You could get Double-Digit Returns too… by learning to be like him!

For the past 9 years, this man has outperformed the stock market CONSISTENTLY by producing annualised returns of 18.2%!

Imagine getting 18.2% returns on your portfolio every year! Isn’t it amazing?

Known to many as the “English Warren Buffett”, he is UK’s favourite investor. With a fund size of >€$16 billion, he is famous for his growth investing strategies. He is also the best-selling author of “Accounting for Growth”, founder of Fundsmith and the winner of Editor’s Choice Award at Financial News 2019.

His VERY SIMPLE strategy could be summarised in 3 sentences:

• Buy good companies.
• Don’t overpay.
• Do nothing.

When this guy speaks, many stop and listen!

Now… Who is this amazing guy?

Source: Financial Times

You may have already guessed it: Terry Smith!

Naturally, I want to share many things about this man with you because there is just so much to learn from him! But, just for you, I have condensed it to only two simple points.

The two key things you need to take away for high-performing results are:

1. Is Cheap Really Cheap?

In his 1st quarter 2020 letter, Terry Smith expressed a few views that I will break down for you.

As you know, I was immensely skeptical of the view that so-called value stocks
could protect you in a downturn. I have never been a believer in the philosophy
that so-called “value” investments would perform well or protect your investment
in an economic and market downturn. Shares in companies that are lowly rated
are so mostly for good reasons. Because their businesses are heavily cyclical,
highly leveraged, they have poor returns on capital and/or they face other
structural or management issues. It doesn’t sound like a combination likely to
protect the business and your investment in difficult times, and so it has proven
thus far.

Most investors use P/E ratio as a way to gauge whether the share price is cheap or expensive. You could be looking at a company with a P/E of 10x and think it is a great buy.

Stop right there!!

Looking at one point of data is extremely dangerous for any investor!

To give you an analogy:

• When bread is about to expire, the shops sell them at massive discounts.
• When sushi is about to expire, the shops sell them at massive discounts.

Would you buy ten cartons of sushi selling for $0.10 each if I told you they’re all rotten and inedible? Absolutely not!

(RELATED: Share Price Alone is Meaningless)

Likewise, you have to look at more quantitative measures to indicate the quality of the companies. Examples of these measures are:

1. Return on Equity,
2. Cash Flow Cycle and
3. Profitability.

While buying something for a P/E of 10x seems like a good deal, if the earnings collapse by 50%, you’re actually buying it for P/E of 20x!

In short, low P/E stocks may look enticing but they are often the most dangerous because the business model behind the share price is not sound. You have to be skeptical if something is excessively cheap!

2. Attend/Watch the Annual Shareholders’ Meeting!

For those of you who have yet to attend/watch an Annual Shareholders’ Meeting, it is essentially a Q&A session between shareholders and management.

Why is this so crucial?

1. You learn about previous activities and future plans for the company
2. You know about important decisions before they’re implemented
3. You get to know the management and how invested they are in the company

While watching the entire video would be ideal, I have summarised the entire video to a few pointers for you.

Disclaimer: The pointers below are not exact quotes from Terry Smith himself, I have included my personal take and analogies for better understanding.

1. You can never get poor by taking a profit.
   • That’s true! But you don’t get very rich either.
2. For best performers, you make money by being persistent with them.
   • Sometimes, share prices drop. This is where many people will panic-sell.
   • There are reasons why some companies have performed well, and if those reasons do not change, the key thing is to be persistent and hold on to them…even through a drop in share price!
   • This is because they are likely to repeat the good results for you.
   • For example: Microsoft turned out to be Fundsmith’s best performer for > 2 years because they stood with it. Good companies compound.
3. Your returns as an investor do not come from performing active trades consisting of buying and selling.
   • It consists of doing the proper work and choosing a good company. You delegate the work to the management of those companies.
   • It is the management’s ability to put their cash to work and receive high returns, that creates returns for us.
4. Have the discipline of not owning too many companies.
   • If you’re a soccer coach managing over 30 team players, how can you know every of your team player well – realistically?
5. Good companies seldom come cheap. You have to pay up. The real question is: are they too expensive that it becomes unsuitable for purchase?
   • It is like a nice Rolex submariner. Most of us would lament over its price tag. Despite that, anyone who has purchased a Rolex in the past 10 years would have seen steady price appreciation in their watches. This is a testament to Rolex’s quality and desirability.
6. Quit focusing on share price.
   • Share price is one thing, but we have to focus on real value.
   • Share prices are often influenced by several factors such as investor’s confidence, a fund liquidating a big position, greed and fear. There are probably thousands of other reasons too.
   • Do these factors affect the growth and the management of the company? Absolutely not!
7. The most important thing is having growing businesses.
   • In most scenarios, the big drops in the stock market may matter in the short term but it will never matter in the big scheme of things.
8. On Apple: it is a fashionable company that we are not so sure of.
   • Fashionable businesses always need a guiding genius. When the guiding genius is no longer around or attentive, what happens?
9. On Google:
   • It has a powerful unassailable position as a search engine and it enjoys a duopoly with Facebook on advertising. However, their capital allocation has always been questionable.
   • After doing >200 acquisitions, there was not a lot that came out. One of their best acquisition is probably YouTube.
10. On Colgate:
    • Fundsmith could not find any evidence that a growth strategy was forthcoming.
11. On foreign exchange risks:
    • This is not a big concern because currency swings back and forth. In the long run, it will not have any material significance.
12. Terry does not own any Chinese companies because he is wary of the Variable Interest Entity (VIE) structure.
    • Basically, you do not own the actual shareholdings of the company.
    • You own interests in a offshore shell that has contractual agreements with the actual operating company in China.
13. On retirement: he has no desire to retire.
    • He enjoys what Fundsmith is doing. He promises that even if he leaves, their investment strategy will remain the same

If there was a single factor I would attribute to my successes, it is always thinking about applying, applying and applying! Don’t let any knowledge be wasted space in your precious brain.

Now that you know what you need to do, what WILL you do?

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