Terry Smith’s 4 key investment principles for weathering market volatility

Terry Smith stands out as a prominent figure in the field of investing, earning him the nickname “Britain’s Warren Buffett” for his dedication to value investing and outstanding long-term performance. As founder and chief investment officer of UK-based Fundsmith, the investment management firm built a reputation for prioritizing high-quality global listed companies.

At the heart of Mr. Smith’s investment philosophy is a strategy of acquiring robust businesses and maintaining them for the long term, unlike the short-term trading strategies commonly used by many fund managers. His focus is on extensive research and understanding of portfolio companies with the aim of pinpointing companies with durable competitive advantages and effective management teams. This methodical and insightful approach has resulted in significant benefits for Fundsmith investors and is exemplified by the firm’s flagship fund, Equity His Fund, which has returned an average annual return of 478 yen since its inception in 2010. % or more.

Considering Mr. Smith’s success highlights the importance of understanding his investment philosophy and how it differs from others. His stock selection strategy revolves around his three key principles: invest in healthy companies, avoid overpaying, and maintain a long-term holding approach.

Consider investing in reputable companies

Search for companies that consistently achieve a return on invested capital (ROIC) well above their cost of capital and demonstrate efficient and profitable deployment of resources. Mr. Smith emphasizes a strong competitive advantage, known as a “moat,” which protects a company’s profitability from competition. These moats can stem from a variety of sources, including brand awareness, intellectual property, network effects, and cost leadership. However, simply focusing on companies with high ROIC is not enough. Some high-quality companies may show high ROIC, but their growth potential may be limited or they may rely on unsustainable methods.

Additionally, allocating investments to reputable companies reduces reliance on market timing and predicting short-term fluctuations. By prioritizing the intrinsic quality of a business, investors can navigate market cycles with confidence that sustainable long-term value creation will continue.

emphasize simplicity and clarity

Terry Smith’s focus on investment simplicity appeals to those who find the financial world too complex and difficult. He advocates for a simple business model that is not only understandable to individuals of all economic backgrounds, but also operates with transparency and clarity.

But it can’t be that simple. Simplicity starts with focusing on the basics. Mr. Smith focuses on understanding a company’s fundamental business, competitive, and financial health, rather than delving into complex financial models or engaging in technical analysis.

It is important to avoid unnecessary complexity. This savvy investor avoids companies with complex structures, opaque accounting practices, or excessive debt. He argues that such complexity often masks underlying issues and increases risk for investors.

The benefits of adopting a long-term perspective should not be underestimated. Mr. Smith promotes a long-term investment horizon through simple and straightforward business investing. This strategy reduces the temptation to make impulsive decisions caused by short-term market fluctuations.

Avoid overpaying for stocks

Smith has a nuanced perspective on valuation and long-term value creation. Undervalued stocks can provide short-term profits, but relying solely on “bargain prices” can lead to overlooking the compounding potential of high-quality businesses that provide stable, solid returns over the long term. there is. Additionally, cheap stocks may be discounted at effective prices. Reasons can include poor management, market decline, or an unsustainable business model, and mistaking value traps for bargains can be costly.

Pay attention to fees and investment costs

Terry Smith is a strong supporter of lower investment fees and a vocal critic of the industry’s tendency to impose excessive fees that reduce long-term returns for investors. He argues that even seemingly modest percentage-based fees can accumulate significantly over time, reducing profits and inhibiting capital growth.

Each percentage point in fees acts as a hurdle that investment returns must overcome to produce a positive net income. Smith highlights that rising fees can significantly reduce the compounding potential of long-term investments.

He scrutinizes the value proposition of expensive actively managed funds, which often underperform the market while charging hefty fees. Smith recommends focusing on low-cost index funds and passive strategies that mirror broader market indexes and offer similar or better returns at a fraction of the cost.

Mr. Smith advocates for investment structures that align with the interests of fund managers and investors, with performance-based fees and direct ownership of the underlying assets incentivizing managers to prioritize real value creation for investors. suggests that it is possible.

While Mr. Smith’s accomplishments are undeniable, it is important to remember that past performance is no guarantee of future results. It would be imprudent to blindly follow Smith in hopes of replicating his success. Investing in any financial product involves inherent risks, so it is essential that you conduct comprehensive research and carefully evaluate your investment objectives before making a decision.