terry smith: Terry Smith’s tips for choosing great companies and getting high returns

Legendary fund manager Terry Smith says the hardest part of an investment strategy is having the patience to sit back and do nothing when the investment climate isn’t conducive to trading.

According to Smith, investors should look to buy a small number of high-quality, resilient, global growth companies that present good value and can be held for a long time.

Smith is famous for writing a controversial “Growth Accounting” report that later became a bestseller of the same name. The book was essentially about accounting fraud in listed companies. The report was not well received by his employer at the time, UBS, who fired him from the company.

Also known as the Englishman Warren Buffett, Smith joined Barclays as a history graduate in 1974. He became the UK’s highest rated banking analyst throughout the 1980s.

Smith is now best known for his hugely successful career as a fund manager, having established Fundsmith and managed his flagship Fundsmith Equity Fund since its inception in November 2010. The fund has become the most popular actively managed open-end fund based UK. .

The fund generated an annualized return of 18.4% from its inception to the end of November 2021, far outperforming the MSCI World Index which has a comparative annualized return of 12.8%.

Lessons investors can learn from the Tour de France

In his book, “Investing For Growth,” Smith discusses the investing lessons he learned from the men’s annual multi-stage cycling race, “Tour de France.”

According to Smith, investors have a knack for reviewing their portfolio’s performance every reporting period, as often as every quarter, and sometimes exiting stocks that are underperforming.

He says it is as pointless to expect an investment strategy or fund manager to outperform the market in all reporting periods and in varying market conditions as it is to expect to find a rider capable of winning every stage of the Tour.

He says investment performance should be measured over a period of time and a quarter is too short a period to judge performance reasonably.

“To evaluate an investment strategy or a fund, you need to see its results over a full economic cycle with bull and bear markets,” he writes in his book.

According to Smith, any strategy that relies on an element of market timing is one to avoid.

He says there is plenty of evidence to suggest that investors who like to change their investment strategy invariably get market timing wrong.

“As the old saying goes, there are only two types of investors: those who can’t time the markets and those who don’t know they can’t time the markets,” he says.

According to Smith, investing is a test of investor endurance and the winners are those who find a good strategy or fund and stick with it.

Investment strategy

Smith says investors should have a concentrated, high-quality portfolio of 20-30 resilient global growth companies held for the long term.

According to him, investors should follow a simple three-step investment strategy, which is-

1. Buy from good companies

2. Don’t pay too much

3. Do Nothing

Smith shared some of the secrets to his success and key investing principles in his book. Let’s look at some of them-

Invest in companies with intangible assets

Smith says investors should look to invest in companies that violate the mean-reversion rule that states’ returns must revert to the mean as new capital is attracted to business activity that generates supernormal returns.

According to Smith, investors should find companies with brand names, high market shares, patents, licenses, distribution networks, installed bases and customer relationships, because together they define the franchise of a company. company and its ability to outperform its competitors.

“We seek to invest in companies whose assets are intangible and difficult to replicate,” he says.

Invest in companies with growth potential

According to Smith, to achieve superior returns, it is not enough for companies to earn a high rate of return without leverage.

He says investors should try to find companies with a high degree of growth certainty through the reinvestment of their cash flows at high rates of return.

“The businesses we seek must have growth potential. Our definition of growth is that they must also be able to reinvest at least some of their excess cash flow back into the business to grow while generating a return. high on the cash thus reinvested.” he said.

Invest in businesses that do not require high leverage to generate returns

Smith says investors should invest in companies that earn a high return on their capital without leverage, recognizing that sometimes credit is taken away.

Avoid companies vulnerable to technological innovation

According to Smith, investors should avoid investing in industries that are prone to rapid technological innovation and therefore obsolescence. This approach makes many sectors uninvestable.

Invest for the long term

Smith says the ideal holding period for a good investment should be indefinite, which means investors should keep stocks in their investment portfolio for a long time.

Don’t time the market

Smith says investors should try to avoid timing the market as it can lead to huge and unnecessary losses.

Following a high conviction approach

Smith says that without deploying a consistent, high-conviction approach over time, it’s difficult for any investor to beat their target sector’s benchmark.

According to Smith, too many investment managers have abandoned targeted stock selection. He says investors should choose excellent companies to invest in with high conviction.

Have emotional discipline

“Investors are their own worst enemy.” He says the average stock fund investor significantly underperforms the average stock fund because of their tendency to buy funds at the top and sell them at the bottom of market cycles.

Smith’s timeless lessons can help investors understand the importance of rational, emotionally disciplined investing where often the best course of action is to do nothing.

From Smith’s investment principles, it’s easy to see why he’s found so much success in the investment world. If investors follow these investment tips, it can be of great benefit to them to achieve superior returns over the long term.

(Disclaimer: This article is based on Terry Smith’s book “Investing for Growth”)

Comments are closed.