Terry Smith on Warren Buffett and how to find good companies

TL;DR

Terry Smith discusses his investment approach influenced by Warren Buffett and other legends, focusing on high-return businesses with growth potential and defensive mechanisms.

Transcript

hello today i have with me my colleague kyle caldwell collectives editor interactive investor and someone who needs no introduction terry smith founder chief executive and chief investment officer at farmsmith which includes the uk's largest investment fund fundsmith equity hello terry delighted that you could join us today good morning both yourse... Read More

Key Insights

• 🇧🇯 Terry Smith's investment approach is influenced by Warren Buffett, but he also draws inspiration from Ben Graham, Charlie Munger, and Philip Fisher.
• ✋ Smith's investable universe consists of approximately 70 companies that demonstrate high returns on capital employed and have growth potential.
• ☠️ He emphasizes the importance of businesses having a source of growth and retaining a portion of the returns generated to reinvest at a similar rate.
• 👀 Smith looks for companies with repeat and predictable transactions, supplying everyday necessities, and possessing defensive mechanisms to fend off competition.
• ↩️ Return on capital employed is crucial for Smith, but he highlights that the investment industry often prioritizes growth in earnings per share instead.

Questions & Answers

Q: Besides Warren Buffett, which other investing legends have influenced Terry Smith's approach?

Smith was influenced by Ben Graham, Charlie Munger, and Philip Fisher. These individuals impacted his move towards valuing the quality of businesses he invests in rather than solely focusing on value analysis.

Q: How many companies are in Terry Smith's investable universe, and what makes a good business in his view?

Smith's investable universe consists of around 70 companies. A good business, in his view, is one that generates a high return on capital employed and has a source of growth. Both elements are essential for creating value.

Q: What qualities does Terry Smith look for in companies when building his portfolio?

Smith looks for companies that have a large number of repeat and predictable transactions. He prefers businesses that supply everyday necessities and have defensive mechanisms like brands, control of supply chains, or patents to fend off competition.

Q: Why does Terry Smith believe the investment industry does not prioritize return on capital employed?

Smith acknowledges that many in the investment industry focus on growth in earnings per share rather than return on capital employed. He suggests that analysts may have various reasons, but it is an oversight that goes against the advice of Warren Buffett, who considers return on capital employed the primary test of managerial economic performance.

Summary & Key Takeaways

• Terry Smith's investment approach is influenced by Warren Buffett, Ben Graham, Charlie Munger, and Philip Fisher.

• He synthesizes the best practices and principles from various investment professionals he has met over the years.

• Smith's investable universe consists of around 70 companies that demonstrate high returns on capital employed and have a source of growth.