Terry Smith: Buffett’s Simple Rule Of Thumb For Buying

Johnny HopkinsTerry SmithLeave a Comment

In his latest Fundsmith Annual Meeting 2022, Terry Smith discusses Buffett’s simple rule of thumb for buying. Here’s an excerpt from the meeting:

There’s a rule of thumb, which is a sort of a Buffett and a number of others rule of thumb, which is if you can invest in a quality company, one where you could foresee growth and pretty consistent returns you think from it, and you can buy on a free cash flow yield, or even better dividend yield, which is the same as or higher than the long bond yield, just buy it, because that’s the discount rate. And the long bond coupon doesn’t grow, whereas the company yield will grow.

If rates go up an awful lot, more than the market is currently discounting, we will definitely have a torrid period where share prices will react to that. But I think if you prepared to sit there and take that, you’ve definitely got an equity which is cheap in comparison with the long bong yield and therefore in comparison with the only reality you can judge it against.

You can listen to the entire meeting here:

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