You Make Money With Old Friends... And 10 Other Things I Learned From Terry Smith
"I’m not a gardener, but I’m told what you’re supposed to do is water the flowers and pull up the weeds. An awful lot of people do it the other way around."
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The money game needs more characters like Terry Smith.
Brash. Contrarian. Outspoken.
Smith might not be everyone’s cup of tea, but — full disclosure — I’m a huge fan. Because, if nothing else, he has the courage of his convictions.
In 1992, Smith burst onto the scene with Accounting for Growth, a book that took aim at the financial machinations that British companies used to (legally) manipulate results. It cost him his job as head of research at UBS — and cemented his reputation as a bold truth-teller unafraid of critic or censor.
Since 2010, his open-ended Fundsmith investment operation has outpaced its benchmark (MSCI World Index) by nearly four percent annualized.
Back in February, Smith headlined Fundsmith’s annual shareholders meeting in London and fielded questions (alongside Julian Robins) for nearly ninety minutes.
What made this year’s meeting so interesting, though, is that Fundsmith has scuffled a bit of late — trailing the MSCI in each of the last three years. It’s under less-than-ideal circumstances like these that I most like to hear what someone has to say.
Does he sway in the wind or stand up for his time-tested principles?
And, while everyone should watch the full video and judge for themselves, I think Terry Smith acquitted himself quite well and reaffirmed Fundsmith as an able steward of its shareholders’ money.
But, since I’m not a Fundsmith shareholder, I was most impressed with Smith’s ability to cut through the jargon and doublespeak of markets and lay out his case in a simple and accessible manner. I’ve collected some of his more notable points below.
And, as you’ll notice, he hasn’t lost his knack for ruffling a few feathers along the way…
Right off the bat, Terry Smith made two comments that impressed me.
(1) “Don’t expect me to say anything [today] that you don’t already know — because that’s the whole point in many respects. We hope we communicate to you what we do and what we’ve done well enough for you to be able to stand up here and do this.”
(2) “You know the [investment] strategy by now, I hope. We’ve made it quite clear from the outset what it is. But, really, we tell you about the strategy so you can judge whether or not we’re still keeping to it. One of the dangers of fund managers is so-called ‘style drift’. They go off and do something else when it seems to suit them — and you can judge whether or not we’re doing that.”
Communication is the name of the game at Fundsmith.
Too many money managers bury their clients under an avalanche of inscrutable jargon and legalese that only serves to mystify the investment process. (The cynic in me thinks that this is very much on purpose.) Smith, on the other hand, speaks more in the mold of Warren Buffett or Charlie Munger. Clear, concise, and simple.
Buffett has long bemoaned the “high priests of finance” who lord their acquired knowledge and expertise over the unwashed masses. But, despite his flashy reputation, Terry Smith eschews these trappings and instead opts to share his wisdom and investing strategy with all comers.
And, like all the best systems, Fundsmith’s could not be simpler:
Buy good companies
Don’t overpay
Do nothing
(3) “You have to bear in mind when you’re investing now — whether you’re investing with us or anybody else — that Uncle Sam will give you 5% without any risk whatsoever. That’s quite a high bar for anybody to jump over in terms of a return.”
(4) “In terms of finding a new company, [we ask ourselves] do we actually want to own it? Never mind the valuation. We’ll get to that later. And we may find a company that we want to own which we never own. There are plenty of companies that we’ve been following for the last fourteen years that we’ve never owned — where, rightly or wrongly, we just didn’t think it was right at the time in terms of valuation and other factors to buy them.”
Reminiscent of Nick Sleep and Qais Zakaria’s “terminal portfolio” concept. Create an investable universe of great companies that you would love to own — even if they happen to be overvalued today. Do the work now so that you won’t miss a chance to add a lifetime holding to your portfolio the next time it drops in price. That may be tomorrow, it may be in six months, or it may be in five years.
(5) “Share prices follow the fundamentals of companies, not the other way around. We’ve never really found an example of something which had a high or low share rating and, as a result, the company [itself] improved or deteriorated. But we’ve found lots of examples where a company’s performance eventually was reflected in the share price.”
