INVESTING FOR GROWTH (BY TERRY SMITH)

Summary

In this video, Terry Smith’s investment strategy, likened to buying high-quality cars, is explored, focusing on selecting superior companies for long-term growth. The key takeaways include investing in industry leaders with high profit margins and returns, avoiding unnecessary gadgets like dividends, and waiting for discounts during market downturns. Smith emphasizes the importance of free cash flow over manipulated earnings and warns against chasing performance by switching strategies. His approach is rooted in patience and thorough analysis, ensuring that investments align with a company’s fundamental strength rather than short-term fluctuations.

Takeaways

• 😀 Focus on quality: Terry Smith's strategy is to invest in high-quality companies, much like buying a durable, long-lasting car over a cheap one.
• 😀 Recognize the winners: Look for companies with high profit margins, high return on assets, and growing market shares to identify industry leaders.
• 😀 Don’t overvalue dividends: While dividends are nice, companies that reinvest earnings can create greater value in the long term, as seen with Berkshire Hathaway.
• 😀 Wait for discounts: It's important to wait for opportunities to buy great companies at a discounted price, even if they are currently trading high.
• 😀 Don't be fooled by appearances: A strong P/E ratio can be misleading; instead, focus on free cash flow (FCF) yield to assess a company’s real value.
• 😀 Patience is key: Sometimes, stock prices fall for short-term reasons, but if the long-term fundamentals are solid, these dips present buying opportunities.
• 😀 Focus on long-term results: Short-term price fluctuations shouldn't dictate investment decisions. Evaluate companies over a full market cycle to see real performance.
• 😀 Avoid unnecessary distractions: Dividends and gimmicks (like unnecessary car gadgets) should not distract from investing in strong, fundamental businesses.
• 😀 Recognize the importance of market cycles: A successful investment strategy should be assessed over a complete economic cycle, not based on annual performance alone.
• 😀 Stick to a strategy: Consistency in your investment approach is vital. Chasing performance or switching strategies based on short-term results can harm your long-term success.

Q & A

What is Terry Smith's preferred investment strategy?

Terry Smith's preferred strategy is 'Buy once, cry once,' which focuses on investing in high-quality companies that may cost more upfront but provide superior long-term returns, rather than opting for cheap, low-quality investments that lead to more regret and losses over time.

How does the analogy of buying a car relate to Terry Smith's investment strategy?

The car analogy highlights the idea that while high-quality investments (like a premium car) might have higher initial costs, they provide long-term benefits and less headache compared to cheaper, lower-quality alternatives that often result in ongoing problems and costs.

What characteristics should investors look for in high-quality companies?

Investors should look for companies with high profit margins, high return on assets, and increasing market share. These companies typically have strong 'moats' and are leaders in their respective industries.

Why does Terry Smith emphasize avoiding companies with unnecessary gadgets?

Smith compares unnecessary gadgets in cars (like small TV screens for rear seats) to dividends in investments. Dividends can sometimes be a distraction from the true value of a business, and reinvesting earnings back into the company can often create more long-term value.

What is the main flaw in the belief that companies without dividends are not valuable?

The flaw lies in assuming that companies that don't pay dividends will never do so. In reality, some high-quality companies reinvest their earnings to generate more growth, which can be more beneficial to shareholders in the long run than receiving dividends.

How does Terry Smith advise dealing with the price of quality companies?

Smith advises waiting for opportunities to acquire high-quality companies at a discount. He believes that good companies can sometimes be undervalued due to temporary market fluctuations, creating buying opportunities.

What role does the P/E ratio play in evaluating companies, according to Terry Smith?

While the P/E ratio is a common tool for assessing company valuation, Smith cautions that it can be misleading if a company’s earnings are manipulated or diluted. Instead, he suggests using free cash flow (FCF) to get a more accurate picture of a company’s financial health.

What is free cash flow (FCF) yield and why is it important?

Free cash flow (FCF) yield is calculated by dividing the company's cash flow from operations minus capital expenditures by the share price. It is important because it represents cash that can be used for reinvestment, acquisitions, dividends, or saving for future needs, giving investors a clearer understanding of a company’s true financial strength.

What does Terry Smith mean by 'no car is a true all-rounder' in terms of investment strategies?

Smith emphasizes that no single investment strategy works in all market conditions. Just as a car may not be the best for every driving situation, different strategies perform better at different times, and investors should not chase short-term performance but evaluate their strategy over an entire market cycle.

How does Terry Smith recommend handling market downturns or periods of poor performance?

During market downturns or when a company's performance dips temporarily, Smith advises maintaining a long-term view. Short-term setbacks, such as a quarterly miss on earnings, should not change an investor's perception of a fundamentally strong business.