After a 50% fall, is it time to buy Scottish Mortgage shares?

Scottish Mortgage shares have collapsed over the last six months. But as Roland Head explains, this could be a buying opportunity.

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After falling by 50% in six months, have Scottish Mortgage Investment Trust (LSE: SMT) shares now hit the bottom?

It’s a question that seems to divide DIY investors at Hargreaves Lansdown, where Scottish Mortgage shares have been the most bought and the most sold stock over the last week.

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Today’s annual results included some useful updates on recent share trades at this investment trust. SMT’s new co-managers also took some time to explain their investing plans.

I’ve been taking a look to help me decide my view on this stock. Should I be buying Scottish Mortgage shares for my portfolio?

Disruptive strategy

Given SMT’s share price crash, I wasn’t surprised to see a review of the company’s strategy in today’s results. As a brief refresher, Scottish Mortgage invests in companies with the potential to deliver extreme long-term growth.

The trust targets sectors where management expects new technologies or trends to cause major disruption. Past examples have included online retail, electric cars and more recently, mRNA vaccine science.

The trust has a record of getting involved early, before most other investors are aware of the opportunity. It then aims to hold for very long periods, in order to generate the kind of profits that have driven the Scottish Mortgage share price up by 455% over the last 10 years.

Portfolio changes

I’m relieved that Scottish Mortgage’s new managers Tom Slater and Lawrence Burns are not planning big changes to the strategy developed by departing manager James Anderson.

In my experience, consistency is key to good investment results. Chopping and changing between strategies doesn’t usually work well.

SMT aims to hold stocks for very long periods – at least five years, usually more. But the managers do sell shares when they see more limited potential for future gains.

Over the last year, Scottish Mortgage has reduced its holding in Amazon, following the departure of founder and CEO Jeff Bezos. SMT’s holding in Tesla has also been reduced, although it’s still a top 10 position.

Slater and Burns have reinvested some of this cash in newer opportunities, including mRNA vaccine pioneer Moderna.

Will Scottish Mortgage shares recover?

A long-term approach means being willing to accept painful share price falls from time to time.

Manager Lawrence Burns points out that Tesla’s share price has fallen by 30% or more on seven occasions since the trust invested in the electric car firm. If Scottish Mortgage had sold on any of these occasions, Mr Burns says it would have had a “catastrophic” impact on the performance of Scottish Mortgage shares.

The big risk here is that we won’t know if the trust’s managers are making the right decisions today until many years in the future. The change of management is an added concern. Tom Slater worked alongside James Anderson for many years. But we don’t know how his decisions might change with a new co-manager.

I still need to decide if I’m willing to back SMT’s management to pursue a disruptive growth strategy for another decade.

However, most of the trust’s top 10 investments are starting to look quite reasonably priced to me. In valuation terms, I’d be happy to buy Scottish Mortgage shares for my portfolio at current levels.

Should you invest £1,000 in Scottish Mortgage Investment Trust right now?

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon, Hargreaves Lansdown, and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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