In this interview with Barclays Stockbrokers TV, Terry Smith discussed the importance of having a very long-term horizon, ignoring macro, and why avoiding losers is more important than picking winners. Here’s an excerpt from the interview:
Smith: My definition of long-term investing is forever basically. I seek to invest in really great companies and the average company that we own has been around I think since 1907, so they’ve been around for over a century, and I think really what people should focus upon is a very long-term horizon. People will start thinking about well what’s a time horizon in which I should buy and sell this? Stop thinking about the second part; if you own really really good companies just try and own them forever.
This fund is quite global. Although all the companies are headquartered and listed in America or Europe, over a third of the revenues come from the developing world. And that’s what we really look at, not where a company’s headquarters are listed, but where it actually gets its money from, and in that regard I think it’s quite a global fund.
Is it an income or a growth fund is a question that people often pose – and I actually think the labels are somewhat artificial. I think they’re made up by marketing people. Anyone in marketing will tell you call it income, because they outsell growth two to one. The reality is I think income and growth are two sides of the same coin. Basically, if you look at a long period of time on equities, the majority of the return you get from equities comes from the income, comes from the dividend. So you can’t ignore it, but equally you can’t ignore growth. I mean we’re looking for companies that can reinvest part of their returns to compounding value, so both.
I think it’s more important to avoid losers than it is to pick winners. I think that if you look at what happens when you lose a great deal of your capital, making it back in terms of compounding is difficult. It’s the oldest story in the world. If you lose 50% on an investment you need to make 100% on the next one in order to get back to breakeven, and that’s a difficult equation basically. The other thing is I wouldn’t actually say picking winners is what people should do; what I look for is a horse that’s already won the race, and then get the bookmaker, the market in this case to make me the wrong odds and buy it.
I give almost no thought to the global economy when I’m investing. There was a good article in The Financial Times recently about somebody who was at a conference with a billionaire private equity investor and said to him so what do you think about in terms of geopolitical risk when you’re investing? He said nothing. Quite often the sort of turmoil that you see in the global economy is a force for change for the good. You know, the fall of the Berlin Wall was dramatic at the time, but it’s only been a force for good in terms of most of Eastern Europe. So I don’t really sit there and think about the macro. I also when it comes to macro events have another saying, the worse the country the better the company. Quite often you find the worse the state of a country the better the companies have to be in order to perform there.
I’ve got about £45m of my money in the Fundsmith Equity funds. I put in a stake right at the beginning, in fact mine was the only investment I think we had on day one, and I’ve still got £45m; I haven’t taken any out.
I started work in the City in 1974, which is exactly 40 years ago, and people came in late, went home early and had a good lunch, and now they come in an awful lot earlier, go home a lot later and have lunch at their desk, and do you know the funny thing is I don’t think it’s improved investment performance. It’s actually what people do in terms of thinking that makes a difference, and really the sort of manic activity you now get from people working longer hours and more strenuously is actually the enemy of good returns, not its friend. Doing nothing is quite often the right thing to do.
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