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This collection of shareholder letters and articles is a gold mine for investors
Wednesday 23 Dec 2020 Author: Ian Conway

In a neat play on words, analyst turned investment chief turned fund management guru Terry Smith has published a collection of newspaper articles and shareholder letters from 2010 to 2020 under the title Investing for Growth, echoing that of his 1992 book on corporate shenanigans, Accounting for Growth.

Smith, who founded asset manager Fundsmith, has no need to worry about attempts to ban his latest book: it is more likely to become part of a teaching course given his immense success as an investor.


While the Fundsmith mantra should be well-known to readers – once again, for good measure, ‘buy good companies, don’t overpay, do nothing’ – these collected writings delve more into Smith’s thinking on how to identify good companies in the first place and, equally importantly, how to identify duff companies.

They also take us on detours into share buybacks and why they don’t add value, what investors can learn from the Tour de France, why exchange-traded funds (ETFs) are riskier than most investors realise, and why the explosion in ESG investment offerings means we might not be getting quite what we thought.

When it comes to how he picks companies to invest in, the short answer is ‘carefully’. He says: ‘Very few companies make it through our filtering system and even fewer make it into our portfolio.’

Smith looks for companies which have ‘superior financial performance’, although that needs to be an outcome of their operations and not their primary objective.

Typically, companies need to offer ‘a superior product and/or service which enables them to generate these impressive financial returns and prevent competition from eroding them,’ he says.

He then looks for the opportunity to buy at a discount. A prime example is Microsoft, which Fundsmith originally bought at $25 per share when the firm seemed to have lost its way both in mobile phones and internet search under its old chief executive.

Smith recalls ‘a cacophony of comments’ from his own investors as well as financial analysts saying he shouldn’t have paid $25. ‘They were right’, says Smith, ‘albeit not in the way they intended given that we have made nearly ten times our money on our first purchases of Microsoft.’


The book dives into quite a few different sectors including why the Fundsmith head doesn’t like to buy shares in banks. It’s down to a principle of never investing in a business which must borrow money to make an adequate return on equity – more specifically, he won’t back companies who need to borrow to survive.

‘Banks rely on leverage to a greater extent than any other business. A 5% equity to assets ratio for a bank is leverage of 19 in debt to 1 of equity,’ writes Smith.

‘The good news about such high leverage is that when something goes wrong, at least you go bust quickly.’

Smith tells a story from the 1980s where there was a period of nervousness in Hong Kong following the signing of the joint declaration regarding the colony’s handover to China. It caused property prices to fall and banks to run up bad debts.

‘During this febrile period, a queue of people waited for a bus. It started to rain, and the queue moved across the pavement to shelter under the cover of a canopy on a building, which happened to house a branch of a local family-controlled bank,’ he recalls.

‘Passers-by, seeing the queue, concluded that there was a problem with the bank. Rumours of a run spread rapidly and by the following day, the bank was besieged by depositors demanding to withdraw their savings.’


Fans of well-known investors such as Warren Buffett and Benjamin Graham won’t be disappointed with the book – it is liberally sprinkled with words of wisdom from all three – but Smith is far from in thrall to them.

He even indulges in a spot of one-upmanship with Buffett over IBM, which Berkshire bought and Fundsmith rejected, and which has lost over 40% of its market value in the last seven years, suggesting the Sage of Omaha should have listened to his own advice rather than be seduced by the firm’s ‘roadmap’.

This type of ‘straight talking’ is typical of Smith and the book is all the better for it. True to his reputation, he pulls no punches, and investors couldn’t ask for a clearer insight into his single-minded investment approach.


Shares readers can download an electronic copy of The Investment Trusts Handbook 2021 for FREE from Harriman House.

The 280-page e-book contains comment by analysts, fund managers and investment writers about investments trusts and includes lots of data and analysis.

Articles including how to read an investment trust annual report, which investment trust directors and managers have the largest personal shareholding in the trusts they are responsible for, and is it possible to do well by following ESG principles?




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