The annual Berkshire Hathaway meetings are referred to as being filled with wisdom about investing, business and even life at large. Similarly, we at Urbem think that the yearly meetings of Terry Smith’s Fundsmith are informative, insightful and rewarding to value investors. The investment guru, known colloquially as the “English Warren Buffett,” has consistently beaten the benchmark with his ODD strategy (Only invest in good companies, Don’t overpay, and Do nothing), which he applies to the global equity market. With regards to this year’s session, below are a few of our takeaways from the Fundsmith team.
The best fund
With its stellar performance since inception, the Fundsmith Equity Fund has proved itself the best mutual fund in the global equities category on both an absolute and risk-adjusted basis, which is exactly what the goal was according to the founder. Smith elaborated on the importance to state the aim loud and clear:
“One of the things that a lot of people are bad at is being very clear about what their aim is, because the problem with setting such as aim is that your set up the possibility of failing and being laughed at. I think that something you have to face if you really want to achieve in life is that possibility.”
Make money with old friends
“You never get poor by taking a profit, but you don’t get rich, either.”
Both Microsoft PYPL and Paypal (PYPL) have been the leading annual contributors for Fundsmith over many consecutive years now. Smith likes to stick with his winning stocks - “you make money if you get things right by persisting with them.”
Never declare victory
Mr. Smith hinted a critical characteristic for him and his Head of Research, Julian Robins, to be long-term investors. According to them, one of the tricks of the trade is "paranoia."
3M
Smith sold 3M MMM during 2019 and thinks that the company has allocated capital poorly by divesting businesses too cheaply and acquiring businesses too expensively. He also expressed his disappointment on management teams “who don’t tell the truth about the (bad) decisions in a very direct way.”
A dark secret
The successful fund manager disclosed his so-called dark secret: he never looks at share prices before buying companies. Smith even claims not having a live price feed on his Bloomberg, citing two reasons: “I don’t care” and “it costs money.” At the same time, he provided a trick for getting live prices for free – checking through a Charles Schwab account.
Throughout the meeting, Smith encouraged investors to concentrate on reality rather than price. For instance, the movement of organic sales of a business is something that they like to keep close eyes on.
Political concern
“The main concern is not whether somebody will get elected and do something dramatic but whether anyone can ever do anything.”
When asked whether the U.S. presidential election can impact the portfolio, Smith did not seem to foresee any long-term risk, mentioning that the American political system has more checks and balances than any other in the world.
Market timing
“I don’t think we are capable of predicting economic downturns. I don’t think anybody else is particularly either.”
Having admitted the incapability of predicting the market or economy, Smith thinks what is important is that his investments are economically defensive, offering protection in the event of a downturn, based on the fact that “people still brush their teeth and feed their dogs.”
Google and Apple
Regarding the reason for not owning Google GOOG GOOGL, Smith cited the company’s unimpressive return on capital along with too many acquisitions done over the years. In terms of passing Apple AAPL, Robins expressed his concern about the fashionable nature of the business, which always requires a “guiding genius” to answer the question, “what do you do next.”
Chinese stocks
When it comes to investing in Chinese companies, Smith provided the un-investable cases of the two largest companies in the country. He referred to the Variable Interest Entity structure at Alibaba BABA and the government influence with Tencent (HKSE:00700) as being untrustworthy, especially to minority shareholders.
Amazon
Smith thinks that Amazon’s AMZN could be most vulnerable to threats from Walmart WMT and Costco COST instead of Alibaba. Both of the American retail giants have a fantastic reach in terms of their ability to do collection and delivery as well as get the cost of products down for consumers.
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the financial market. We do not own any security mentioned in the article.
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