The age of resilience: Survivors must be the first to achieve success

According to Scottish Mortgage's investment manager, Tom Slater, transformative businesses need to prepare themselves for uncertain times

Money is in danger.

It was economist Frank Knight who initially distinguished between risk and uncertainty. He maintained that risk could be quantified. But in our world of pandemics, real wars, and trade wars, uncertainty reigns supreme.

Professor Knight made the argument that entrepreneurs are rewarded for taking calculated risks rather than bearing the weight of the unknown.

Considering a company's potential from a different perspective gives you a competitive advantage when investing. Our goal is to recognize value before others, which entails accepting the unknown. The market will already have decided on a value if a company faces predictable risks.

Scottish Mortgage reexamined whether the businesses in its portfolio are resilient enough to handle any challenges after the trauma of 2022's rising interest rate environment.

We are still open to supporting "blue-sky" ideas. However, we are more conscious of the fact that today's business must overcome obstacles rather than tomorrow's potential. No matter how great the opportunity, a company won't reach its full potential if it can't overcome those obstacles.

Look at Northvolt. Peter Carlsson, the company's founder, had a vision of a European battery champion that we shared. It filed for bankruptcy in November 2024 as a result of our failure to anticipate its susceptibility to declining demand and operational issues.

What resilience actually looks like.

Both financial stability and cultural flexibility are components of resilience. One example of this is Shopify. It changed from investing in projects below break-even to retaining 20% of revenue after operating expenses. That cushion allows for flexibility without sacrificing growth.

With its "year of efficiency," Meta addressed weaker business areas and expenses in a similar manner. Additionally, Cloudflare, which was previously losing money, has gradually raised its margins, making it more resilient to shocks.

In order to generate cash, avoid taking on too much debt, and withstand sales declines, businesses need to have enough margins. However, resilience goes beyond financial indicators. Culture is part of it as well.

Weather-making companies.

Ferrari demonstrates how businesses are able to "make their own weather."

It has levers to pull when demand declines because of its strong brand.

Oddity uses AI to provide personalized recommendations and improves products with recently discovered molecules to thrive in a shrinking cosmetics industry.

Additionally, Netflix is an example of how innovation fosters adaptability. It can change the rate at which it commissions new content and offers pricing options.

Another example of resilience is the massive delivery company Meituan in China. Analysts lowered ratings when competitors targeted its markets because growth and profit margins suffered. However, fending off competition demonstrated the viability of its business strategy. Its comeback shows how investors can outperform by realizing that resilience is more valuable than most people realize. Scottish Mortgage is not growing timid as a result of this emphasis. Absolutely not. We continue to look for outstanding companies that have uncertain futures but have the potential to be far more successful than anyone can imagine.

However, businesses that hindered our performance were those whose vulnerability kept them from reaching their full potential. We want to hold fewer of these companies when the next crisis arises.

Concentrate on what you can predict in the midst of chaos.

Since I began investing in 2000, there has never been a lack of difficult circumstances. However, a certain amount of detachment and, yes, resilience are necessary for surviving for 25 years.

No matter how well-prepared you are, unforeseen circumstances arise that are beyond your control. Because of this, not everyone should pursue it as a career, especially in light of the volatile nature of markets. Concerns are constantly present.

We need businesses that are taking risks to align with themes we are confident in. In five years, AI will undoubtedly be more powerful. Batteries for electric vehicles will have more range and be less expensive. Additionally, cloud software will grow more potent.

Since only the most resilient survive to flourish, it is our responsibility to improve our understanding of long-term developments.

Crucial information.

This article does not qualify as independent research and is not protected in the same way. The investments in question may have been handled by Baillie Gifford and its employees. The opinions expressed are not factual statements, and they shouldn't be taken as guidance or a suggestion to purchase, sell, or retain a specific investment. The Financial Conduct Authority (FCA) authorizes and oversees Baillie Gifford & Co. and Baillie Gifford & Co. Limited. The London Stock Exchange lists the investment trusts that Baillie Gifford & Co Limited manages; the FCA does not authorize or regulate them. You can access a Key Information Document at bailliegifford.com.

Passed you by.

Gifford, Baillie.