financial progress from one quarter to the next. Today, Tesla's annual revenue is 13 times higher than it was in 2013, and the company is now generating close to $1 billion in free cash flow.
As Catharine Flood, corporate strategy director for the firm's Scottish Mortgage Investment Trust, recently told the Wall Street Journal...
[Tesla's] quarterly numbers don't matter. The most important question is what is happening in the transportation industry, and the long-term implications for the sector's transformation.
Again, the key is to think in decades, not quarters.
Baillie Gifford's second guidepost recognizes that a long growth runway alone isn't enough...
The biggest long-term winners must also possess a durable competitive advantage.
Above-average growth always invites competition. But truly special companies, like Baillie Gifford's largest holdings, rise to the occasion and continue growing faster than their peers. They do this by finding new ways to delight customers that their competitors can't easily replicate.
In the increasingly important e-commerce sector, for instance, fulfillment is the greatest "pain point"... or source of unhappy customers. Think of everything that needs to happen to get the order you place today to your doorstep tomorrow...
We're a spoiled lot. A few years ago, we were happy to get an online order within three days. Now, we want it the next day. Eventually, same-day delivery will be the standard.
To further speed up the fulfillment timeline, Amazon is bringing more of the shipping process under its direct control, rather than outsourcing to third parties like the U.S. Postal Service or UPS (UPS). That means you can expect to see even more Amazon Sprinter vans on the roads wherever you live.
To make it happen, supply-chain consulting firm MWPVL estimates Amazon's distribution-network capacity will grow by an astounding 150 million square feet in just 18 months. MWPVL President Marc Wulfraat, a 33-year supply-chain veteran, recently told tech news website The Information that he has "never seen this type of industrial growth before."
In other words, expect Amazon's fulfillment to get even faster over the next year or so – and to set a new delivery standard that others must match... or get crushed.
That includes the millions of e-commerce businesses selling products on other outlets – like Shopify (SHOP), another top Baillie Gifford holding.
Many of Shopify's merchant customers operate small businesses, and they don't have the same kind of sophisticated warehousing and logistics capabilities as a global powerhouse like Amazon. So Shopify has created these needed tools by partnering with third-party warehouse and transportation providers. It's called the "Shopify Fulfillment Network."
As part of this network, Shopify recently acquired a company that makes warehouse robots named "Chuck." (You can watch Chuck in action right here.) Like Amazon, Shopify is determined to make its fulfillment process as efficient as possible.
It's a durable competitive advantage... or another way to delight customers that can't easily be replicated.
Here's the key takeaway... It's hard to differentiate a business from the competition. But it's even harder to maintain that edge year after year. That's why the few companies in any industry that can pull it off often turn into spectacular long-term investments.
That brings us to what might be the most important guidepost in Baillie Gifford's game plan...
Staying power.
Mature companies generating a lot of regular free cash flow can usually take whatever punches are thrown at them... even if that happens to be an unexpected global pandemic.
But young, fast-growing companies – the kind that Baillie Gifford prefers – often generate little or no meaningful free cash flow... at least during the first few years in business. To survive and grow, they must attract boatloads of capital from outside sources.
Of course, this is the main reason that most companies ultimately go public. Selling shares to the public provides a massive capital infusion (typically measured in the hundreds of millions of dollars)... And it provides at least a few years of staying power.
Tesla is a perfect example... The company raised $226 million during its 2010 initial public offering ("IPO"), and this capital infusion essentially carried the company over the next several years while it remained marginally unprofitable.
Then, in 2014, as sales of Tesla's electric vehicles began to slowly ramp up, the company's operating losses soared and its free cash flow turned deeply negative. Tesla needed to raise a substantial amount of capital (debt and equity) to keep its dream alive.
Tesla is thriving right now because long-term-oriented institutional investors like Baillie Gifford threw a desperately needed capital lifeline to the company. Baillie Gifford embraced Tesla's long-term vision for electric cars, then bought the new equity it was issuing.
Now, Baillie Gifford is reaping the rewards.
For perspective, before the recent stock split, Tesla had issued roughly 113 million new shares since its 2010 IPO. Its top five shareholders alone – including Baillie Gifford – accumulated about 35% of those shares.
