No balance sheets please, my son invests on vibes

HAVE chronicled conversations with my son John as he enters my world of investing — contrasting a difference in styles that may signal a generational shift in the art of investing.

I noted his excellent performance and took a look at his current holdings. Half of the portfolio is held in two Baillie Gifford funds whose style complements John’s concentrated portfolio of nine technology and healthcare stocks.

In short, John’s investment approach is to be only interested in stocks that are on the cusp of an “S-curve” of growth, with a clear competitive advantage and, where possible, substantiated by personal customer experience. John has his own version of each of these ingredients, but the S-curve theory basically describes the explosive adoption of new technologies.

Exponential growth potential for a product or sector arises from a developing secular trend with scale, for example electric vehicles or online e-commerce. Unlike a traditional investment approach, John argues, near-term financial performance is not the main focus. To be investible, a company does not need to be profitable, and missing a quarterly earnings forecast is not significant as the S-curve path is long-term and not linear. Even a heavy miss might not be a big deal — it is far more important to understand whether the S-curve is still valid.

John’s investment approach

Given this, the expected holding period is long, as establishing a competitive position in a new emerging secular trend does not happen overnight. He talks of time horizons of five to 10 years or longer, with the young having a time advantage and able to tolerate the intra-period volatility.

This is a key difference to an investor like myself, whose time horizons shrink with age and who value stability of outcomes. It also explains John’s low portfolio turnover, typically only making six or seven trades a year.

John disputes that all these super-growth opportunities are already in the price. He argues that the market is more focused on next year’s earnings from the current product range than the broader opportunity over time. He also believes that there can be a lack of imagination over the breadth of the future product and market opportunity.

Tesla is a good example and, valued purely as a car company, John agrees it looks expensive. But when you add in its ambitions in autonomous driving, solar and energy production and distribution, he believes it still looks very cheap. He reminds me of early views of Amazon, where its valuation was being compared with global book sales. Tesla is aiming to be the Google or Amazon of energy and John is betting that Elon Musk is the man to deliver on his vision.

The younger investor seems to find it easier to extrapolate into the future in an ever-faster world of change in a way that typical historic and prospective price-toearnings ratios may not do justice.

But identifying an S-curve opportunity is not sufficient. John does not like “leaky buckets” — he is introducing me to new investment terminology — or companies that burn through money too fast. He talks about the importance of finding companies that have the “stickiest” products. This competitive advantage can occur for various reasons:

The customer becomes captive, as in the case of Shopify, which is not just a company that builds e-commerce platforms but is a one-stop shop for online commerce, including inventory management, customer service and payment processing plug-ins.

Where the user experience cannot be replicated. Tesla is not a car, John tells me; it is an in-car experience such that its users become “once a Tesla, always a Tesla”.

The process for switching away is heavy, as in the case of cryptocurrency exchange Coinbase, where the experience to move to a competitor is painful and time-consuming.

Where there is a “network” effect, for example in the case of Coinbase where the value of the product increases if a friend or third-party is on the platform making for easier money transfers. Other examples include Tesla building its own electric vehicle charging network or where user numbers are important to product validation.

John goes one step further, emphasising confirmation through personal experience.

His approach to stock research is certainly untraditional. There is no reading of company balance sheets or reliance on third-party research reports, so no outsourcing.

“I need to know myself what it is like to be a customer,” he says.

The focus on personal experience

For Tesla, this involved testing and eventually buying a Model S electric vehicle. John built his own business’s online storefront platform using Shopify’s tools, even learning Shopify’s open-source development code, Shopify Liquid, in the process.

In the case of online payments provider Square, a close friend who owns a chain of gyms and clothing stores took John through their experience with the firm as a provider of hardware and software for transactions processing, inventory management and order tracking. They allowed him to test it live in real-time. In this way, John was personally able to see how easy it was to buy, install and operate software and hardware through Square compared to horror stories he had heard from other friends about alternative systems.

With Coinbase, John opened an account as an indirect play on cryptocurrency. He made a few trades to see what buying and selling, transferring money between accounts and making deposits and withdrawals was like. John described the user experience as “criminally friendly” and so easy it sucks you in.

John does read analysts’ reports, but as a sanity check to see if his view is already in the market, looking to see what is being missed by analysts.

But what about the biotech stocks?

I pointed out that John’s small holdings in the four genomic stocks do not follow this user experience research pattern. John admits that this is a field that caught his eye after watching an interview with Cathie Wood, the founder and CEO of Ark Invest.

John was impressed by her statement that she still loves Tesla, but likes DNA stocks even more. The collapse in research costs and production times in genome sequencing from rapid advancements in technology was accelerating the emergence of a global, almost boundless market in genetic-based healthcare solutions. His small stake reflects John’s admission that he is still learning which companies’ genome sequencing and editing technology are more advanced.

Inherent in John’s style is an implicit assertion that the greatest investment returns lie in a technology-induced rapidly changing world where the young investor has a natural advantage. With this comes a self-reliance based on a self-confidence that they understand better these powerful changes and what will make winners and losers. Better than the investment industry establishment, trapped in their traditional prejudices he claims.

Given the similarity in styles, I ask John: why not just buy Baillie Gifford funds? Too diversified, he says, and little opportunity to learn. For John, the transfer of knowledge to his own business activities may be more rewarding in the long term than his investment portfolio’s financial returns.

Robert Kyprianou’s 32-year career in finance includes spells at Citibank, Salomon Brothers and Axa Investment Managers, where he was global head of fixed income. He also served on the Bank of England’s fixed income committee. He chairs the Polar Capital Global Financials (PCFT) investment trust. He is writing in a personal capacity.