Terry Smith: The Maverick Investor

Terry Smith, born on May 1, 1953, in London, England, is a British investor, fund manager, and CEO of Fundsmith. Renowned for his straightforward approach and emphasis on long-term investing, Smith has built a reputation as one of the UK’s most successful and respected fund managers. With a career spanning several decades, his insights and strategies have significantly influenced the investment community.

Early Life and Education

Terry Smith was born in the East End of London and attended Stratford Grammar School. He went on to study history at University College Cardiff, graduating with a first-class degree. After university, Smith qualified as a Chartered Accountant with Touche Ross (now Deloitte) in 1974. His strong analytical skills and interest in finance paved the way for his future career in the investment industry.

Career Beginnings and Achievements

Smith began his career in finance as a stockbroker at W. Greenwell & Co in 1984, where he specialized in banking and financial services. His insightful analysis and candid opinions quickly earned him recognition as a top-rated banking analyst. In 1990, he joined Barclays de Zoete Wedd (BZW) as head of UK Company Research.

In 1992, Smith published his controversial book “Accounting for Growth“, which critiqued the accounting practices of several UK companies. The book became a bestseller but led to his dismissal from BZW due to the contentious nature of its content. Undeterred, Smith continued his career by joining Collins Stewart in 1992 as a chief executive, where he transformed the firm into a leading independent financial advisory group.

The Birth of Fundsmith

In 2010, Terry Smith founded Fundsmith, an asset management company focusing on global equities. The firm’s flagship fund, the Fundsmith Equity Fund, launched in November 2010 and has since delivered exceptional returns, consistently outperforming its benchmark index. Smith’s investment strategy at Fundsmith is guided by three core principles:

1. Buy Good Companies: Invest in high-quality businesses that can sustain a high return on operating capital employed.
2. Don’t Overpay: Avoid overpaying for shares by focusing on companies with attractive valuations.
3. Do Nothing: Maintain a low turnover by holding investments for the long term, allowing compound interest to work.

Investment Philosophy

Terry Smith is an advocate of long-term, buy-and-hold investing. His philosophy centers on investing in companies with durable competitive advantages, commonly referred to as “moats,” which protect them from competition. Key aspects of his investment approach include:

• High-Quality Businesses: Companies with high returns on capital, strong market positions, and resilient business models.
• Owner-Oriented Management: Management teams that act in the best interests of shareholders.
• Strong Free Cash Flow: Businesses that generate consistent and growing free cash flow.
• Avoiding Certain Sectors: Excluding industries like banking, utilities, and commodities, which are capital-intensive and cyclical.
• Concentrated Portfolio: Holding a focused portfolio typically consisting of 20 to 30 stocks.

Smith emphasizes the importance of patience and discipline, often quoting Warren Buffett’s principle that “investing is simple but not easy.” He believes that by holding onto high-quality companies over the long term, investors can benefit from the power of compounding returns.

Notable Investments and Performance

Under Smith’s leadership, the Fundsmith Equity Fund has invested in several well-known global companies, including Microsoft, PayPal, Unilever, and L’Oréal. The fund’s performance has been remarkable, often ranking among the top in its category. The fund had delivered annualized returns significantly above the benchmark MSCI World Index since inception.

Philanthropy and Personal Interests

Beyond his investment career, Terry Smith is involved in various philanthropic endeavors. He is a supporter of the World Wildlife Fund (WWF) and has served as a trustee of the organization. Smith is passionate about conservation and has been involved in initiatives to protect endangered species and habitats.

Smith is also an avid motorsport enthusiast and has participated in classic car racing events. Additionally, he has a keen interest in military history and has funded projects related to historical preservation.

Authorship and Thought Leadership

Terry Smith is known for his outspoken views on the investment industry. His book “Accounting for Growth” (1992) critiques the accounting practices that can obscure a company’s true financial health. The book became a bestseller and is considered a seminal work on financial analysis.

He regularly shares his insights through annual shareholder letters, interviews, and articles. Smith advocates for transparency, simplicity, and a focus on fundamental business quality rather than short-term market trends.

Comparison with Warren Buffett

Often referred to as “Britain’s Warren Buffett,” Terry Smith shares several investment principles with the legendary investor. Both emphasize investing in high-quality companies with durable competitive advantages and holding them for the long term. Smith’s focus on free cash flow and return on capital mirrors Buffett’s approach to evaluating businesses.

Key Lessons from Terry Smith

Investors can learn valuable lessons from Terry Smith’s approach:

1. Invest in Quality: Focus on companies with strong fundamentals and sustainable competitive advantages.
2. Long-Term Perspective: Hold investments for the long term to benefit from compounding returns.
3. Simplicity Over Complexity: Avoid overly complex investment strategies; stick to straightforward principles.
4. Avoid Market Timing: Do not attempt to time the market; stay invested in good companies.
5. Concentrated Portfolio: Invest in a select number of high-conviction stocks rather than over-diversifying.
6. Understand What You Own: Thoroughly research and understand the businesses you invest in.

Conclusion

Terry Smith’s distinctive approach to investing, combined with his track record of success, has earned him a reputation as one of the UK’s most respected fund managers. His emphasis on buying high-quality companies at reasonable prices and holding them for the long term resonates with investors seeking sustainable growth. Through his work at Fundsmith, Smith continues to exemplify the value of a disciplined, patient, and focused investment strategy.

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