Building strong relationships with the management teams of new companies is "second nature to us" at Baillie Gifford, according to client services director Catherine Flockhart. This is precisely the kind of support fledgling enterprises – like Tesla in 2013 and 2014 – need to survive.
At the height of the current pandemic, Baillie Gifford also encouraged the companies in its portfolio to maintain their growth plans, going so far as to offer them new investment capital.
Ultimately, though, no one is perfect in the investing world – not even Baillie Gifford...
Last month, for instance, the firm's stake in Unity Biotechnology (UBX) plunged 75% due to the failure of a lead clinical program in age-related diseases.
But the sudden loss of $34 million in value didn't hurt Baillie Gifford – at least not in a big way. That's because even before the implosion, the UBX position represented much less than 1% of the firm's entire portfolio.
This is exactly how you should manage risk as an investor.
Baillie Gifford's highest-conviction ideas represent the largest positions in its portfolio – like electric vehicles through Tesla and e-commerce through Amazon. The firm deploys far less capital into speculative moonshots, like Unity Biotechnology.
Nobody can know for sure what the biggest winners over the next decade will be. But Baillie Gifford's three guideposts improve our odds of finding them now... before everyone else does.
We're looking for companies with years of strong growth still ahead of them... They must also possess a durable competitive advantage to fend off challengers... And finally, it's critical that they're able to access the capital they'll need to scale the business as the growth story plays out.
If you're just starting out as an investor, focusing on these guideposts will help limit your mistakes. And remember, big winners often play out over many years. To grow your wealth exponentially, you'll have to be patient.
Speaking of early investing mistakes, my colleague Dan Ferris made a critical one back in 1996...
He lost all but $268 of his life savings after following the advice of a con man.
But fortunately, Dan landed on his feet and started working at Stansberry Research just a few years later. And the way he fixed that early investing mistake got him to where he is today...
Dan now lives with his wife in a mansion in the Pacific Northwest. He has everything he'd ever want – luxury cars, a music room full of guitars, and a life spent traveling first class to exotic places all over the world.
And here's the thing...
The exact setup Dan used to bounce back from his early mistake and grow his wealth is now available to you. He believes this same lesson could lead investors today to a 1,550% gain in one of the best businesses on Earth. Get all the details straight from Dan right here.
New 52-week highs (as of 9/2/20): Amazon (AMZN), AutoZone (AZO), Cognex (CGNX), Dollar General (DG), New Oriental Education & Technology (EDU), Expeditors International of Washington (EXPD), Fidelity Select Medical Technology and Devices Portfolio (FSMEX), Alphabet (GOOGL), Innovative Industrial Properties (IIPR), JD.com (JD), KraneShares Bosera MSCI China A Fund (KBA), Microsoft (MSFT), Procter & Gamble (PG), Rollins (ROL), ProShares Ultra Technology Fund (ROM), Sabina Gold & Silver (SGSVF), Sprott (SII), S&P Global (SPGI), ProShares Ultra S&P 500 Fund (SSO), The Trade Desk (TTD), Visa (V), Victoria Gold (VITFF), Vanguard S&P 500 Fund (VOO), Zebra Technologies (ZBRA), and Zendesk (ZEN).
In today's mailbag, a subscriber shares his pair of "shoeshine boy" indicators, which we talked about in Wednesday's Digest. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Reading yesterday's Digest this morning brought me back to my thoughts yesterday evening about trimming some positions.
"Along with the shoeshine/plumber indicator comes the wife indicator. This morning my wife was commenting on how she thinks we should stay fully invested and if she hadn't been in all cash in her 403b years ago, she'd have twice as much money now in that account. I pointed out that she avoided the 50% drop in the financial crisis. She made some other bullish statements which are encouraging me even more to trim my holdings.
"The last time I didn't listen to my gut was the crypto collapse. I joked with my buddy, who makes fresh salsa for a living, to let me know as soon as he starts buying crypto so I can sell everything. He started buying, I didn't sell, my holdings collapsed about 95%.
"Plus, you've got Mark Putrino in your employ illustrating that the market is overdue for a correction!" – Paid-up subscriber Matt C.
Regards,
Mike Barrett
Orlando, Florida
September 3, 2020