Terry Smith: How much to pay for a quality company?

TL;DR

The long-term returns of a stock are strongly influenced by the business' return on capital employed, regardless of the initial purchase price or eventual sale price.

Transcript

over the long term it's hard for a stock to earn a much better return than the business which underlies earns if the business earns six percent on capital this is the return on capital over 40 years and no idea why he chose six percent in four years but it doesn't matter you hold it for that 40 years you're not going to make much different than a s... Read More

Key Insights

• ↩️ The return on capital employed of a business strongly influences long-term stock returns.
• 🥺 Investing in companies with higher returns on capital employed can lead to better investment outcomes.
• 🍉 Timing the market or buying stocks at a discount does not ensure superior long-term returns.
• 👨‍💼 The business' performance is more critical than the purchase or sale price of a stock.
• ✋ Companies with consistent and high returns on capital employed are favorable long-term investments.
• 🍉 The long-term investment approach should focus on the quality of the business rather than short-term market fluctuations.
• 🥶 Comparing free cash flow yields and growth rates can help identify value and guide investment decisions.

Questions & Answers

Q: How does the return on capital employed of a business impact long-term stock returns?

The return on capital employed determines the long-term investment outcome, as companies with higher returns tend to generate better returns for investors.

Q: Does the initial purchase price of a stock significantly impact long-term returns?

The initial purchase price is not as important as the return on capital employed. Even if the stock seems expensive, investing in a company with a high return can still lead to favorable long-term returns.

Q: Is timing the market crucial for maximizing stock returns?

Timing the market is not as important as investing in companies with high returns on capital employed. Long-term returns are primarily driven by the business' performance, rather than market timing.

Q: Can buying stocks at a discount guarantee superior long-term returns?

Buying stocks at a discount does not guarantee superior returns. The business' return on capital employed is a more significant factor in determining long-term investment outcomes.

Summary & Key Takeaways

• The return on capital employed by a business, rather than the purchase or sale price of a stock, determines the long-term investment outcome.

• Companies with a higher return on capital employed tend to generate better returns for investors, even if the initial purchase price seems high.

• Timing the market or buying stocks at a discount does not guarantee superior returns compared to investing in companies with high returns on capital employed.