Terry Smith’s latest shareholder meeting offered a refreshing dose of straight talk for investors. His candid reflections cut through the usual market noise and provided some lessons worth remembering.
Even top performers have off years, as Smith openly admitted when discussing Fundsmith’s recent performance: “Last year wasn’t our finest hour. We were up 8.9% in the T class in Sterling with dividends reinvested, while the market was up 20%.”
But he quickly put this in perspective by highlighting their long-term track record: “Since inception, we’ve annualized 15.2% per annum while the market has annualized 12.3%.” This reminds us that short-term underperformance happens to everyone, and what really counts is sticking with a sound strategy through market cycles.
The current market concentration in a handful of tech giants reveals another important lesson. Smith pointed out how “these five companies contributed 44% of the S&P return – an astonishing level of concentration.
Nvidia alone was 21% of the index return.” Yet Fundsmith didn’t chase this trend, selling Apple and Amazon while avoiding Nvidia altogether. His reasoning was simple – valuation matters.
As he explained about Apple: “We bought Apple at half its current rating and sold it when the rating doubled during a period where sales grew by zero over two years.” This shows the discipline of paying attention to what you’re actually getting for your money rather than following the crowd.
Smith also challenged conventional wisdom about passive investing, noting that “during 2023, more than 50% of assets under management worldwide were in passive funds, creating distortions.” He quoted John Bogle’s warning that “at some point, when a certain proportion of assets are in index funds, it will lead to distortions because they’re invested without consideration of quality or valuation.”
This passive approach essentially becomes what Smith describes as “a momentum-based strategy” where money flows into stocks regardless of fundamentals. The takeaway is clear – blindly following indexes isn’t necessarily the safe choice it’s often made out to be.
Perhaps the most valuable lesson comes from Fundsmith’s famously simple strategy: “only invest in good companies, try not to overpay, and do nothing.”
Their portfolio turnover was just 3.2% last year, costing minimal fees. Smith highlighted long-term winners like Microsoft, which is “making its eighth annual appearance in our top five, extraordinary for a company of this size,” and Meta, which “made a fantastic contribution” after initial criticism. This proves that successful investing often means resisting the urge to constantly tinker with your portfolio.
When asked if active investing is dead, Smith invoked Betteridge’s Law: “any headline ending in a question mark can be answered with ‘no.'” His view is that “any active manager worth their salt dreams of being the last one standing when all other money is invested without consideration of quality or valuation.”
In today’s market dominated by AI excitement and passive flows, this serves as an important reminder that the fundamentals still matter. The key is tuning out the noise, focusing on businesses with durable advantages, and having the conviction to hold them through market fluctuations. While not glamorous, this approach has stood the test of time.
You can watch the entire shareholder meeting:
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