(6) “I was in New York [when Meta Platforms fell to new lows in 2022] meeting with a big wealth management private office that we manage money for in the United States. The young associate was giving me a reasonably hard time about Meta and what we thought about it — and I was giving him our answers and so on. His much older — and, obviously, wiser — boss said, ‘Every portfolio should have one stock like that. If you believe what you’re saying, you should buy more.’ And we did. And it worked — which is great. The most important thing that that man said to me was ‘one’ stock. You don’t want 27 of them.”
For those with short memories, Meta Platforms (née Facebook) careened from about $375 (September 2021) to $90 (November 2022) to $490 (today). That kind of volatility will test even the most determined investors among us. “We’re not all going to have the fortitude to live through that,” Smith said, “even if we should.”
At the time of Meta’s lows, Smith admits that he faced a barrage of criticism. Why are you buying Facebook? Nobody even uses that anymore! You got this one wrong! “Frankly, the share price isn’t the thing that tells you whether you got it right or wrong,” he said. “It’s what’s happening in the company.”
(7) “We will never get this perfect. It’s one of the things that you carry with you when you do this job. What we can do, though, is do it better. React to things that come up and do it better.”
If not for Smith’s decision to sell Adobe and Amazon, Fundsmith might well have beaten the benchmark MSCI World Index in 2023. Alas, as he says above, nobody will ever get it completely right. On Adobe, he disagreed with the company’s since-abandoned $20 billion acquisition of Figma. On Amazon, it was CEO Andy Jassy’s comments about “going big” on grocery that gave him pause. In both cases, as Smith ruefully noted, his reasons for selling never actually came to pass.
(8) “When you’re thinking of selling something, even if your reasoning is right — and I think our reasoning fundamentally in Adobe and Amazon was right — if you can see an enormous tailwind going on for some reason, even if it’s a very spurious tailwind, don’t do anything. Sit on your hands for a while. That’s the one big thing that we learnt [in 2023].”
“With [Adobe and Amazon], we basically got in the way of a truck at the top of a hill that someone had let the handbrake off,” he added. “And, as a result, it wasn’t our finest hour in terms of selling.”
(9) “People sometimes say to us, ‘You see, the problem is you don’t actually understand how AI works.’ And I always say to them, ‘Actually, there’s an awful lot more in the way that things work that [investors] don’t understand.’ The one I always use, as I say, ‘Never mind AI … how about surfactants?’ You know, the stuff that you use to clean your bathroom and your kitchen. Could you explain the chemical reaction that is involved in a surfactant? This is a pretty basic product. And the answer, of course, is for the vast majority of people — including us — no. But we know they work and we know the people that make them.”
(10) “One of [Unilever’s] divisions went from being ‘Personal Care’ to ‘Beauty & Personal Care’ to ‘Beauty & Wellbeing’. How did that help exactly? One of the divisions went from being ‘Savory Dressings & Spreads’ to ‘Foods’ to ‘Food & Refreshment’ to ‘Nutrition’. Anyone think any of this helps? Really, a focus on selling more stuff to more people might have been what they should have gone for.”
It wouldn’t be a Fundsmith meeting without a few pokes at longtime punching bag Unilever. Though, to be fair, Smith reserved his barbs for the conglomerate’s former management — and sounded optimistic about the new leadership.
(11) “You make money with old friends. If you’ve got something like [Microsoft] that you get right, the likelihood is it’s going to continue to be right. I’m not a gardener, but I’m told what you’re supposed to do is water the flowers and pull up the weeds. An awful lot of people do it the other way around. They sell the things that worked and hang on to the things which are not working in the hope they’ll come right. Our strategy — and, in my view, the correct way to do it — is the opposite of that, to run our big winners.”
Smith purchased Microsoft many years ago during its doldrums at about $26 per share. And, ever since, it’s been a consistent winner for the firm. In fact, in eight different years it has ranked among the biggest gainers in Fundsmith’s portfolio.
A great company, bought at the right price, can be a gift that keeps on giving. As long as you don’t sell it.