terry smith: Terry Smith’s tips for picking exceptional businesses

Legendary fund manager Terry Smith says the most challenging part of an investment strategy is to have the patience of sitting and doing nothing when the investment climate is not conducive for trading.

According to Smith, investors should look to buy a small number of high quality, resilient, global growth companies that are of good value and which can be held for a long time.

Smith is famous for writing a controversial report ‘Accounting for growth’ which later became a best selling book by the same name. The book basically talked about accounting frauds by listed companies. The report wasn’t very well received by his then employer, UBS who fired him from the company.

Also known as the English Warren Buffett, Smith joined Barclays as a history graduate in 1974. He became prominent as the UK’s top-rated banking analyst throughout the 1980s.

Smith is now best known for his hugely successful career as a fund manager, having set up Fundsmith and managed its flagship Fundsmith Equity Fund since its inception in November 2010. The fund has become the most popular open-ended actively managed fund based in the UK.

The fund has delivered an annualized return of 18.4 per cent between inception and the end of November 2021 far outstripping the MSCI World index which has a comparative annualized return of 12.8 per cent.

Lessons investors can learn from Tour de France

In his book, “Investing For Growth”, Smith discusses investing lessons he learnt from the annual men’s multiple-stage bicycle race, “Tour de France”.

According to Smith, investors have the knack of examining their portfolio performance in every reporting period, as often as every quarter, and sometimes exiting the stocks which underperform.

He says it’s as pointless to expect an investment strategy or a fund manager to outperform the market in all reporting periods and varying market conditions as expecting to find a rider who can win every stage of the Tour.

He says investment performance has to be measured over some time period and a quarter is too short a period to judge performance reasonably.

“To assess an investment strategy or a fund, you need to see its results across a full economic cycle with both bull and bear markets,” he writes in his book.

According to Smith, any strategies which rely upon an element of market timing are the ones to be avoided.

He says there is a lot of evidence to suggest that those investors who like to switch and change investment strategies, invariably get the market timing wrong.

“As the old saying goes, there are only two types of investor: those who can’t time the markets, and those who don’t know they can’t time the markets,” he says.

According to Smith, investment is a test of the endurance of investors and the winners are the ones who find a good strategy or fund and stick with it.

Investment strategy

Smith says investors should have a high quality, concentrated portfolio of 20-30 resilient global growth companies which are held for…