Morningstar - Q4 2021 - 71

Nygren: The behavioral bias that you need
to be most concerned about is overreacting to
short-term events. As value investors,
we're always trying to take advantage of that
when we think investors have overreacted
to negative news. The overreaction potential with
disruptive investments is that you get excited
and lose your skeptical hat.
Lynch: When I've made mistakes in this area,
it's because I've had an initial reluctance-
that'll never work, or it's pie in the sky. When
I have that sort of gut reaction, I like to
explore why it might be wrong. Back in 2002 or
2003, Amazon sounded like the worst idea
of all time. I thought it was like the poster child of
everything that went wrong in the financial
world back in the late '90s. I remember Bill Miller
was pitching Amazon on CNBC. I was on
paternity leave listening and started thinking
about it differently, maybe because I was
out of my daily routine. That wound up being our
best idea ever.
that have very specific durations. What I like about
bitcoin is that there are scenarios where it could
do really well as a diversifier, but it's not necessarily
going to expire tomorrow. The government
could just outlaw it; that's one of the risks,
of course. But there's no contractual endpoint.
Bitcoin is something that could go right when
the rest of our portfolio is having something
go wrong. To me, that's compelling. Given bitcoin's
persistence, it's worth a small speculation.
Ready for Change
Reichart: A question from the audience: What
behavioral biases are the most important to watch out
for when evaluating disruptive companies?
Reichart: We have an audience question on inflation:
How would sustained higher interest rates affect
your outlook for innovative, fast-growing companies,
which often have heavy investment needs?
Nygren: I think higher inflation and higher
interest rates would be good for our portfolios
because of the amount of financial-services
companies we own, and oil companies would be
beneficiaries. The biggest risk with higher
interest rates is that higher interest rates make the
future worth less. Not worthless, but worth a
smaller amount than it would be with low interest
rates. One of the reasons that high-growth
companies have performed so well over the past
decade, and it's been so difficult for value
investors, is the duration effect: High-growth
companies deserve to go up more in price when
interest rates fall than low-growth companies
do. A reversal of that could be quite difficult for the
high-growth sector of the market.
Lynch: All things equal, that makes sense.
I hope there are some nuances, too, though. It's
not just about the overall trajectory; there
can be some company-specific things that can
continue to go right. How do you prepare
for inflation? I think it's about owning companies
you think have pricing power and that are in
a good position competitively.
Reichart: Bill, you own a lot of financials. How worried
are you about disruption in the financial sector?
Nygren: Most of the financial names we own
are selling relatively close to stated book
value. In a world where they get disrupted and
their business goes down every year, they
could liquidate for relatively close to the current
stock price.
Second, I would say that a lot of the change
that's been going on has been good for the very
large, traditional financial companies. Brian
Moynihan [CEO of Bank of America BAC ] said that
the pandemic has pulled forward mobile banking
by a decade. If you go into a bank to a teller,
it costs them $4 to process your check. If you do it
at an ATM, it's 40 cents. And if you do it on
your phone, it's 4 cents. The big banks are
a disruptor there because they are so far ahead in
mobilization for their clients. I don't see a big
downside for most of the companies that we own.
Reichart: What disruptive change theme or company
do you think is going to be most relevant over the next
five years?
Lynch: E-commerce penetration and software
as a service as a solution for all sorts of enterprises,
in terms of enabling them to serve their end
users and build their businesses most effectively.
Whether every company currently is a great
investment in these areas is to be determined. But
we're focused on those two as fundamental trends.
Nygren: I don't have a strong opinion on it,
but I think one of the surprises that you're likely to
see is that traditional companies will be able
to do a good job maintaining their markets as they
adopt new technology and even lead in
new technology in spaces that we consider ripe
for disruption.
Reichart: Thank you so much for sharing your views.
This has been a great panel.
K
Laura Lallos is managing editor of Morningstar magazine.
Photography by Matthew Gilson.
morningstar.com/lp/magazine
71
https://www.morningstar.com/stocks/xnys/bac/quote https://www.morningstar.com/authors/44/laura-lallos http://www.morningstar.com/lp/magazine
Morningstar - Q4 2021

Table of Contents for the Digital Edition of Morningstar - Q4 2021
