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Investing lessons from the Buffett of Britain

We explore the investing philosophy of Terry Smith, founder and CIO of Fundsmith

Terry Smith: Investing lessons from the Buffett of Britain

Dubbed Britain's Warren Buffett, Terry Smith has surely earned his namesake. He is the founder and CIO of Fundsmith. And since he started his fund in 2010, he has consistently outperformed his benchmark index (MSCI World Index), returning 478 per cent to his investors.

Recently, we came across a podcast that explored his investing philosophy and what sets him apart from the herd. His stock-picking philosophy focuses on three things - buying good companies, not overpaying, and holding them for the long-term.

Here are a few snippets from the podcast.

Reject bad companies to find good companies
Smith believes the process of elimination is pivotal for selecting multibaggers. Before you set out to find a good company, reject the bad ones.

He says, "We are screening to get rid of bad companies. We think there are very few good companies in the world, companies that consistently make a return on their capital above their cost of capital right across their business and economic cycle that you can rely on not to destroy any value for you while you're holding them ... So that's what our screening process is about. It's about looking for companies that right across the business and economic cycle have fundamentals that actually create value by making a high return on capital in cash."

Focus on the fundamentals
Philosophies may vary, but every successful investor is united on one thing: There is no alternative to strong fundamentals.

"The secret to the companies we own, if there is a secret, is that they actually compound in value more consistently in the market over a long period of time, not because they grow faster, but because they don't really have a downturn. And that's what makes them relatively inexpensive over time because people find that hard to figure out," says Smith.

Take the long road
The longer you hold your position, the better the compounding. Just like Warren Buffett, Smith is also a firm believer in staying invested for the long term.

He says, "We did some work on 30 years of investment, looking at baskets of companies, of the sort we invest in, and said, well, on average, what could you pay for those companies in terms of a P/E versus the market and still break even over that 30 years versus the market. And you know, on average you could pay nearly four times the market P/E and still break even."

A must-read for investors
Apart from the core tenets of Terry Smith's investing philosophy, the podcast has many valuable lessons for investors. Here are some key highlights:

  • If you don't fully understand it, don't invest.
  • Don't try to time the market.
  • Minimise fees.
  • Minimise trading and friction.
  • Don't over-diversify.
  • Never invest just to avoid tax.
  • Never invest in poor companies.
  • Buy shares in a business that can be run by an idiot.
  • Don't engage in the Greater Fool theory if you don't like what's happening to your shares, turn off the screen.

To read the transcript of the full podcast, click here.

Suggested read: Investing wisdom from Howard Marks


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