In his recent presentation with Canaccord Genuity Wealth Management, Terry Smith discusses why investors miss the most important thing by focusing on whether a company is cheap or expensive. Here’s an excerpt from the presentation:
In his recent presentation with Canaccord Genuity Wealth Management, Terry Smith discusses why investors miss the most important thing by focusing on whether a company is cheap or expensive. Here’s an excerpt from the presentation:
Smith: l wish I’d had a diary that I’d kept from when I started in finance all those years ago, and I put two columns in each day, and every time in the investment business somebody asked me whether a company or a strategy was a high quality, had high returns on capital, I put a tick in one column, and every time they said but is it cheap or expensive, I’d put a tick in that column.
I would have far far more ticks in the is it cheap/expensive.
People spend almost their entire effort thinking about whether something’s cheap or expensive or highly rated or lowly rated, which I guess is a better way of expressing it, and far too little deciding whether it’s a high-grade business that they really want to own that can compound in value.
And I think Munger basically encapsulates why it’s important in that quote.
As I said, return on capital is the single most important thing. There’s no point in engaging in a business that has low returns on capital.
You can watch the entire presentation here:
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